Good day, and welcome to the P3 Health Partners Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I'd now like to turn the conference over to Karen Blomquist, Director of Investor Relations. Please go ahead.

Thank you, Rocco, 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 operations. 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 obligation to update or revise the forward-looking statements. We will refer to certain non-GAAP financial measures on this call. 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 these 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 a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. Information presented on this call is contained in the press release we issued today and in our SEC filings, which may be accessed from the Investors page of the P3 Health Partners' website. Thank you. And I will now turn the call over to Dr. Abdou.

Thanks, Karen. Good morning, everyone, and thank you for joining our call today. I am delighted and excited to be here today to announce our new financing and to review the results of the year 2022. We are very excited about the progress that we've made in 2022 and the possibilities we see for our populations, our teams and our business and for our shareholders as well. Today, I will discuss three points. Number one, the update on the liquidity and how the capital raise that we just announced early this morning will get us through to cash flow positive and profitability in 2024. Number two, I will share with you our insight and our determination to reach profitability in the year 2024 with a clear path to that end. And finally, we'll discuss the possibility and impact and the questions that arose about the CMS advanced notice and any other changes in the risk adjustment, factor calculations by CMS. So first, let me address the capital raise that we announced earlier today. Through a deal with our largest shareholder Chicago Pacific Founders and other shareholders including Leavitt Partners, we have secured approximately $90 million in funding to an equity agreement. We are grateful for the support and the confidence of our shareholders Chicago Pacific Founders, Leavitt Partners and other shareholders as well. The capital that we raised will provide us the financial resources to realize our strategic vision for P3. And we believe and we will address the details of the capital raise tool, Kavthekar our CFO will address those calculations that is sufficient to get us through to cash flow positive and profitability in 2024. As a matter of fact, we're confident that that will get us in early 2024 profitability and cash flow positive. Second, I want…

Thank you, Sherif. Good morning, everyone. Since this is my first quarter speaking with you, I just want to take a minute to tell you how excited I am, to be part of the P3 team. I was drawn to P3 for a number of reasons. First and most important is, the mission of the company, which is defined as solution to the healthcare problems facing our nation, including high healthcare costs and poor outcomes. Second is, its history of bringing value you based healthcare quickly and effectively to its members through an asset light affiliate model. The third is the incredible team of professionals at P3 that I get to work with. Now let me walk you through the fourth quarter and the full year 2022 numbers. Top line results for 2022 were strong as the team executed and delivered with revenue of $1.049 billion and is tremendous growth of 65% versus 2021 and squarely in the middle of our guidance. And even more indicative, on a PMPM basis, revenues grew 10% over '21. In the fourth quarter, we had revenue of $258 million a 40% increase over the fourth quarter of 2021. In this reporting cycle and to help our investors and analysts to understand our business better, we've broken out what we previously referred to as medical expense into two separate components. These include medical claims expense, which are the specific expenses related Part C and D services and network expenses, which include partner physician expenses, related to surplus sharing and other direct medical expenses incurred to improve care for our members. You can see some more detail around that in our 10-K and our hope is that it lends a deeper level of clarity around our model. As Sherif mentioned, we had strong improved in both…

[Operator Instructions] Today's first question comes from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

Good morning, everyone. Thanks for taking my questions. I have a couple. I'd like to first start off by just asking you if you could summarize your perception of the demand environment in the marketplace today. Specifically, I'm thinking about interest from provider partners, primary care groups in your existing markets and from payers. But I'm also curious if you could just comment a little bit about the demand environment from the patients as well.

Thanks, Brook, for your question. Really appreciate your interest here. So we've seen high level of demand across all the three constituencies that you just described, Brooks. So number one, is that position or provider groups. Usually, the sales cycles or the engagement cycle used to run anywhere between one to two years with the provider groups. Today, we are receiving incoming calls asking to engage and as a pricing pressure on the fee for service compensation from CMS and other payers continue, we see the provider are very engaged and excited and looking forward to move into value based contracting and full risk and also excited about using our tools. And from technology to the team, surrounding them. Secondly, is the payers, as they made commitment to their constituencies and as the evidence increase that people and patients and value base contracting and value based relationship have seen an improved clinical outcome and an improved quality, the payers are excited to move more and more into the value-based contracting. So we're getting demands and engagement from all kind of payers in the marketplace. And finally, the patients. The patients have really seen the benefits and experience a different experience from value-based provider than the fee for service where the availability, the accessibility and the transparency of information and communication with them by the providers themselves or the surrounding team from P3, we see that demand intensify and increase continuously year-over-year.

