Cano Health, Inc.

Good afternoon and welcome to Cano Health's fourth quarter 2022 earnings call. Currently, all participants are in 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 Cano Health press release, webcast link, and other related materials are available on the investor relations section of Kenno Health's website. As a reminder, this call contains forward-looking statements regarding future events and financial performance, including our guidance for the 2023 fiscal year. Investors are cautioned not to unduly rely on forward-looking statements, and such statements should not be read or understood as a guarantee of future performance or results. We intend these forward-looking statements to be governed 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 such statements are subject to risks, uncertainties, and assumptions that could cause actual future events or results to differ materially from those discussed as a result of various factors, including but not limited to risks and uncertainties discussed in our SEC filings. We do not undertake or intend to update any forward-looking statements after this call or as a result of new information, except this may be required by law. 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 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, Chairman and Chief Executive Officer of Kano Health. Please go ahead, sir.

Thank you and welcome to the call. We appreciate your joining us today. 2022 was an important growth year for O'Connell Health. Our total membership reached nearly 310,000 members, growing 36% from the prior year. We achieved full-year revenue of over $2.7 billion and adjusted EBITDA of approximately $153 million, all while growing in new markets and service lines, and most importantly, providing our patients with excellent clinical care that measurably improves their outcomes. We continued on our journey to be one of the nation's leading primary care providers. During 2022, we opened 24 de novo medical centers and added another 18 centers on a net basis through acquisitions in existing markets. We ended the year with 172 medical centers in Florida, Texas, Nevada, Illinois, New Mexico, California, and Puerto Rico. Our Medicare membership grew to just under 180,000 members. a 42% year-over-year increase. At the same time, Kindle Health maintained its clinical excellence and high service standards, which continued to improve patient outcomes. Our full-year medical cost ratio, or MCR, was 79.1%. Excluding the Medicare direct contracting program, now called ACO REACH, our full-year MCR was 75.1%, a significant improvement from 79.7% in the prior year. Our admissions per thousand members, or APTs, were approximately 7% lower in 2022 compared to 2021. Our ability to keep patients healthy and out of the hospital is an important component of our model of care, which emphasizes frequent primary care visits and member engagement. When you combine our clinical outcomes with the growth in membership, we generated considerable value for our payer partners and all stakeholders. We have great momentum in our business. However, 2022 was not without its challenges. The organization's rapid growth pressured revenue on a per-member basis, particularly in our Medicare Advantage business. Factors negatively impacting Medicare Advantage revenue in 2022 included new members with lower than expected first-year revenue per member per month, or PMPM, growth in geographies with lower revenue PMPM, and a higher percentage of non-risk members with a lower PMPM. Importantly, our medical center member disenrollment rates were comparable to prior years. Consequently, lower than expected Medicare Advantage revenue negatively impacted our operating performance and our cash flow. And as a result, liquidity was not at the level needed to fund the growth we had planned for 2023 And we took decisive actions at the end of 22 and into 23 that have and will continue to improve cash flow and liquidity. We made the decision to dial back the addition of de novo medical centers in 2023, which is expected to reduce cash used for capital expenditures by approximately 35 million. The 13 de novos we plan to add this year are medical centers that are generally completed at the end of 2022 and require limited capital investment in 2023. We're also merging eight smaller medical centers into nearby larger existing centers to improve center-level economics for an expected total of 177 medical centers at the end of 2023 compared to 172 at the end of 2022. In addition, we reduced our headcount, aligning to our revised growth plans. implemented tighter spending controls, and negotiated better contracts with our vendors. These actions are projected to generate approximately $70 million in annual SG&A cost reductions for 2023. We also terminated underperforming affiliate positions and renegotiated payer agreements to improve our medical cost ratio, resulting in expected benefit of approximately $20 million. These initiatives put us on a path to meaningfully improve cash from operations as we move through this year and into 2024. That said, we will continue to evolve our organization to create sustainable growth for our patients, employees, and shareholders. At Canal Health, our purpose is to help our patients live their best lives. We are inspired and fulfilled through this pursuit, which we define as our mission, quality of care, and lifelong bonds. Simply put, Our goal to provide superior care and deliver better health outcomes for our patients is achieved when we optimize our financial performance to fulfill our mission in ever greater ways. In 2023, our financial objectives are to, one, capitalize the business, two, unlock embedded profitability by increasing capacity utilization at existing medical centers, and three, optimize our value-based platform to further improve the balance sheet and cash from operations. We made a significant step toward our first objective by closing our recently announced $150 million term loan with Diameter Capital Partners and Rubicon Founders. This financing provides liquidity to strengthen and grow our operations. As we discussed in the past, scale and density are critically important to our operational success. In 2022, we built significant scale and density, particularly in our home state of Florida, where we have a leading position in value-based care. We have the ability to roughly double our membership at our existing medical centers without incurring significant additional expenses. And thus, by filling this available capacity, we expect to unlock significant profitability. Moreover, we are committed to reviewing all aspects of our platform to further improve cash flow and liquidity. This is part of our focus on capital management by better allocating resources. Our scorecard for success this year will be a simplified and more efficient operating model with improved cash from operations and a stronger balance sheet. As we continue to execute on these objectives, we expect our results to better reflect the strong fundamentals of our value-based platform. Lastly, I want to take this opportunity to thank our associates for their commitment to our mission and vision. It is during challenging times when the character of a team is revealed and our team rose to the occasion. In addition to measurably improving the quality of care, our team's cultural ability to find solutions in difficult situations differentiated us in 2022 and defines us as a company. With that, I'll turn the call over to Brian Coffey, our CFO, who will walk you through our 2022 financial results and guidance for 2023.

