CareMax Inc (CMAX) 2021 Q3 法說會逐字稿

Greetings, and welcome to the CareMax, Inc. Third Quarter 2021 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Devin Sullivan, Senior Vice President of The Equity Group. Thank you, Mr. Sullivan, you may begin.

Thank you, operator. Good morning, and thank you all for joining us for CareMax' third quarter earnings call. During the call, we will be discussing certain forward-looking information. These forward-looking statements are based on assumptions and assessments made by CareMax' management in light of their experience and assessment of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. And forward-looking statements made during this call are made as of today, and CareMax undertakes no duty to update or revise such statements whether as a result of new information, future events or otherwise.

Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the company's filings with the SEC, including the section entitled Risk Factors. In today's remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial metrics to the most comparable GAAP measures can be found in this morning's earnings press release.

With that said, I'd now like to turn the call over to Carlos de Solo, CEO of CareMax. Carlos, please go ahead.

Thank you, Devin. Good morning, and thank you all for joining us. I'm proud to report that we had a solid third quarter of continued revenue growth, sequential MER reduction, operational developments and overall progress towards our 2022 new de novo goal. We believe our strong growth while still maintaining a best-in-class MER is a testament to our team and our model.

By utilizing our whole person healthcare clinical program and our deeply integrated proprietary build point-of-care technology platform, CareOptimize, our physicians and care teams truly partner with our members to improve health outcomes and overall well-being. We do this by working in some of the most challenged neighborhoods, many of which are otherwise health care deserts, with patients with significant barriers to care.

Our model truly does well by doing good. I would like to thank each and every one of our team members for their dedication to improving our patients' lives. For the third quarter of 2021, we achieved GAAP revenue of $105 million, up 330% from the third quarter of 2020. Pro forma for the acquisition of DNF from the beginning of the period, our revenue for the third quarter would have been $115 million or $460 million on an annualized basis.

Our third quarter GAAP net loss was $2.9 million, bringing our year-to-date GAAP net loss to $8.9 million. Our adjusted EBITDA was $1.2 million for the third quarter and $9.1 million year-to-date pro forma for the business combination.

Total membership as of September 30, 2021, was about 68,500 and Medicare Advantage membership was approximately 26,500, up over 10x and 3x, respectively, compared to September 30, 2020. We are on track for our previously guided run rate performance metrics that Kevin will discuss. In September, we finalized the acquisition of DNF Medical Centers in Central Florida. DNF brought to the CareMax family approximately 4,000 Medicare Advantage patients across 6 high-end medical centers.

We are well underway with unifying the brand services and operating model across all of our medical centers to continue to drive maximum outcomes and shareholder returns on these investments. Like many, we experienced a rise in COVID admissions among our Medicare patient base in the third quarter, which peaked in August, fell in September and showed continued reduction in October.

However, as you can see on Page 10 of our posted slide presentation, the peak in August was lower than in prior waves, a testament to our ability to vaccinate our members, instill good preventative practices and identify cases early to prevent hospitalizations. We are encouraged that we are reaching the end of the Delta wave variant of COVID-19. And based on the publicly available data, our core market of Florida has now among the lowest case and positivity rates in the country.

Despite the continued impact from COVID during the third quarter, our clinical model continues to perform well. For the quarter, we recorded a healthy 75.4% medical expense ratio, or MER. Normalizing for direct impacts from COVID, our MER would have been in line with historical levels. We also have line of sights to bringing newly acquired assets to this level of performance as well.

In addition, our internal results show that the third quarter external provider costs in absolute dollars PMPM, were in line with Q3 2020, and ex COVID would have been down year-over-year and sequentially. If you recall from our Investor Day, we showed our ability to drive MER by a patient cohort down by 47 percentage points over 3 to 4 years.

On Page 6 of today's presentation, you can see that's not just a percentage of MER reduction, but also a roughly 40% medical cost PMPM reduction over that period or a 14% average decline per year. We think these results are a powerful validation of our technology-enabled care delivery platform which provides the ability to control dollar costs in the face of a pandemic by improving patient outcomes and speaks to where we are -- where our priorities are as a company.

