Evolent Health, Inc.

Welcome to Evelyn Health's earning conference call for the quarter ended June 30, 2020. As a reminder, this conference call is being recorded. Your host for the call today is Mr. Frank Williams, Chief Executive Officer of Evelyn Health. This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section entitled Investor Relations. Here are some important introductory information. This call contains forward-looking statements under the U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience of present expectations. A description of some of the risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission including cautionary statements included in the current and periodic filings. For additional information on the company's results and outlook, please refer to the second quarter news press release issued earlier today. As a reminder, reconciliations of non-GAAP measures discussed during today's calls to the most direct comparable GAAP measures are available in the company's press release issued today and posted on the investor relations section of the company's website IR.EvelynHealth.com in the 8K filed with the company with the SEC earlier today. At this time, I will turn the call over to the company's Chief Executive Officer, Mr. Frank Williams.

Thank you and good evening. I'm Frank Williams, Chief Executive Officer of Evelyn, and I'm joined by Seth Blackley, our President, and John Johnson, our Chief Financial Officer. First and foremost, I hope you and your families are all staying safe and healthy during what I know has been a difficult time for many. I'll open the call this evening with a summary of our recent financial results, as well as an update on the market, our current pipeline, and overall performance across the Evelyn network. I'll then hand it to John to take us through a more detailed financial review of the second quarter, And we'll close with an update on our organization and a summary of our key business and strategic objectives for the year. As always, we'll be happy to take questions at the end of the call. In terms of our results for the quarter, total adjusted revenue for the quarter ended June 30, 2020, increased 24.2% to $238.6 million from the comparable quarter of the prior year. Adjusted EBITDA for the quarter into June 30th, 2020 was 9 million. As of June 30th, 2020, we had approximately 3.1 million total lives on the platform. And with two partner additions in this quarter, we've welcomed five new partners to the Avalon National Network already this year. Overall, we're quite pleased with our top and bottom line results for the second quarter. And based on the strong financial visibility we have on the third and fourth quarters, we expect to outperform the full year 2020 revenue and profit targets that we outlined at the beginning of the year. Accordingly, we now anticipate delivering over 30% revenue growth in our service business for calendar year 2020. In addition, this past quarter, we continue to make solid progress on our margin enhancement initiatives and achieved an important goal of becoming cash flow positive ahead of our previous timing estimates. In terms of our ongoing response to COVID, the good news is that the initiatives that we put in place earlier this year have set us up well to support our partners comprehensively as the pandemic evolves into the fall and next year. In particular, our efforts to enhance our predictive risk stratification models as well as honing our care management outreach to incorporate social determinants of health for chronic condition patients, has had a meaningful impact on health outcomes for the populations that we serve. Our population health infrastructure serves as an important tool for our partners to manage community health in a comprehensive and integrated way. As the pandemic is, of course, an evolving and unprecedented situation, we continue to closely monitor each of our businesses and geographies, to ensure we're well prepared to address any significant issues should they arise. Lastly, as we shared several weeks ago, we're pleased with the agreement we're able to reach in the sale of certain assets of Passport Health Plan to Molina Healthcare and anticipate the transaction closing before the end of the year. We are heartened to see continued strong performance at Passport, including the plan's 1.9% operating margin across the last 12 months through June of this year. This has been a significant achievement since the retroactive rate cut from the Bevin administration went into effect and has represented a 14-point margin improvement since Q1 of 2019. Looking back at our key strategic and financial goals coming into 2020, we believe we're well on our way to accomplishing our most important objectives. First, we wanted to establish a diversified growth strategy across our total cost of care specialty care, and administrative solutions, which could serve the payer, physician, and provider markets. This has effectively expanded our addressable market to well over $130 billion, while diversifying our customer base substantially and setting up a differentiated strategy to drive consistent growth in the years ahead. Second, we were focused on delivering strong, immediate organic top-line growth in 2020. Delivering organic growth of close to 25% year-over-year this past quarter is evidence that our revenue strategy and that our solution offering continue to be well received in the marketplace. Third, we wanted to ensure a successful outcome from our work and investment in Passport. Across the last 18 months, we've delivered a 14-point turnaround in margins and strengthened the balance sheet significantly. Our collective effort established Passport as