Thank you, Marlo, and thanks everyone for joining us today. Before I get started today, I'd like to let you know that we will file an extension for 2022 10K. We expect our 10K to be filed on or about March 10th. Given our team's efforts to reach an agreement on a new term loan and close that transaction, we required more time to finalize the related information in the form 10K. As a result, all financial information presented today is subject to completion of the audit of the company's financial statements and filing of the 10K. Total membership increased 36% year-over-year to approximately 310,000 members in the fourth quarter. This represents an increase of approximately 83,000 members from the fourth quarter of 2021. At the end of 2022, 45% of our members were Medicare Advantage, 13% were Medicare DCE, 25% were Medicaid, and 17% were ACA. I would also like to highlight that in December of 2022, we completed an acquisition that included nine medical centers and an MSO business in Florida for initial consideration of approximately $31 million in equity and $1 million in cash with future cash earn-out payments based on achieving certain measures. This acquisition added approximately 7,400 Medicare Advantage members. Total revenue for the quarter was approximately $680 million, up from approximately $492 million a year ago, and $665 million in the third quarter. Total capitated revenue in the quarter was approximately $651 million, in line with our expectations. In the quarter, Medicare Advantage PMPM was $1,084, down 4% sequentially due to the increased mix of new membership. Fourth quarter Medicare DCE PMPM was $1,374, up 13% sequentially, based on the latest Medicare DCE benchmark data. Additional information about our membership mix and our PMPM is available in our press release and updated financial supplement posted this evening on our website. Our medical cost ratio, or MCR, in the fourth quarter was 76.1% compared to 78.1% in the fourth quarter of 2021, while the full year 2022 MCR was 79.1% compared to 80.5% in 2021. The year-over-year improvements in the quarter and full year were driven primarily by lower MCRs in our non-DCE service lines. As we have said on prior calls, Medicare DCE has a higher MCR than our capitated revenue. So the increasing mix of Medicare DCE members increases our total MCR. Excluding Medicare DCE, our MCR was approximately 71.7% in the fourth quarter of 2022. compared to approximately 77.7% in the fourth quarter of 2021, while the full year 2022 MCR excluding DCE was approximately 75.1% versus approximately 79.7% in 2021. Direct patient expense in the fourth quarter of 2022 was 11.4% of total revenue. This was above the third quarter of 9.6% and reflects higher performance-related payments to affiliates, which was due to favorable performance. SG&A expense in the fourth quarter of 2022 was approximately $108 million, down from approximately $112 million in the third quarter. SG&A was 15.8 percent of total revenue in the quarter, compared to 19 percent in the fourth quarter of 2021, and 16.8 percent in the third quarter of 2022. We expect further improvements in our SG&A ratio in 2023 as we realize the full impact of operating efficiencies from actions taken in the fourth quarter of 2022 and early 2023. As Marlo mentioned, these actions include a reduction of headcount to align with our revised plans for growth, implementation of tighter controls on spending, and better contract terms with our vendors. The impact of these items is projected to generate approximately $70 million in cost reductions in 2023, which are offset by costs associated with the growth in our operations during 2022 and 2023. Adjusted EBITDA in the quarter was $35.7 million, up from $11.1 million a year ago. The fourth quarter adjusted EBITDA included a lower add-back for de novo losses reflecting the roll-off of de novos that have been open for more than one year. Now let me turn to our cash flow and liquidity. We ended the fourth quarter with about $27 million in cash. Total debt at the end of the fourth quarter was approximately $1 billion and included current and long-term debt, capital leases and payments due to sellers. Our total net debt, defined as total debt less cash, was $987 million as of December 31st. Cash used in operating activities was approximately $146 million for the full year and approximately $62 million in the fourth quarter. The fourth quarter use of cash was primarily due to higher working capital requirements related to higher accounts receivable. At the end of 2022, we drew $84 million of our revolver, and through the end of February 2023, we had an outstanding balance of $99 million. As we move into 2023, we remain focused on improving cash from operations and free cash flow. I will provide further details shortly. Earlier this week, we announced the closing of a $150 million term loan with Diameter Capital Partners and Rubicon Founders. We intend to use the net proceeds of approximately $140 million from the transaction for general corporate purposes, including the repayment of outstanding amounts on our revolving credit facility. Importantly, in 2023, we intend to pay the interest on the term loan in kind instead of cash. Details on the 2023 term loan are provided in the 8K filed on Monday, February 27th. This financing provides Cano Health with the capital needed to optimize our existing capacity and unlock the embedded profitability with our medical centers. Now let me touch on our outlook for 2023 and the strategic changes we are making to improve cash flow and profitability. We are focused on leveraging our market-leading scale and density, particularly in Florida. Growing membership will increase capacity utilization at the existing centers, which we expect to improve margins. 