Convey Health Solutions Holdings, Inc.

Good afternoon and welcome to Convoy Health Solutions first quarter 2022 earnings conference call and webcast. After today's presentation, there will be an opportunity to ask questions. Leading the call today is Stephen Farrell, Chief Executive Officer, and Tim Fairbanks, Chief Financial Officer. John Steele, Convay's Executive Vice President of Technology, is also joining the call. Before we begin, we would like to remind you that certain statements made during this call, including during the Q&A, will be forward-looking statements pursuant to the Safe Harbor Provision and Private Securities Litigation Reform Act. These forward-looking statements are subject to known and unknown risks and uncertainties and reflect our current expectations based on our beliefs, assumptions, and information currently available to us. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes may differ materially from those made in or suggested by such forward-looking statements. Factors that could cause actual results to differ materially from those reflected in forward-looking statements include the risk factors section of the company's Form 10-K for the period ended December 31st, 2021, and its other filings and the Securities and Exchange Commission. Expect as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. Additional information will also be set forth in Convay Health Solutions quarterly report on form 10-Q. For the quarter ended March 31st, 2022, which is expected to be filed later today. In addition, please note that the company will be discussing certain non-GAAP financial measures that it believes are important in understanding and assessing its financial performance. Details on the relations between these non-GAAP measures to most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website. With that, I'd like to turn the call over to Conway Health Solutions CEO, Stephen Farrell. Stephen, please go ahead.

I'd like to thank you for joining us for our first quarter 2022 earnings call. I'm joined today by Tim Fairbanks, our Chief Financial Officer, and John Steele, our Executive Vice President of Technology. We just concluded our fourth quarter as a public company. We continue to perform well. It's been less than two months since our last update, so my comments on strategy and the business will be a bit abbreviated. Today, we reported net revenues of $96.7 million for the first quarter of 2022, an increase of 17% over last year. and adjusted EBITDA of $15.3 million, which is in line with our expectations outlined on our March call when we indicated that we expect the balance of 2022 to have higher margins than the first quarter. We believe the recurring nature of our business makes our revenue, adjusted EBITDA, and cash flow generation attractive and generally predictable. We expect to continue to achieve strong growth going forward as we have excellent technology, a strong management team, and we are a leader operating in growing markets. We are not currently changing our guidance for 2022 that we just recently provided on March 23rd. We continue to be confident in our ability to execute for the remainder of 2022. We successfully onboarded new clients in the first quarter, and we believe we are on track for the year with our cross-sell and up-sell activities. As we mentioned in our call at the end of March, like many other companies in the United States, we've experienced some supply chain challenges. Those challenges caused some incremental labor and shipping costs in the first quarter. Let me take a minute to elaborate. Our margin percentage pressure in the first quarter was not primarily caused by higher labor rates or by higher costs of specific inventory, although they were a small factor. We've done a really good job managing labor rates and inventory costs, partly by leveraging our technology to drive efficiency and partly because we are leveraging our offshore capabilities. In the future, we expect to leverage the supply chain expertise of our HealthSmart team, which will improve inventory costs, although we experienced very little of that benefit in the first quarter as we just closed on that acquisition. Our margin pressure in the first quarter was primarily due to longer lead times for inventory. Let me explain. Lead times for inventory, the time between when we place an order and the time it is received by us, were longer than we expected, which created an inventory shortage. We didn't order enough to get the orders in-house to meet the high demand we experienced. In order to meet our client needs, we incurred incremental shipping charges to expedite deliveries, and we also incurred higher labor expenses related to both shipment and member engagement to manage the inventory shortfall. We believe we will be able to more effectively manage these supply chain challenges and that our HealthSmart acquisition should help as we are now better positioned to leverage their manufacturer relationships to deliver high-quality and cost-effective products on time. We are also leveraging our Philippines footprint and our work-at-home skill set at safety valves. So, although we may continue to have some short-term headwinds due to the labor, inflation, and supply chain challenges, we continue to think it is manageable. And importantly, we are seeing strong momentum in our technology and service offerings. Although early, our 2023 selling season is off to a good start and is tracking well so far. In closing, we delivered another solid quarter starting off the year with net revenues up 17% compared to last year, and we believe continued revenue growth will translate into higher margins as the year progresses. We continue to help our health plan clients increase revenue, engage with members, and operate more efficiently. So our value proposition continues to be strong. We will be attending the Bank of America conference tomorrow and look forward to seeing many of you there. Now I will turn the call over to Tim, who will provide more details on our first quarter. Then we will open the call up to questions.

Tim, thank you, Steve, and thanks to everyone for joining the call today. We generated strong first quarter 2022 financial results with net revenues increasing 17% to $96.7 million compared to $82.6 million in the first quarter of 2021. Our technology-enabled solution segment revenue was $83.2 million, which is a 20% increase over $69.6 million during the first quarter of 2021. The increase is primarily driven by growth in both supplemental benefit services and health plan management revenue. Our advisory services segment revenue was approximately $13.5 million during the first quarter of 2022, compared to $13 million in the first quarter of 2021. While we believe our advisory services business continues to grow nicely, the quarter-over-quarter comparison was impacted by a strong first quarter of 2021, which benefited from pent-up demand when our clients continued to return to their office after a pandemic lockdown. We generated a net loss of $1.2 million during the quarter, driven by $1.6 million of one-time expenses related to the HealthSmart acquisition that closed February 1st. Included in these costs is a $1.2 million non-cash inventory step-up needed for purchase accounting. Note this one-time expense will impact year-over-year margin comparison but have no impact on cash or adjusted EBITDA. Adjusted EBITDA was $15.3 million for the first quarter of 2022 compared to $15.9 million in the first quarter of 2021. While our first quarter adjusted EBITDA was in line with our expectations, we experienced some margin pressure related to higher staffing, inflation, and supply chain challenges exacerbated by our first quarter revenue growth. Interest expense was $3.7 million for the first quarter of 2022 compared to $5.5 million for the first quarter of 2021. This decrease reflects lower term loan balances following the second quarter of 2021 pay down using IPO proceeds. Also in July, we amended our credit agreement which reduced our effective interest rate by approximately 75 basis points. Moving to balance sheet and cash flow items. As of March 31st, 2022, cash and cash equivalents totaled approximately 20.9 million and we had 39.4 million available on our revolver. Total debt excluding unamortized costs of 5.4 million was 270.6 million. This increase over last quarter reflects additional debt incurred in connection with the HealthSmart acquisition. Net cash used in operating activities during the quarter was $15.7 million, driven by a net working capital use of $26.5 million. We typically see higher than normal net working capital cash use during the first quarter as we pay down prior year liabilities. Finally, I'd like to thank our employees for their continued hard work and dedication. Operator, we are now ready to open the call to questions.