ASTH - NASDAQ

Hello and welcome to the Apollo Medical Holdings' Second Quarter 2023 Financial Results Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Carolyne Sohn, Vice President, Investor Relations. Carolyne, please go ahead.

Thank you, operator, and hello, everyone. Thank you for joining us. The press release announcing Apollo Medical Holdings Inc.'s results for the second quarter ended June 30, 2023, is available at the Investors section of the company's website at www.apollomed.net. To provide some additional background on its results, the company has made a supplemental deck available on its website. A replay of this broadcast will also be made available at ApolloMed's website after the conclusion of this call. Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terms such as anticipate, believe, expect, future plan, outlook, and will and include, among other things, statements regarding the company's guidance for the year ending December 31, 2023, continued growth, acquisition strategy, ability to deliver sustainable long-term value, ability to respond to the changing environment, operational focus, strategic growth plans and merger integration efforts. Although the company believes that the expectations reflected in its forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected. There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in ApolloMed is included in its filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise, except as required by law. Regarding the disclaimer language, I would also like to refer you to Slide 2 of the conference call presentation for further information. For those of you following along with the accompanying supplement, there is an overview of the company on Slide 3. On today's call, the company's Co-Chief Executive Officer, Brandon Sim, will discuss second quarter 2023 highlights and the latest operational developments. Chief Financial Officer, Chan Basho, will follow with a review of ApolloMed's results for the second quarter and 6 months ended June 30, 2023. Brandon will conclude the remarks with an update on the company's outlook and long-term growth strategy before opening the floor for questions. With that, I'll turn the call over to ApolloMed's Co-Chief Executive Officer, Brandon Sim. Please go ahead, Brandon.

Thank you, Carolyne. We were pleased to deliver another strong quarter, achieving 29% growth on the topline and 44% growth in adjusted EBITDA compared to the same quarter in 2022. Revenue growth was primarily driven by strong organic membership growth and a more favorable payer mix in our Care Partners business. We continue to execute on our 3 key operational goals: One, growing our membership in core and new geographies; 2, empowering our Care Delivery and Care Partners providers to successfully move along the glide path towards value-based care; and 3, enabling our providers to deliver excellent patient outcomes in order to manage that risk effectively. On the first goal, growing our membership in core and new geographies, we continue to see strong growth as a result of the strength and quality of our Care Partners business as well as the technology, operational, and care management support we bring to bear in our Care Enablement business. Our core business in California continues to demonstrate robust growth, both organically in our partner groups, as well as the new partnership signed. We recently formed a long-term partnership with a primary care group in California with a network of over 50 providers joining our newly signed class of partners in 2023. We expect to onboard this group onto our Care Enablement platform by September 1 of this year. We also want to highlight what we believe is our ability to replicate our success in Southern California and other markets. As previously communicated, our playbook for empowering providers in a new market includes: First, entering a market in partnership with a high-quality anchor group for our risk-bearing Care Partners business; second, investing in local operational and care management teams to ensure successful onboarding onto our Care Enablement platform for these providers; and finally, partnering with additional groups in the market who would benefit from joining our platform. This flywheel accelerates as we reach critical mass in each market. And we believe that the enabling platform we've built and proven to generate great patient outcomes and profitability in Southern California will allow us to demonstrate this progression rapidly in each new market we enter. In Texas, for example, we entered with the acquisition of Valley Oaks Medical Group last October. As we build out our local market leadership in Texas, we are pleased to share that [ Jaime Melkonoff ], a healthcare executive with over 20 years of experience in the industry, has joined us as President of Apollo Care Enablement of Texas and Senior Vice President of Business Development. Jamie is expected to play a key role in expanding our Care Partners network across the country and further building out our Care Enablement platforms capabilities, empowering providers to advance along the value-based care glide path responsibly in Texas. We are thrilled to welcome Jamie to our leadership team and look forward to your contributions to our expansion efforts. Next, we continue to partner with groups across the region to empower their providers to provide high-quality value-based care. Firstly, we recently announced the acquisition of certain assets related to Texas Independent Providers or TIP. Through its network of 120 primary care providers, TIP is expected to be an anchor for a high-quality care partner segment in Houston. And we expect to onboard TIP's providers onto our Care Enablement platform by the end of 2023. We are pleased that we will continue to benefit from the leadership of TIP's President, Dr. Carlos Palacios, who will join ApolloMed as Chief Medical Officer for Texas to spearhead clinical initiatives for local providers; and TIP Executive Director, Vincent Roth, who will join us as Group Vice President of Operations for Texas and lead the continued growth and development of our Texas network. We also announced a partnership with IntraCare to advance value-based care in Dallas, Fort Worth, El Paso, Austin and Oklahoma City. Through a network of over 425 primary care providers, IntraCare manages the care of over 40,000 members. And through this partnership, IntraCare's providers are expected to join our Care Partners business in these regions and be onboarded onto our Care Enablement platform by the end of the year. We are thrilled by the continued strong momentum we've been seeing in terms of the excitement around our Care Partners and Care Enablement offerings in both California, Texas, and beyond. Our next strategic pillar is in empowering our Care Delivery and Care Partners providers to successfully move along the glide path towards value-based care. In California, we shared during our previous quarterly call in May that we had closed on the acquisition of For Your Benefit or FYB, and received regulatory approval for the change in control of FYB's full-service Restricted Knox-Keene licensed health plan. We are working closely with the Department of Managed Health Care to expand the RKK to other counties within California and to add more members within existing counties, and we believe that the process is on track relative to our expectations. Finally, the most important strategic pillar is ensuring that we are successfully empowering our providers to deliver excellent patient outcomes, thereby managing that risk effectively. We continue to closely monitor utilization trends and did not see an increase in utilization in Q2 compared to Q1. Based on prior authorization data, however, we do see a slight uptick in utilization for Q3, but do not believe that this will significantly impact our overall performance or guidance for 2023. With regards to Medicaid redetermination, a bulk of our Medicaid members and value-based arrangements reside in California, which began disenrollments in July. We have not yet seen a significant impact on either our membership or mix, but we continue to monitor and assist in the redetermination process for our members to ensure they have access to care. With these recent developments and our solid financial performance through the first half of 2023, we are pleased to be reiterating our previously provided guidance for full year 2023. We continue to grow membership in our core California markets and in our new Nevada and Texas geographies through organic growth, new partnerships and inorganic activities. We continue to responsibly accelerate providers towards a value-based aligned feature, and we continue to make ongoing strategic investments in our business, our teams and our technology, which we believe are necessary to support growth in the years to come. With that, I'll turn it over to Chan to review our financial results.

