CareMax, Inc. (NASDAQ:CMAX) Q4 2022 Earnings Call Transcript

CareMax, Inc. (NASDAQ:CMAX) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Ladies and gentlemen, good morning. My name is Abby, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the CareMax Fourth Quarter 2022 Financial Results Conference Call. Today’s conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. And I will now turn the conference over to Samantha Swerdlin, Vice President of Investor Relations. You may begin.

Samantha Swerdlin: Thank you, and good morning, everyone. Welcome to CareMax’s fourth quarter and full year 2022 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 the 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, 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 today. 2022 was a great year for CareMax marked by significant growth and national expansion. We exceeded our guidance on revenue and membership. Delivered adjusted EBITDA within our guidance range and added 17 new centers, ending with 62 locations across four states. We also took a major step forward in accelerating our national presence with the acquisition of stored value-based care and expanded our MSO platform to 10 states with 245,000 lives in value-based care arrangements, and approximately 2000 primary care providers in our network. We have made tremendous progress integrating stores and are very excited about the opportunity.

We believe our hybrid model of a capital light MSO, combined with our high touch centers, provides us with a strong platform for leadership in the industry as we transition to value-based care across the country. Now turning to some highlights from the quarter, Medicare Advantage membership increased to 93,500. And we’re pleased to report that our medical expense ratio for the quarter was 69.5%. It’s worth noting that center level NER remained at approximately 70% for the year. These metrics reflect our continued commitment to providing high quality care while maintaining operational efficiency. We continued to deliver strong operational performance during the quarter, we remain focused on ensuring members across our CareMax family have access to consistent high-quality care.

Our physical rebranding efforts are well underway with 80% of our footprint already rebranded to enhance our one CareMax value proposition. We continue to benefit from investments we’ve made in patient experience, as evidenced by our five-star rating and quality across all of our Florida senators in 2022. We believe that this underscores our ability to maintain best-in-class care as we grow rapidly. Further, we’ve received a net promoter score of over 97 for member satisfaction and saw 93% of patients during the year. A testament to our efforts to provide accessible patient centered care. Among other initiatives, we continue to build out the specialty services offered at our centers in areas such as cardiology, diagnostic services, pulmonology, endocrinology and gastroenterology.

We believe that by offering these services in-house, we can significantly reduce total cost of care and allow for better and more seamless care coordination between primary care physicians and specialists. We understand that building strong relationships with our primary care providers is critical to delivering exceptional care to our patients. That’s why we’re proud to report that we achieved an impressive 94% retention rate for our employee providers over 2022. We believe that our strong success in retaining providers is directly attributable to the comprehensive range of services and support that we provide from technology to streamline administrative processes. We’re committed to making it easy as possible for our providers to focus on what they do best caring for patients.

At CareMax, we’re committed to delivering comprehensive care solutions that meet the unique needs of our patients. As part of this commitment, we’ve been expanding our in-house pharmacy operations. Recently, we launched a pharmacy for Central Florida locations and are currently in the process of creating a standard pharmacy offering throughout the region. Our investment in expanding our pharmacy offering goes beyond just providing medication to our patients. By having a larger pharmacy present, we’re able to manage patients’ total cost of care. We also provide medication adherence programs, helping to ensure that our members take their medications as prescribed and stay healthy. Overall, we’re excited about the progress we’ve made and expanding our pharmacy operations.

And we believe that these efforts will help us deliver better outcomes for our patients and drive continued growth. Early in 2022, we began opening up centers outside of our core Florida market. We have expanded our presence to Memphis and Houston and continue to build density in New York City, where we now have seven centers, including our first Center in the Bronx, which opened during Q4. The results we’ve seen from the center open earlier in the year have been very encouraging. We have exceeded our membership goals, and now have 1,000 patients in New York City driven by strong organic sales from our team and hiring a PCPs with deep roots in their respective communities. We’ve also had success in Memphis, where we now have approximately 500 Medicare Advantage patients.

Our growth in both markets has been driven by our focus on providing high quality care and building strong relationships with patients, their families and the broader community. Looking ahead, we’re excited about the growth opportunities in our new markets. Now I’d like to update you on the progress of stored integration efforts, which have been gaining momentum since our acquisition in November. The acquisition of stores value-based care business provided us immediate scale to deliver value-based care across the country. Our expanded network now comprises approximately 2,000 providers and over 200,000 Medicare value-based care patients in 10 states and 30 markets. To support this growth, we onboard 65 full time employees to ensure a smooth transition.

We are encouraged to see that local practices in the store network are eager to adopted value-based care. And we have been working closely with them to provide education and resources they need to successfully transition this model of care. On the payer side, we’ve made significant progress in transitioning stores that Medicare Advantage fee-for-service beneficiaries into Medicare Advantage value-based care arrangements. We have also moved some of the legacy stored value-based care contracts into contracts with higher levels of risk sharing. We are pleased to report that our care partners are receptive to aligning with our glide path risk strategy. We believe that our momentum in this area will continue, as more payers seek to shift their business into value-based arrangements, and that this puts us in a strong position to ultimately shift a significant portion of the stored Medicare Advantage fee-for-service population into risk-based arrangements over time.

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Since the founding of CareMax, we have been committed to taking an innovative approach to healthcare delivery, which includes our proprietary system of blending targeted technology with comprehensive high touch care. This unique approach has been a key driver of our strong results. As we continue to pursue deliberate growth plans. We believe that our hybrid delivery model of a capital light MSO integrated with our high performing centers, that’s us apart from others in the healthcare industry. As we look ahead to the next several years, we couldn’t be more excited about the momentum we’ve established and the opportunities that lie ahead for us. Over the past year, we’ve made significant strides in transforming our business, expanding our operations to a national scale, and establishing ourselves as one of the largest value-based care operators in the country.

We believe that our focus on delivering high quality value-based care will continue to drive significant growth and value for our shareholders. And that we have the opportunity to unlock $400 million to $550 million and adjusted EBITDA value over the next five to 10 years. Now, I want to take a moment to discuss our upcoming Investor Day on March 13th. We have a great day plan for you, which will include presentations from many members of our leadership team, we hope you will come away with a deeper understanding of our business, vision and strategy and the deep impact we have on the communities we serve. We are looking forward to seeing you in Miami next week. Before I hand over the call to Kevin, I want to thank our incredible team members for all their hard work and dedication over the past year.

They continue to exceed our expectations with their commitment to growing the business while going above and beyond to deliver exceptional health care and always keeping the needs of our members first. With that, I’ll turn it over to Kevin to provide greater detail on our fourth quarter financial performance.

Kevin Wirges: Thanks, Carlos and good morning. As those of you who have followed us know, we had big ambitions to bring our differentiated care platform to seniors in new markets. And we’ve done just that. With 17 de novo clinics open to date across New York City, Memphis, Tennessee, Houston, Texas and the Space Coast in Florida. We’re now serving over 2000 new Medicare members and our de novo as of year-end 2022. All while continuing to grow membership and EBITDA in our core Florida centers. And now we are taking our next step in growth with the integration of the national MSO from Steward. I will first recap our results in the fourth quarter and full year 2022 And then provide financial guidance for 2023. As a reminder, a reconciliation of GAAP to non-GAAP metrics like adjusted EBITDA can be found in our earnings release in presentation all year-over-year comparisons with 2021 our pro forma for the combination of CareMax and IMC Health as if they had occurred at the beginning of 2021.

Before going into the fundamentals, I’d like to note that we recognize the $70 million goodwill impairment charge in the fourth quarter offset by a gain of approximately equal size related to the remeasurement of earnout liabilities from the Steward transaction. These items may arise due to fluctuations in our stock price, but they have no impact on our cash or non-GAAP financials. We reported fourth quarter revenue of $164 million up 39% from the fourth quarter of 2021. This looks full year revenue at $631 million, up 57% from 2021. Coming above the high-end of our latest guidance and exceeding the midpoint of our original guidance by 15%. Medical expense ratio for the quarter was 69.5%, bringing full year MER to 72.7%. For clarity MER figures exclude de novo or acquired national MSO patients that are not full risk.

Importantly, MER in 2022 was approximately 70% for members in our centers and approximately 85% for members in our existing MSO, both in line with historical and long-term targeted performance. Platform contribution in the fourth quarter was $25.6 million growing approximately 60% over the fourth quarter of 2021. Full year platform contribution was $85.1 million, up approximately 71% over 2021 and rebounding as we had expected from COVID related headwinds in 2021. As a reminder, platform contribution represents a blend of centers at different stages of maturity, including some of our most established centers at over 20% platform contribution margin. We continue to see opportunity to scale not just de novos, but also less mature core Florida centers to a 20% platform contribution margin or better.

As for adjusted EBITDA, we’ve adopted a change in our reporting that no longer adds back de novo preopening costs and post opening losses in the figure. Had we done this for 2022, our adjusted EBITDA guidance would have been $10 million to $20 million, reflecting expected de novo post opening losses of approximately $10 million, and another $10 million of internally budgeted preopening costs, which include onetime expenses to enter new markets and build out related professional fees. Together, these de novo costs and losses were approximately $13 million for 2022, putting our adjusted EBITDA at $22 million, or over $7 million favorable to the midpoint of our recast guidance. With this shows is our team has done a great job deploying capital judiciously towards de novo growth.

And by leveraging the national MSL, we believe there are opportunities to be even more efficient and growing membership and new markets. Cash as of the end of December, was $42 million. As a reminder, we pulled down $45 million from our delayed drop term loan facility in November to help fund the Steward VBC acquisition. This week, we entered into an amendment with our term loan lenders to add an additional delay draw facility of $60 million. Together with the $65 million of remaining capacity under our current DTTL and $42 million of cash as of year-end, we would have had $167 million of total liquidity to continue our de novo expansion and invest and value creation and our MSO. On top of that, we have worked with our lenders to increase our ability to raise a further $45 million in revolving credit from $30 million previously to fund additional working capital needs.

Amidst the challenging macro backdrop, we are fortunate to be in partnership with long-term oriented stakeholders that have high conviction in the financial viability of our business. With these sources of liquidity, we expect to be able to fund our current growth strategy for the foreseeable future. Now, let me turn to 2023 guidance. We plan to continue executing on Medicare Advantage member growth across both our centers and MSO, reaching 110,000 to 120,000 MA VBC members by the end of 2023, representing 23% growth at the midpoint over our year-end 2022 membership. This reflects a combination of organic growth and our core and de novo markets and collaborative efforts with payers and providers to transition Medicare fee-for-service beneficiaries and to value based care plans.

We expect full year revenue of $700 million to $750 million or 15% growth over 2022 at the midpoint. As noted in previous calls. 2022 revenue included favorable impacts from true ups and GAAP risk revenues. Due to the retrospective recognition of full risk membership and certain health plans. We consider $600 million as an appropriate annual run rate for the pre-Steward CareMax business exiting Q4. To reach the midpoint of the guidance, we assume low double-digit percentage growth off of this run rate, and the remainder coming from the acquired national MSO revenues. As most of our MSO lives are not yet in full risk arrangements, GAAP revenues from MSSP, ACO reach and Medicare Advantage partial risk contracts will primarily be recognized on a net basis, effectively as if external provider costs were already deducted from premiums.

We expect full year adjusted EBITDA fully burdened by de novo post opening losses and pre-opening costs of $25 million to $35 million or 36% gross at the midpoint. This includes approximately $25 million of de novo costs and losses, reflected continued center openings and a full year of operating losses for the 2022 cohort. We plan to take a measured and opportunistic approach towards center openings, as we believe our MSO provides us a pipeline of high performing providers to seed new locations. Finally, similar to last year, we expect the revenue to be distributed relatively evenly throughout the year. Adjusted EBITDA should also be roughly consistent between the first half and the second half as favorable seasonality and external provider costs in the second half, partially offset increased de novo losses.

Even with the greater de novo investment this year, our ability to grow adjusted EBITDA reflects the immediate earnings accretion from the National MSO acquisition, as well as continued growth in our core Florida membership improvement in PMPM economics and operating leverage over corporate general and administrative expenses. As Carlos noted, integration with the national MSO is well underway. With provider engagement and clinical teams already in close collaboration with key MSO accounts with their goals to drive improvements and medical utilization and shared savings. Since the 2022 MSSP receivable will go toward repayment of the Steward AR facility. We expect to reinvest most of this year’s cash flows from the national MSO into human and technological capital to support taking increasing risk under our new Medicare Advantage contracts.

We look forward to going into more detail on financial drivers of the national MSO next Monday at our Investor Day. We still well positioned to execute on our multi prong strategy, and are excited to demonstrate how our efforts have the potential to unlock significant earnings and cash flow for the coming yours. Operator, we will now open it up for questions.

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Q&A Session

Operator: And we’ll pick our first question from Joshua Raskin with Nephron Research. Your line is now open.

Joshua Raskin: Hi, thanks. Good morning. Just a quick clarification to make sure we get this all right. So, if I recast the reported EBITDA for 2022, the $22 million. And then you know from the slides, I add back the $5.9 million in de novo post up opening losses and the other $7.1 for the preopening costs. That’s the $35 million, is that comparable to the old guidance? Is that the right way to think about it?

Carlos de Solo: Hey, good morning, Joshua. Yeah, that sounds right. I mean, what we’re doing now the company is no longer reporting EBITDA with the add back of the de novo. There was some clarifying guidance from the SEC additionally on December. We also think it makes it more clear this way. So, the way we’re reporting moving forward is without adding back those de novo losses. But that’s sure.

Joshua Raskin: And then the external MLR, it was down 570 basis points sequentially came in below 70. And I just would have expected with a little bit of a flu season in December, and then I don’t know what you guys are booking on the ACO reach or the MSSP lives, I assume that’s, that’s higher added from Steward. I would have thought maybe there would have been a little bit more pressure. So, the 70 was a little bit favorite was that I guess the question is, was that payroll to your expectations? And if so, maybe you could talk a little bit about the cost drivers and what you’re seeing in terms of underlying medical costs?

Kevin Wirges: Hi, Josh, it’s Kevin. That’s came in a little favorable to our expectations. I would note that from a flu standpoint, in South Florida, we typically don’t fill that impact until Q1 of ’23. And so, we’ll see that coming in the next quarter. You talked about the MSSP and ACO ratio, those, as we look at on our part, are deemed partial risk contracts because of the risk sharing arrangement there. So, they’re not actually calculated anymore in our MER calculations, we’re really taking full risk in there. So, anything that we have substantially all risk for, we’re booking full gross revenues and medical expenses that the MSSP, ACO reach, and even the Medicare Advantage, partial risk contracts are all being recorded kind of net.

And so therefore, the revenue PMPM on those is significantly lower. So that’s why when you look at the MER standpoint, those aren’t included. The only thing I would tell you is the reason it came in one of the reasons we believe it came in favorable to our expectations, typically, on the MSO side, which is obviously a little bit more of our population now. It has been during 2022. It’s been one of our folks growth, those tend to have those patients in that contracting tend to have a higher MER, just due to how the calculation works. And so just the mix shift alone, we would have expected a little bit higher of an MER. But we’re very pleased that we’re we came in at 69.5%.