Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the CareMax Incorporated First Quarter 2022 Financial Results Conference Call.

[Operator Instructions] It is now my pleasure to turn today's call over to Samantha Swerdlin, Vice President of Investor Relations. Ma'am, Please go ahead..

Thank you, and good morning, everyone. Welcome to CareMax' first quarter 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'll 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 assessments of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

And forward-looking statements made during the call are made as of today and CareMax undertakes no duty to update or revise such statements, whether it is a result of new information, future events or otherwise.

Important factors that could cause actual results, development 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 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..

Thank you, Samantha. Good morning, everyone, and thank you for joining our call today. We had a solid start to the year as our quarter results continue to demonstrate the effectiveness and consistency of our model. We delivered a medical expense ratio of 72.6%. And if we exclude the estimated impacts of COVID, it would've been 71.8%.

Additionally, we ended the quarter with over 34,000 Medicare Advantage members. As we mentioned during our last call, we recently opened our first 2 centers in Memphis, Tennessee, and our first center in New York City.

We had the opportunity to spend time at all 3 centers over the last few weeks and are extremely impressed by all of the hard work our team has done to bring our vision and model to these new communities.

We're excited about the strong demand we are seeing in these new markets and the opportunity we have in bringing our transformative whole-person health model to improve health outcomes and overall wellbeing to those patients that will benefit the most. Turning now to our performance.

For the first quarter of 2022, revenue grew 55% over the prior year to $137 million pro forma for the business combination of CareMax and IMC. Notably, we saw over 3/4 of our members during the quarter and continue to see reimbursement rates return to pre-COVID levels. Our first quarter GAAP net loss was $16.8 million.

Our first quarter adjusted EBITDA was approximately $6 million, which included roughly $1 million in COVID-related cost. Despite impacts from COVID in the quarter, we believe we remain on track to deliver 2022 adjusted EBITDA in the range of $30 million to $40 million excluding de novo losses.

As announced this morning, we have entered into a new Credit Agreement to refinance our current debt facility to support our accretive de novo strategy. We knew our pivot to a de novo growth strategy from M&A would fundamentally alter the course of our EBITDA inability to support our existing bank debt.

Today, we remain as confident as ever in the long-term returns of the de novo strategy and have sought a financing solution that would both give us significant flexibility from a covenant standpoint to invest in de novos, and also provide us with additional liquidity to fund those initial operating losses, as well as pursue opportunistic tuck-ins that augment our de novo unit economics.

Later in the presentation, Kevin will provide additional details on the terms of this facility. Our total membership at quarter end was over 84,000 and Medicare Advantage membership was over 34,000.

Typically our membership grows slower in Q1 when compared to the rest of the year, in part due to our significant share of duals who are able to enroll throughout the year.

We continue to expect that our focus on de novo openings, in combination with our affiliated physician practices and our own grassroots marketing efforts, will continue or contribute to strong membership growth throughout the year.

Similar to others in our industry, early in the first quarter, we experienced higher COVID hospitalizations related to Omicron variant. However, lengths of stay were lower than under prior variants, which paralleled the decrease in virulence of Omicron.

Our medical staff continues to be diligent about the outreach and educating our members, which has led to early diagnosis and more effective treatment plans for COVID. In turn, this has helped mitigate some of the high cost associated with COVID treatment. For the first quarter, we recorded a solid 72.6% medical expense ratio.

This increased 110 basis points from the fourth quarter of 2021, primarily due to the aforementioned impacts from Omicron.

Seasonality was also a factor as [MERs] tend to be higher in Q1 due to a number of factors, including an increase in utilization driven from members accessing new health plan benefits, as well as the reset of both stop-loss insurance and the reset of pharmacy limits at the beginning of the calendar year.

Our model also continues to perform well on the provider side. We had no physician turnover in Q1 and have had strong demand recruiting providers in our new markets in what would otherwise be a difficult labor market. We believe this is a testament to our strong culture and mission here at CareMax.

With that, I will turn it over to Kevin to provide greater detail on our first quarter results..

Thanks, Carlos, and good morning. We're off to a good start to the year and continue to be cautiously optimistic that COVID headwinds will be less of an impact this year than last. As a reminder, a reconciliation of our GAAP net income to non-GAAP metrics, like adjusted EBITDA, can be found in our press release and earnings presentation.

All references and comparisons to 2021 metrics I make are pro forma for the business combination of CareMax and IMC as if it had occurred at the start of 2021. I will first give an update on the quarter and then discuss the new Credit Agreement. First quarter revenue was $137 million, a meaningful step-up from fourth quarter revenue of $118 million.

