Evolent Health, Inc.

Welcome to Evelyn Health's earnings conference call for the quarter ended September 30, 2020. As a reminder, this conference call is being recorded. Your host for the call today is Mr. Seth Blackley, 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's 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 historically experienced or 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 filing. For additional information on the company's results and outlook, please refer to its second quarter news press release issued earlier today. As a reminder, reconciliations of non-GAAP measures discussed during today's call. 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.evalenthealth.com, and the 8K filed by the company with the SEC earlier today. At this time, I will turn the call over to the company's Chief Executive Officer, Mr. Seth Blackley.

Thank you, and good evening. I'm Seth Blackley, Chief Executive Officer of Evalent Health, and I'm joined by John Johnson, our Chief Financial Officer. We hope that you and your families are remaining healthy and safe. Thank you again for those that were able to join us virtually for our fifth annual investor and analyst day on September 29th. But those of you that were unable to join the webcast replay and presentation are available on the investor relations portion of our website. I'll open the call this evening with a summary of our recent results, including an update on the key elements of our strategic plan communicated at the investor day, which are one strong organic growth in the core to scaling our EBITDA margins, and three, strategic portfolio and balance sheet optimization. Next, I'll provide an update on the market and the macro environment, including our thoughts on the election. After that, I'll share a few highlights from each of our three solutions, our specialty platform, New Century Health, our total cost of care solution, Evaluant Care Partners, and our administrative solution, Evaluant Health Services. I'll then hand it to John to take us through a more detailed financial review of the third quarter, as well as provide guidance. We'll close with a summary of our key messages. As always, we'll be happy to take questions at the end of the call. In terms of our results for the quarter, we're pleased that we have exceeded the midpoint of our range on the top and bottom line. Total revenue for the quarter was $264.6 million, up 20.2% as compared to the third quarter of 2019. Adjusted EBITDA for the quarter was $12.7 million. As of September 30, 2020, we had approximately 3.5 million total lives on the platform. And as John will discuss later, based on our performance and momentum, we now expect adjusted EBITDA to be at the higher end of our previously raised full-year guidance range for 2020. With respect to our first focus theme of strong organic growth, we continue to be on or ahead of our plan for growth objectives as we utilize our core solutions to serve as a bridge between healthcare providers and payers. As we mentioned at our investor day, we signed two new partners in the third quarter. Additionally, we are excited to announce an agreement we recently signed with Florida Blue Medicare for our specialty management platform, New Century Health. This brings our total new partners for the year to eight. at the high end of our previously communicated range of six to eight new partners expected for 2020. Florida Blue Medicare is the Blue Cross Blue Shield plan of Florida and is a highly innovative organization. They're one of the largest blue pans in the country and serve more than 5 million members in the state. So this is an important announcement for us and we'll discuss it in more detail later. Further, the momentum in our pipeline remains strong as our solutions are increasingly necessary in the market, and we continue to anticipate six to eight new partnerships per year going forward and a long-term target of mid-teens organic top-line growth. In addition to adding new customers, we are seeing strong engagement across our partner network, and as a result, we continue to drive strong same-store growth. We've made continued progress with national partners such as Molina and Centene, who are both utilizing our newly announced new century technology-enabled solution. For states where we are alive, we are seeing strong return on investment for our plan partners, and we are seeing positive provider feedback. Those outcomes give us confidence that we'll have the opportunity to continue expanding to new states in the future. Additionally, I'm excited to announce that we have expanded our partnership with SOMOS to include Medicaid innovator contracts with two new large payers in New York State. These two arrangements represent the maturing of the value based care model in New York from an upside only model funded by the delivery system reform initiative to more fulsome value contracts. Next, with respect to our second theme of driving enhanced margins, we continue to make strong progress. The dedicated overhead cost initiative led by John and his team that we launched the beginning of the third quarter is accelerating and the results thus