an attractive asset from Lena entering the Kentucky market and ensured that the brand and unique clinical approach will continue for several years to come. The transaction also provides continuity for the community, employees, and for members. Should Passport maintain its current performance into the second half of the year, we may also have an opportunity to generate a substantial return on our invested capital in the plan while also maintaining ongoing service revenues in Kentucky. All in all, a good resolution given the political dynamics with the previous administration. Fourth, we focused on driving demonstrable clinical and financial results for our partners. And as I'll touch on later, in outcome studies of our engaged members versus control groups, our clinical programs are delivering meaningful reductions in hospitalizations and total costs, as well as improvements in quality of care. It's this ability to drive tangible results which has led to growth within our network as well as new partner additions, including some of the most sophisticated national payers. Lastly, our continued focus on efficiency and cost improvement has led to margin expansion across this year and has allowed us to meet our objective of generating positive cash flow this past quarter ahead of our original timing estimates. Positive cash generation, as well as strong returns from the passport transaction, will continue to strengthen our balance sheet as we head into next year. Before providing a summary of the pipeline and some operational highlights, I'd like to provide an update on the overall market environment. Obviously, the pandemic has impacted geographic regions in different ways. At the time of our last call, there were much fewer COVID cases and fatalities in Texas and Florida and now the bounce back has reached crisis level in those states, which is putting significant strain on local healthcare systems. We're adjusting our response in terms of regional severity and looking to enhance the pace and reach of our clinical support efforts, particularly for the most vulnerable patients. From a macro perspective, we believe the impact on the overall economy, including pressure on state, federal, and employer budgets, will likely cause purchasers of healthcare services to enhance their focus on cost and value. We believe this will allow for opportunities to expand our payer and provider partner base as industry players look for value-based arrangements to diversify their revenue models and reduce healthcare spending growth. As we think about how this might translate to our core solution areas, we believe this market dynamic aligns well with New Century's value proposition and ability to deliver cost savings and quality care in a short period of time. We believe that's one of the reasons we're seeing strong pipeline momentum in this specialty care management area. On the total cost of care management front, we feel that the market impact is positive on a medium-term basis as CMS continues to roll out pathways to success, direct contracting, and other programs. We're hearing from a number of organizations about the importance of having a dual financial model, including fee and risk-based arrangements as a hedge against utilization and pricing risk on the fee-for-service side. Payers are also looking for provider partners that have the ability to manage delegated capitation arrangements, which can be an important driver of growth in this segment. On the administrative services side, we anticipate that regional payers will focus on operational platforms that integrate clinical and administrative capabilities, deliver demonstrable financial and operational improvements, and improve the provider and member experience. In terms of the pipeline, we remain on track with our projected range of adding six to eight new partners across the calendar year and maintaining renewal performance in line with last year. We're excited to announce two new partners this quarter, which brings us to five for this calendar year. The first is with a regional health plan based in the Southeast. New Century Health is fully launched and providing comprehensive oncology and cardiovascular management services to our partners, roughly 20,000 Medicare Advantage members, and we look forward to exploring opportunities to expand the partnership over time. Second, we're also very excited to enter into an agreement with Molina, a national payer with a broad market presence, and strong track record of delivering high-quality service to well over 3 million members across the U.S. Molina will leverage New Century's specialty care management services for cardiovascular care to support Medicaid plan members in Kentucky. In addition, we're excited to announce that New Century will also provide cardiovascular care services to Molina's members in the state of Washington where Molina already has several hundred thousand members and a strong presence in the market. Molina plans to deploy NCH's CarePro technology platform, evidence-based pathways, and peer collaboration model in both Kentucky and Washington starting in early 2021. In collaboration with the team at Molina, New Century has an opportunity to improve health outcomes while also driving more efficient care for patients. Launching in two states represents an exciting opportunity, and we're hopeful it will continue to expand across time. It's our ability to ultimately deliver on our core value proposition across our three solution areas and drive results that led to the growth this year and that we anticipate over the long term. First, New Century Health is performing well in terms of driving provider adherence to its high-value, evidence-based clinical pathways, and