Let me outline some key drivers. First, as we disclosed in March, we estimated COVID risk adjustment headwinds impacted 2021 revenues by $11.5 million. This was driven by COVID affecting our ability to document the acuities of our members in 2020, which in turn depressed our Medicare risk premium, the MPMs, in 2021.

Despite COVID waves last year, our providers were able to see over 95% of our members in 2021 and document their conditions, allowing us to fully recover those risk adjusted headwinds for 2022. Additionally, as of Q1 alone, we have already seen more than 3/4 of our members, putting us on track to achieve historical levels of visitation by year-end.

Second, we gained several thousand members toward the end of 2021 from a couple of tuck-in acquisitions closed in December, and the addition of new members and new markets. These additions marked our entry into the Tampa and Space Coast markets and continue to upon our skilled platform here in Florida.

It's important to remember these Medicare patients range from non-risk to full risk, with different levels of revenue PMPM. However, we continue to believe that we have the ability to convert Medicare patients to full risk over time and unlock significant embedded medical margin.

And third, we continue to grow organically through a combination of grassroot [cells] and assignments from our collaborations with health plans and providers. Medical expense ratio was 72.6% compared to 71.5% in the fourth quarter, with COVID driving about 2/3 of the difference and the remainder due to seasonality from Q4 to Q1.

We think our underlying business continues to perform well and that the 70% MER range is still an appropriate level of normalized performance for us. We estimate COVID impacted our external provider costs in Q1 by about $1 million as Omicron peaked and subsided quickly in January.

And despite record hospitalizations in Florida in the Omicron wave, we are pleased that the overall volume of COVID admissions among our members still came in below the prior wave. As you can see in our earnings presentation, COVID hospitalizations per 1,000 in April were immaterial compared to prior quarters.

We can never count out the possibility of another wave, but we believe we have adapted our care processes effectively to keep our members safe and healthy. Q1 platform contribution with $17.3 million and in our estimate, would've been over $18 million absent COVID, marking a meaningful recovery back to historical levels of profitability.

Note that this includes centers at all stages of maturity, from our most established centers to ones more recently opened. We continue to see capacity in our current Florida centers to nearly double membership, which could drive platform contribution margins to 20% or higher over time.

In addition, our Q1 platform contribution includes the first phase of frontline compensation adjustments we mentioned last quarter. We have since rolled up the remaining increases in Q2 and expect those changes to pay dividends over time in the form of lower turnover, better continuity of care, and ultimately better patient experience.

On sales and marketing in corporate, general and administrative, we've been disciplined in keeping those costs, on an adjusted basis, relatively flat quarter-on-quarter.

While we still intend to invest to bolster our platform capabilities, we view these shared services and corporate cost as real sources of operating leverage that will help our core business grow in profitability as we expand in new markets.

As announced on our Q4 call, we've opened our first clinics outside of Florida, two in Memphis, Tennessee, and one in Brooklyn, New York. We have care teams in place seeing patients and are building grassroots-oriented salesforce, leveraging relationships with local community organizations to attract seniors.

And of course, we are leveraging the related companies' real estate footprint in underserved areas to help us target seniors, particularly dual eligibles whose lives can benefit most from CareMax' whole-person health model.

We have more centers on the way in Q2, including centers supported by our health plan relationships and remain on track to opening a total of 15 centers this year.

Following these results, we have reiterated our prior 2022 guidance for 38,000 to 40,000 Medicare advantage members by year-end; $540 million to $560 million in revenue; $30 million to 40 million in adjusted EBITDA, excluding de novo losses; and 15 de novo center openings.

As noted last quarter, we expect revenue to be fairly consistent quarter to quarter this year as organic growth in membership is offset by the phasing in of Medicare sequestration in Q2 in the back half of the year.

Additionally, while we expect our operating expenses will continue to grow, we expect to experience a declining MER as elective utilization moderates from Q1, and beneficiaries hit various coverage limits, and more patients hit reinsurance deductible over the course of the year.

In addition to core profitability, we expect de novo EBITDA losses to total approximately $10 million this year, mostly weighted towards the back half.

So far of the $1 million of de novo losses reported in Q1, about half are related to losses in core Florida centers opened in the last 18 months, and half are related to the initial operating losses and new markets.

As Carlos mentioned, today, we announced we entered into a credit agreement for a new 5-year facility consisting of $190 million initial term loan and a $110 million delayed draw facility, for a total of $300 million.

After repayment of our existing credit agreement and associated expenses, our net proceeds from the new initial term loan are expected to be approximately $57 million. Pro forma for the raise, our cash on hand at the end of Q1 would've been approximately $90 million.