far exceeding our expectations. Further, we're seeing expanding gross margins and fixed cost leverage and continue to have confidence in reaching our medium-term goal of mid-teens EBITDA margins. And with respect to our third theme, I want to provide a short update on our balance sheet and our strategic portfolio review. We previously communicated our intent to monetize our health plan assets and use that capital to de-lever and also to focus on our three core solutions. As we previously announced, we have closed the passport transaction, and the Lighthouse Health Plan has signed a definitive agreement with Anthem. We also continue to make progress on our exploration of strategic options for True Health New Mexico and are hopeful that we'll have an update there soon. Passport continues to perform well. The lives have been moved to Molina, and we expect to receive $130 to $170 million of return of capital. Obviously, capital return from other planned assets would be in addition to this $130 to $170 million. We continue to be on track for the deleveraging that we mentioned at the investor day, and we continue to feel confident that in aggregate, the capital return from all health plan investments will well exceed the capital invested. So we've made a lot of progress on our three focus objectives that helped set up 2021. Based on this strong execution, we now have visibility to our goal of mid-teens growth on our services business, excluding passports, which, as we've discussed, would translate to an excess of $900 million of revenue for 2021 with services revenue in the $800 million range. With the contract signed in place, we also have high visibility into these numbers. Further, on the margin side, we do expect reasonable adjusted EBITDA margin expansion versus our 2020 results. This margin expansion is due both to our targeted overhead cost initiative as well as expanding gross margins. So the business is scaling, and we look forward to continue building towards a strong 2021, and we continue to have confidence in reaching mid-teens adjusted EBITDA margins in the medium term. Before providing highlights from each of our businesses, I'd like to provide an update on the overall macro environments. We obviously just had an election in the United States. And as we mentioned that our investor day, everything we do is towards the goal of controlling healthcare costs and addressing the trillion dollars of waste in the U S healthcare system. This work is bipartisan. And to be clear, we are confident in our medium term targets and our outlook, regardless of the policy outcomes, regardless of who wins the white house or who controls the Senate. And if either a Trump. or a Biden administration accelerated the pace of value-based care, there is upside to our medium-term revenue and EBITDA targets. If you step back and think about the pace of the move to value-based care, a lot of the work we do is with managed care organizations or around evergreen programs with providers. To that point, less than 10% of our current pipeline is dependent on the pace of value-based care. That said, there are three macro themes that we do believe are incredibly important and will support our business in the years ahead. First, we believe the pressure we're seeing on state, federal, and employer budgets, which have been exacerbated by COVID, will cause purchasers of healthcare services to continue to enhance their focus on cost and value. This will continue to sustain a pipeline of opportunities, 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. Second, any policy-based acceleration in the shift of value would open up additional opportunities for us and could accelerate our targets. But again, our targets are intact regardless of the pace of value-based care adoption and regardless of who controls Washington. For example, While it's not part of the pipeline today, given the nascency of the program, the Trump administration's direct contracting model could be an accelerator for our total cost of care solution, Evelyn care partners. And there certainly would be policy accelerators if Biden wins the White House. So policy is for us mostly upside and limited downside. At third, we're starting to see increased pressure on managed care plans as the impacts from COVID and unemployment continue and even accelerate into the future. This pressure is creating sales opportunities for all three of our solutions as those managed care plans look for ways to contain costs and improve quality by collaborating with providers. And with respect to COVID, we continue to feel that a prolonged pandemic will be neutral to slightly positive for our business. In summary, the macro environment will continue to reward any organization that can be disruptive in attacking the $1 trillion of waste in the healthcare system. Organizations like Bright Health and Clover are gaining traction as disruptive health plans. Organizations like Oak Street have established themselves as disruptive providers. And we continue to feel we are the market leader for payer provider enablement. Great disruptive results by enabling collaboration between payers and providers. Shifting gears. I want