2023 year-end total membership is expected to be in the range of 375,000 to 385,000 members. We expect Medicare Advantage membership to grow 7% to 9% year-over-year. We expect Medicare DCE or ACL REACH membership to increase approximately 55% year-over-year. We received most of our new ACO REACH membership in January of each year from CMS claims-based alignment. On January 1st, we had approximately 68,000 ACO REACH members. We expect this membership to decline slowly throughout the year due to natural attrition, and in the year approximately 10% lower than January 2023. We expect Medicaid membership to be flat in 2023 as redeterminations are expected to offset underlying growth. We expect ACA membership to increase approximately 70% year-over-year. Note that we had approximately 80,000 ACA members in January 2023 due to expanded relationships with ACA payers. We expect modest increases throughout the year. Total revenue is expected to be in the range of 3.1 billion to 3.25 billion, which represents growth of approximately 16% at the midpoint. We expect Medicare Advantage revenue to be flat year-over-year as membership increases are largely offset by a 10% to 15% decline in full-year Medicare Advantage or MA PMPM. We expect the MA PMPM in the first quarter of 2023 to be generally in line with the MA PMPM in the fourth quarter of 2022 and decline sequentially throughout the year as we add more new members who start with a lower PMPM. During 2023, we expect to have a higher proportion of non-risk MA members compared to 2022. In 2022, non-risk members represented approximately 5% of total MA members. In 2023, we expect non-risk members to represent approximately 10% of total MA members. Non-risk members have a lower PMPM than at-risk members. The higher mix of non-risk is due to growth in non-Florida markets and the impact of our December 2022 acquisition, which added about 7,400 members. the significant majority of which are currently non-risk. We anticipate converting this membership to risk over time as we integrate this acquisition into our business. We do not expect material differences in the full year revenue PMPM for our ACO REACH, Medicaid, or ACA service lines compared to full year 2022. Turning now to MCR, we expect the full year 2023 total MCR to be in the range of 81% to 82%. In 2022, we recorded a reduction in third-party medical costs of approximately $44 million related to claims assigned to a third party. We do not expect this reduction to continue in 2023. Excluding this benefit, the normalized 2022 MCR was approximately 81%. Moreover, as in previous years, we expect MCR to be materially better in the second half compared to the first half of the year. The higher 2023 MCR guidance versus normalized 2022 MCR is primarily driven by a higher mix of ACO REACH members, which typically have a higher MCR than our other service lines. The full year 2023 ACO REACH MCR is expected to be approximately 93% compared to approximately 91% in 2022. Moving to adjusted EBITDA. As you know, we have been adding back de novo losses as part of our adjusted EBITDA calculation. This adjustment was helpful to management in evaluating the business when we were rapidly building out our center footprint, particularly in new markets where new medical centers ramp more slowly. Given our current strategy to significantly reduce the number of de novos ads, we have revised our definition of adjusted EBITDA to no longer add back de novo losses, which makes it more comparable to cash earnings. This is the only change we have made to the adjusted EBITDA calculation. Please see our earnings release and financial supplement posted to our website this evening for more information about this change. Excluding de novo loss ad backs, we now expect our newly modified full year 2023 adjusted EBITDA to be in the range of $75 to $85 million. By comparison, had we excluded de novo loss ad backs in 2022, the full year 2022 adjusted EBITDA would have been approximately $74 million using the new definition of adjusted EBITDA. And as a reminder, 2022 results include the reduction of third-party medical costs of $44 million that we do not expect to continue in 2023. Additionally, we expect 2023 interest expense to be approximately $100 million, which includes approximately $90 million of cash interest and approximately $10 million of non-cash interest related to the 2023 term loan. Stock-based compensation in 2023 is expected to be approximately $50 million. For reference, de novo losses, which as we said are no longer added back to adjusted EBITDA, are expected to be approximately $45 million compared to approximately $79 million in 2022. Also, we expect capital expenditures to be approximately $15 million in 2023, compared to approximately $50 million in 2020, two, reflecting fewer additional de novos in 2023. In 2023, we expect cash used in operating activities will be in the range of $70 million to $80 million, compared to 2022 cash used in operating activities of $146 million, a projected $71 million improvement at the midpoint. As Marlo mentioned, a key objective for 2023 is to optimize our value-based platform with the goal of improving the balance sheet and cash from operations. As you know, our non-Florida medical centers are generating losses. In 2023, we expect non-Florida medical centers to generate approximately $100 million of revenue and approximately $40 million of adjusted EBITDA losses, excluding corporate expenses. compared to approximately $70 million of revenue and $60 million of adjusted EBITDA losses excluding corporate expenses in 2022. Note, we are using adjusted EBITDA under our newly modified definition for both periods. While we have made progress towards achieving profitability for these centers, we are committed to accelerating the company's path towards positive free cash flow. In conclusion, During 2023, we expect to continue to generate solid revenue growth. We are taking important steps to improve our cost structure and unlock embedded profitability within our medical centers to meet our goals of improving adjusted EBITDA and cash flow and maximizing long-term value for our shareholders. With that, I will ask the operator to open the call to your questions.