The effective interest rate on the new facility, based on the spread of SOFR, is approximately 10% upon close, of which 4% can be paid in kind.

Importantly, for purposes of calculating leverage ratios, the facility allows us the ability to add back de novo operating losses for up to 36 months after opening of a center, as well as a significant amount of pre-opening de novo cost.

Additionally, the new facility has built in flexibility to add an uncommitted revolver and an incremental facility to the base loan, if our leverage permits. Between these sources of liquidity and de novo loss addbacks, we feel in our capital position and ability to fund de novo growth in the years to come.

With that, I'll turn it back to Carlos for closing remarks..

Thanks Kevin. In closing, I want to recognize the continued contribution of our team members. Their hard work and commitment every day is improving the overall quality of life of our patients. For this reason, I have deep conviction that we have what it takes to expand our model to those communities who need it most.

The operator will now open it up for questions..

[Operator Instructions] Your first question comes from the line of Andrew Mok with UBS..

Adjusting for some of the timing differences on working capital, it looks like cash from operations may have been closer to a deficit of a few million.

Just given expectations for increases in EBITDA throughout the year, is positive cash from operations a reasonable target for 2022?.

Andrew, it's Kevin. Yes, I would respond to that by saying that our core Florida operations we believe will be able to produce positive cash flow. I think where overall operations will probably come in at a negative cash flow is due to those funding of the de novo losses in the last half of the year..

Got it. Okay.

Can you comment on some of the inflationary cost pressures you're seeing as it relates to de novo centers? What kind of impact do you suspect this might have on planned openings this year?.

Yes, I think we're still planning on opening the 15 de novos as expected. We had some margin for error. We had additional centers that we were building out, obviously with the supply chain.

We've had to get creative in ordering materials ahead of time to make sure that we have everything in place to complete our buildouts, but we're confident in our ability to complete these buildouts within 2022 to hit the target number of 15 medical centers.

With respect to some of the inflationary pressures on cost of some of those goods, I think that was already baked into our model..

Got it. Okay. That's helpful. And then it sounds like you attributed some of the slower MA growth to higher mix of duals, which we'll see, which can enroll throughout the year.

Can you give us a sense of the MA membership growth on the non-dual mix, sequentially from 4Q to 1Q?.

Yes, most of – so about 70% of our growth comes from dual members. So about 20% to 30% comes from non-duals. And then generally with duals, you can enroll those members all year long. So generally after an open enrollment period, you have some movement on some of those duals, just coming back after a large push.

So this has been typical of our business over the past 11 years where Q1 is generally a slower growth quarter for us. It's protecting our business and stabilizing what we've grown in that open enrollment period. And then really ramping up growth for that second, third and fourth quarter..

Got it. That's helpful. And last one for me. You mentioned the success in retaining existing physicians and recruiting new physicians in expansion markets.

Can you help us understand what's – what you're doing there to drive the positive results there?.

Yes, look, I think that's a testament to our culture here at CareMax, using that PCP and really allowing him to be the quarterback of the ecosystem of how we provide care. So I think from a perspective of employee satisfaction, physician satisfaction, I think we're best in class.

I think second to that is also the way we've structured our comp model really benefits the physician, compared to what independent physicians are able to make, or even those of hospital systems, because so much of the heavy lifting falls on the physician in terms of quarterbacking that patient's care program.

So I think because of those 2 factors, we've been very successful in keeping those physicians happy and have very, very little turnover..

Your next question comes from the line of Josh Raskin with Nephron Research..

I just wanted to stay on the new markets and I'm curious how the progress has been in those new markets, specifically around the member recruiting, and it sounds like a little bit of the physician recruiting. I'd be interested in new markets, how that works, if you don't have a local presence. And maybe help us with that membership.

And then lastly, any update on New York City and Anthem on the situation there..

Yes, so we just started in both markets. We did the soft opening earlier in the year. We just finished the ribbon cutting a couple of weeks ago in our center in Brooklyn; 2 weeks before that in Memphis and Tennessee.

I could say we're building a very solid pipeline for growth in those markets and are fairly confident in our ability to drive membership growth due to our strategic collaborations in both of those markets. With – specifically, we are working with Anthem on another center that should be coming soon in the New York area.

Additionally, we work very closely with Related on all of the sites that we open up and really allowing us to embed ourselves with all of the different community groups in New York. And we've got several other centers coming soon in collaboration with Related as well..

Perfect.

And then Carlos, as you think about maybe next year, next year or 2, should we be thinking about additional, further market entry or is the, sort of, intermediate term focus going to be growing within that existing footprint?.