Fundamental to our clinical success is our whole person healthcare, value-based care system and our homegrown and deeply integrated technology platform CareOptimize. As I have discussed previously, our whole person health model goes beyond just the clinical needs of our members to solve problems arising from social determinants of health, such as education and access, isolation and medication adherence.

We do this through our highly coordinated care management program that uses data from across our members encounters with our providers and it provides our care teams with the tools to effectively coordinate the care and needs of our members in a truly differentiated manner, improving the well-being of our members and preventing highly acute hospital admissions.

It is worth noting that CareOptimize has been successfully commercialized outside of CareMax and is used by over 2,000 clients and more than 20,000 providers across the U.S. This broad market adoption of CareOptimize speaks to the powerful tools it provides providers to practice medicine without undue administrative burdens and empowers them to make more informed clinical decisions.

Next, I would like to provide an update on our operational initiatives. We have now captured about half of the previously announced combination synergies with IMC, primarily driven by SG&A savings and pharmacy utilization. The SMA and DNF integrations are moving along smoothly, and the team is moving ahead on executing our value creation strategy. Additionally, we are optimizing our platform for accelerated growth in 2022 to hit our de novo targets.

And with that, we have brought in several key new management hires to lead our regional operations. We believe we have built a human capital foundation to execute on our growth plans and plan to continue to simultaneously add depth to our local and regional corporate teams to support further expansion. Similar to many other companies across the country, we are experiencing a tightening in the labor market at entry-level positions.

While we are seeing some wage inflation, it remains limited to lower wage positions, and we have been able to successfully navigate through this. We continue to have a pipeline of physicians interested in joining our platform, as our differentiated care model is a big draw for professionals who want to make a holistic impact on patients' well-being.

Moving to the additional strategic initiatives. As mentioned during our Investor Day in September, we have been impressed by the amount of inbound interest from those looking to collaborate with us to improve outcomes and efficiencies in the healthcare system. We have announced and highlighted 2 of these: The Related Companies and Anthem.

The related collaboration affords us the opportunity to work closely with one of the largest owner operators of affordable housing in the U.S. Our vision is to bring CareMax' vertically integrated whole-person healthcare model directly to affordable housing communities, providing convenient access to care to those seniors who need it the most. We have proven that this model of collaborating with affordable housing communities can be a mechanism for growth with one of our South Florida medical centers we opened in 2017.

This center that we opened in the ground floor of a retirement community experienced the fastest ramp to membership maturity of any of our centers. Through our collaboration with Related, we plan to take this model to communities across the country to expand convenient access to value-based care. We also announced our strategic collaboration with Anthem to open up 50 new de novo medical centers across 8 initial states.

We are pleased to say that the collaboration is going smoothly and ahead of schedule. Anthem has long been a key partner for us, and we are excited to expand our relationship with them to provide quality care and superior outcomes for their members throughout the country. In addition, to these 2 important strategic collaborations, we continue to work with our other payer partners to assist in our collective goal, bringing the best-in-class medical care to underserved communities.

Our patient acquisition strategy is based on grassroots marketing through community events and our in-house sales and marketing team. Lastly, we announced in July our guidance of opening up at least 15 de novos in 2022, approximately 25 in 2023 and approximately 35 in 2024. We have already executed the leases for 12 locations across Florida, Tennessee, Louisiana and New York with 5 other leases nearing completion.

Furthermore, we are reiterating our expectation to end the year with our previous run rate revenue and EBITDA guidance. Looking ahead to 2022, we expect lower COVID headwinds on the revenue and a more normalized utilization.

Now I will turn it over to Kevin to go more in depth on our third quarter performance.

Thanks, Carlos, and good morning. We reported another quarter of strong revenues despite COVID headwinds. As a reminder, our GAAP third quarter financials include full quarters of CareMax, IMC and SMA and about one month of DNF. The 9-month 2021 numbers and prior year comparisons that I'll be providing are pro forma for the business combination between CareMax and IMC as if they had occurred on January 1, 2020.

