The P3 Health Partners Q2 2023 earnings call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. I would now like to turn the conference over to your host today, Karen Blomquist. Ma'am, please go ahead. Thank you, operator, and thank you for joining us today. Before we proceed with the call, I would like to remind everyone that certain statements made during this call are forward-looking statements under the U.S. federal securities laws, including statements regarding our financial outlook and long-term targets. These forward-looking statements are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operation. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. Additional information concerning factors that could cause actual results to differ from statements made on this call is contained in our periodic reports filed with the SEC. The forward-looking statements made during this call speak only as of the date hereof, and the Company undertakes no obligations to update or revise the forward-looking statements. We will refer to certain non-GAAP financial measures on this call, including Adjusted EBITDA, Adjusted EBITDA per member per month, medical margin, and medical margin per member per month. These non-GAAP financial measures are in addition to, and not a substitute or superior to, measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of non-GAAP financial measures. For example, other companies may calculate similarly titled non-GAAP financial measures differently. Refer to the appendix of our earnings release for reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. Information on this call is contained in the press release we issued today and in our S.E.C. filings, which may be accessed from the Investors page of P3 Health Partners website. Thank you, and I will now turn the call over to Dr. Abdou, CEO and Co-Founder of P3. Thank you, Karen. Welcome everyone to our second quarter 2023 conference call. I would like to kick off the call by saying we have had a strong second quarter, and I would like to thank our team for their hard work and contributions to this success. Adjusted EBITDA for the quarter was positive, approximately $200,000, compared to a loss of $29 million in the prior year, same period. As a matter of fact, Adjusted EBITDA was positive in four out of the five states that we serve in this quarter. This is a reflection of what we have shared with you previously, that with more persistent lives on a P3 platform than new lives, and a higher level of maturation, translate into funding improvement, medical cost improvement, and enhanced medical margin, which all flow through to the bottom line and lead to profitability. I would like to share with you a few helpful data points from this past quarter that are reflective of where the P3 model is operating now, and serve as the foundation for our 2024 expectations that we have shared with you previously. Number one, medical cost ratio was 84% in the quarter, and that led to medical margin of about $50.5 million. We view this metric as the best reflection of the value we deliver to our stakeholders, the ability to bend the cost curve and answer the key demand drivers of our business in the marketplace. Number two, medical margin was approximately $161 PMPM, versus $72 PMPM in the same period of the prior year. If you were to compare that to the other value-based care provider peers, $161 PMPM, or a 16% margin, is squarely in the maturation range of any cohort and exceeds Agilon margin of $113 PMPM for the 2Q 2023. We believe that we can even improve further. No. three, medical cost trend was about increase of roughly 1% for Medicare Advantage lives year-over-year. When you compare that to the overall market at mid-single digits or higher, it is clear that the P3 care model is working and bending the cost curve. No. 4, operating expenses were $85 PMPM, versus $102 PMPM in the same period prior year. That's down approximately 20% compared to the prior year. Number five, finally, Adjusted EBITDA PMPM was close to breakeven versus negative $95 PMPM in the same period of the prior year. An output of all great trends that I just noted, and consistent with our previous remarks, that we believe we are on the path to sustainable profitability on an Adjusted EBITDA basis in the near term. The above metrics are just a few validating data points of P3 model and our trajectory. In particular, we are achieving great outcomes now and not just projecting in the future. As a result, we're updating our 2023 full year Adjusted EBITDA guidance ranges to loss of $50 million-$30 million for the year from the original range that we gave in the beginning of the year of loss of $60 million-$40 million. More to come from Atul on this topic. In the past, we have told you that we can expand into adjacent counties with minimal cost by leveraging the existing infrastructure. In the quarter, we did just that. We have entered Jackson and Josephine counties in the state of Oregon with a large national payer partners. Also, in the second quarter, we made an important announcement. We named Bill Bettermann our Chief Operating Officer. He recently joined us from Optum Care, where he led their Pacific Northwest operation and served as the Chief Operating Officer of The Everett Clinic and The Seattle Polyclinic. He was drawn to P3 because he is a strong believer in P3 mission and the affiliate model, with which he has significant prior experience running it and optimizing it. He is an exceptional operator and now runs the day-to-day operation of the company and local markets. As we think about achieving our long-term guidance for the company, operational excellence will be critical to achieving those goals. We believe that Bill is the right leader with the right experience to help us to do that. With that, I'm going to turn it