Cano Health, Inc.

Good afternoon, and welcome to Kano Health's first quarter 2023 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. Joining us on today's call will be Dr. Marlo Hernandez, Chief Executive Officer, Bob Kaverlink, Chief Operating Officer, Mark Kent, Chief Strategy Officer, and Brian Coppe, Chief Financial Officer. The Kano Health press release, webcast link, and other related materials are available on the investor relations section of Kano 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 covered by the safe harbor positions 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 included or 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 as 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 now turn the call over to Dr. Marlo Hernandez, CEO of Kano Health. Please go ahead, Doctor.

Thank you, and welcome to the call. We appreciate your joining us today. I have been looking forward to having this opportunity to discuss with you the operating progress we are making on the action plan we described on the last call. Like everyone here, I'm disappointed by our share price performance, and my team and I are laser-focused on the near-term execution of that plan. During today's call, you will hear from our Chief Strategy Officer, our Chief Operating Officer, and our Chief Financial Officer. You will hear from them how we're streamlining operations, improving operating cash flow, and simplifying and optimizing our business model. We have continued to streamline operations, with SG&A expenses lower today than one year ago, though we have a business that's serving 44% more members. Our operating cash flow is improving despite higher interest rates due to maturing medical centers and the use of our capital light models. And we're simplifying and optimizing our business model through divesting certain non-core assets, trimming provider networks, and favoring profitable contracts to further strengthen our high-performing operations and markets. Channel Health's performance in the first quarter of 2023 reflects our continued focus on profitably growing our value-based membership and our commitment to greater efficiency and long-term value creation. As I mentioned in our last earnings call, we outlined a clear action plan And this quarter's results reinforce our confidence that we're on the right track and gaining momentum while recognizing there is still work to be done. Overall, our solid start to the year gives us confidence to raise our full year 2023 guidance for membership and total revenue and reaffirm the ranges of our medical cost ratio and adjusted EBITDA from our prior guidance. Shortly, you will hear more about how we are focused on near-term execution to maximize long-term shareholder value. Membership growth varied across service lines, reflecting ongoing execution of our disciplined strategy, prioritizing profitability and cash flow and ensuring strong clinical results. We ended the first quarter of 2023 with total membership exceeding 388,000 members, growing over 25% since December 31st and 44% from the first quarter of 2022. Our Medicare membership as of March 31st, 2023, was approximately 207,000, growing 16% since December 31st and 29% from the first quarter of 2022. The sequential growth was almost entirely due to ACO REACH as we thoughtfully trimmed our Medicare Advantage MA affiliate network. Total revenues grew to $867 million in the quarter. an increase of 23% from the prior year, and we're above our expectations due to higher capitated revenue per member per month for our Medicare membership, inclusive of ATO REACH and MA. Consistent with our focus on value-based care, our capitated revenue as a percent of total revenue is now 97%, which is a historical high. Clinical results in the first quarter of 2023 continue to reflect the differentiated capabilities of our value-based platform. Our key medical cost metrics, such as hospital admissions per thousand and high-risk patient visits, remain stable in the first quarter of 2023. Therefore, we expect our MCR to moderate as the year progresses, especially in the third and fourth quarters, as we realize the full benefits of stop-loss and pharmacy rebates. As evidenced by our consistently strong clinical outcomes, Channel Health has established a highly differentiated Medicare-focused business model. Last quarter, we indicated that management was evaluating all aspects of our operations to enhance shareholder value. After a thorough evaluation, we plan to divest certain non-core assets to narrow Kindle Health's operating focus to our core Medicare Advantage business and bolster our highest performing markets. We began this process in the first quarter with our team of evaluators and expect to complete the initial divestment in the coming months. We will provide further updates on this process at the appropriate time. In addition to the divestment of certain non-core assets, our management team is making important strides on near-term objectives to accelerate our path to positive free cash flow over time and fully realize the embedded earnings potential within our medical centers. The objectives of the plan we have in place are to sharpen our operating focus improve care margins, and simplify the core functions of our business, therefore reducing associate costs. Part of this essential work is streamlining the organization and making sure the right people are in the right roles. I'd like to turn the call over to Mark Kent, our newly appointed Chief Strategy Officer, who brings a proven record of effective healthcare operating oversight to his role. He will talk about the opportunities we see across our platform, to unlock synergies in our administrative functions and to optimize and expand margins through our affiliate partners, specialty networks, and payer contracts. Then Bob Kemerling, our Chief Operating Officer, will take you through the operational enhancements we are making to accelerate the path toward realizing the significant embedded earnings potential in our medical centers. Go ahead, Mark.

Thank you, Marlo. Since joining Cono Health earlier this year, I have been focused on enhancing the company's strategic planning process, identifying new synergies across the organization, and making it easier for our team members to execute our strategy. Ultimately, our goal is to improve profitability and generate positive free cash flow over time, and we believe there are multiple levers we can pull in connection with working to achieve that goal. For example, in addition to our planned divestiture of certain non-core assets, we are optimizing our affiliate operations to fully engage our affiliate providers and manage them against our higher performance standards to drive better results. This quarter, we executed on this strategy to prioritize high-performing MSO contracts and affiliates, which resulted in targeted trimming of some membership. This initiative moderated sequential membership growth in the quarter and may create near-term headwinds to our affiliate membership growth in this calendar year. However, we expect the incremental profitability generated through higher performing affiliates will have a greater positive impact on our financial performance over the long term than simply adding volume. As we mentioned on past calls, our focus is on achieving profitable growth. And as such, we would expect to continue to take action to trim underperforming contracts and affiliates throughout the year if performance does not align with our standards. Another area of focus is how we manage our payer agreements. Over the past three years, our rapid growth resulted in a significant number of new and varied payer agreements. Servicing these varied agreements added complexity and cost to everyday operations. and we are focused on simplification and related cost reduction by reducing the types of agreements in place. Based upon our thorough analysis, we also identified instances where the payer agreements may not have been fully aligned with our preferred model of care. And so now, we are working on modifying contracts to align the inherent economics of those partnerships to the clinical value we are providing. Moreover, we are holding our specialty networks to the same performance standards that we hold our affiliates and payers. As a result, we intend to continue to adjust contracts where appropriate and narrow provider networks. In doing so, we believe we are decreasing the administrative burden on our company and are making further improvements to our cost structure while improving patient outcomes. Collectively, we believe these levers represent an important MCR opportunity this year and into next. Therefore, we are excited to empower our team with the insight and authority to take these actions. With that, I'll turn the call over to Bob Kammerle, our Chief Operating Officer.