You can find a reconciliation between our GAAP net income and adjusted EBITDA in our press release or earnings presentation. As Carlos mentioned, total reported revenue was $105 million for the third quarter and $285 million for the 9 months. We reported GAAP net loss for the quarter of $2.9 million, bringing our net loss for the 9 months to $8.9 million.

Adjusted EBITDA for the quarter was $1.2 million, bringing adjusted EBITDA for the 9 months to $9.1 million. Excluding the estimated impacts of COVID, our Q3 adjusted EBITDA would have been $8.5 million and $27.6 million year-to-date. Medical expense ratio, which equals external provider costs divided by Medicare and Medicaid risk-based revenues was 75.4% in Q3, but would have been in line with historical levels after normalizing for direct COVID impacts to revenue and external provider cost.

Beneath the COVID noise, we feel good about the underlying medical performance of our business. Our internal Q3 PMPM external cost unadjusted for COVID were in line with Q3 2020. Nine-month internal PMPM costs were lower than the prior 9-month period in 2020. This gives us confidence in our ability to manage challenging populations and arguably the most challenging environment our industry could ever face.

Now let me share some observations regarding COVID. We are encouraged by COVID trends in our geographic footprint. Today, according to public data, Florida has the lowest cases per capita of all states and the sixth lowest COVID hospitalizations per capita. Despite record COVID hospitalizations across Florida in August, total Q3 COVID admissions among our Medicare patients were just half the numbers we experienced in Q1 of this year.

Our care teams have done an outstanding job with vaccinations, education and social distancing to prevent major outbreaks at any of our centers. And as a proxy for the cost per COVID admission, hospital inpatient days in Q3 were also down about the same percentage as admissions from Q1, suggesting relative stability and acuity and cost for carrying of COVID, Medicare COVID patients. Although COVID claims were in line with the patients -- although COVID claims among our patients continue to decrease, we continue to see top line headwinds as the 2021 revenue is based on 2020 date of service and will not change until 2022.

However, year-to-date PCP in-person visits and coding revalidation rates among our Medicare members have recovered to pre-COVID levels, even exceeding overall visitations for the full year of 2020 already. This tells us that we are documenting the acuity of our members more appropriately, giving us confidence in recapturing risk adjustment revenues for next year. In addition, we continue to invest in our platform capabilities ahead of our planned de novo center openings beginning next year. We have onboarded 2 regional market presidents and continue to build our construction and marketing capabilities.

At corporate, we've added a new Chief Compliance Officer, General Counsel and Chief Experience Officer. And we anticipate continuing to add business development resources in our new markets. These roles will help manage payer and provider relations, source positions and tuck-in opportunities, conduct grassroot outreach efforts and operationalize our whole person healthcare model.

At the same time, we will be disciplined about balancing platform investments with operational efficiencies. We've captured about half of the previously communicated synergies related to the combination of CareMax and IMC and expect to execute on the remaining half in the coming months. These synergies have helped partly offset some of the public company costs like D&O insurance that have been higher than expected prior to the completion of our business combination.

In addition, we are targeting a capital-efficient approach to opening de novos, including securing landlord financing for build-outs to reduce upfront CapEx where possible. Many of our signed leases already have such arrangements in place. Regarding our capital position, we ended Q3 with $80 million of cash and $119 million of debt.

As a reminder, we also have a $40 million revolving credit facility and a $20 million delayed draw term facility, both currently undrawn. Basic share count is 87 million, excluding dilution from warrants and additional potential earn-out shares. Based on our capital -- our projected capital needs, we believe our liquidity is sufficient to execute on our near-term M&A pipeline and de novo centers over the next year.

Despite the accelerated investments made in the quarter, we are targeting the mid-range of the $30 million to $40 million pro forma adjusted EBITDA as an appropriate range of our run rate earnings power for the year, including an estimated $23 million of headwind from COVID, unchanged from our prior expectations. This pro forma adjusted EBITDA reflects expected full year contributions from closed and unannounced acquisitions and synergies remaining to be realized.