over to our Chief Operating Officer, Bill Bettermann. Bill? Thank you for the very kind words, Sherif. I'd like to start by sharing my objectives for the company over the next few years with some background context. P3 onboarded over 100,000 Medicare risk lives in a relatively short period of time. You can see that by moderating growth for just the past six months, you begin to see the effectiveness of the P3 model. Medical margin PMPM at $161 is a testament to that. In my prior experience, I saw the affiliate model in action in two important ways. First, ability to grow, and second, ability to bend the cost curve. I was drawn to P3 because I believe the model is highly effective and the team has significant experience in helping drive it to optimal outcomes. The affiliate model works across geographies, payers, and providers. Although there are differences in models across the value-based care industry, capital intensity and scalability being just two, P3's clinical outcomes and medical cost improvements, we believe, are very similar, whether you compare it to Oak Street's clinic employed model or Agilon's affiliate model. There are more similarities than differences. The value-based care model in all its current forms share the same thing. It is the right model. There is actually more variation in operational execution. How long the J curve is from time zero to maturation, and how much or little do you have to spend to achieve the desired outcomes? P3's model is high growth, low CapEx. It is the most capital-efficient model in the marketplace. There's limited CapEx to build clinics or significant market spend to attract members. Our outcomes, relative to other models, speak to our ability to effectively engage physicians and patients to bend that cost curve. Members mature on the P3 platform after 24-36 months. Success requires strict operational discipline to achieve, particularly with our rapid growth. The demand side is there because of our outcomes. Our revenue is at a 15% discount to the health plan revenue, and we are running at 16% medical margin off that now, with a ways to go before maturation. On the cost side, there's no one thing that bends the cost curve. It's many, many little things done really well. It requires operational excellence. My focus and the objective is to further instill a culture defined by operational excellence across our team and local markets, and to optimize P3's clinical outcomes to near perfection. That's our team's goal, and that's my goal. With that being said, I want to take a minute to focus on our oldest market, Arizona, where it started, where it is now, and where we believe it can go. For folks that are focused on cohorts, this is a relevant example of a market cohort, not that dissimilar to our peers that discuss market cohorts publicly. If we compare the Arizona market from 2018 to the second quarter of 2023, the trajectory of the P3 model becomes clear. Let's take members, for example. In 2018, it was 10,000. Today, it is approximately 45,500. Revenue PMPM. In 2018, it was $628 PMPM. In the second quarter of 2023, it was $921 PMPM. Medical margin PMPM. In 2018, it was -$53 PMPM. In the second quarter of 2023, it was positive $163 PMPM. In the future, we expect continued improvement. How was this achieved and how do we improve upon it? It is a culture where everyone at all levels is driving towards KPI benchmarks, exceeding them, and resetting new ones higher. I'll leave you with this, P3 is an incredible company and has an incredible team with tremendous experience going back to the HealthCare Partners days, and I hope to marry my experience to take it to the next level higher together. Thank you for your time today, and now I will turn the call over to Atul Kathpal, our CFO. Thanks, Bill, and good afternoon, everyone. I'll start today by providing detail around our strong quarter and how we are progressing towards meeting our full year guidance and anticipated Adjusted EBITDA profitability in 2024. Top-line results for the second quarter were strong, with capitated revenue of $325.6 million and total revenue of $329.1 million, both representing growth of approximately 22% compared to the prior year. For the first half, capitated revenue was $624.3 million, and total revenue was $631.2 million, both an improvement of approximately 16% compared to the first half of the prior year. In the first half of 2023, we had funding increases of 12% as a result of the maturation of the lives on the platform. To give you a more updated sense of P3 scale, at the end of the quarter, we had 129,000 members on our platform. This consists of 116,000 Medicare Advantage and ACO REACH members, plus an additional 13,000 members in Part D membership and fee-for-service relationships. We remain as optimistic as ever about our membership growth over the long term as we have guided in the past. In the second quarter of 2023, our medical margin improved to $50.5 million, or $161 on a PMPM basis, which is a 132% and 123% improvement, respectively, compared to the prior year. Gross profit improved significantly over the prior year to $26.8 million. This is the second quarter in a row that we have seen significant progress and begins to paint a clear picture of our expected trajectory overall. These improvements to our medical margin and gross profit reflect the increases in funding in 2023, the mix of persistent lives on the platform, and our ability to manage cost trends. As it relates to cost trends, we saw a significant drop in our platform support costs, going from 12% of revenue in the second quarter of 2022, down to 7% in the current quarter. This high single-digit% is consistent with the prior commentary I have provided around this metric and was driven by a realignment of our staffing model to focus more of our spending on patient