Privia Health Group, Inc. (NASDAQ:PRVA) Q2 2023 Earnings Call Transcript

Privia Health Group, Inc. (NASDAQ:PRVA) Q2 2023 Earnings Call Transcript August 6, 2023

Operator: Good day, and thank you for standing by. Welcome to the Privia Second Quarter 2023 Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I’d now like to hand the conference over to your speaker today, Robert Borchert, SVP, Investor and Corporate Communications.

Robert Borchert: Thank you, Amanda, and good morning. Joining me today are Parth Mehrotra, our Chief Executive Officer, and David Mountcastle, our Chief Financial Officer. This call is being webcast and can be accessed from the Investor Relations section of priviahealth.com. Today’s financial press release and slide presentation are posted on the Investor Relations pages of priviahealth.com. Following our prepared comments, we’ll open the line for questions. Please limit yourself to one question only, and return to the queue if you have a follow up, so we can get to as many questions as possible today. The financial results reported today and in the press release are preliminary and are not final until our Form 10-Q for the second quarter and six months ended June 30, 2023, is filed with the Securities and Exchange Commission.

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Some of the statements we’ll make today are forward-looking in nature based on our current expectations and view of our business as of August 3, 2023. Such statements, including those related to our future financial and operating performance and future business plans and objectives, are subject to risks and uncertainties that may cause actual results to differ materially. As a result, these statements should be considered in conjunction with the cautionary statements in today’s press release and the risk factors described in our Company’s most recent SEC filings. Finally, we may refer to certain non-GAAP financial measures on the call, and reconciliation of these measures to comparable GAAP measures are included in our press release and the accompanying slide presentation posted on our website.

Now, I’d like to turn the call over to Part.

Parth Mehrotra: Thank you, Robert, and good morning, everyone. Privia Health delivered another solid quarter as we moved into the second half of 2023. We continue to execute on our strategy, and remain focused on building one of the largest ambulatory care delivery networks in the nation. This morning, I’ll highlight a number of business and company updates. Then David will discuss our recent financial performance and our 2023 guidance outlook before we take your questions. Privia Health continues to gain market share and momentum with our broad provider partnership and operating model. We executed at a very high level during the second quarter, which resulted in Practice Collections increasing almost 14% year-over-year. Adjusted EBITDA was up more than 24%, which demonstrates the very strong operating leverage of our model, as we continue to increase our number of provider partners and invest in our new markets.

Our results were driven by continued same-store and new provider growth as well as strong performance in our value-based arrangements, in aggregate. Based on our performance year-to-date, we have updated our 2023 guidance and are raising most of the metrics to the mid to high end of our initial ranges. Earlier this week, we announced a definitive agreement to enter Washington, our 13th State, in partnership with Walla Walla Clinic, a multi-specialty practice with more than 50 providers caring for patients in three locations. It was essential for us to find the right partner who shares our vision to help build a scaled provider network in Washington, while improving access to, and affordability of care, in the local communities. Walla Walla Clinic has a highly successful history over its decades of operation, and we look forward to continuing to build on its rich heritage of delivering high quality care in the community.

We expect the transaction to close in the third quarter, with Walla Walla Clinic being fully implemented on the Privia Platform by the end of 2023. Turning to some other Company news. On May 8th, we completed a secondary offering of 42.6 million shares of common stock, or more than 34% of our total fully diluted shares outstanding. This entirely eliminated Goldman Sachs and Pamplona Capital’s ownership in the Company, as well as the previous shareholder agreement provisions with the private equity sponsors. We are excited to welcome a number of new, long-term oriented investors, and look forward to continuing to create shareholder value in the years to come. In addition, the Privia Health Board has continued to broaden the capabilities and expertise of our Board members.

Adam Boehler, Managing Partner of Rubicon Founders, joined our Board on July 1st. He brings deep domain experience as the former Senior Advisor for Value-based Transformation and Innovation at the Department of Health and Human Services, and also previously served as Director of CMMI, the Innovation Center at CMS. Dave Wichmann and Pam Kimmet joined our Board on August 1st. Dave’s distinguished career with UnitedHealth will bring unique insights to our Board across the healthcare industry landscape. Pam is a proven leader with broad corporate experience and human capital expertise both in and outside the healthcare sector. We look forward to the important insights and valuable contributions from each of these new Board members as Privia continues to execute on its vision.

Privia’s national footprint continues to expand and now includes close to 3,900 implemented providers in our medical groups caring for more than 4.4 million patients in over 1,000 care center locations. Our scale and diverse provider and payer partnerships are true differentiators. We are building one of the largest multi-specialty medical groups and ambulatory care delivery networks in the country that can improve patient outcomes and reduce costs. We continue to be ahead of our growth plan for adding new implemented providers in our recent new markets of Connecticut, North Carolina, and Ohio. While not highlighted on this slide, it is also noteworthy that our gross provider attrition rate in 2023 has been less than 1% year-to-date. This is one of the lowest in our Company’s history, and we continue to add providers on a net same-store basis.

Privia has one of the broadest, most balanced and diversified value-based care platforms in the industry. We serve close to 1.1 million attributed lives across more than 100 at-risk payer contracts in Commercial and government programs. Total attributed lives increased almost 27% from a year ago. There remains a significant embedded opportunity for us to move our Medicare Advantage lives into upside and downside risk arrangements over the next few years. However, we remain focused on thoughtfully moving to increased risk arrangements, while continuing to provide significant opportunities for EBITDA and free cash flow growth. Our strong performance in the current healthcare environment is a testament to Privia’s proven ability to manage risk.

Our book of business across a diverse set of fee-for-service and value-based contracts in Commercial, Medicare Advantage, the Medicare Shared Savings Program and Medicaid allow us to uniquely balance risk while delivering significant shared savings, EBITDA, and free cash flow growth across a cycle of varying utilization trends. We leverage our clinical operations, performance management, healthcare economics and actuarial expertise to manage the transition to risk. Our close alignment with our physicians is critically important in managing patient panels across the risk spectrum. This is accomplished through our physician-led governance structure in our homogeneous single tax ID medical groups in each State, and the hands-on, day-to-day work of our clinical and operations teams.

These differentiated fee-for-service and value-based care capabilities in the Privia model allow us to be a unique partner to physician practices across all specialties in any State serving all patients across all reimbursement models. Now, I’ll ask David to review our recent financial results and 2023 outlook.

David Mountcastle: Thank you, Parth. Privia Health’s operational execution continued to deliver strong performance in the second quarter of 2023. Our Implemented Provider count was 3,870, up 9.3% year-over-year. Solid ambulatory utilization trends and new implemented providers led to Practice Collections increasing 13.7% from Q2 a year ago to reach $700.0 million. Adjusted EBITDA was up 24.3% over Q2 last year to $19.3 million, highlighting our ability to continue to generate operating leverage as we expand and grow in existing and new markets. Total value-based care comprised 37% of total GAAP Revenue in the second quarter of 2023 compared to 29.6% in Q2 a year ago, which highlights our thoughtful and prudent moves to at-risk contracts over time.

For the first half of 2023, Practice Collections increased 15.4% to almost $1.36 billion. Care Margin was up 18.8%, and Adjusted EBITDA grew 19.3% to reach $36.2 million. Our updated 2023 guidance highlights the strength and resiliency of our operating model and diversified book of business. Based on our year-to-date financial and operating performance, we are raising all of our 2023 guidance metrics to the mid to high end of our initial ranges, except Practice Collections and Attributed Lives. We expect Practice Collections to come in at the midpoint of guidance, as this includes the impact of the one paused capitated contract we discussed last quarter. We also expect year-end Attributed Lives to be at the midpoint of our previous guidance.

As we’ve noted previously, our 2023 Adjusted EBITDA guidance absorbs approximately $8 to $10 million in new market entry and expansion investments. With five new States and three new ACOs in 2023, we plan to continue to invest across our business enterprise to support our significant expansion while continuing to grow EBITDA and free cash flow year-over-year. We expect our new markets to scale significantly in the coming years as we grow our provider base and attributed lives in these new States. Our balance sheet and capital position continue to be very strong, with cash of approximately $318 million and no debt. Given our capital-efficient partnership model with annual capital expenditures of less than $1 million, we continue to expect 80% to 90% of our Adjusted EBITDA to convert to free cash flow on an annual basis.