At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press star one. Thank you. Your first question is from the line of Gary Taylor with Cowan.

Your line is open. Hi, sorry, had to get my headset picked up.

Okay, that was a ton of detail, Brian, so I have to pick and choose where I want to ask. But maybe let me just start with liquidity, so make sure I have this correct. So $27 million of cash, there's another $21 million available on the revolver, and we have $150 million term loan just closed. That's $198 million basically available to set up against the cash from ops guide you just gave?

That's right, based on the fourth quarter.

Okay. One other question I've asked, how are you looking at the 2024 advance notice and that risk score scenario? model change. Obviously, the way they're moving the weightings around on the ATCs and removing some of the diagnosis codes, there's some underlying, you know, current that some providers would be impacted, you know, more than the, or in some plans, more than the 3% that, you know, CMS sizes for that risk score.

Edwin, do you have a thought on that yet? Molly, you want to take that?

Let me take that, Gary, and I apologize to you and the rest of the audience. I'm just getting over a cold, so my voice is a bit hoarse, but please feel free to ask again if I'm not clear. So on the rate notice, this is something we've been looking at, and I feel it's too early to really give you anything definitive. First, the rates are not finalized, but as we look into our data, we've looked at large representative sample of our data from 2022, working with our market leaders and payers. We found that some of our members had a lower score, some members have a higher score. Net-net in the absence of changes or mitigating factors, it may have a potential of a 2% headwind on our MRA scores, which is highly correlated to MA revenue p.m. p.m. important to note that mitigating factors to that roughly two percent headwind include changes to the payer bids the payer makes itself what happens ultimately with the star ratings and that is also going to be embedded within our own payer makes the growth in our population provider risk share type of offsets, and risk trend among or specifically MRA risk trend among other operating type of adjustments. So, there's a lot that would go into answering the question once those rates are finalized. Direct answer is if you just look at the MRA component by itself, which should not be looked at in a vacuum, you're looking at a potential 2% headwind. We also have the benefit of starting from a much lower place than many others. And as you can see, we're taking a very cautious view as to our revenue rates, PMPM, this year with the impact of new membership and new geographies. Therefore, don't expect at this point material impact.

I appreciate that's helpful. I was just reading recently the American Physicians Group had sent a letter to CMS saying that the risk or model change could disproportionately impact minority populations and populations of color just because of some of the diagnosis codes they're pulling out of that. And given your larger Hispanic population, I guess it kind of It's good news. It sort of flies against what they're saying. So I appreciate that.