care while we invested in critical infrastructure, such as our accounting and analytics departments. We will continue to monitor our spending with an eye towards continuous improvement and efficiency and incorporate this mindset into our everyday cash management. Adjusted EBITDA was positive in the quarter at $200,000, an improvement compared to a loss of $28.7 million in the same period of the prior year. The first half of 2023 Adjusted EBITDA loss was $18.9 million, compared to a loss of $47.6 million in the first half of 2022. These strong results reflect our ability to combine our improvements in medical margin with an ongoing discipline to leverage our existing infrastructure and drive continuous improvements in operating efficiencies. As we move into August, the strength we are seeing across our markets reinforces our view, and for the second quarter in a row, we are going to raise our guidance. We still expect 2023 revenue to be between $1.2 billion and $1.25 billion, and our medical margin to be between $155 million and $175 million. We are increasing our Adjusted EBITDA guidance to now be at a loss of $50 million-$30 million, compared to the guidance at the start of the year of a loss of $60 million-$40 million, and the revised guidance we gave in Q1 of a loss of $55 million-$35 million. Thank you all once again for your time today. With that, I'll turn the call over to Dr. Bacchus, our Chief Medical Officer. Good afternoon. Today, I would like to provide some color on what we're seeing for utilization trends. Utilization trends are running consistent with our expectations and at levels similar to those of the last 4 quarters. We are certainly aware of all the discussion regarding increased medical costs out there publicly, particularly on the outpatient side. We at P3 have only seen a slight uptick in medical expense overall, in part due to strong inpatient cost reductions. In fact, after reviewing the paid claims data, we have seen a medical cost trending of approximately 1%. We attribute our strong success to actions like, number one, significant provider engagement in all our markets, which has led to an increase in access by 6%-7%, and access is the key to driving improved revenue and quality and decreased medical expense. Number two, we have seen our network specialists more than double their use of ASCs as compared to utilizing hospitals for surgeries or other procedures like endoscopies. Number three, continued success on UM activities with our teams, leading to a system-wide acute admits per thousand of 178, a reduction of 20% over the last 18 months, and an ER per visit per thousand of 289, a reduction of 19% over the last 18 months. Number four, we have improved quality gap closures by 5% at the same time last year. As we have stated previously, the maturity of the model, now that we have had the majority of our populations greater than 24 months, is bearing fruit in these persistent lives. Whether our team's working with the patients or providers to influence behavior change, educating providers on proper documentation, performing prior authorization and concurrent review, or even encouraging both patients and providers to close gaps in care, all of these actions and many more, are consistent with Sherif and Bill's remarks, that P3 care model is managing revenue, quality, and cost efficiently. With that, I will turn the call over to the operator for Q&A. Thank you. Yes, thank you. At this time, we will begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble the roster. The first question today comes from Josh Raskin with Nephron Research. Hi, thanks. Good afternoon. This first question is just on the G&A number, down $10 million, absolute dollars sequentially. I, I think there might have been some one-timers in the first quarter, but what, what drove that, and how sustainable is that $27 million on a quarterly basis? Yeah, thanks, thanks for the question. On the one-timers part of it, there are actually relatively little in terms of the one-timers. You'll see some disclosure. Year to date, there's maybe a total of $3 million, but this is really on the back of a complete redesign, as I was mentioning, of how do we staff the business? How do we position ourselves for growth, getting people in the right places and, and, you know, making sure that we have adequate resources in the places that are really critical to our success. You know, when you think about it, we think it's very sustainable. Not only is it sustainable, I think there is probably some opportunity. I don't think you're going to see quite the same quantum every quarter, of reduction going forward, but I think this is a, a very, very solid base from which I think we can become even more efficient. Yeah, to add to that, Josh, to, to what, Atul just said, it, it is measuring it well per member per month, and it's a improvement per member per month. It is a sustainable measure as we grow and add more members, more than just the absolute dollars. Got it. I get that. Then on the provider side, I know we talked about this last quarter, and there was a little bit of a culling. I think your provider count, I, I saw 2,600, is down about 200 from last quarter. Is that still more intentional, where there's some providers that left? Is that more on the ACO REACH side, where you're kind of culling the book? Maybe just any color on the provider count. Yeah, it's, it, it is intentional. We, we are focusing on, on extending our mind share and wallet share of the existing practices and reducing the number of unengaged and, and, and that don't have that many membership engaged in value base. The, the sustainable discipline growth, focus on increasing the number of engaged provider and expanding the relationship with the engaged provider, Josh. Okay. If I could just sneak one more in. I know you