We feel opportunistic about the growth ahead of us. First, we look at the risk adjustment headwinds to normalize and for the overall utilization to settle back towards historical baseline. Second, we expect to maintain our strong medical margin and continue to drive improvements in our members' well-being. And third, we continue to target at least 15 de novo openings in 2022. We have a high conviction in our de novo strategy, and we'll continue to invest in our platform to execute against our growth goals.

We look forward to providing you a more detailed 2022 outlook on next quarter's call. With that, Carlos will give some closing remarks before Q&A.

Thanks, Kevin. In closing, I want to thank, again, and thank all of our clinical team members who are at the front line continuing to battle the impact of COVID-19 and providing the care to our members that is truly changing the lives of so many and to our entire organization, who continue to exceed all of our expectations with their dedication to growing our business while always keeping the needs of our members first. It has been an extraordinary year and I have never been as confident as I am today in our team, our model and our strategy.

Operator, we'll now take questions.

(Operator Instructions) Our first question comes from the line of Josh Raskin with Nephron Research.

So the first question is just on the cost of care line, the external medical -- or internal medical costs came in a little bit higher. And so I'm just curious, are those costs that you took on from DNF or is there sort of a right run rate for those just as I think about it as a percentage of capitated revenue.

Josh, it's Kevin. Yes, that's right. So we do have one month of DNF in there, so you will notice that the premiums have also increased concurrently with that external provider cost. I think it's also important to note that the prior period when you're looking at that Q2 really only has a stub period of SMA as well. So now you have the full quarter of the SMA cost as well as revenue and then you have 30 days of DNF in there. So that's right. And it is a normalized, I would say that the MER there, again, normalized for COVID is in line with our expectations.

On the internal side, so you have COVID costs pressuring the CareMax specifically.

Right. I'm sorry, I thought you were looking at the external provider costs. Yes. On the cost of care line, that's right. So there's a couple of lines in there. Those 2 items, obviously, that we talked about are still in there. The other component is we acquired a pharmacy in the quarter. And so you also notice that other revenue increased pretty materially from Q2 to Q3. And there's a cost of care or cost of goods sold line in that cost of care specifically for the pharmacy medication.

Okay. So we should think of those as -- when we think of a ratio, we should include the other revenue as well as [a jump up]. Okay. And then just thinking about sort of 4Q and 2022, midpoint of guidance of $35 million add back the $23 million, you get to $58 million as sort of a starting point for 2022, which would seem like a relatively big jump.

Should we expect COVID costs, other headwinds and start-up cost, things like that? And then sort of the jumping off maybe for 4Q as well, you've done roughly $9 million or so of EBITDA year-to-date, obviously implies a relatively large fourth quarter. I just want to make sure I'm at least getting the math right for the starting point.

Yes. I think your math is right. For '22, look, we're not ready quite to give guidance on that. What I would say is as we bridge the '22 EBITDA, we will be starting with a number similar to what you just mentioned, which is I think a lot of math that folks are doing, our normalized run rate plus the impact of COVID. But yes, to your point, we're going to have investments from our de novo strategy. We're going to have investments in growing the core business and the platform.

So there will be headwinds around that as well. So yes, there's a lot of puts and takes that we're going to have to model through and share with you folks. But I think that's right from a starting point. From a Q4 standpoint, we're still looking at Q4 from a favorability standpoint. I do think we have favorability that's going to probably come through.

Initially, what we're seeing right now is that our reinsurance, our stop loss, the percentage of patients that are hitting stop-loss are significantly greater because of the additional costs that we had this year. And so we haven't modeled that through to that level of granularity in our projection, Josh. But we do expect Q4 to be better than Q3 just because we're going to have the full year -- the full quarter impact of DNF as well as SMA.

And our next question comes from the line of Brian Tanquilut with Jefferies.