Well, Gary, let me expand on that. And part of the reason is that there was significant changes to diabetes codes. And those rates are quite high in underserved population and minority populations. At the same time, you have adjustments to the normalization factor, as you know. and adjustments to CHF, chronic kidney disease, and other codes. And it does really depend on the specific provider population and where scores are at and which specific codes are utilized, but yes, In populations that are hyper-specific to a particular diagnosis code, which is more common in minority populations, it may have, indeed, a disproportionate impact.

That's it. I think just, I mean, to your point, I appreciate the thought. I mean, if your population, the risk score alone, the 2% headwind, it's not just an issue for you, it's an issue for the plans that you're contracting with that they need to find a way to potentially offset that with their bid and benefit package. So I appreciate the comment. Okay, thank you very much.

Your next question is from the line of Jaylandra Singh with Truist Securities. Your line is open.

Thank you, and thanks for taking my questions. My first question, I know there are a few moving parts here when comparing 2023 EB Dow to look what's at 22. So it'll be great if you can spend some time on your expectations around the margin and MLR trends on the MA lives you have brought on board over the last couple of years.

Are those in line with the ramp you generally expect in year two and beyond to be any collaboratively helpful?

So, Jaludra, let me start, and Brian can follow up. But we see our medical cost ratios going down year over year. The only reason that it's comparable is that we have, on a consolidated basis, a higher proportion of DCE members, which naturally have a higher MCR. As I mentioned in my prepared remarks, we are seeing lower utilization. So our admissions per thousand, roughly 7% down, even as we have grown, and we expect continued improvement in clinical outcomes for which the APTs is a very good proxy. So, overall, we're seeing margin expansion or improvement in underwriting margin. Brian and I talked about the operating adjustments that we made to gain further leverage on the business. on the SG&A as an example to drive more earnings and cash. So when you look at our new definition of adjusted EBITDA, which does not add back de novo losses and is more of that proxy for cash, you are seeing improvement year over year. And when you take out a potentially non-recurring reduction in third-party claims, which is $44 million, that gets you to about a $30 million comparable adjusted EBITDA versus the $80 million that we're guiding at the midpoint. So you can see there the material improvement in year-over-year, and we're integrating a significant number of new members, as you know, recently new over the past 12 to 18 months, proud of the team and how they were able to find the different action items to do improve the operations and start reengineering the company for cash generation. As you know, in 2022, we got less contribution margin than expected for our members and at the same time had an inflationary environment and higher interest rates. And our team quickly, you know, put their heads down and while continuing to serve a much higher than expected number of total members, also expanded margins and we're continuing that momentum into 2023 with great clinical care and also operating efficiencies.

Okay, that's helpful. Just one quick follow-up.

You know, you guys talked about non-Florida medical centers, EBITDA loss improving there. Any color, like, how would you describe the trends there when compared with your internal expectations? And when you return to adding de novos in future, should we expect any changes to your approach in terms of picking new markets outside of Florida, like, in terms of approach around, like, picking markets, around investments? Just curious, like, I mean, how do you think about that?

Great question, Jalinder. Appreciate it. Clearly, we like the trajectory the non-Florida markets are going. Nice improvement year over year from 22 to 23, which, as you know, all fits in with our scale and density strategy that we've had in those markets. And as you added more centers, you're going to get that leverage. And I would say, as we would expect, those markets Markets will continue to improve as we add more members to those existing centers. Since we're not really going to be adding additional medical centers in those existing markets, that new membership all funnels into the current medical centers we have there. So, you know, we would expect them to continue on that trajectory into, you know, 24 and beyond. You know, and I think what's proven out is the markets we've selected are really strong markets for growth opportunities, and the assets that we've built there are really good assets that have good growth potential.

Great. Thanks a lot.

Your next question is from the line of Andrew Mock with UBS.

Your line is open.

Hi. Good evening. Question for Brian. Just wanted to follow up on the 2023 guidance. Your EBITDA guidance is flat to up $10 million for 2023, but I think you called out $70 million or so of SG&A cost reductions. So if costs are getting $70 million better, can you help us understand what the offsets are in the 2023 guide to hold EBITDA relatively flat? Thanks.