is also highly focused on driving strong performance on key cost and quality metrics. In addition, I'm proud to announce a team recently earned NCQA accreditation in utilization management, which we believe is a credit to the team's operational expertise and the strength of our clinical knowledge base. On the Evelyn Health Services side, the team has continued to perform well operationally in terms of its key member services, provider support, and call center management activities after rapidly shifting and mobilizing resources to a remote model a few months ago. The platform's use of automation, machine learning, and AI delivers a strong value proposition and differentiated offering in easing the administrative burden for providers and driving efficiency through an integrated solution. The team is hard at work implementing its platform and services with our partner, Maryland Physicians Care, and we're on track to go live at the beginning of 2021 to support more than 200,000 Medicaid beneficiaries in Maryland. Third, our Evelyn Care Partners team continues to demonstrate a high level of performance in terms of driving engagement at provider practices improving patient engagement, and serving Medicare beneficiaries across the U.S. Our provider engagement strategy is made possible by having aligned incentives. We ensure that independent provider organizations are rewarded for the value that they generate and can thrive in value-based care. Our technology platform, Identify, also plays a critical role in supporting practices with addressing their highest impact opportunities across their panel. Because of our substantive experience working with Medicare patients across populations and regions, we know which clinical programs and approaches will result in the highest yield and impact on outcomes and cost. From Q1 to Q2, the team delivered a five times increase in successful patient engagement using Identify and our local engagement efforts with the provider network. In addition, Our analytics platform enabled us to identify unexplained variation in local practice patterns and partner with local physician champions to drive measurable improvement. These activities helped our physician partners to craft a high-value referral network to maximize cost and quality outcomes. Finally, our care management programs continue to be a staple of our approach for Medicare and Medicaid populations. Recently, Certain members of our clinical team published an article in the American Journal of Managed Care demonstrating the success of our care management programs. The study evaluated Evelyn's complex care program, which targets Medicare beneficiaries with multiple chronic diseases across five Medicare ACOs over a two-year period. The study found that hospitalizations were 21% lower and total medical spend was 22% lower for high-risk beneficiaries who participated in care management programs versus high-risk beneficiaries who did not. Additionally, reductions were more than 40% among high-fidelity patients, those for whom the program was able to achieve the operational KPIs that we manage to on a day-to-day basis. These are the types of results that drive significant value for payers and provider organizations through the ability to deliver high quality care and lower costs. We also believe the significant financial turnaround at Passport demonstrates the kind of value we can create when we bring our three core solutions together in a holistic population health approach. Overall, We feel very good about our performance thus far and are confident in meeting our key objectives for 2020. We feel well positioned in the market and in our ability to drive consistent growth. With that overview, I'll turn it over to John to speak about our financial performance on the quarter.

Thanks, Frank, and good evening, everyone. I hope you and your families are staying safe and healthy during this unprecedented time, and I thank you for joining us. Our second quarter results exceeded our expectations on adjusted EBITDA and cash flow, largely as a result of strong performance across our customer base, the strength of our performance-based arrangements, and our overall cost containment efforts. The strength of our operations also translates to being on track to outperform the high end of our previously stated guidance range for the full year. Before going through our detailed results, I wanted to give a brief update on the COVID pandemic and its impact on our financials, which is modestly net positive for Q2 and our revised outlook for the year. As discussed during our first quarter earnings call, we are monitoring the pandemic across all areas of our business, but in particular in the three areas of membership, medical utilization trends, and liquidity. On the membership front, through June, we have seen modest increases in Medicaid enrollments across select clients relative to the first quarter, consistent with macro expectations during the COVID pandemic. These enrollment increases ramped across the second quarter and thus were not a meaningful contributor to our top-line performance in the quarter. That said, with over 50% of our lives in Medicaid, the continued shift towards higher Medicaid enrollments would likely be a net positive for us. Turning to medical utilization trends, as expected, the disruption of care patterns nationwide during the quarter resulted in a reduction in overall medical utilization. This drove a modest net benefit to the economics of our performance-based arrangements in the quarter, as expected, with lower utilization partly offset by expenditures made to enhance the accessibility of our services during this important time. Overall medical utilization across the country has largely rebounded from April lows, suggesting that this dynamic is largely behind us. Finally, we have been focused on operational discipline with a priority on liquidity and financial sustainability, which resulted in a positive cash flow for the quarter ahead of our target date for reaching positive cash flow by this fall. We now expect to be cash flow positive for the full year 2020. Now let me take you through our results for the quarter before turning to guidance. Beginning with our consolidated results, Adjusted revenue increased 24.2% year-over-year to $238.6 million. Adjusted EBITDA grew to $9 million relative to minus $7.7 million in the same period of the prior year. Adjusted loss available to common shareholders was minus $2.3 million, or minus $0.03 per common share for the quarter compared to minus $21.4 million, or minus $0.26 per common share, in the same period of the prior year. Turning to our segment results, in our services segment, second quarter adjusted revenue increased 45.1% to $217.3 million, up from $149.7 million in the same period of the prior year. The increase was primarily driven by new partner additions and cross-sell expansions within our existing partner base. Adjusted platform and operations revenue accounted for $216.5 million for 99.7% of our total services revenue for the quarter, compared to 147.8 million in the same quarter last year. As of June 30th, we had approximately 3.1 million lives on our full services platform, which excludes members covered by our light service offering. Our average PMPM fee for the quarter was $22.12, compared to $14.16 in the same period of the prior year, and $20.22 in the first quarter of 2020. Adjusted EBITDA from our services segment for the quarter was $10.5 million compared to minus $8.8 million in the prior year. Turning to our true health segment, we had premium revenue of $25.5 million in the second quarter, down $20.2 million from the same quarter last year. The drivers of this decrease are twofold. First, year-over-year revenue is down due to exiting the reinsurance agreement with New Mexico Health Connections in the fourth quarter of 2019 and slightly offset by membership growth within the individual and federal employee markets. Secondly, lower medical utilization driven by COVID-19 restrictions year-to-date raised the potential that premium rebates could be due based on minimum medical loss ratio regulations in the state of New Mexico. As a result, an approximate $4 million liability was booked in the quarter. True Health served an average of approximately 24,000 members in New Mexico in the quarter, up from approximately 17,000 members in the same quarter of the prior year. Claims expense as a percentage of premium revenue was 71% in the second quarter compared to 73.1% in the first quarter. Adjusted EBITDA from True Health for the quarter was minus 1.5 million. As we discussed in our 10-K filed in February, Passport's unsuccessful bid in the Kentucky Managed Medicaid RFP indicated a triggering event that required us to perform interim impairment testing. As of May 31, 2020, we determined that one of the three reporting units in our services segment, the one which was most closely associated with the Passport services, had an estimated fair value less than its carrying value. This resulted in a charge of 215.1 million that does not impact cash or our forward financial projections. Turning to the balance sheet, we finished the second quarter with 115.2 million in cash and cash equivalents and investments, an increase of 28 million versus the end of the first quarter, and principally driven by our adjusted EBITDA results and efficient working capital management. During the quarter, cash provided by operations was 37.7 million. Cash used in investing activities was $7.6 million and principally comprised $6.4 million of capitalized software development expense. Cash used in financing activities during the quarter was $6.7 million and largely comprised decreases to restricted cash accounts held on behalf of our partners for claims processing purposes. Finally, as Frank mentioned, Passport Health Plan, which we account for using the equity method, continues to perform ahead of our initial expectations of an overall profitable year. Overall, we are pleased with our progress against our financial objectives for the year thus far. As Frank mentioned, based on the strength of our revenue growth coming into the year, the success of our cost containment efforts and performance in our performance-based arrangements with our partners, we now have strong line of sight into outperforming our initial adjusted revenue and EBITDA guidance for the year. As a result, we are updating our full year guidance as follows. We are forecasting total adjusted revenue of $995 million to $1.035 billion for the calendar year 2020. The components of full year 2020 adjusted revenue are as follows. We expect adjusted service revenues to be in the range of $900 to $930 million. We are forecasting true health segment revenues of $115 to $125 million. We are forecasting intercompany eliminations of minus 20 million. With respect to full-year adjusted EBITDA, we are now forecasting a range of 32 to 38 million. For the third quarter specifically, we are forecasting total adjusted revenue of 258 to 272 million. The components of adjusted revenue for the third quarter are as follows. We expect adjusted services revenues of 235 to 245 million We are forecasting true health segment revenues of 28 to 32 million. And we are forecasting intercompany eliminations of minus 5 million. For the third quarter, we are forecasting adjusted EBITDA of 10 to 14 million. With that, I will turn it back over to Frank.