Thank you, Brandon. We continue to deliver strong results, reporting total revenue of $348.2 million in the second quarter of 2023, a 29% increase from $269.7 million in the prior year quarter. This was primarily driven by increased revenue from our Care Partners segment. Quickly reviewing results in each of our business segments for the second quarter versus the prior year quarter, our Care Partners segment reported revenue of $325.2 million, an increase of 32% compared to the second quarter of 2022, primarily driven by organic membership growth in our consolidated risk-bearing entities and a more favorable payer mix. Segment operating income increased 250% to $27.8 million for the period. This was primarily driven by a larger midyear MA risk adjustment payment this period and the retrospective trend adjustment related to the CMS DCE program in the prior year period. Moving to our Care Enablement segment. Revenue increased 18% to $35 million in the second quarter of 2023. Segment operating income was $7.6 million for the period compared to $7.3 million in the prior year period. We continue to make investments in infrastructure, technology, and people to support our operational growth in new geographies and capabilities surrounding our RKK. We expect these investments to result in additional revenue and margin expansion over time as we onboard incremental clients. Membership under management within our Care Enablement segment was approximately 1.3 million managed lives at the end of the second quarter ended June 30, 2023. Approximately 650,000 or half of these members were also within our Care Partners business. Finally, our Care Delivery segment revenue increased 14% to $26.7 million during the period. This was primarily driven by increased volume in patient visits at our primary multi-specialty and ancillary delivery entities. Segment operating income was $0.6 million for the period compared to $3.4 million in the prior year period. The decrease was a result of our ongoing investments in expanding our care delivery footprint in Nevada and Texas. As you may recall, in the past, we highlighted our commitment to invest up to an incremental $10 million in 2023 to scale new geographies across all lines of business. Due to this reason, we view the results in this segment as in line to better than guidance we provided last quarter. In aggregate, income from operations, including corporate expenditures, was $27 million, an increase of 75.7% from $15.4 million in the prior year period. Adjusted EBITDA was $35.8 million, up 44% from $24.9 million in the prior year period. Net income attributable to ApolloMed was $13.2 million, an increase of 10% from $12 million in the second quarter of 2022. Earnings per share on a diluted basis were $0.28, up 8% from $0.26 in the prior year period. I want to note that our tax rate this quarter is 45%. Earlier this year, in my capacity as the new CFO, the finance team and I completed inventory of our tax filings and with the assistance of outside consultants determined we did not appropriately account for the income tax impact associated with certain intercompany dividends and also neglected to include certain loss-generating entities in certain consolidated tax filing groups between 2019 and 2022. Specifically, income tax expense was appropriately accrued for the income generated by the entity that made the intercompany dividend. However, the additional tax associated with the dividend itself was not accrued. This resulted in a decrease to previously reported net income of $8 million, with a net cash impact of $7.7 million for the period 2020 to 2022. Today, after the market closed, we filed an 8-K with additional information about the restatement. To be clear, this restatement has no impact on historically reported GAAP and non-GAAP measures, which include revenue, gross profit, pretax income from continuing operations, EBITDA, or adjusted EBITDA. We do not believe the tax-related restatement will have any impact whatsoever on the strength of the business, our ongoing operations, our ongoing liquidity or our need to raise capital. Going forward, we are evaluating changes to our tax structure to reduce the current effective tax rate and the amount of cash taxes. We expect to have this put into place by the fourth quarter, which we believe will result in a normalized tax rate going forward. Again, this has no impact on the measures the company reports such as revenue, gross profit, pretax income from continuing operations, EBITDA, or adjusted EBITDA. Turning over to the balance sheet. We remain well-capitalized and well-positioned to execute on our growth initiatives. We ended the second quarter with $294 million in cash and cash equivalents compared to $288 million at the end of 2022. Our working capital was $284 million compared to $288 million at the end of 2022. Also, total debt at the end of the second quarter was $208 million. I wanted to reiterate our 2023 outlook. We continue to be on track for total revenue between $1.3 billion and $1.5 billion, adjusted EBITDA of $120 million to $160 million and EPS of $0.95 to $1.20 per share. Despite the elevated tax rate for Q1 to Q3, we expect to still be within guidance for EPS, though it will most likely be in the lower half of the range. I'd like to now turn it back to Brandon for closing comments. Brandon?