Yes, I think a lot – I've said that a lot on calls. It's really important for us to gain density in specific markets. So as I've said, we're not going to be planting flags just to be in many, many different markets. So everywhere we go into has to have a strategy that we believe will deliver significant growth in a short period of time.

So there are several other markets that we will be going into, but again, we're going to be very focused on the markets that we're in today, in Tennessee, New York, expanding our current market in Florida. And then there are several other markets that we are looking to go into.

But those again will be as part of strategic collaborations with payers or community groups..

Perfect. And then just last one for me on the external medical costs. I know the numbers a little tough to compare year-over-year and COVID impacts, etc., but should we think of 1Q – I think of the external provider cost of 72.6%.

Is that the high watermark for the year? Should we think about a slow ramp-down or, kind of, similar numbers, 1Q, 2Q, and then you start getting the benefit of stop loss and all the other stuff in the second half?.

Josh, it's Kevin. Yes, I think that's right. I think historically we've seen that Q1, obviously without COVID, has historically been, kind of, the high watermark, so yes, you can anticipate, kind of, a steady gradual improvement, kind of, quarter-on-quarter..

Your next question is from the line of Brian Tanquilut with Jefferies..

This is Jack Slevin on for Brian. Kevin, I just wanted to touch on, cost of Caroline came in a little bit higher than we were expecting.

Any color on the dynamics there, how we should think about that phasing throughout the year? And maybe just as an add-on that, how should we think about the remaining 12 centers that you plan to open this year and the pacing throughout the quarters?.

Great question. Yes, so to your point, the cost of Caroline includes a few items. So as we discussed historically, it includes the cost of the boxes, right? And as from a de novo loss standpoint, it's a separate segmented item towards the bottom of the financial. So it does include those costs, which have no revenue associated to them essentially.

In addition to that, we are investing to ensure that we're getting additional specialists in our facilities. We believe it's the best return on our investment, and it really leads to that continuity of care and the ability for the PCP to be the quarterback for the care of our patients.

And so having those specialists investing and having more specialists in our clinics is really important for us. The other piece is that there's components of our new patients that are coming in that are not full risk. And from a revenue recognition standpoint, we are not recognizing full revenue premiums on those patients.

And so as the year progresses and those patients move into those full risk contracts, we will get the step up from the premium side, even though we have the cost there. So there's going to be a little bit of some geography that that's happening on the financials. But I would – from our standpoint, that investment in cost of care is really critical..

Got it, makes sense. And then I can appreciate the comments on really high engagement with patients in the quarter. I guess, coming out of COVID, a lot of the discussion has been around patients that maybe haven't gotten into [indiscernible] [PCPs] potential disease progression that could have happened.

And I know you guys are really on the forefront of including a lot of diagnostics and within your facilities.

Anything to call out or interesting to pick up from what you've seen with patients that are, sort of, reentering the healthcare system or engaging more with the healthcare system early in this year?.

Yes, I think the great thing about our model is that last year we saw close to 95% of our members. This year we've already seen 75% of our members. So our members, throughout this period of time, even throughout COVID, we've been able to see them. So we don't expect to have any of those headwinds going into 2023.

Some other groups that may not have been able to access their members, I think are going through some of those issues today, but we don't expect that to be a problem for CareMax, just because of our model. We have been able to either see our members at the medical centers or send somebody out to see them in their homes, if they're unable to come in.

So I think there's a real benefit there for us..

Your next question is from the line of Jessica Tassan with Piper Sandler..

So just interested to know on the Brooklyn and Tennessee centers, when are those centers going to start taking risk? And then do the 1Q membership numbers include members at each of these new centers or, kind of, when should we start to see membership associated with Brooklyn and Tennessee?.

Yes, we're already growing in those centers today. With respect to risk, any time before a 2-year period is when we'll trigger risk. We have the ability to trigger sooner so we'll be closely watching all of these individual centers and we can trigger risk based on our agreements that we have sooner than that.

So it'll depend on bringing in the members, the acuity of these members and making sure that we understand what the medical [indiscernible] ratio is of that cohort of patients before we trigger that risk. But definitely by year 2, we'll be at full risk; it could be significantly sooner than that..

Got it.

So just the 500 net MA adds from 4Q to 1Q reflect recruitment efforts at Brooklyn and Tennessee, as well as within the existing base?.

Yes, it's our total membership – no, the final numbers are total membership growth. There's 20, I believe, new add-ons over the last couple of weeks..

Okay. Got it.