This is Jack Slevin on for Brian. I guess, first one, I want to start out with the incremental detail you gave us on the new markets and the leases you've signed. I guess looking at it, right, we see Memphis and New Orleans now as targeted markets. Can you give us a little bit about what makes those markets attractive or remind us why those states or priority states for you despite not having Related or Anthem overlapping markets.

Yes. I think as we've stated in all of our other calls, we -- when we enter new markets, we're always going to enter with strategic partnerships and organizations where we feel a clear line of sight in being able to reduce that J curve. So Anthem and Related are a very big part of the strategy, and we're well underway with both of those strategies, but there are still other states that are very exciting where we have similar relationships where we feel that we can grow just as quickly.

So we're going to continue to take advantage of those specific situations. And Memphis and Louisiana were a couple of those markets. And then we continue to really grow in the New York area, where we've already signed one lease. We've got several other leases coming underway with the Related strategy in Florida.

We've got a significant amount of leases that we've already signed up and a good amount of those are going to be strategies that we do together with Anthem as well as we continue to expand in the Central Florida region and in the West Coast as well as Northern Florida.

Okay. Got it. That's helpful. And then the next one for me. I just want to make sure I'm modeling this right because I think the timing on the acquisitions may have thrown off the PMPM numbers a little bit. So just can you give a PMPM exit for the MA book kind of coming out of 3Q?

And then also, can you give us an update? I appreciate all the color on the impact of risk adjustment this year. Can you give us an update on how annual wellness checks are going and sort of a read-through to risk adjustment or PMPMs in '22?

Yes. Let me start with the second part of that. So we are -- right now, we've seen about 85% of our members, all of those compared to where we were this time last year. We've already seen more members this year than we had in 2020. So we feel very confident in having been able to capture the full acuity of our members for this year.

We're trending to finish the year somewhere in the 92%, 95% of having seen all of our members. And I think that gives us a lot of confidence going into 2022, being able to accurately capture that acuity, which should stabilize our revenue going forward. Kevin, do you want to elaborate a little on the first part of that question?

Yes. I'm sorry, the first part was on the cost PMPM?

Yes, that's right. I think ours looks a little bit low just based on, I think, the timing of the acquisition there at September 1. So if you could just give us a normalized number to project outwards on what the MA PMPM is, that would be really helpful.

Yes. So I think to help with that, what I would do is take the 26,500 that we have in there. There's one month of DNF, which represents roughly 4,000 patients. And so if you modeled out the PMPM for the quarter to deduce or take away 4,000 for the first 2 months and then you could come up with that blended PMPM from there.

Our next question comes from the line of Jessica Tassan with Piper Sandler.

So just first off, to be clear on the adjusted EBITDA ramp from Q3 to Q4, that the impact of DNF. And then also, you guys are anticipating an MER improvement sequentially. Is that sort of the basis of the step-up?

Jessica, it's Kevin. Yes, that's correct. So historically, what we've seen in Q4 is that elective utilization tends to go down a little bit for the holidays, folks don't like to have those surgeries at that time. We also see the impact of the ICL from the Part D standpoint, folks are starting to hit that donut hole or may have already hit the donut hole, and so costs tend to go down.

And then the other piece -- or a major factor there is that the reinsurance, right, folks are hitting on that catastrophic level throughout the year. And so we tend to get higher reimbursements or refunds from the stop loss credits. So that's correct.

Got it. And did you let us know just how much DNF is contributing on an adjusted EBITDA basis or expected to.

I don't believe we did.

Okay. And then just my follow-up would be from that chart on Page 6, the cohort -- the medical expense ratio for cohorts as they progress from 24 to 36, 48 months, what percent of the cohort actually makes it to 24 or 36 or 48 months. And then just how do you expect those retention rates to change as you add new payers to (inaudible) [help them]?

Yes. It's roughly over 60% retention. And as you can see there, it's a 14% reduction year-over-year and it translates into close to 40% reduction for that period of time. Yes. I mean we're already working with 18 different health plans. So we will continue to add different payers in different regions. We do expect retention to be more favorable outside of the South Florida market where it's very competitive. You have a significant amount of penetration here, specifically in the Miami area. It's over 80% on MA penetration.