Thanks, Chan. In closing, we are pleased with the progress we've made thus far in 2023 and look forward to taking advantage of the positive momentum we built in the first half of the year. We believe the recent partnerships announced with the group in California, TIP and IntraCare, demonstrate the enthusiasm and need in the market for our physician-centric value-based care platform. We remain laser-focused on delivering excellent growth, improving quality of care and clinical outcomes and accomplishing those goals sustainably by continuing our strong track record of profitability. With that, operator, let's open it up for Q&A.

[Operator Instructions] Our first question is coming from Ryan Daniels from William Blair.

This is Jack Senft on for Ryan Daniels. First, in your prepared remarks, you noted the RKK expansion. Can you just elaborate on this and kind of what specifically this involves? And then 2, if you can, just provide any possible timing on this expansion.

Hello, Jack, this is Brandon. Thanks for joining the call today. I appreciate it. It's a busy time. So for -- with regards to your question around the Restricted Knox-Keene license, as I noted in the script -- this prepared remarks, we are working closely with the Department of Managed Health Care in California to expand the Restricted Knox-Keene license to other counties within California. And at that point, we would be able to add more members into that Restricted Knox -- under that Restricted Knox-Keene license health plan. The process includes contracting with payers, it include contracting downstream with provider groups as well as with institutional entities. And that is all a process that we believe is on track relative to our expectations.

As a quick follow-up to -- adjusted EBITDA came in sequentially better. How should we assess the quarterly cadence going forward through the rest of the year, possibly thinking about the uptick in preauthorization that you noted in your prepared remarks too? How will that impact third quarter adjusted EBITDA? I just kind of want to make sure we're thinking about this correctly and modeling it accurately.

It's Chan. Thanks so much for the question. As we think about the rest of the year, I'd say Q3 is going to be in line with Q2, and then you'll see a drop in Q4 as we've seen in historical years.

And I just want really quick final one. Can you just give us an update on the Medicaid redeterminations and kind of how that's progressed over the past few months? I think on the last call, you noted that you're just starting to see some developments in May. So I'm just kind of curious how the past few months have progressed.