And then just on the medical cost ratio for the year, the 70% normalized and then you've got $1 million of COVID-related expenses in 1Q, I guess, barring that – or is that $1 million barring, kind of, another wave of COVID the only exception to the 70% normalized for the full year 2022?.

Yes, Jessica, it's Kevin. That's right. We believe that our platform has consistently contributed 70% medical loss ratio, kind of, pre COVID. And that's correct, that's exactly the way to look at it.

That $1 million you, kind of, have to exclude as COVID related and to your point, barring any other COVID waves, we would expect a 70% MER for the full year..

Got it. And then I think you said you made some investments in just cost of care.

So should we expect an incremental, sort of, step-up in that line in [indiscernible] reflecting the full extent of investments? Or, yes, how should that line progress over the next couple quarters?.

Yes, that line will continue to increase, probably not at the same steady state that we're seeing right now. But as we open new centers and those centers come online, the cost of those centers will go into that cost-of-care line.

Pre-opening costs right now [and] adjustment to EBITDA, they are, kind of, below the line, so they're baked into that cost-of-care line. So yes, I would – that is an investment for us and it's a component that we believe makes for really strong medical expense ratios and obviously leads to better outcomes for our patients.

So that we will continue to see a steady investment there, but not what you're seeing the Q4 to Q1 range..

Got it.

And then my last one is just, are you guys considering tuck-ins in that 15-center target for the year? And then can you just remind us, kind of, what is the cost of a typical tuck-in and what happens to membership revenue and adjusted EBITDA when you do tuck-in at center?.

Yes, we're always looking at….

Yes, go ahead, Kevin..

No, that's I was just going to – sorry, Carlos, I was just going to say the 15 does not include tuck-ins. Those are going to be the de novo center openings and it just – from a – they're not all one size kind of fits all. Tuck-ins are going to range – have a range of unit economics.

Some of the tuck-ins, specifically here in South Florida, some providers would be at full risk contracts. We've also seen providers that are PCP cap-only with no risk. And so it really – when you've seen one, you've seen one. They range from a multitude of different levels of sophistication..

Yes. What I was going to say is we see tuck-ins as an opportunity to grow our de novos. So to the extent that we identify small tuck-in providers with 100 or 200 members that can fit into one of our de novo centers, that's what we really take advantage and see an opportunity on that..

[Operator Instructions] Your next question is from Gary Taylor with Cowen..

Couple questions. First, I just wanted start with the new Credit Agreement and make sure we're thinking about the numbers correctly.

The go-forward interest rate of closer to 10%, are you anticipating that you'll be paying cash interest? I know you said there's an opportunity, the 4% capitalization, but we're just trying to think about that income statement, interest expense go from – it's been a trailing, like, $6 million.

Is that headed towards ['19], the 10% level? And would that be all cash?.

Yes, I think internally right now, we're looking at that [pick] option to your point to, kind of, conserve cash and redeploy out from a de novo standpoint. So that's right..

And then the GAAP interest expense would still be at the 10% level, regardless of that decision though, right?.

That's correct..

Okay. And then the other thing I just wanted to make sure I understand. So I know the guidance for the year excludes $10 million of de novo losses. But there's still a lot of other non-recurring expenses you're excluding on trailing basis. It's $23 million. That was $6 million this quarter.

Can you just give us a little insight on that $6.055 million, what's in that? Is it all cash and, kind of, what's the trajectory of that over the course of the year?.

Thanks Gary. Yes, so I'll start with the trailing 12, in the, kind of, the Q2 range, there's a lot of costs associated to the [de-SPAC] component. So you can see there's a meaningful stepdown from Q2 to Q3. Obviously don't expect that to continue. For Q1 this year, it's not all cash, there are some non-cash items in there.

The biggest item that we had in there though for the quarter is we did engage with a big [indiscernible] consulting firm to assist us with some operational strategic initiatives. So a consulting engagement that, kind of, started the middle of Q4, ended early or mid Q1.

And so that was a onetime fee that we have in there that's makes up probably about half of that delta..

Okay.

So it should be coming down to some degree sequentially, but then, I mean, we're still anticipating that will be items running through there in the back half?.

Yes, there's still items running through there in the back half. What I'd say is based off of our internal estimates today, probably north of 65% of those we – are falling off in Q1. And there's a remaining 15% or 20% that we anticipate to, kind of, slowly roll off throughout the end of the year..

There are no further questions at this time. I will now turn the call back over to Mr. Carlos de Solo..

Thank you all for joining our call today and continuing to support the company. As you can see, our team continues to execute. We've had a solid start to the year and remain confident that we will continue the momentum for the remainder of the year. We look forward to updating you on our progress, and thank you..

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect..