Apollo Medical Holdings, Inc. (NASDAQ:AMEH) Q3 2023 Earnings Call Transcript

Apollo Medical Holdings, Inc. (NASDAQ:AMEH) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Good day, everyone, and welcome to today’s Apollo Medical Holdings Third Quarter 2023 Earnings Call. [Operator Instructions]. Today’s speakers will be Brandon Sim, Co-Chief Executive Officer of Apollo Medical Holdings; and Chan Basho, Chief Strategy and Financial Officer. The press release announcing Apollo Medical Holdings, Inc.’s results for the third quarter ended September 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. With that, I’ll turn the call over to ApolloMed’s Co-Chief Executive Officer, Brandon Sim. Please go ahead, Brandon.

Brandon Sim : Thank you, operator. Good evening, and thank you all for joining us to discuss ApolloMed’s third quarter performance. We are pleased to deliver another strong quarter at ApolloMed, one in which we not only continue to deliver strong operational, clinical, and financial results, but also continue to grow the momentum we’ve had in transforming health care for local communities across the country. The infrastructure that we have built and the alignment we have with our partners continues to accelerate the country towards our vision, one in which everyone has access to high-quality, accessible, and high-value care. Starting with financial highlights for the quarter. Revenue of $348 million grew 10% compared to the prior year period, as we experienced growth in all three of our segments: Care Partners, Care Delivery, and Care Enablement.

Capitated revenue grew almost 34% to around $306 million in the quarter compared to the prior year period. Adjusted EBITDA of $52 million benefited from the aforementioned strong growth in capitated revenues in the Care Partners business, and our continuing successful efforts in managing total cost of care for these members and value-based risk-bearing arrangements. Adjusted EBITDA margin was around 15%, as we continue to grow while building a sustainable business. Before getting into strategic and operational developments from the quarter, I wanted to comment on our announcement today of our intent to acquire assets related to Community Family Care Medical Group, or CFC, including their independent physician association, Restricted Knox-Keene licensed health plan, and managed service organization entities.

Community Family Care is a scaled, full risk-bearing provider group, made up of more than 350 primary care providers and more than 500 specialists, managing care for over 200,000 Medicaid, Medicare, and Commercial members in Los Angeles County. They have been a care enablement client since January of 2020, and we’ll continue to utilize those solutions with no further onboarding period necessary as a care partner going forward. In addition to its unique network and robust clinical capabilities, CFC will also bring pending regulatory approval with existing Restricted Knox-Keene or RKK license for Medicaid members, which will accelerate our path to scale and full risk for this important population. Furthermore, we expect to harness synergies in shifting our existing Medicaid population to full-risk arrangements, while also moving CFC’s Medicare members into full-risk arrangements utilizing our senior-focused RKK.

We anticipate that this will allow us to more effectively manage total cost of care across our Medicaid book of business, while expanding access to high-quality care to even more patients across the Los Angeles metropolitan area. Importantly, the acquisition of an existing client shows the value and synergy of leveraging both our Care Enablement and Care Partners business segments, transitioning from a vendor-client relationship into one in which we are responsible for the total cost of care of their scaled membership base, in a derisked and accretive fashion. We are excited to not only recognize several costs and revenue-related synergies in partnering with CFC and its providers, but far more importantly, continuing to deepen our commitment to local communities across Los Angeles and continuing to drive access, quality and value in these communities.

Chan will dive more deeply into the financial details of this acquisition later in this call. Turning now to business updates from the third quarter. We continue to build on our momentum this year, with two new provider partnerships since our last earnings call. First, we have partnered with Associated Hispanic Physicians, a group of over 150 primary care providers and over 450 specialists in Los Angeles with around 25,000 Medicaid, Medicare, and Commercial members and value-based care arrangements. In order to support that group with our Care Enablement offering. We expect associated Hispanic physicians’ providers to be onboarded onto our Care Enablement platform by March of 2024. Next, we expanded our relationship with Advantage Health Network, a group of approximately 15 primary care providers and several hundred specialists in Los Angeles, which supports around 4,500 Medicaid, Medicare and Commercial members and value-based care arrangements.

As part of the partnership, Advantage’s providers are slated to join our Care Partners business. We also acquired five primary care clinics in the Advantage Health Network, which will be integrated into our Care Delivery business. Of note, Advantage Health Network has been a long-time care enablement client of ours, and will continue to benefit from the Care Enablement offering. As in the case of CFC, Advantage Health Network providers are already onboarded onto the ApolloMed platform. This is another example of our ability to support our Care Enablement clients seamlessly and more deeply in our Care Partners business, where we manage the member’s total cost of care on a capitated basis. We believe this tuck-in acquisition and partnership will be immediately accretive and will further expand our Care Delivery and Care Partners geographic footprint in the Los Angeles area.

