Greetings. Welcome to Apollo Medical Holdings First Quarter 2023 Financial Results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Carolyne Sohn, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and hello, everyone. Thank you for joining us. The press release announcing Apollo Medical Holdings Inc's results for the first quarter ended March 31, 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, ability to decrease cost of care while improving quality and outcomes, ability to deliver sustainable revenue and EBITDA growth as well as long-term value, ability to respond to the changing environment, ability to offset anticipated losses in the care enabling segments, ability to successfully implement operational streamlining and successful implementation of strategic growth plans acquisition strategy and merger integration efforts. Although the company believes that the expectations reflected in its forward looking statements are reasonable as of today, the 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 Apollo Med is included in 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 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's an overview of the company on Slide 3. On today's call, the company's Co-Chief Executive Officer Brandon Sim will discuss first quarter 2023 highlights and the latest operational developments. Chief Financial Officer Chan Basho will follow with a review of Apollo Med's results for the first quarter ended March 31, 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 the Apollo Med's Co-Chief Executive Officer Brandon Sim. Please go ahead Brandon.

Great. Thank you, Carolyne and good evening everyone. Thank you for joining us today. We began 2023 with a strong first quarter as we continue to rapidly scale our leading value based care enablement and delivery platform while maintaining our long history of outstanding clinical outcomes, great health care experiences for our members and sustained profitability. I will first summarize our key quarterly financial results and reporting improvements and then provide updates on operations. For the first quarter ended March 31, 2023, we reported total revenue of $337.2 million, a 28% increase from the prior year quarter and $29.8 million in adjusted EBITDA. We're also introducing segment based reporting, details of which are included on Slide 7 of our earnings supplements. As our business continues to grow, we felt it was important for us to provide greater clarity into each segments revenue, growth and operating profitability, which are the metrics by which we also evaluate our businesses, excluding non-operator factors. We believe this information will allow investors to better evaluate changes in the operating results of our business segments, a set of non-operational factors that affect net income thus providing insight into both operations, and other factors impacting our results our reported results. Beginning with the first quarter ended March 31, 2023, we are reporting our financial results based on the following three business segments; care enablement, care partners, and care delivery. Our care enablement segment is an integrated end-to-end clinical administrative platform powered by our proprietary technology suite, which provides operational, clinical, financial, technology, management and strategic services to providers and payers. Revenue for this segment is primarily comprised of management and software fees, charged as a percentage of gross revenue, or on a per member per month basis. Our care partners segment is focused on building and managing…

Thank you, Brandon. I want to thank you for the support and greatly valued opportunity. As you highlighted, we continue to deliver strong results reporting total revenue of $337.2 million in the first quarter of 2023. A 28% increase from $263.3 million in the prior year quarter. This was primarily driven by increased revenue within our care partners segment. I'll quickly highlight our per segment results and offer brief commentary on each. First, our care enablement segment reported revenue of $30.6 million for the quarter, an increase of 4% from $29.4 million in the prior year period. Segment operating income decreased 49.3% to $5.7 million for the period, which was driven by our additional investments in infrastructure, technology and people to support our operational growth. We believe that these investments are necessary as we prepare to take on management services contracts related to global risk, and we expect margin expansion once fees for managing these global risk contracts begin to offset some of the investments made over the past year. Membership under management within our care enablement business segment was approximately 1.3 million managed live at the end of the first quarter ended March 31, 2023. Approximately 650,000 or half of these members were also within our care partners business and have capitated risk bearing arrangements through our consolidated risk bearing entities. Deep diving into our care partners segment, revenue increased 30.4% to $314.7 million during the period, primarily driven by organic membership growth in our consolidated risk bearing entities and a more favorable payer mix. Segment operating income increased 28.2% to $22.3 million, which was primarily driven by our ability to maintain a steady medical loss ratio and cost structure, even with rising revenue. This is a result we're pleased with and we will continue driving further growth in…

Thanks, Chan. In closing, we've hit the ground running in 2023 and are very excited about our prospects for the remainder of the year. We are making notable progress on the key operational goals of organic growth and record new markets, moving our risk based membership towards global risks, and empowering a growing network of providers to deliver superior outcomes for their patients in order to effectively manage our increasing book of risk based business. With that, operator, let's open it up for Q&A.