We've also invested very heavily this year on bringing in a Chief Experience Officer and really working to reduce the attrition on our membership. So we continue to expect that number to get significantly better and better. And that's -- just to be clear, that's a total PMPM cost reduction in medical expenses.

(Operator Instructions) Our next question comes from the line of Gary Taylor with Cowen.

Just a few. I just want to go back to the fourth quarter just for a second and just clarify what the implied guidance is. Am I understanding when you say pro forma earnings power, $35 million, sort of targeting the middle, you're basically saying the fourth quarter EBITDA, you're expecting around $9 million. Is that correct?

Gary, it's Kevin. Yes, so I think we should clarify that. That's a good point. Yes. So the pro forma run rate adjusted EBITDA, which is a term we'll only use really this year going forward, we'll be using a normalized EBITDA number. It really identifies the impact of the earnings power for the organization. So the way you would think about it is that the core business burden for COVID, burden for pubco, burden for the investments that we're doing. During the year, we'll probably produce somewhere around the $10 million to $11 million range. We have a normalized -- or we have acquired and we'll acquire. So there's some acquisitions that we've done and some unannounced acquisitions.

But the run rate normalized EBITDA for those are around $19 million. And then again, those -- we've executed on those. SMA came in the middle of June, DNF came in September. There's a couple more that are going to happen later on this year. And so when you look at the normalized run rate for those $19 million and then additionally to that are the synergies, which represent roughly $5 million.

So not all going to come in the fourth quarter in this big pop. It's the annualized run rate and kind of the jumping off period, if you will, or jumping off earnings point for CareMax for 2022.

Yes. I understand that. I guess I'm trying to understand what that implies for the 4Q since it's only the stub period left. I don't think it implies people should be modeling a huge fourth quarter up to that $35 million, but -- so you sound like you're saying not even all of the synergy and run rate earnings power is reflected in an annualized 4Q EBITDA number?

That's right. So we'll have some acquisitions that are probably -- haven't closed yet. And so those won't be in the full quarter. And the other piece is some of the synergies that we're working on, right? Some we executed on the SG&A side in the middle of October, some early part of December, right? So you do have a stub period in there for the quarter. So yes, that's correct. I think what we're estimating from a fourth quarter standpoint, for our core business is probably somewhere around $2.5 million. And then with the other components of the acquisitions, the synergies and all the other items is probably worth another $1 million, $1.5 million or so.

Got it. So on a reported basis, it could be in the $3.5 million to $4 million range, basically.

That's correct.

Okay. And what else -- I just want to go back to that cost of care number that Josh talked about. So it sounded like there's some pharmacy costs that are now in there. And then I did see, I think there was like $1.3 million of what you call the nonrecurring costs coming out of that cost of care line. Can you just discuss what that amount is?

Sure. Absolutely. So the $1.3 million represents 2 items. One is a normalization of cost that was related to periods prior to 2021, specifically around occupancy costs, which represented about $0.5 million or so. The remaining balance is -- was a pilot that we were running specifically for lab results.

And essentially, we ran that pilot with expectations that we would get results faster in the hands of our positions quicker so that they could determine what they needed to do faster. At the end of the day, that pilot was killed on October 1. So we did run that pilot for a couple of months. We had duplicative costs in there from a period of -- I want to say maybe for the whole quarter, August through September, so a couple of months, and that makes up the delta.

And then my last, I did see in the pro forma or the historic sort of adjusted EBITDA presentation. You now showed some pretty modest amounts, but add backs for de novo losses. So should we assume when we get your 2022 guidance, your convention will be to exclude the expected losses from the de novo openings?

Yes. So it's definitely something we're contemplating, absolutely.

And we have reached the end of our question-and-answer session. And I would like to turn the floor back to Carlos de Solo for closing comments.

Great. Thank you. We'd just like to thank everyone for joining on our Q3 earnings call.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.