mentioned on the call some of the new county expansions up in Oregon. I'm just curious how we should be thinking about the game plan for, 1, sort of number of new counties that you guys are thinking about in the next year or two. Then, you know, how long does it take these to ramp? What's a reasonable expectation in terms of even just number of lives, you know, under management over a, say, 12, 24-month period? Yeah. As, as we grow, as we mentioned before, we'll go to the counties right next door. It's, it's really almost in, in the same state, and literally, it's half an hour or 45 minutes drive between the counties that we're in and the new counties. That was purposefully, Josh, done, so we can leverage the infrastructure and don't have to do extra build up. We, we're going to continue to focus on the growth of the contiguous counties and adding more lives through expanding the network in these county and the relationship with the payers. Does that answer your question? Yeah. I, I guess, is it similar provider groups, or what makes it so easy when you talk about, other than, you know, the corporate infrastructure? How, how is it easier to get the docs? Are they part of, you know, large groups that practice across counties? the staffing, the care managers can cover more than one practice. The education provided by the medical directors can be provided by the same person. So the common services that we share across practices can be leveraged over that space That makes more sense. Thanks. Thanks, Sherif. Thank you. The next question comes from Ryan Daniels with William Blair. Yeah, guys, congrats on the strong performance. Thanks for taking the questions. I guess, number one, given the outperformance you saw this evening, what are your thoughts on kind of getting to a sustainable EBITDA breakeven target? I know you talked about early 2024. Do you think you can accelerate that, or is that still the right point to think about from a kind of a launch point of positive EBITDA on an ongoing basis? Yeah, Ryan, thanks. This is Atul speaking. Look, I think it, it gives us more and more confidence in what we said earlier. I think, you know, we're still of the view 2024 is EBITDA profitability. You know, with, with regards to 2023, the increase in guidance is, is just reflective of our increased confidence. We'll, we'll evaluate that as it goes forward and, and update, but at this point, we're, we're, we're just sort of a higher degree of confidence in what we said earlier. Okay, great. Great case study on Arizona. It really shows the power of the platform for growth and increasing PMPM rates and medical margins. I'm curious, you know, given that that's the case, given that you're now profitable on an EBITDA basis in four of five states, what do you think about reaccelerating membership growth? I know that's been fairly flat. I know you've culled some of the smaller, underperforming physician groups. Is it now time to maybe step that up a little bit more, or do you need to balance that in order to hit that EBITDA positive level? Yeah, Ryan, this is Sherif. We're, we're definitely excited about the good performance from all the states that we're in. As I mentioned in the last call, it is not because of softening of the demands, but rather we have, you know, as an industry term used, Class 24 and Class 25, almost ability to double the size of the company. We have determined and shared with you that we're going to follow a disciplined growth to reach the point of profitability and sustainable with a disciplined, profitable growth. Okay, perfect. I'll hop back in the queue. Congrats again. Thanks. Thank you. Thank you. The next question comes from Gary Taylor with Cowen. Hi, good afternoon. Three quick ones for me. First, I just wanted to understand on the, on the guidance raise on EBITDA, is that more on the lower sustainable G&A or the lower platform costs you were talking about this quarter? Yeah, Gary, thanks for the question. This is Atul speaking. Look, I think there's a couple of components to it that really drive it, and it's not on the back of one single factor or one single metric. I think, you know, as we went through the quarter and as we go through, you know, we're already in August, you know, we look at a couple of key metrics around, for example, physician and patient engagement. Those are, those are going exactly as we expected, and frankly, a little bit better. That gives us some confidence that, you know, where, where, where we're able to engage with those patients, we think we have a better opportunity to control medical cost. The second part of this is persistent lives, and I think that's a theme for the year, where the, the, the balance of the persistent lives is, is a substantial one, and I think we're seeing the benefits of that. You know, we do have... we're, we're optimistic around growing our, our membership, you know, as we go through the quarter. The business developments and the demand that we see is, is, is every bit what we thought and maybe even a little bit better. Then you do have the efficiency factor. I think that the, the, this is a sustainable cost reduction. As I mentioned just a minute ago, I think this is, there's an opportunity to get even better at it. You know, it's a combination of all those things. It's not just any one. Second one for me. I know one of the key issues in the anticipated improved margin and performance was a sweep revenue for 2023 versus not booking any in 2022. I saw in the Q, $14.5 million in the first half. Was that all in the 2Q? Should we think about the EBITDA impact as being, you know, roughly 50% as being shared with your affiliated docs? Well, I, I'll tell you about the first part. Yeah, that, that's, that's in the disclosure. That was all in the second quarter. Look, you know, we don't really talk other