Thank you. [Operator Instructions] Our first question is from Ryan Daniels with William Blair. Please proceed.

Hey guys, thanks for taking the questions. Love to get a little bit more color on some of the G&A investments you're making and how we should think about that going forward given some of the streamlining you mentioned. And in particular we'd love to hear more about what you're doing in care enablement. I know that nearly doubled year-over-year even though it's only about 10% of your sales. So it's not the biggest G&A area. So maybe one talk about how we think about overall G&A going forward and number two, specifically in care enablement.

Hey, Ryan, this is Brandon. Thanks for joining the call. Good to hear from you. So around care enablement, and overall G&A I think there have been a lot of areas where we've invested in starting last year, and that's where you're seeing the same quarter year-over-year increases in G&A. With particular respect to care enablement we've made a lot of investment in our analytics and software engineering departments, for example, which are leading to causing some of the increased G&A. We've also made investments into preparing for management services around institutional claims processing authorization, case management, etc, which we've been doing in anticipation of one of our clients in the care enablement segment signing on for additional institutional related services, as well as our own Restricted Knox-Keene licensed going live this year. And so we'll start to see revenue come in to offset the increased G&A within next quarter or two for the institutional investment. We do believe that G&A is going to slow down a bit for the rest of the year. Maybe Chan can talk a little bit about that.

Yes, thanks. Thanks, Brandon. Kevin, thanks for the question. So as we previously mentioned, the G&A increase that we saw last year really kicked in Q3 and Q4 is running at a steady state in Q1. And we expect '23 to be in line with full year 2022. Sorry about that, Ryan in terms of the name.

No worries at all. And then maybe another big picture, one just on Medicaid redetermination. I know that's down to 20% of sales now, but any thoughts on the potential impact given your exposure to California Medicaid, I know you're payer agnostic, but certainly some of those lives are going to lose coverage. So is that contemplated in guidance? And then how big of an impact would that have?

Yes. We're just starting to see redetermination kick-in in May. And those numbers are built into our guidance give us about till next quarter to give you exactly the movement that we're seeing from Medicaid over to the exchange. With the robust policies that are in place in California we do expect to capture many of those members as the process happens.

Okay, perfect. And then maybe last one just any more color. I'm sure we'll get some questions on LaSalle Medical Group and the care enablement agreement there with the MSA being, I guess discontinued as of August. Was it a pricing issue? Was it dissatisfaction with the technology, just normal business? And then maybe you can remind us what the typical length of contract terms are in your historic retention rates? Thanks.

Sure thing, Ryan. I can take this one. LaSalle I would say that all of our MSA our care enablement clients are important to us. We really do our best not to lose any. And this is actually a pretty rare occurrence for us. I think our retention rates well in the 90s and net retention from a revenue basis is probably over 100 to answer other question, but I think this particular instance, in those numbers I cited earlier, obviously, excluding LaSalle, just to-date, and then the contract ends August 31 of this year. Unfortunately, with LaSalle, we were unable to come to terms with pricing that supported the long term margins that we wanted in business, which are 20% to 30%. And there's a bit of a difference in kind of strategy that I probably won't go too deep into on this call. But unfortunately these things happen. What I can say is that going forward, we do anticipate the build to ensure that the care enablement segment is still on track towards the 20% to 30% EBITDA margins that we've talked about, and there is a pipeline, kind of a folks who are excited to get back on board, or to get on board, sorry in the care enablement segment.

Okay. I appreciate all the color. And thank you for the new disclosure. I think it's super helpful. So I applaud you for kind of continuing to advance your communication efforts. Thanks so much.