In totality, the partnerships with Community Family Care, Associated Hispanic Physicians, and Advantage Health Network, will strengthen our ability to provide high quality, accessible and coordinated care for local communities throughout Los Angeles. Finally, we are excited to share that we have entered a strategic partnership with Wider Circle, a peer-based community health organization working with payers and providers to connect neighbors for better health. Under this partnership, our two organizations will provide comprehensive patient-centered care and enhanced care management for Medicaid members with complex needs, an integral component of the California Advancing and Innovating Medi-Cal, or CalAIM initiative. By pairing Wider Circle’s community-based engagement model and our core clinical offerings and proprietary care management platform, we will strive to bring community-based, interdisciplinary and person-centered care to all who need it, especially those most underserved.

We believe that this joint venture will be an especially valuable offering, given our definitive agreement to acquire Community Family Care, a full risk-bearing Medicaid organization, as well as the Managed Medicaid scale that already exists in our existing and new provider group partners. This brings our total number of provider group partnerships signed for the year so far, to five, with two of those in Texas and three of those in California, not including our joint venture with Wider Circle and our planned acquisition of Community Family Care. And our outlook for additional provider group partnerships for the remainder of this year, in both California and beyond is very strong. Overall, we continue to be a leader in value-based care with a focus on all populations, including members in Managed Medicaid, Medicare Advantage and Medicare fee-for-service and Commercial lines of business.

We believe that our scaled and highly diversified business with over 10,000 providers on platform, serving approximately 900,000 members in value-based care arrangements, alongside over 20 payer partners, positions us very strongly to accomplish our mission to provide high-quality, accessible, and high-value care to all, and communities across the country. And with over 90% of our revenue related to value-based care, our incentives are truly aligned with those of the patients and providers, whether in our core markets in Southern California, or in our newer markets in Northern California, Nevada, Texas, and beyond. Our scaled value-based care infrastructure and long proven ability to effectively manage total cost of care and patient outcomes allows us to have confidence in sustained profitability, as we invest to grow our model into local communities across the country.

We are excited by the continued momentum we are seeing in the business, and we’ll continue to work to improve our members’ health, empower physicians and effectively manage total cost of care for those we serve. To close my prepared remarks, I would like to thank our teammates and partners for believing in our vision to transform health care in local communities across the country. The accelerating growth and outcomes of our business would not be possible without your passion, dedication and support. With that, I’ll turn it over to Chan to review our financial results.

Chan Basho : Thank you, Brandon. Before I review the third quarter results, I wanted to discuss our recent acquisition of Community Family Care Medical Group, including their independent physician association, Restricted Knox-Keene licensed health plan and managed service organization entities, or in aggregate, CFC, as well as our recently announced Term Loan A and the financial flexibility that it provides. As Brandon already highlighted, the strategic benefits of the CFC transaction, I’m going to provide an overview of the financials. CFC is expected to generate approximately $190 million of revenue this year, and approximately $25 million of adjusted EBITDA. Once the transaction is closed, which we expect to happen in Q1 2024, we will transition their approximately 200,000 members to our Care Partners platform.

This will be meaningfully additive to our Care Partners’ revenue. It will also slightly increase our intersegment eliminations, since this population will continue to utilize our Care Enablement solution. The transaction price of $202 million is a combination of $152 million of cash from our balance sheet, $20 million of equity, and up to $30 million of performance-based earn-outs. Today, we also announced an oversubscribed term loan of $300 million, which increases the company’s facility to $700 million with our existing $400 million revolver. We intend to use these funds to position us for future M&A transactions, which allow us to continue to expand our geographic footprint and grow our membership base. Through this process, we were able to negotiate expanded baskets within our overall facility, including increasing the maximum levels of certain forms of permitted indebtedness, increasing the maximum levels of restricted payments, including share repurchases, and increasing the maximum levels of certain investments.

The term loan is also being used to fund our recent $100 million share buyback from APC-excluded assets. We have confidence in the future growth and profitability of our business, and with this buyback, we’re optimistic about our ability to generate sustainable shareholder value in the years to come. This buyback also allows us to work towards a consolidated tax return and solve for our effective tax rate. Now turning to our third quarter results. Our third quarter revenue of $348.2 million increased 10% compared to a year ago, and was driven by growth in all three of our core segments. Our capitated revenue grew by 34% annually during the same period, from $227.6 million to $305.7 million. We ended the third quarter with 900,000 members, which is the total number of unique members we support in our Care Partners, Care Delivery, and Care Enablement segments.