than sort of the requirement of disclosing. We don't really talk about it because we sort of really think about sweeps as part of the normal course of the business. We're, we're going to be seeing those across the year, in the various quarters. Again, I think we feel good about the, the, the, the performance of the quarter and also, you know, our ability to kind of predict the, you know, the, the amounts that, that we wind up seeing. So. You're going to continue to book those on a cash basis, right? We will. Okay, last one for me. I just saw the, the, the note about the cybersecurity incident. Is there a quick, you know, just explanation on kind of what happened and contained or any go-forward impact or anything? Thank you. Yeah, I think, I think the, the quick answer is no go-forward impact. We did have an event in the quarter. It was relatively small, immaterial, as we see it. It did happen, and we reflect that as part of expenses, but we, we don't necessarily consider that as, as a, as an ongoing thing. We have quickly closed all of the gaps that we saw in security and, and, and elevated everybody's awareness around it. We think we've got it under control, but yeah, that is something that we excluded. Thank you. Thank you. The next question comes from Brooks O'Neil with Lake Street Capital Markets. Yeah, good afternoon, everyone. I have a couple questions. I guess I'd start off with, appreciate Atul's comments about demand and activity in the first half. Can you just talk a little bit about what you anticipate for the second half in terms of, of patient demand and, and the provider response to what could be either one time or seasonal increase in demand? Hey, Brooks, this is Amir. Our, our demand continues to be high, not only from our payer partners, but also from our clinicians and our providers willing to grow with us. We are very bullish in regards to our growth, as we move forward. For us, it's continue to work with our clinicians as we bring more opportunities with payers that wanna continue to grow. I, I think, you know, as we look from the third and the fourth quarter, that we'll do quite well, as you roll through the, the, the latter part of the year. Great. Let me ask you a second question. Obviously, the financial performance shows significant improvement year-over-year, which is terrific. Do you have anything you can point to that indicates whether you believe quality remains as good as it's been, or perhaps is even getting better in terms of the way you're taking care of your patients and members? Yeah, Brooks, Amir again. You know, as we've said before, a lot of what we see as far as improvement of quality of care, comes in the maturation as well, right? As physicians start to learn more and more of the tools that P3 can bring to those practices, working with the care managers, working with the overall team, quality team, et cetera, we start to see those results. The quality of care does improve as we work with our clinicians. I, I think that's part of the reason why we're seeing such success in the model overall, as Atul mentioned earlier. In addition to that, from just, you know, straightforward quality measures, those things also rise as physicians indeed get more engaged with closing gaps in care, working with teams, et cetera, to drive those very things. We expect quality overall, whether from clinical care or quality measures, to continue to improve. Great. The last one I had, I was quite impressed with the funding improvement that you've achieved, so far in 2023, and I'm curious if you have any indications of whether that's sustainable into 2024. Yeah. Hi, Brooks, this is Bill Betterman. We're really excited about what we've been able to achieve this first half of the year. The teams are really laser-focused. You know, in my, in my part earlier, I, I shared with you there's many little things that we're doing. What I'm excited about is the level of engagement we have with our groups. Right now, you're seeing us see 6%-7% more visits than we did the prior year. That is not by chance, that is a focus within the organization. As a result of that, you'll see revenue continue to, and funding continue to improve from the first half into the beginning of next year. We're excited about where we're headed. Great. Congratulations. Keep up all the good work. Thanks, Brooks. Thanks, Brooks. Thank you. This concludes the question and answer session. I would like to return the floor to management for any closing comments. Great. Thank you very much, Keith. Before end of the call today, I would like to clean a couple of things. Number one, we are not seeing any evidence of increased utilizations by prior auth or otherwise, in-patient or outpatient. However, there is definitely consideration for seasonality and seasonable changes in the, in the winter that, that can, can change the utilization. There's no evidence that we're seeing that patient and provider demands for services are increasing. Number two, as, as we continue to perfect our ability to predict the sweep and to smooth out the year, as Atul said, we're going to continue to discuss with the accounting and the auditor to allow us to be able to accrue for the sweeps in the right time and the period that it belongs to. And we'll continue to have this, and we'll update you as, as we go along. I will leave you with this. The first half of 2023 results show the progress we are making toward achieving our goals. Our focus is on the patient and producing better clinical outcomes, and our model does just that while lowering medical costs. The mission and the model are working, and the momentum we are seeing in the business is quickly driving us toward profitability. With that, I'd like to thank you all for your time today, and have a great evening. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.