Thanks Ryan. Appreciate it.

Our next question is from Brooks O'Neil with Lake Street Capital Markets. Please proceed.

Good afternoon, guys. And congratulations on the strong start to the year. Congratulations to Chan. I think it's fantastic. I look forward to continuing to work with you guys. So I have a couple questions. I guess I'd like to start off obviously will you comment about trimming up the workforce. I've heard some other rumblings around from some other plan organizations that they're considering staffing reductions. Would you say that in response to reimbursement levels in any parts of your business in particular, Ryan mentioned the redetermination in Medicaid, but I've heard that there's some pressures in the Medicare Advantage business broadly defined? And could you comment if you guys are seeing that feeling that?

Sure, yes. Brooks, thanks for joining. Good to hear from you. I can certainly comment on that. I think, around Medicare, we haven't seen as much pressure as perhaps the organization or perhaps the industry on average has seen. I think some of the pressure that folks are anticipating are related to the [Rabe] changes that will be phased in over the next three years. The risk adjustment changes from CMS. I think as we've stated before, and continue to believe the risk adjustment changes will not affect us as much as other organizations. We run some analyses around the prevalence of certain codes or combinations of codes that will be eliminated or reduced in terms of risk adjustment contributions. And it's just not as high as we think. That combined with the rate of growth for us and the heightened base value score, demographic score for risk adjustment, should end up being a bit of a wash. So I think we're feeling okay on the Medicare side of things. The main realignment or streamlining so to speak for the organization will really be we grew very quickly. We grew to 1500, more than 1500 employees. Currently, we're talking about cuts of 5% or less. To be honest, it's not a large thing, but it is something we have to do to ensure that our margins of the care enablement business are going to be robust and on track for the 20% to 30% long term margins that we've guided towards the best. So that's really the scope and the rationale for the streamlining.

[indiscernible] thanks for that color Brandon. So second question I have or I guess it makes quick comments, and I'm wildly excited about your opportunity with the Restricted Knox-Keene license. I was hoping you might tell us a little bit about how you expect to take advantage of that? Obviously, San Francisco market is one opportunity, but this applies to the whole stage seems like just an enormous opportunity for you. And maybe you could share with all of us sort of how you envision the financial impact of that and how you expect to take advantage over the next couple of years?

Sure thing. Yes. Thanks for the question Brooks. So we received regulatory approval from the state for the Restricted Knox-Keene licensed health plan and as you mentioned, currently for two counties. So it's a fairly small group of members today, around 5000, senior members, which we're taking global risk on via the Restricted Knox-Keene license. Chan and myself are working hard to make sure that that's operationalized across other counties in California, including ones in which we have the bulk of our risk bearing care partners membership. And so you'll start seeing results of that show up in the care partners segment as we do that. Chan do you want to talk a little more in depth about the impact to top and bottom line?

Sure. Brooks, thanks so much for the kind words, great to hear from you. Yes, short term in terms of top line we have about under 10,000 members that will initially be within FYB and we're working to quickly expand it from the San Francisco Bay Areas to other locales within California. In terms of bottom line, I would say for the initial 12 months, it's as we invest and build up it's going to be breakeven. And we expect over time it will come in line with our overall long term margins that we've guided to historically.

Great. Could I just ask one more follow up on that? Obviously FYB has had some experience managing the mobile capitation global risk. Would you say your organization more broadly has significant experience with that or is that going to be a learning curve for the organization going forward?

Yes. We've been managing institutional risk via our dual risk arrangements, [indiscernible] arrangements, as it's called in California, for some time, even in Southern California and a fairly large book of business. We've also hired most if not all the FYB related staff, which contributed partially to the increased G&A in the care enablement segment because the revenues haven't come in yet, but we've already hired the staff. And so that's kind of a bit of what I was alluding to earlier with some of the fees related to institutional revenue coming in to offset the increased G&A that we had to invest in for, there's a bit of a quarter timing issue there. So we expect those margins to kind of climb back up in line on the care enablement segment. On the care partner segment where the actual risk will be borne Chan mentioned earlier, we think we can get to 10% to 20% longer margins, even on the close to doubled revenue on that segment. So to answer your question yes we're confident in our ability to do it. We've hired the folks and made the investments we need to and what's left is really operationalizing, the contract across the state of California.