Jack, yes, definitely. So that's something we're keeping a close eye on. So almost all of our Medicaid members in value-based contracts reside in California, as I noted in the prerecorded comments. So California has been one of the slower states to start disenrollments. We started seeing that slightly in July, hasn't been material thus far. We've been working very closely with community groups, with payers and others to ensure that folks have access to Medicaid and access to care if they qualify and making sure they're not being disenrolled for administrative reasons. So I would say -- I would reiterate that there is no material impact that we're seeing yet, although we do expect that to happen perhaps in the quarter or 2 to come. We've accounted for that in the guidance. I mean, that's part of what Chan is talking about when you mentioned a fairly strong Q3 and a slightly weaker Q4.

Our next question is coming from Adam Ron from Bank of America.

On -- I have a couple of questions. But on the utilization, can you be a little -- provide a little bit more color around what you're seeing in terms of prioritizations in Q3? Is that like outpatient surgery specifically? Is it in MA? Just any additional color on that would be helpful.

Yes, sure. So in Q2, so far -- I know this is not the question, but in Q2 so far, we actually haven't seen a large pickup in utilization at all relative to Q1. However, reviewing the prior authorizations that are coming in, we are seeing a slight uptick in inpatient Medicare Advantage utilization. And so that's baked into some of our guidance for Q3s and Q4 coming up.

And then in terms of your normalized tax structure comment, I noticed that your tax rate is kind of higher than any other company we really cover, and I wasn't sure if that was because you were in California, but it sounds like some of it is like structural and that you see -- that there was ways to actually produce that. So most of the managed care companies then kind of hover around mid-20s tax rate. Is that something you see as achievable? Or just what reference would be like a reasonable target?

Yes, I'd say it's closer to low to mid-30s.

And that's really the only thing driving down your net income guidance to the lower end of the range which is higher taxes than expected for the future?

That's correct.

And then one of your competitors had 2 interesting comments. One, saying that direct contracting was coming in better than they had expected based on data they were getting from CMS, I guess, like a positive retro trend adjustment or perhaps to its growth expectations. So is that at all factored in your guidance or results here that direct contracting is coming in better than expected?

For the guidance today, we're not assuming any positive incremental impacts for either direct contracting from last year or ACO reach for this year. That does remain a possibility, certainly. But in the spirit of conservatism, we have not accrued or incorporated any positive impact from those 2 programs, again, either from a true-up from 2022, which we'll know by August or ongoing operations in the ACO reach this year into our full year projections.

And if there any -- but is there any data that you're getting from CMS that's like positive one way or the other? Are you saying it's just too early to make that call?

On the Direct Contracting Entity program from 2022, we have not got any information from CMS that would suggest any differences relative to information we already had at the end of the year. And that final report, we do expect to come sometime this month or early next from CMS relating to the final true-up for the DCE program last year. If you're asking about the ACO reach program for this year, we are getting monthly reports around the retroactive benchmark adjustment that has been around in line with expectations, not noticeably positive impact.

And another comment they made that was interesting was that they had got in discussions with payers now that the MA payers have submitted their base for 2024, they were able to see the supplemental benefit cuts. And especially they were larger than expected just because of the rate pressure that MA plans are seeing. And so I'm wondering if you were able to get visibility into your payer partners and what you're seeing in terms of supplemental benefits customer next year and how you think that will impact your numbers and if it gives you more confidence in your ability to manage through that rate headwind for next year.

Yes. I think that's accurate on average across the board. Of course, each plan is going to look a little different, but I think on average, that is also the trend that we are seeing due to their -- due to payers' management of some of the risk adjustment changes, premium changes and star rating changes on their end. So I think what you're saying is accurate, and we're seeing it as well. I think given the longevity of our model and the fact that we're already providing a lot of the items that may or may not have been included in supplementary benefits from some of the plans, and we're going to continue providing those services, which we always have. I think we have a good shot. We think we're -- or we expect our model to be able to weather through that pretty consistently as we have with decades of supplementary benefit changes up and down. We haven't seen that impact our financials or our care ability to do over care at all.

