CareMax, Inc. (NASDAQ:CMAX) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good morning. My name is Audra and I will be your conference operator today. At this time I would like to welcome everyone to the CareMax, Inc. First Quarter 2023 Financial Results and Earnings Conference Call. [Operator Instructions]. At this time, I would like to turn the conference over to Samantha Swerdlin, Vice President of Investor Relations. Please go ahead.

Samantha Swerdlin: Good morning, everyone. Welcome to CareMax’s first quarter 2023 earnings call. I’m Samantha Swerdlin, Vice President of Investor Relations. And I’m joined this morning by Carlos de Solo, our Chief Executive Officer and Kevin Wirges, our Chief Financial Officer. During the call we will be discussing certain forward-looking information. These forward-looking statements are based on assumptions and assessments made by CareMax’s management in light of their experience and assessment of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Any 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 the 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 certain 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, I’d now like to turn the call over to Carlos.

Carlos de Solo: Thank you, Samantha. Good morning, everyone. And thank you for joining our call. There are three things I plan to review today. An overview of our first quarter performance, the progress we have made expanding our MSO and our general outlook. Starting with our Q1 financial performance, we had developments that had an unfavorable impact on our revenue and adjusted EBITDA. Specifically, we recognize two prior period developments that together lowered Q1 revenue by $26.6 million and adjusted EBITDA by $14.6 million. The first development was related to MSL membership with one of our health plans and the second was related to higher acuity admissions in Q4, which Kevin will discuss in more detail. While some prior period development is common for risk based providers like CareMax, we believe the MSO membership PPD was an anomaly in terms of its nature and impact.

And the Q4 acuity was isolated to a period related to an earlier than normal flu season, coupled with RSV, even though overall admissions remained flat during the period. Despite these headwinds, underlying results for the quarter came in ahead of our expectations, reflecting a disciplined execution of our strategy. We are encouraged by our Q1 runway performance and expect to achieve our 2023 guidance despite the prior period of developments. As of the quarter end, we had approximately $44 million in cash and $95 million of undrawn capacity on our delayed draw term loans. We believe that this provides us with sufficient capital to bridges to reach sustainable free cash flow by Q4 of 2024. Now turning to some highlights from the quarter. We are pleased to report that our Medicare Advantage platform continues to grow.

But 95,500 lives on our platform as of quarter end, representing approximately $1.3 billion of revenue under management. Of these 62% are currently in partial risk arrangements and 36% are in full risk. By 2026 we expect nearly all of our current MA membership to be in full risk arrangements. Medical expense ratio for the quarter was 75.2% compared to 72.6% for Q1 last year, due primarily to the impact from prior periods development. As we discussed during our recent Investor Day, we take a prudent approach to taking full risk in new markets, typically with an 18 to 24 month glide path to risk. This approach allows us to take limited downside risk while our physicians implement medical management practices, and we gain profitable scale in the new markets we enter.

It’s also worth noting that during the year we may opportunistically shift contracts to full risk early in our MSO network. If you recall when we shift contracts to flow risk they drive higher revenue and incremental adjusted to dollars but may not yet be mature and could generate MERs above our historical MSO average of 85%. While the negative MER impact of electing full risk early is not contemplated in our guidance, we may do so when it’s accretive to adjusted EBITDA and cash flow. During the quarter we continue to deliver solid operational performance at our centers and remain focused on ensuring our members have access to consistent high quality care. Our quality initiatives have already resulted in 50% of quality gaps closed in Q1, putting us on track for a sustained five star rating in 2023.

Moreover, our investments in patient experience continue to deliver cap survey measures at the 90th percentile among peer groups as of Q1, ensuring timely access to care is key to our operating success. And we’re proud to report that our primary care providers have seen set over — 75% of our members at our centers as of Q1. Furthermore, our specialty care services are readily accessible both in house and to our preferred network. And we have now expanded our network to offer over 50 different specialties through our multi specialty network. Last year we expanded our reach beyond our core Florida markets, and the results have been very encouraging. During the new quarter, new member growth was strong. And now we have over 3000 members in our 2022 de novos.

Additionally, we have expanded our dental services across New York and recently signed agreements to add in house cardiology, nutritionist and podiatry services. By offering these services in house we’re able to provide our members with comprehensive care that is designed to lead to best in class outcomes, lower costs, and ultimately healthier members. Now we’d like to provide an update on our MSO expansion. The integration of our stored VBC acquisition is on track and we are confident that we will achieve our membership growth targets that we announced in March. We are working closely with our affiliate groups and they are excited about the opportunity. Each market in the MSO network is participating in monthly joint operating committee meetings where we combined the operational and clinical teams to review performance, best practices from our centers that can be implemented into the MSO and what resources they need to effectively practice value based care.