Great. Fantastic. Let me just ask one more, appreciate all the color. Can you just give us an update on what's going on, if anything with regard to sort of traditional Medicare programs you've been involved in? In the past you performed incredibly well. Just curious what you envision either this year or next year in those areas. Thanks a lot.

Hey, Brooks. So last year, we were in the DCE program for our and that has now transitioned to the ACO REACH program. As we think about 2022, we've really viewed this as a breakeven business. In 2023 we continue to evaluate and as we get further data, especially around the retrospective trend adjustment factor, which is a benchmark used by CMS around historical revenues versus current revenues, we will be able to provide more insight probably by Q3.

Fantastic. Thanks for taking my questions, guys. Congratulations again.

Thank you.

[Operator Instructions] Our next question is from Adam Ron with Bank of America. Please proceed.

Hey, guys, thanks for having me on the call. I have a couple of questions. So I guess, following up on the ACO reached anything last year was breakeven and this year, you're recruiting for basically 100% MLR in the program? And if so if that's how things end up playing out, like, is that a program still worth being in? Like, it adds scale and revenue? And it's kind of breakeven introduces new provider relationships? Or is it not really playing out versus what expectations were? And then would you seek out like an MSSP? Or what is the general thought process around that?

Yes. I mean, long term, we would want to be in a business where we are able to achieve margins similar to other books of business. And you are right in your earlier statements, Adam, that for 2022 is breakeven, and we are in terms of 2023, that's where we're starting it. I think we are still, we're being very conservative, and we're still learning about the program. And so as we see our and we've had so much fluctuations in the retrospective trend adjustment factor that it's hard to, it's really hard to get to move in any other way. And so, we will be getting our May, in May, we'll be getting our summary for 2022 and then the final reconciliation happens in August. And so we'll be able to provide a lot more insight on '22 there. In terms of '23 as we start seeing that retrospective trend adjustment factor, stabilized we can also provide more insight. Around your third question around other programs, where we're definitely evaluating other programs in terms of our long term focus around help providing a full range of offerings and services for all members. In terms of viewing the ACO program, in terms of growth levers, it definitely is a growth lever. It's a way for us to build a relationship with new providers, and further expand it as over the years and as well as our existing providers, make sure we have a program for all other members.

All right. Appreciate that. And then going back to another question about the Knox-Keene conversion. If you could add some additional color around potential timing of converting it across your other capitated lives in California like, what is it tied to? Is it tied to provide payer contracts? And so those expire over the course of two to three years and as you renegotiate those, you need to get full risk contracts from them. And so we it might take two to three years to get fully converted. And if that's the case, like what is the lumpiness associated with that? And then second, I didn't fully understand how the EBITDA conversion on that would work. Like would it be symmetrical if you're going from like 40% risk to 100% risk. EBITDA should convert that way or was your hospital partner already sharing through the risk pool incentives some of what the upside wouldn't be taking full risk and so it's somewhere in between the 40% and 100%.