Yeah, I think there's a number of puts and takes in there. You know, on the SG&A side, it's important to note, you know, the way I look at it is really more from the higher level, which is SG&A as a percentage of revenue, which is going to significantly improve from 22 to 23. As you can imagine, we built a significant number of medical centers in 2022. And they were not all at the beginning of January. In fact, most are in the back half and even in the third quarter. So we've staffed them up, and now you have the annualization effect of those costs for those centers. So that will, while we've made great progress in reducing our cost basis around the expenses that we have, we have just the annualization effect of that ramp that we did in 2021. that now is coming into 23. So that really offsets a lot of those savings. So the nice part about it is we are seeing significant SG&A as a percentage of revenue improvement. So we are getting that leverage as we optimized our workforce and our staffing levels across the organization. So that's from the SG&A side. And then I think you kind of take a look at some of the other initiatives that we have in the underwriting margin side. Marlo talked about Not only have we executed a number of called payer and payer action items, we still believe we have more to go. And we'll talk about those as we go through the year to generate additional improvements.

Got it. Can you provide the de novo loss number that you're expecting for 2023? Yeah, it's roughly I think $45 million or so for 2023.

versus 79 million in 2022. Got it.

Okay. And as we assess the forward guide, I think it would be helpful to hear one last time maybe the postmortem on what exactly went wrong in 2022 with respect to the lower revenue yield on your members and what changes you made in operations to give you confidence in projecting this forward. Thanks.

Yeah, let me take that, Andrew. The PMPM surprises negatively because of less revenue per new patients than we had historically seen in new and existing markets. We also had more non-risk patients. And as a result of those factors which Brian described, we're taking a more cautious outlook into this year. What also compounded the issue was the rapid rise in inflations and interest rates, which as a result of us serving more patients than anticipated in total, which also was a positive surprise, but we have to definitely make the investments that our patients expect from us in our differentiated care delivery. But then you have the inflationary type cost and the higher interest expense that we have to burden. We moved decisively to make operating adjustments that on the last call, I described that at a high level and we have now quantified for you, taken out 70 million in SG&A through the negotiation with vendors and other operating efficiencies. We also moved to reduce headcount, aligning it with growth. renegotiated payer agreements, affiliate agreements. We optimized our affiliate network that improved the underwriting margin. We have also reduced our capital expenditures, and that's a $35 million of year-over-year type of savings. So when you put all that together, combined with continued growth, great momentum in the business, and the three items that I described for 2023, is why I'm so confident and so excited about this year. So we had a growth that outstretched our liquidity to support it. Therefore, we capitalized the business, have more roughly double of the liquidity required for this year's growth and operations. We continue to optimize our operations, and there's further work to do there to gain efficiency. And three, we're going to fill existing capacity, which is significant, and leverage the scale and density that we have. So, I would like to focus in on that, the scarcity of of primary care and the long-term fundamentals. And this year is going to start to unlock the value that we have intrinsically built over the last couple of years in particular.

Okay. And lastly, maybe, can you provide more detail on the goodwill impairment charge of $323 million? There wasn't a lot of detail or disclosure around that. Which asset specifically did the write-down relate to? Thanks.

Yeah, I mean, I would say, you know, we take a broad look at the overall organization. But the way to think about it is, you know, the test is a fair value test and is heavily determined by stock price. Our stock price, unfortunately, declined from September, when we would normally do this, to December. require an additional goodwill test to be formed at the end of the year. You know, so the $323 million just essentially represents the excess of that carrying value or the fair value. But, you know, it's really a broad look of the enterprise.

And doesn't it relate to the excess of the fair value of assets that you purchased?

That's correct. So you kind of take a broad look at all of them. Take a broad look at all of them.

Okay.

Nothing specifically that you would point out of what's driving the write-down? No. Okay. Thanks.

Your next question comes from the line of Josh Raskin with Nefron Research. Your line is open.

Hi. Thanks. Good evening. Was there a thought about slowing membership growth to reduce sort of the short-term losses or is it more critical in your mind to fill the centers and maybe specifically on DCE where if you're accruing an MLR of 93, I'm just not sure, maybe that is still profitable with a low GNA, but just curious on thoughts on membership growth.

Yeah, so we have all of this embedded capacity which we are growing organically as you know Josh two-thirds of our new patients come from other patients even as we have reduced as part of our operating efficiencies marketing costs we continue to see robust enrollment figures at our centers in light of the state of capital markets. It certainly behooves us to moderate our growth expectations. And so the focus of this year is one in which we fill the existing capacity. We continue to harness further operating efficiencies. and we improve the internal cash generation and liquidity as we optimize our platform to selectively execute on a creative opportunities. But yes, our growth has to be in line with the cost of capital. And for us, the investment being made, the great momentum in our business will be very selective and thoughtful as to which additional growth opportunities to attain. Our focus this year is growth at the existing markets and centers.