As we discussed in detail at our Investor Day we’re also making significant progress on the payer side as we transition stored contracts into CareMax VBC contracts. We’ve completed the ingestion of almost all payer data from stored into our care optimized technology platform and have built an internal infrastructure to accelerate the ingestion of new payer contracts and claims data so that we can provide accurate and timely insights to our clinical and operations teams. Furthermore, we’re continually expanding our EMR connector portfolio and are pleased to report that we now have access to data for over 30 EMRs connecting the majority of our provider network to care optimize. As the year progresses, we expect to see further implementation of our technology platform enabling us to better serve our members and deliver high quality care through efficient and effective data management.

In addition, we are improving our capabilities to incorporate recent technology developments. This quarter we launched a new machine learning module for strict — for risk stratification, which is designed to enable us to better manage chronic condition acuity and provide even more personalized and efficient care to our members. Moving forward, we intend to continue enhancing and developing our care optimize technology to drive operational efficiencies and reduce the administrative burden for our care teams. Although this quarter didn’t turn out, as expected, due to the prior period developments, our Q1 run rate gives us confidence in our ability to achieve both our short term and long term objectives. In CareMax and growing it to where we are today, we have remained dedicated to revolutionizing healthcare delivery through discipline growth in a capital efficient manner.

We believe this approach will ultimately deliver the best returns for our shareholders. We look forward to updating you on our progress over the coming months. With that, I’ll now turn things over to Kevin to provide more details on our financial performance in the quarter.

Kevin Wirges: Thanks Carlos. And good morning. We’re proud to report meaningful progress in the integration of our acquired MSO business and are well on our way to unlocking the value we envision at our March Investor Day. Noncurrent developments in membership, revenues and medical expenses are a normal part of VBC, which is why we manage our business and liquidity conservatively. As of quarter end, we had approximately $44 million in cash and $95 million of undrawn delayed draw term loans, which we continue to believe is sufficient to bridge us to sustainable free cash flow by Q4 2024. Additionally, we have the ability to raise up to $45 million and super priority revolving facilities. And we believe we have further upside levers from transitioning profitable contracts to full risk earlier than planned.

In short, we are comfortable with our current capital position, and we remain bullish on the MSO opportunity ahead of us. Now I will walk you through the puts and takes of our first quarter results and explain why we believe our full year 2023 guidance is still achievable. As a reminder, a reconciliation of GAAP to non-GAAP metrics like adjusted EBITDA can be found in our earnings release and presentation. As we began doing last quarter, we are no longer adding back de novo preopening cost or de novo post-opening losses to adjusted EBITDA, and all references I make to adjusted EBITDA pertain to our current definition. We reported first quarter total revenue of $173 million, up 26% year-over-year. Medicare risk revenue was $122 million, up 13% year-over-year, and Medicaid risk revenue was $26 million, up 27% year-over-year.

We’ve introduced a new line item, government value-based care revenue, which is $10 million, representing our acquired MSSP and ACO REIT businesses. Finally, other revenue was $16 million, up 75% year-over-year, driven by MSO capitation as well as growth in our in-house pharmacy. Platform contribution was $25 million, up 43% year-over-year despite being fully burdened by the de novo preopening cost and post-opening losses, which together totaled $6 million in Q1. Net loss was $82.1 million, and adjusted EBITDA was approximately breakeven, largely due to top line headwinds I will explain shortly. Lastly, we recognized a goodwill impairment charge of $98 million, driven by the decline in our stock price during the quarter, partially offset by $36 million from revaluation of earn-out liabilities.

These have no impact to cash or fundamentals of our business. Regularly, we received from our health plan partners updated data on membership revenues and medical expenses, which often contain true-ups to previously reported figures. In Q1, Medicare risk revenue was impacted by $26.6 million of unfavorable prior period development related to full risk membership at one of our Florida MSO health plans with a corresponding impact of $6.4 million to margin. We believe this to be an anomaly, both in size and nature of the true-up and isolated to the onboarding of a single MSO contract with limited risk of this sort for other plants. During the quarter, we saw a medical expense ratio of 75.2%, which represents an increase from 72.6% in Q1 2022. It’s worth noting that our Q1 MER was impacted by $8.1 million of unfavorable prior period development and medical expenses.