Hey, Adam, this is Brandon. Thank you for joining the call. Good to hear from you. I can take this one. So rather the timing of their operationalization of the RKK license. You're right there will be lumpiness to it, because it depends on the specific health plan partner and county combination for that to be signed, and then approved and move into the global risk arrangements. We don't necessarily have to wait until the end of the expiration of each contract. So it's not like we have to wait two, three years, if that's the end of the current contract. That's something we're negotiating on a plan by plan basis to ensure it gets done as soon as possible. I would guide towards at least one plant in Southern California, we expect to be within their certain Augustine umbrella this year, 2023 and their next and the rest should be phased in over the next 18 to 24 months. The utility really is around contracting with each payer and we're very diversified in terms of our payer mix as well as contracting with the appropriate hospital systems for the [indiscernible] and numbers that are included in each plan. Such that we have network adequacy. So that's something we've been working on already, some of the investments we've been making on the care enablement side. And like I said earlier, we should have some results to show sometime this year. And then in terms of conversion to EBITDA of increased revenue, the risk revenue related to those numbers moving into global risk. We're conservatively saying that we shouldn't expect only a couple percent of that to convert EBITDA to year zero because we're going to try to maintain the existing hospital relationships that can pull from financial perspective. Over time, we certainly expect to accrue more of that EBITDA accrue such that in the long term it's 10% to 20% EBITDA margin on the entire book of business, including the institutional part of the risk that's just not going to happen year-over-year because it takes time to kind of move the hospital partners into the right economic arrangements. So I would go for that also happened over 18 to 36 months for the EBITDA contribution to get to the scaled margin contribution that we expect. I hope that helps [indiscernible].

Yes. No. Super helpful. And you made an interesting comment about the new geography investments coming in better than you expect. So less dilutive than the 5 million to 10 million you initially guided to. What specifically is driving like is it like you're growing patients faster and so there's more fixed costs coverage or MLR ramping better? And based on what you're seeing I guess, just is there anything to call out? Or do you see an opportunity to invest further or like, what metrics are you seeing? And what do you need to see to expand I guess, further into next year in these new markets?

Yes, totally. So in Q1 you can see in our care delivery segment, which is most of the investments we're making in new geographies came in around two [more or] less in terms of operating income relative to last year's Q1 and that's kind of the extent of the investments we've been making such an aid bill, on an annualized run rate basis, I think we've guided towards 5 to 10 each of the new markets, so it's on track to slightly lower in terms of an operating income hit than guided towards. The progress has been good. We've been adding a lot of the investments include adding new providers, for example, and takes time to ramp those providers up in terms of their patient panels moving the fee for service folks into partial risk arrangements over time as well. And so there's some investment needed for the infrastructure on the ground do operationalize that. So now it's going better than expected membership as I mentioned earlier in the prepared remarks has been growing ahead of curve. We're monitoring number of fee for service members, number of capitated members, star scores, incentive reimbursements, so on and so forth. And things are tracking. So really, it's going to be a small “J-curve” as we add on new providers to ramp for our patients, but we expect it to be kind of in the 10,000 Medicare mark sooner than expected.

Okay, great. And then I guess my last question is broader basically, we cover a lot of the managed care companies and it seems like trend, broadly has been more controlled or tighter than maybe some expected and [indiscernible] companies and med tech companies talking about accelerating volumes. And so just curious what you're seeing in terms of your capitated risk business around trend. And what you're assuming for the rest of the year how things came in versus expectations? Thanks.

Yes. You can see our care partners business, that operating income actually grew quite well in line with revenue growth. So please correct me if I'm misunderstanding your question, but we're seeing volumes moderate and we're keeping our medical loss ratios in control. I mentioned it's favorable relative to Q1 of last year and approximately in line because like it's 30 basis point increase from Q4 of last year to this year. But let me know if I didn't let me know if I missed your question.

Yes. No, I guess saying things came in better than expected. And just curious, like into April, if things are continuing, as accrued and built into guidance?

Yes. We're seeing margins in line with Q1 going into Q2. Yes. I wouldn't say it's materially better. It's probably in line.

Okay, great. Thank you so much.

Sure thing. Thanks.

We have reached the end of our question and answer session. I would like to turn the call back over to Brandon for closing comments.

Great. Well, thank you all for your time today. We appreciate it. We thank you for joining the call. We're always open to a dialogue with investors and welcome visitors to our offices in Los Angeles. Please feel free to reach out to us or investor relations firm via equity group, if you have any additional questions, and we look forward to speaking to you all again on our next quarterly call. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.