Great. Thank you, Sherif. Let me ask you two more quick questions. First, I'm curious, well, let me just make a comment. I thought the information you provided at the JPMorgan conference earlier this year was terrific as it relates to the progress you're making with within markets and with calendar year cohorts of patients. Can you give us any update at all as it relates to continuing progress in markets like Arizona and as your cohorts continue to mature?

Absolutely. Thank you very much for that question, Brooks, because it really highlights the impact and the effectiveness of our medical management team led by Dr. Amir Bacchus, our Co-Founder and Chief Medical Officers and the risk of the medical leadership. We see that in Arizona, the progress continue where independently the market of Arizona will reach breakeven and profitability this year. And the medical margin continue to march positively over $160 million to $180 PMPM medical margin the population that continues with us. And finally, if you look at the medical costs in Arizona, which average about $713 per member per month for the medical claims expenses, almost about $100 to $200 per member per month and Part C medical claims expenses ahead of a lot of our peers in the space and continue to improve as well.

Great. Let me just ask one last one and appreciate the color. I don't think you talk much about this obviously, the last couple of years severely impacted by COVID in positive and negative ways. It seems like COVID is into retreat right now, but can you just talk a little bit about what you expect in terms of medical cost trends. Do you expect to take rebound and people coming to the hospital and seeing their doctors? Or do you think it's going to be a more normal year this year in that regard? Thank you very much.

Thanks, Brooks. So thanks for reminding us. So the COVID is a story of almost three stages. So the second quarter of 2020 saw a significant retreat in the medical utilization and the medical costs. That was artificially developed by the lockdown and the preventive measure from going in public and going into the hospital and emergency room as well. Second, the following when the COVID infection and pandemic intensified and increased utilization through emergency room and the two major variance that hit the population Omicron and Delta variant. That showed increase in utilization. We recorded the last 18 months over $9 million of COVID related expense. In 2023, we see that retreated back and receiving to normal utilization. I think right now its standard operating procedures. The only adjustment that you will see is our success into managing the population. But I believe the COVID impact is behind us positive or negative. And we're back into pre-pandemic standard utilization adjusted by our effective medical management and improvement in the medical costs as well. So anyway, thank you very much for the question Brooks, and happy to hear you're making very strong recovery and back to normal.

Thank you. And our next question today comes from Joshua Raskin at Nephron Research. Please go ahead.

Hi. Thanks. Good morning. I want to talk about the implied EBITDA margin for 2023. I think it implies a negative adjusted EBITDA margin of 4.1%. That's an improvement of about 800 basis point, 810 basis points. So I'm trying to figure out how much of that is coming from medical management. I'm assuming a large majority versus the administrative cost improvements that you were talking about? And if you could give some specifics on what's driving those medical costs ratio improvements that would be helpful? And then I have a second question.

Yes, Josh, this is Atul speaking. Thanks for the question. Yes, look, I think you can look at it a combination of a lot of things. Principally we're feeling strong about the way that our revenue PMPMs are progressing. You saw a pretty big jump just looking at '21 to '22 that was almost 10% as we were talking about. So we've got some assumptions in our forecast in our guidance that I would call non-heroic. I think they are very reasonable and achievable, but it's a combination of that along with some very modest reductions that we're thinking of in medical claims expense. And again, as Sherif was talking about earlier, we've seen good traction in that regard as well. And as far as the SG&A reductions, I mean they're - we are considering some of that as well. But on balance, we think that - this guidance is really driven by all of those components working together it's not especially dependent on any one factor. We've got a number of different levers moving around.

Okay - that's helpful. Which ties to my second question, which is it sounds like a lot of the medical cost improvement is predicated on what you're calling funding improvements or reimbursement improvements. So I'm trying to figure out how are you seeing a 15% to 16% improvement in funding in the first year of the 2022 members and yet your risk scores are still 1 to 1. I think you said 1.0 or 1.1. And again going back to that medical expense is a large majority of that improvement in risk coding or is some of that medical cost management too?