We believe the unfavorable medical expense PPD can be attributed to an earlier-than-normal flu season in South Florida, as well as elevated cases of RSV. This drove unseasonably high cost per admission in Q4, even as rates of admissions remained relatively stable during the quarter when compared to Q3. It’s important to mention that our MER was not materially impacted by the MSO membership we discussed earlier. As you can see in our earnings presentation, the combined PPD impact was a $27 million revenue headwind and a $15 million medical margin and adjusted EBITDA headwind in the quarter that we believe are not reflective of our run rate profitability. Even with the PPD, we believe several factors enable us to still achieve our 2023 guidance of $700 million to $750 million revenue and $25 million to $35 million in adjusted EBITDA.

First, our medical margin run rate, excluding the PPD, is off to a favorable start to the year compared to our budget. Second, to the extent that we are able to identify profitable MSO contracts to transition to full risk, we believe doing so may pull forward full risk revenue and positive medical margin earlier than planned. As a reminder, when we transition to full risk sooner, there may be an unfavorable impact to MER in the near term despite the favorable impact to adjusted EBITDA and cash flow. Moving on. Cash used in operating activities was $22 million in Q1, including $7 million of cash interest and other debt service costs. Cash add-backs to adjusted EBITDA decreased significantly in Q1 as nonrecurring restructuring and acquisition-related adjustments roll off from prior quarters.

We continue to believe our adjustments are useful to illustrate the underlying earnings power of our business. To the extent we have more limited M&A activity, like in Q1, we expect to see smaller add-backs than experienced in the past. We expect CapEx, however, to continue to increase as we continued build-out of our 2023 pipeline of de novos. It’s important to understand the working capital dynamics around the VBC business, particularly related to accounts receivable. Absolute AR dollars will continue to grow as we accrue MSSP and ACO REIT shared savings, which are recognized in the current performance year, but not paid until almost a year in arrears. We will also see AR related to MSO Medicare Advantage contracts increase as newer and partners require time to set up the processes to produce and make payments out of our service funds.

Finally, as our legacy CarMax business continues to grow, we expect to accrue higher amounts of AR for the midyear adjustment and final settlement. Remember that AR represents an accrual of net medical margin, so the appropriate denominator for DSO calculations is full risk revenue, less external provider costs. For appropriate comparisons, Q1 AR should also exclude approximately $60 million related to MSSP receivables and normalized for prior period developments, which may otherwise cause volatility in DSO. In doing so, we find the DSO in the first quarter was materially in line with historical levels. In terms of AR seasonality, we expect cash flows in the second half of the year to be favorable to those in the first half, driven by the midyear and final sweeps.

Additionally, this fall, we expect to receive the MSSP payment for the 2022 performance year, of which a portion will go towards repayment of the accounts receivable facility entered into as part of the Stewart transaction. Beginning next year, we will be able to keep MSSP shared savings payments. To reiterate, we remain comfortable with our leverage outlook, our capacity to service our debt and our ability to access our undrawn . We ended Q1 with $44 million in cash and $95 million of undrawn delayed draw — term loan capacity. Since the end of Q1, we have drawn another $35 million from the DDTL and had $60 million remaining. We believe we are sufficiently funded to reach cash flow profitability by Q4 of 2024, when we expect to receive our MSSP shared savings payment for performance year 2023.

In the meantime, our commitment towards investing prudently in our de novo expansion and MSO capabilities remains unchanged. Operator, we are ready for questions.

Q&A Session

Operator: [Operator Instructions]. We’ll take our first question from Andrew Mokat UBS.

Operator: We’ll take our next question from Brian Tanquilut at Jefferies.

Operator: We’ll move next to Joshua Raskin at Nephron Research.

Operator: We’ll move next to Jessica Tassan at Piper Sandler.

Operator: We’ll go to our next question from Jailendra Singh at Truist Securities.

Operator: And we’ll take our next question from Gary Taylor at Cowen.

Operator: And that does conclude the question-and-answer session. At this time, I would like to turn the conference back over to Carlos de Solo for any closing remarks.

Carlos de Solo: Thank you. So on behalf of the team, I’d just like to thank everybody for joining our call today. We look forward to updating you on our progress, and have a great day.

Operator: And that concludes today’s conference call. Thank you for your participation. You may now disconnect.