Okay. That makes sense. And then, you know, the comment in the press release and then, Marla, that you mentioned on the call about being committed to reviewing all aspects of your value-based care platform to improve liquidity and cash flow and maximizing shareholder value. I guess a simple answer, a simple question is sort of what does that mean? Are there non-core assets at Cano that you see in your view with those comments directed at sort of the non-Florida assets? Or, you know, maybe just help us understand a little bit more what that review means.

Yeah, so our review is availing ourselves of all of the options. We've got our goals, which we have clearly defined, and the options of disposition or closing or consolidation of any of our centers or operations Those are all actively being reviewed. We have a relentless focus on improving our internal cash generation, further strengthening liquidity and balance sheet.

Gotcha. And the potential, when you say disposition or, you know, even closing or selling whatever of that, is that more a non-Florida comment or is that all including Florida?

I think that...

It's more of an all-inclusive type comment. Brian mentioned in the prepared remarks to give examples of how we're seeing very strong growth improvement trajectory outside of Florida, but those markets are still the ones that are using the most cash, and those centers are the ones using the most cash, so require a deeper look than our more established base business in Florida. But even that base business in Florida, we are taking a very close look at every medical center, every operating avenue to align with our 2023 scorecard as I very specifically made that clear.

Okay, perfect. Thanks.

Your next question is from the line of Adam Ron with Bank of America. Your line is open.

Hey, thanks for the question. Can we talk about the renegotiated payer contracts and give us on any color what specifically changed? And you mentioned some remaining action items. And I'm just curious, like, what the term of those contracts typically are in terms of years. And finally, you know, just curious how those negotiations typically go in a state like Florida where you have, like, much more density versus maybe a Nevada where you don't.

Right. Well, let me answer that last question. First, there's a scarcity of providers like ourselves with the breadth and scope of services at a scaled regional and national level. And so, for any payer, even if we are new to a particular market, they will have a hard time looking for provider organizations that can measurely improve quality ratings that affects HEDIS, that are able to take global cap risk, that are able to grow membership because of a differentiated service. The second part to that is the contracts, well, they do – range from evergreen contract to specific term type contracts, a year or two and so on. It is bespoke. But the terms that are negotiated are the percent of premium or funding rate. So that is an area that we have made significant improvements on. There are other specific terms such as the primary care cap or what kind of advance we're getting, what kind of charges we're getting for stop-loss if we use the payer stop-loss rather than another third party. There is related agreements on marketing and contributions from the payers and 50-50 type campaigns. There are more nuanced components to the agreements that affect economics, including what risk levels, which parts of Medicare are included, what networks. And I don't think we should get into it on the call, but that is from a broad strokes perspective is what we look at and what we will continue to optimize.

No, that's helpful. Appreciate it. And last quarter and on this call, you mentioned either optimizing or deactivating affiliate providers, but it looks like at least at the end of the year, you have 1,900 providers versus the last disclosure of 1,500 for the affiliates. So should we still think about it as growing in 2023? No, we're growing. That's for sure. But growing with an eye on

profitability and cash flows, rather than putting our foot on the meeting the demand pedal. And that includes DCE or ACO reach as an example. We did do a fair amount of trimming, but there were other high-performing providers that we agreed to contract with, and we do expect growth in our caplight affiliate model. as well as to fill the existing capacity at our medical centers.

Okay. Thank you so much. Of course.

Your next question is from the line of Justin Lake with Wolf Research. Your line is open.

Thanks. I had a couple follow-ups. First, on the 45 million of de novo note losses, can you tell me what the definition of that is? Is that 45 million loss kind of everything outside of Florida that you've built recently, or is that just the stuff built over the last 12 months or what have you?

Yeah, no, Justin, that's the way we've always, you know, we report is the aggregate de novo loss ad backs that's across any de novo. that we've opened. And keep in mind, the definition is losses ramping up to open and then 12 months after open is all part of that number.

Okay. And the one thing I'd love to, if you take a look back, right, obviously the adjusted EBITDA number is very different than what you would have been looking for. And one of the ways I'd love to think about it is just If I think about your business in three pieces, right, like the core Florida footprint that Kanoa was, you know, when it kind of entered the public market, you did a couple of big acquisitions, you know, spent about a billion dollars on doctors, medical center, and then university health. And then everything you've built outside of Florida. If you were to break it down to those three pieces, just kind of broad strokes, I'd love to see kind of how you think about that $80 million of EBITDA.