As a reminder, we take some level of medical risk in each of our Care Partner members and received the appropriate level of reimbursement. In Care Enablement, we received a smaller fee to utilize our technology platform to support third-party providers in their value-based care efforts. Because of the different financial profiles of each member, I want to take a moment to share how our membership has changed and will be changing within our segments. Our Care Enablement membership decreased to approximately 900,000 members this quarter, as a result of our previously reported Care Enablement client ending their contract. Additionally, when CFC closes, we expect to see the growth of approximately 200,000 members in our Care Partners business, as we begin to take risk for those members’ total cost of care.

Adjusted EBITDA was $52 million compared to $57.1 million, a year ago. Sequentially, adjusted EBITDA benefited from our continued care management efforts. On a year-over-year basis, the decline was a result of our one-time 2021 NGACO payment in Q3 2022. As a reminder, the impact of that program was recognized in one quarter in 2022 and going forward. We have been and will continue to accrue the profitability of the ACO program throughout the year. Our effective tax rate of 26% in the third quarter was lower than our historical levels due to the release of valuation allowances. As previously mentioned last quarter, our effective tax rate has been historically high due to the income tax associated with certain intercompany dividends. The release of valuation allowances offset our high historical tax rates, as we continue to work to implement measures to bring down our effective tax rate, which we anticipate being in the mid-30s by the first quarter of 2024.

Net income attributable to ApolloMed in the third quarter was $22.1 million compared to $23.2 million in the prior year period. Earnings per diluted share was $0.47 compared to $0.50, a year ago. Now turning to our balance sheet. We ended the quarter with $273.9 million in cash and total debt of $209.2 million. As it relates to our long-term view on our leverage ratio, we aim to have a net leverage in the range of 2.25 times to 2.75 times but may experience short-term variation. The last topic I want to cover on today’s call is our guidance. Given where we are in the year, we are narrowing our range for the full year and now expect the following: in regards to revenue, we expect to be between $1.34 billion and $1.39 billion, compared to our previous range of $1.3 billion to $1.5 billion.

We anticipate coming in slightly below the midpoint of our previously disclosed guidance range, primarily due to small headwinds around Medicaid redetermination and the rolling off of our previously mentioned client. We still remain very confident in our ability to continue to grow in the 20% to 30% range. We expect adjusted EBITDA to be between $135 million and $150 million, compared to our previous range of $120 million to $160 million. We continue to see utilization trends being stable across our at-risk book of business because of the unique capabilities of our clinical model and some initial conservatism. We expect to come in on the upper half of our previously disclosed guidance range, as well as within our target at scale EBITDA margins even as we expand into new regions and grow value-based care membership.

In regards to earnings per diluted share, we expect to be between $1.10 and $1.20, compared to our previous range of $0.95 to $1.20. In conclusion, we’re pleased with our financial performance growth partnerships and capital deployment during the third quarter, further demonstrating our platform’s ability to continue to execute on three key operational goals: growing our membership in core and new geographies, empowering our Care Delivery and Care Partners providers to successfully move down the glide path towards value-based care, and enabling our providers to deliver excellent patient outcomes in order to effectively manage risk. The CFC transaction further diversifies our membership mix and provides us a pathway to expand our value-based care exposure.

The ApolloMed platform provides a highly differentiated, pure-play, value-based care company that is profitable, growing rapidly, and yields profitable and sustainable growth. We made meaningful progress in all three areas, and we’ll continue to use this road map as we close out the year, having established a solid foundation for continued growth in 2024. Brandon and I want to thank you all for your time today. We’re always open to a dialogue with investors and welcome visitors to our offices in Alhambra, should any of you be in the L.A. area. With that, operator, let’s open it up for Q&A.

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Q&A Session

Operator: [Operator Instructions]. And we’ll take our first question from Ryan Daniels from William Blair. Please go ahead, Ryan.

Ryan Daniels : Congrats on all the momentum. Thanks for taking my questions. Brandon, maybe one for you. Strategically, it just seems like a bevy of partnerships and the acquisition are all coming together here towards year-end. And I’m curious to hear your view on what’s driving that. Obviously, some of these are prior partnerships moving to more integrated relationships. But what’s really driving such strong momentum over the last few months in driving your partnership growth?

Brandon Sim: Ryan, thank you so much for joining the call today, and thanks for the kind words. I think we’ve — we’re really seeing a lot of momentum across all aspects of the business, organically in terms of kind of same provider member panel growth, organically in terms of number of partnerships we’re signing with provider groups and other entities such as the Wider Circle partnership of course, a larger acquisition that was announced today. I think the way I would characterize it is that, these are partnerships we’ve been working on throughout the year. I think it happened to land in this quarter, and we decided to announce them all at the same time here. As I mentioned earlier in my prepared remarks, I think we have a very strong pipeline for even further partnerships, potentially, even for the class of 2024.