to spend some time highlighting the great work from the leaders who deliver on our three solutions. First, New Century Health, our specialty management offering, has seen strong growth with regional and national payers with solid potential to continue to build across geographies, membership, and through cross-sell. As shared at IR Day, the differentiation for this solution continues to be very strong, and we are extending our market leadership through the results across 2020. We're particularly excited about the relationship with Florida Blue Medicare. Under the terms of our partnership, we'll be supporting approximately 125,000 Medicare lives with our new century oncology platform. While we expect contracted revenue to ramp across the year after we go live during Q1, we expect this relationship to exceed $75 million in annualized run rate revenue by the second half of the year, just on the Medicare population and just with the oncology solution. So this partnership reinforces the large market size we communicated at the IR day. This partnership's also important because it is our first Blue Cross plan on the New Century platform, and we believe that we've now opened up that segment for New Century Health. There are 36 total Blue Cross plans in the country, serving 106 million members, and we look forward to the opportunity to add additional Blue Cross plans in the future. But for now, we are laser focused on delivering excellent results for our partner, Florida Blue Medicare. Second, Evelyn Care Partners, our total cost of care management offering, had two partner wins in the quarter, driven by a strong track record in Medicare ACOs and provider engagement performance. Our differentiation in the market, particularly with independent physicians, is strong, and we see an exciting run ahead for this solution. Further, our operational results continue to be strong. For example, through Q2, 85% of Evaluant Care partner practices were meeting or exceeding their performance targets. We're able to reach these levels on key operational indicators based on our proven clinical programs, our proprietary technology platform, Identify, and based on our efficient services platform. With respect to Identify, we did recently release an important update for our Identify practice module. By tightly linking to provider workflows and by rigorously prioritizing targeted interventions, our Identify practice module allows us to reach leading engagement levels with our 600 primary care providers in our Evelyn Care Partners network. Last but not least, Evelyn Health Services, our administrative simplification offering, is continuing to perform well. I mentioned the expansion of SOMOS earlier. The SOMOS partnership highlight the unique ability of our Evelyn Health Services platform to serve as the bridge between payers and providers, including enabling true delegation of functions like claims payment, utilization management, and care management to SOMOS in order to unlock superior performance I'm also happy to share that Maryland Physicians Care implementation is on track to go live at the beginning of 2021 to support more than 200,000 Medicaid beneficiaries in Maryland. Overall, we feel very good about our performance thus far in 2020 and have strong momentum headed into 2021. With that, I'll turn it over to John to give some more details about our financial performance in the quarter, as well as to provide guidance.

Thanks, Seth, and good evening, everyone. Our third quarter results were right in line with our expectations on revenue and adjusted EBITDA, largely as a result of strong performance across our customer base, the strength of our performance-based arrangements, and our overall cost reduction efforts. We now expect to be at the higher end of our previously increased guidance range on adjusted EBITDA for the full year. This quarter's strong results demonstrate that we are executing on our attractive financial model as we continue to build momentum into 2021. We drove 33% organic services revenue growth in the third quarter relative to the same quarter last year through our focus on multiple channels of growth. We have executed on new partner wins, having now signed up eight in the year, and continue to drive strong same-store growth as demonstrated by the expansion with SOMOS. Our growth combined with our cost control drove adjusted EBITDA margins in the quarter of 4.8% of revenue, up about 100 basis points from Q2 and over 300 basis points from the third quarter of 2019. We also continue to make progress on our strategic review health plan assets while we focus squarely on our three core services. As Seth mentioned, we recently partnered with Florida Blue Medicare and will initially be supporting over 125,000 Medicare Advantage members with our New Century Oncology platform beginning next year. We will earn fixed per member per month fees on that membership. As the first Blue Cross plan that we have added as a partner for our specialty care solution, this further expands our differentiation, serves as an important validation of the strength of our model, and lays the foundation for future expansion, not just in oncology, but in