How would that bucket? Yeah.

So, Justin, it also has the second year type of costs that are not being added back that are being absorbed by that $80 million number. And as you know, we've opened a significant number of medical centers relative to that original base business. in Florida and outside of Florida. And centers typically take a couple of years to break even. Those outside of Florida take a little longer to break even because you don't have the benefit of the scale and density. We see growth across all three of the buckets that you mentioned. in terms of the acquisitions, regional-based business, and de novos in Florida and outside of Florida. We do see improvement in the important components of those businesses. And I highlighted, and Brian did as well, the improvement in the underwriting margins, which you can see in the consolidated business, You can also see the SG&A improvement and obviously the growth in general in membership, which is driven throughout the organization. The contribution margin, however, from that growth end, just looking at a current cost structures from 2022 required us to make adjustments. We are relatively unique among our peers in terms of how we generate cash with medical center business and particularly so much of our medical centers that are below capacity. I would say everything with we can roughly double our membership at our medical centers without additional expense. That's how much capacity availability we have and thus embedded profitability among our centers. And so we have now gotten the runway to unlock that profitability. continue to optimize the operation. We have great overall momentum and are reviewing the different additional options that I described to further improve cash flow and liquidity, as we do have highly accretive opportunities in front of us, but we are taking a rather cautious look at how we deploy, you know, cash. We want to ensure that we get to our stated goal of free cash positivity and then drive additional growth from that point.

Okay, thanks for all the call.

Your final question comes from the line of AJ Rice with Credit Suisse. Your line is open.

Hi, everybody. Thanks. I wondered if I could maybe just make sure we tie the knot completely around the new financing and what that gives you. I know in the last few years there's been quite a swing in the working capital demand or needs, I guess, entry year. when you look at that 70 80 million of cash usage i wonder how much uh is there a maximum point of uh drawdown on some of your availability that's higher than what might be implied by that 7 to 80 when you look at it sounds like you're trying taking a lot of steps to minimize volatility in your working capital but i wondered if you've looked at that and do you have any color on it and i wondered also whether there was any uh covenant terms in the new financing or your existing financing that are particularly, you know, acting as any kind of constraint on the business going forward that you're particularly focused on? In other words, how much leeway to move forward operationally to any covenant terms that are on these deals leave you with?

Yeah, so I think I understand where you're going. You know, I think the way we're looking at it is You know, we have, depending on whether you look at fourth quarter or where we just talked about in the February, $180 million of liquidity to execute on the goals that Marla laid out in a very thoughtful and deliberate way. So, you know, this is the nice part about the additional financing that we just received. You know, and it's really, The covenants within the agreement are very similar to the existing term loan covenant agreements that we have. And, you know, there is a maximum limit within the covenant, but it's important to note that the definition or the calculation of that credit adjusted EBITDA is different and more liberal. then you can get right off our financial statements. But as we look at it and we look at the projections, we expect to have sufficient headroom in our leverage ratio, given where we are now.

Okay. Obviously, the last number of months, a lot of stuff has played out in the public domain, and you guys probably would prefer to be out of the public eyesight as much as you were. I wondered, and maybe there's nothing to talk about here, but I at least give you a chance to comment on it. When you think about adding affiliates, adding new doctors, when you think about your relations with health plans, can you just sort of comment on how things have unfolded in recent months and whether that's had any impact on your relations or the dialogue you've had? What have you done to sort of reassure key constituencies that you're on track and everything's good.

Well, I would say as it relates to patients, we're serving more patients than ever and far ahead of our expectations. We continue to have the same contracts with all the major national players and going very significantly. So ultimately, it comes down to the differentiators of our business, which is our ability to serve the underserved, to have scale and density in key markets in those key areas and deliver the service and clinical, you know, quality that continues to be in very high demand.

Okay. Maybe one last technical question. I think in the prepared remarks you said in your guidance that MCR would improve in the back half versus the first half. I think that's the whole book, but maybe it's MA specifically. Is that related to your reinsurance or is there something else you're calling out when you... when you think about that.

Yeah, no, I think you're right. We're expecting that the seasonal, you know, first quarter to fourth quarter pattern that we would normally expect, you know, there's a number of factors in there, but generally you're going to see starting off at the high end and improving throughout the year. And, you know, so it's very consistent with what we've seen in the past. All right. Thanks a lot. Thank you. And thanks, everyone, for joining. And we're here for any additional follow-up questions. And thank you, and have a good evening.