And so, I don’t think there’s anything necessarily special about this quarter. These are longer-term things that we’ve been working on and we’re glad to be able to announce them today.

Ryan Daniels : Okay. That’s great. And then with the pending transaction, you mentioned you’ll have RKK for Medicaid. I know you already had one with the FYB deal before. Are those different licenses, meaning, do you need separate ones to run Medicaid and Commercial and Medicare in the state so that this actually does expand your risk-bearing capabilities?

Brandon Sim: Yes. So, in terms of the Restricted Knox-Keene licenses, which all my comments here are going to be pending regulatory approval of the transaction, of course. There are actually separate licenses necessary or at least separate approvals necessary for each line of business and each health plan in each county. And so, while the plan was always to expand our existing license into new counties, I mean, to new payer relationships. This will drastically accelerate the process, we believe, again, pending regulatory approval to take on full risk for Medicaid populations across California.

Ryan Daniels : That’s helpful. And then maybe one financial, and I’ll hop off and save the rest for later. But just in regards to the expanded credit line, I know it’s up to $700 million. You have just over $200 million in long-term debt. Is that all part of that revolver, meaning effectively, you have $500 million available? Or is there a different structure to that $200 million plus debt that’s already outstanding?

Chan Basho: Ryan, yes, you’re correct. The $180 million is today, is part of the $400 million facility which has now been expanded to $700 million.

Operator: And we’ll take our next question from Brooks O’Neil from Lake Street Capital. Please go ahead, Brooks.

Brooks O’Neil: Thank you, good afternoon everyone. I guess I’ll follow on with Ryan. As you guys, I think, know I’m particularly excited about the opportunity you have to take on the global risk through the RKK. And I’m just curious, obviously, Brandon just said the opportunity exists now to go after Medicaid full risk. But can you give us any update on what’s going on with regard to the Medicare license that I think you acquired up in San Francisco, and whether you’ve had any success beginning to think about moving those capabilities across the state?

Brandon Sim: Brooks, thank you for joining the call. It’s great to hear your voice again. And thank you, Ryan, for the questions earlier. So, Brooks, I ran your question on the existing Restricted Knox-Keene, FYB. We’ve continued to expand the geographies, the counties in California, where it’s able to take on full risk for Medicare populations, and there’ve been several new contracts with payers that we signed since the last time we’ve conversed here on a quarterly call, and we continue to see good momentum in terms of getting our Medicare Advantage book of business into full-risk arrangements by next year.

Brooks O’Neil: Yes. That’s great. And then I think it was Chan who said that utilization has been stable. One of the big themes we’ve been hearing from people around the United States has been sort of strong procedure activity and growth. No one’s quite sure exactly what it’s all about, a rebound from the pandemic lockdowns and whatnot or some other phenomenon. But would you say that your stable utilization is a manifestation of the success of your business model and your approach to value-based care? Or can you just talk about what you’re seeing out there in your markets and how you responded to it?

Brandon Sim: Sure thing. We’ve seen fairly stable utilization and MCR trends across the business in totality. Of course, there are slight movements up and down based on line of business because we are a diversified business across government and commercial programs. But overall, on both inpatient and outpatient side, of utilization. We believe that our unique care model is — has always been focused on providing access, and we aren’t seeing a large “rebound”, so to speak, in terms of utilization in this quarter. And that kind of showed in terms of our ability to continue delivering the financial results that we expected.

Brooks O’Neil: Yes, that’s great. And congratulations on continued success.

Brandon Sim: Thank you, Brooks.

Operator: And next, we’ll go to Adam Ron from Bank of America. Please go ahead, Adam.

Adam Ron: Thanks for taking my question. I think going on what folks were saying, I know you don’t guide quarterly, but it seems like versus the consensus estimates, EBITDA outperformed significantly, and even if you just look seasonally the cost of care line was down sequentially more than it usually — sometimes even up. And so, I’m taking that to mean that there was actually MLR outperformance or at least, like you’re accruing something more positively it seems, relative to like 2022 or 2023 expectations. Is that right? Or is there not anything really to call out on — from a lot of the outperformance?

Chan Basho: Adam, the main item I’d highlight is, in Q1 and Q2, with the limited data that we have around ACO, we — it’s really breakeven. And so, in Q3, we had a slight ACO true-up. And that’s number one. Number two, our Managed Care business, MCR was stable, and those two things together have led to this quarter.

Adam Ron: Okay. Yes, because it was just a significant outperformance versus consensus and the guidance increase was pretty minimal. And so, I guess, is there anything in Q4 that you’re kind of worried about or assuming some big step up in utilization? Or is it really just the Street was mismodeling?