We remain focused on building Privia Health into one of the largest ambulatory care delivery networks in the nation, and investing to support this growth as we build our national footprint. We are now ready to take your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Jailendra Singh from Truist Securities.

Jailendra Singh: Yes, this happens on a Privia call. This is Jailendra Singh from Truist Securities. Good morning, everyone, and congrats on a strong quarter. So, actually, I wanted to get more color around utilization trends in the quarter. How did those compare with our expectations, and maybe what are you assuming for the rest of the year there? And for the quarter in particular, were there any pockets where utilizations were higher or lower than your expectations and impact on your business, various business lines? And kind of related, there was a $3 million unfilled PYD in the quarter. Can you provide some color what drove that?

Parth Mehrotra: Thanks, Jailendra. Appreciate the question. I’ll tackle the first half and then David will comment on the $3 million prior period adjustment. So, generally speaking, on the utilization trends, one broad comment. If you look at the last three or four years, 2019 through 2022, pre-COVID, acute during the COVID, and then coming out of COVID, we’ve had ebbs and flow in utilization to a pretty extreme level. And the strength of our model just speaks for itself, where we’ve each year grown both our fee-for-service book and our value-based book from both the topline and an EBITDA perspective. So, I think it’s important to take that slightly longer-term view as we look at utilization. The second point I’ll make is, as we’ve said previously, it’s important to distinguish between ambulatory utilization and then surgical, or in or outpatient utilization trends.

On the ambulatory side, we continue to see a higher plateau coming out of COVID. We’ve seen pretty strong tailwinds. That in our minds is good utilization with people seeing their primary care provider, pediatrician, OBGYN, and that boards well for a fee-for-service book and also is good for the value-based book. I think if you see some spikes in surgical utilization, both in and outpatient, that obviously impacts the Medicare Advantage book. But despite that, our other value-based books, both Commercial and the Medicare Shared Savings Program, act as a very natural hedge. So, I think obviously we are downstream from the payers. We’ve all seen the same commentary that you’ve read. And overall, on balance, we performed really well in aggregate across both fee-for-service and value-based book.

David Mountcastle: Yes, and Jailendra, on the $3 million that you see there, it is not related to the paused capitation and contract that we did last quarter, so I kind of wanted to make that point to start with. We received some payer data relative to retroactive 2022 adjustments. So, the $3 million in prior period claims increase was not actually a loss, but was offset by approximately the same amount of revenue booked in Q2 of 2023. And even with that, our financial performance remains strong as reflected in our Q2 results and updated 2023 financial guidance to the mid to high ranges.

Jailendra Singh: Okay. Thanks, guys.

Operator: Thank you. Please stand by. Our next question comes from Lisa Gill from J.P. Morgan.

Lisa Gill: Thanks very much. Good morning. I just wanted to dig in a little deeper on the ramp in the new markets, adding North Carolina, Connecticut, Ohio. How do I think about the trend that you’re seeing, how quickly you’re getting physicians to come onto the platform? And would we expect an impact as we go towards the back half of this year? And I understand that Washington will close in the third quarter, so I think of that as more of a 2024 opportunity. But I’m just curious as to how the ramp is going versus your expectations.

Parth Mehrotra: Thanks for the question, Lisa. So, we’re really pleased with how we’ve started in each of those markets. As we stated in our prepared remarks, we are running ahead of our expectations in new provider sales in each of those States, and we continue to see pretty good opportunities to build very large medical groups over the next four to five years, which is always our thesis when we enter these new States. I think this year, we’ve experienced one of the strongest in market sales years in the history of the company. That’s reflected in our updated guidance of mid to high end on the implemented providers for the end of the year. And then again, Washington is a new State that was not disclosed earlier, and we are really pleased with that partnership.

They’ll be implemented before the end of the year, but you’ll see the financial impact for the full year going into 2024. So, I think all of that leads us to have pretty good momentum closing out this year and then entering into next year, and that’s reflected in the guidance we’ve provided today.

Lisa Gill: And any early thoughts on like health system pipeline partnerships for 2024? Like, how do you feel about that versus what we’ve seen in the last few years? Just given your success, are you seeing more interest, the same interest? Just curious if there’s a way to quantify how to think about that pipeline going into 2024.