And then -- sorry for all of these questions. But my last question would be -- so I think one of the deals, IntraCare, I think it was -- you mentioned 425 providers and 40,000 patients. And generally, I would think about it from PCP patient panel, like the 100s, if not over 1,000. And so wondering, one, why that's below of a patient per provider. I'm not sure if it's maybe like MA-only or something? And then second, if you could maybe help give context to what you think like between these 3 deals that you announced in the quarter, how many patients that should add to the total number of patients and if those are all risk live?

Sure. The 40,000 members are not all seniors. So you're right in that the ratio of PCP to senior is probably a bit high, relatively speaking. But they're not necessarily all Medicare Advantage patients. In aggregate -- and I'm sorry, I got to move. If that wasn't clear, just let me know. But in aggregate, we -- it's a little early to tell exactly how many patients and the exact mix between Medicaid, commercial and Medicare Advantage because our model does encompass and take on risk in all 3 areas. I would probably not want to venture a number at this point in time. But we do expect the revenue impact, I would say, to be in the 10s, if not higher of impact.

[Operator Instructions] Our next question is coming from Brooks O'Neil from Lake Street.

I'm just curious, I think Brandon mentioned in his prepared remarks, elevated risk adjustment payments. And I'm just curious if you could talk about what's driving that, number one. Number 2, is it -- do you think the trend is sustainable into the end of the year and beyond?

So on the elevated risk score relative to last year, that drove some of the incremental outperformance for this quarter relative to the same quarter last year. That was related to our efforts in more accurately capturing the kind of conditions of our senior population, which is something that we've been focused on as part of the operational and technological platform that we've been deploying into our provider offices over the last 12 to 24 months. As you all know, it takes quite a bit of time for risk adjustment payments to catch up with the actual act of coding the chronic condition. And so some of the results and uplift from the kind of platform we've deployed over the past couple of years are now starting to come to bear. We also noted before that our aggregate RAF score for our senior population was quite low, under 1.0. And we believe that at the time that was inappropriately low relative to the actual acuity of the chronic conditions of the patients. And so we're seeing some of that come into fruition in terms of these RAF payments.

But do you think you can probably keep seeing additional improvements as you implement your systems? Is that a fair way to characterize it?

I think related to the performance year with which these payments were related, I think that is actually it for that payment year. Of course, in future payment years we do think that there is future improvement to be had as we continue to roll out the platform to all of our providers.

Let me ask just one other one. I'm curious Jack was asking you about the Knox-Keene license, and that's a particular fascination of mine. I was hoping you might go just a little bit deeper in talking about not just the timing and the fact that you're on pace. But just what exactly do you think the impact of having that license will be on your business in terms of what does it mean for your provider networks? What does it mean in terms of the premium or the dollar capture you can have on a per patient basis?

Brooks, thanks so much for the question. We're very excited about our expansion of the RKK into new counties. It will allow us to quickly deploy our risk-based ecosystem into new counties as was geographies. It will allow us to differentially capture the premium dollar as well as really expand our enablement services. In terms of timing, we are working quickly with the DMHC to expand to our current counties as well as counties where new partners are in. As you know, this is -- this takes time in terms of the regulatory efforts, and we'll keep you apprised as we get further traction.

Let me just ask one more follow-up, and I'm not trying to be too picky on this, but I'm curious, I think having that Knox-Keene license means you can accept global capitation, which would include the hospital portion. And if I'm not mistaken, the premiums you've gotten historically don't include that, but those hospitals -- that hospital portion could potentially be quite significant for you? Isn't that true?

Definitely, yes, you brought up a great point with the RKK we will now be able to take on the hospital risk along with the professionals risk in terms of our revenues. And we are looking forward to moving down this path. Essentially, we will be recognized in revenues for 85-ish percent of the premium dollar versus the 35% to 40% that we are recognizing today.

And do you think ultimately you can expand more or less for all patients that you will serve across the entire state of California. Isn't that -- is that -- do I have that right?

Yes. We will start with our Medicare Advantage population. The goal is to expand it across multiple lines of business. Of course, this does take time, and it's not going to be overnight. But yes, that is the long-term expand.

I'll leave it at that. Good quarter, good outlook. I'm excited for you guys.

Thanks so much, Brooks. Great to hear you.

We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Well, thank you all for your time today. We are always open to a dialogue with investors and welcome visitors to our offices at Alhambra, should any of you be in the Los Angeles area. Please feel free to reach out to us with any additional questions. We look forward to speaking to you all again on our next quarterly call. Thank you.