Thanks, Josh. It's a combination so - and number one, those percentage for the population that were there in 2022 and now still with us in 2023. It's a combination of the benchmark improvement in the counties that we are in. In addition to the increase of a percentage of the dual eligible populations that comes with a higher funding and also our engagement with the chronic special need program, which also comes with a higher funding. So the - and the average of the risk scoring that I shared is across all population and - an annual average because at the end - as you very well know that there is a degradation over a period of time for population - the severely young population kind of depart and the new patients come in with the 0.8 average of risks. So that modifies the risk score across all populations throughout an average year. So like I said, the overall population should increase 7.7% and the specific visits and population have shown an increase of 16% and that's a combination between the risk scoring, the benchmark adjustment and the increase of dual risk population percentage in our population.

Okay. So and I want to make sure I get this clear, because I think it's important. At 16% that you're quoting in terms of increased PMPMs, that's not risk coding, right or are there some component of that?

Correct.

But that's more mixed, okay. How much is the risk coding component of that 16% is there an estimate there?

Yes. So it's about 3% to 5% across all population, of course vary from one population to other, about 3% to 5% of that is - in risk adjustment.

Okay, that's super helpful. Thanks again.

Thank you. [Operator Instructions] Our next question today comes from Ryan Daniels at William Blair. Please go ahead.

Hi, guys. This is Jack [indiscernible] on for Ryan Daniel. Thanks for taking my question. So just first, when looking at the cash burn, the fourth quarter looks to be slightly elevated and I understand fourth quarter is historically higher? But I'm curious how should we think about cash burn going forward in 2023 and I believe in your prepared remarks you said you expect to be cash flow positive in early 2024? So does 2023 get you mostly there where the cash burn tapers quite a bit or I guess just kind of how should we think about this going forward? Thanks.

Yes, Jack, that's great question. So the way I would suggest you think about and I gave a little bit of an indication of sort of again the seasonality of EBITDA. And I think that that may be a reasonable proxy - for you to think about the burn as we progress through the year. But again, you can think of it as [indiscernible]. We gave you EBITDA guidance, 40 to 60 loss over the course of the year. You should probably tack onto that when you think about burn, you should probably tack onto it. Roughly $20 million say of between cash interest, working capital changes as we go through the year. So you can think of that as sort of the entirety of the burn. And again, you can kind of map that out I think over in the quarters as you proportionate to your EBITDA, if that makes sense. I think in the first quarter, especially as we went through managed our expenses. We were very careful. We were very aggressive in how we managed our cash and our research and we'll continue do that of course. But I think you'd probably see a little bit of a less burn in the first quarter as compared to the next three.

Perfect. That's great color. Thank you. Another quick question too. Are you guys seeing anything in terms of the pipeline for 2024? I know that for 2023. So pretty robust growth in that cohort class. And I know it's really early and you're not guiding beyond 2023, but I'm curious if you have any comments on the 2024 progression or if it's on track at this point?

Yes. We are very confident. Thanks for the question, Jack. And the pipeline is we have a clear line of sight for 2024 growth and especially in the counties and the states and the geographies that we are in today and providers that we're engaged with today where they want to expand the relationship to all Medicare Advantage and all Medicare SEO patients that will be included in our platform coming 2024. So we have a clean line of sight for 2024 growth and we're continuing to be very confident about it as well.

Okay. Understood. Thanks. And then one really just quick last question and this is going off Brooks question on demand. I'm curious you guys have seen any uptick in conversations with health systems. And if this is a segment you're looking to pursue and maybe if you can just touch on the opportunity there? Thanks.

Thanks. Absolutely, we do. The health system, they are seeing the value in converting from fee for service to value-based contracting and engagement with the organization like ours into improving not only the health outcome, but also the economics of their own medical group or engaged network. So we're seeing multiple help system that engage with us to create that path to value-based contracting in 2023 and 2024.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Sherif Abdou for any closing remarks.

Thank you very much, Rocco. Thanks again for all of you that joined us today and for your interest in P3. And I just want to finally make a comment about our excitement and commitment to our shareholders and our appreciation for the support of our shareholders in a capital raise that we successfully included late last night, early this morning. And we continue to look very optimistically into 2024 of reaching profitability and positive cash flow. And we look forward to engaging in our next quarter call. Thank you very much everyone.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.