cardiology as well. Finally, we continue to focus on operational discipline and again drove positive cash flow for the quarter. We continue to expect cash flow to be positive for the full year of 2020. We also continue to make progress on the additional efficiencies we mentioned at Investor Day, which we expect to contribute at least another 20 to 25 million of gross SG&A savings by 2021. With regards to the COVID-19 pandemic's impact on our operating results, We experienced modest net positive increases in our Medicaid membership across the quarter, principally as a result of new state prohibitions on revalidation of Medicaid enrollees that were put into place during the declared public health emergency. We continue to be focused on serving our members and our partners during this unprecedented time. Now let me take you through our detailed results for the quarter before turning to guidance. Beginning with our consolidated results, revenue increased 20.2% year over year, to 264.6 million, driven by growth in core services. Adjusted EBITDA grew to 12.7 million, up from 3.3 million in the third quarter of 2019, benefiting from top-line growth and operational discipline. Adjusted loss attributable to common shareholders was minus 2.7 million, or minus 3 cents per common share for the quarter, compared to minus 7.7 million, or minus 9 cents per common share, in the third quarter of 2019. Turning to our segment results, in our services segment, third quarter revenue increased 33.2% to $239.7 million, up from $179.9 million in the third quarter of 2019. The increase was primarily driven by new partner additions and cross-sell expansions within our existing partner base. As of September 30th, We had approximately 3.5 million lives on our full services platform, which excludes members covered by our life service offering. Our average PMPM fee for the quarter was $23.73 compared to $16.20 in the third quarter of 2019 and $21.92 in the second quarter of 2020. Adjusted EBITDA from our services segment for the quarter was $13.8 million compared to $3.1 million in the prior year. As we continue to progress on our strategic review of our health plan assets, including True Health New Mexico, this quarter we had premium revenue of $29.5 million, down $14.3 million from the same quarter last year, a decrease principally driven by the termination of a reinsurance agreement we had during 2019. Claims expense as a percentage of premium revenue was 72.1%. Adjusted EBITDA from TrueHealth for the quarter was a loss of $1.1 million. As expected, upon the close of the sale of certain of Passport's assets and transfer of the plan's membership to Molina on September 1st, we consolidated the remaining assets of Passport into Evelyn's reported financials. The plan continues to perform well with 930 year-to-date operating income margin of 2%, excluding certain wind-down accruals. Statutory capital in the plan on September 30th was in excess of $140 million. We have begun the process to return capital out of the regulated entity to enable debt pay down according to our plan, and we continue to expect a portion of the cash to transfer this fall with the remainder coming in the spring. Turning to the balance sheet, we finished the third quarter with $387 million in cash and cash equivalents and investments. which included $228 million in cash held in regulated accounts related to the wind-down of Passport. Excluding cash held for Passport, this represents an increase of $43.8 million relative to the end of the second quarter, principally driven by our adjusted EBITDA results and working capital dynamics. Cash deployed for capitalized software development was $5.6 million. In terms of cash uses going forward, we plan to prepay our senior term loan with proceeds from the Passport transactions. We have minimal other maturities due before 2024 and continue to expect adjusted EBITDA left capex to be positive in 2021 and beyond, which will give us the ability to invest in differentiating our core services and maintain a strong balance sheet. Overall, we are pleased with our progress against our financial objectives for the year so far. We now expect total adjusted revenue to be in the range of $1 billion to $1 billion and $14 million for the full year 2020. The components of full year 2020 adjusted revenue are as follows. We expect adjusted services revenues to be in the range of $903.3 million to $913.3 million. We are forecasting true health segment revenues of $116 to $120 million. And we are forecasting intercompany eliminations of minus $19.3 million. With respect to full year adjusted EBITDA, we are now forecasting a range of 35 to 38 million. For the fourth quarter specifically, we are forecasting total adjusted revenue of 249.5 to 263.5 million. The components of adjusted revenue for the third quarter of 2020 are as follows. We expect adjusted services revenues of 225 to 235 million. We are forecasting true health segment revenues of $28.5 to $32.5 million. We are forecasting intercompany eliminations of minus $4 million. And for the fourth quarter, we are forecasting adjusted EBITDA of $10 to $13 million. With that, I will turn it back over to Seth.