Claritev Corporation (CTEV) Earnings Call Transcript & Summary

Okay. Let's go and get started here. So thank you, everybody, for joining us in the room and for those on the webcast. Really want to also extend our appreciation to MultiPlan for being here today, taking time out of your schedules, running a company to meet with investors and come and talk to us. So thank you so much, Jim Head here with us, Chief Financial Officer. We also in the room have Luke Montgomery and Shawna Gasik who run the IR effort at MultiPlan. I think before we start, Shawna, is going to come up and just give a quick disclaimer, and then we'll jump into Q&A.

Good morning, everyone. Just to give you a quick reminder that our remarks and responses to questions may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those stated or implied due to risks and uncertainties associated with their business, which are discussed in the risk factors included in our quarterly and annual reports and other documents filed or to be filed with the SEC. Any such forward-looking statements are based on assumptions and information available as of today, and while we may elect to update such forward-looking statements at some point in the future, please note that we assume no obligation to do so. So I'll turn it back over to you.

Okay. Thanks Shawna. Yes. So we'll just jump into Q&A here.

I think maybe we'll just start with a lot's happened in the last year. And maybe it makes sense just to spend a couple of minutes kind of just with a quick review on some of the moving parts and kind of how you're seeing things today?

Yes, it's -- that's an understanding -- first of all, thanks for having us here. This is a great conference, and we're really appreciative. Yes. A lot's happened in the last year. If you think about where we were a year ago at this conference, we had 2 new executives, CEO in the seat for 2 quarters. I was in the seat for about 3, 4 quarters. We had a lot of uncertainty in the business with respect to contracts coming due. Utilization environment was cloudy and strategy was to be formed. And so, but I think our message is something we've been consistent about over the last few quarters, including our Investor Days, we've done a heck of a lot to reposition the business in 2023. We kind of reset our financial guidance, came out with a new growth plan, which was formulated at the back half of last year and started executing on that. And that's a multiyear transition of the business. Which is building upon the strengths of our core out-of-network platform, which is a monster over $500 million invested in the platform itself. But we realize there's more to do with it, with the customers that we have, 700 payers. So you're seeing us execute on this transformation. And what we did in the first half of the year, and I'm going to time stamp our commentary to second quarter, i.e., our earnings call in August because we're in the quiet period. But we -- we started investing in new products, and that's moving along very nicely. We bought a data and analytics engine that we're going to put on top of the platform, which -- it's 3 months in, we're very excited about, announced a partnership with ECHO Health in the payments realm. And all this is essentially to create new products to add on to the platform and find more ways to grow. And in a differentiated way in a way that we think is advantaged. Meanwhile, in just the core execution of the business, the first half came in exactly as we expected. And to us, that's really good news. It's much more visible. The utilization in the external environment started getting stabilized and started ticking upwards in the first 2 quarters. On our earnings call, we talked about how we feel good about the execution in the second half. There will be sequential growth in Q3 and Q4. And, what you're seeing here is us getting through 2023 as planned. And after last year, where there was a lot of ambiguity and drama, that's a pretty darn good thing. And now the seeds are planted for some growth going forward.

Great. That's helpful. So maybe that will kind of take me to a couple of questions on utilization and revenue. Maybe just to clarify a couple of things. So I think MultiPlan discussed some incremental revenue opportunities in the $200 million to $275 million range in the next few years. I think in the Q2 slides, you talked about how this was ahead of schedule around the data and B2B in certain areas. But some of this was acquired in recent partnerships. I guess I'm just trying to clarify and get a sense. The $200 million to $275 million will it be essentially all organic or internal, I guess, partnerships can be part of that, too? Or should we expect M&A to be a piece of that, too?

Well, actually, that -- it's really our strategy, which is grow the business either build, buy or partner. And as we lay out in the slides with $200 million, $275 million, the build is the first layer. $50 million to $100 million in our core products. And that's basically enhancing what we have in our business. That's probably more of the near-term ramp because what we're going to be doing over the course of this year, investing in the products, developing the products, and then going into 2024, turning them on and reaping some revenues. So that's kind of the first layer. And that, when we say it's ahead of schedule, the product launches, everything is executing as planned, which is really encouraging. A lot of hard work. The second part is BST, which we highlighted as an opportunity to be $100 million plus. And that's going to take time because it's a SaaS business, and we -- it's very sticky and it slowly but surely continues to ramp as we launch new products. But BST, the acquisition itself is a series of over 10 products. There's 4 product families that we've highlighted. We're really excited about pushing this through our own channel. They are doing great in some of their own channels like supplemental in the employer market. But as we start thinking about what the opportunities are with some of our payers, it's pretty substantial, but it will ramp over time. And then last but not least, is partner decision. And we look long and hard at the payments market and how we could bundle that into our solutions into our sales in the TPA market regionals, HST, and we opted to partner on that one because we wanted to beat to market. So what you're really seeing here is that layer cake of our strategy build organically, buy and partner. And I think the buy is probably a little bit, for the time being, is not going to be key to our plan. I think the build going into 2024. We're going to continue to execute on new products, make investments. The underlying message here is this platform has so much room to grow with new products, but we were not historically a product company. We had an unbelievable position in the out-of-network market, but it gave us the right to win in a bunch of other areas inside the payer environment, Medicare Advantage, and things like that. So optimizing that is really good return on investment.

Great. That's helpful. And then so you talked about for 2023 volume expectations. I think there's a core 1% annualized expectation in the second half of '23. Can you just talk a little bit about this. We see the results in Q2. We hear anecdotes from hospitals and other service providers in Q2 and going into Q3 where utilization has been, I think, stronger than many expected starting back in May, June, when this trend was really starting to get some legs. Is there some conservatism in this? And that's maybe not a fair question to ask, but are there other pieces to this that we should consider maybe?

Well, probably a little bit of both. What we saw in the first half actually rhymed very clearly with what we were seeing at some of the external stakeholders. And so a perfect example is you could look at the hospital environment, the tenants, the HCAs, et cetera, and they were seeing substantial year-over-year growth, 2% to 3% sequential growth in some of the areas like surgeries, et cetera. And in our book, which -- it's not the whole book, but in that portion of the book, very, very consistent with some of those markets. But we also [ our ] regular way physicians and kind of that classic family care, primary care, et cetera. And that is relatively stable. It's not jumping up. And then NSA is stable, very stable because it's nondiscretionary. It's emergent care. And so, there's lots of, I think message number one, there's a lot of stability in the business. We don't see it falling off. But we did say that we are being conservative. We weren't ready to get over our skis and call an extra turn up. In the first half, it turned up since the end of 2022, about 5%. And we want to see some sustained growth in our unique book before we call anything. But you'll probably see it in third quarter, but it feels like the hospitals, et cetera, are doing just fine.

Okay. Great. Sorry, I meant to had one add-on question to my first question. So as we talk about the longer-term growth expectations I think you said 4% to 5% out-of-network, 8% to 10% revenue back from your Investor Day. How much do these depend on M&A versus core product launches, partnerships, things like that?

Yes. And so Miles is referring to in our investor deck, if we look at a longer-term growth algorithm, and we kind of say, we've got a core out-of-network business that we think -- and there's a lot inside that. I think we can grow 4% to 5%. Medical inflation, utilization, things like that are big tailwinds. And then we give a little bit back in terms of -- we even bake in some customer concessions. We baked in a little bit of shift in network, things like that over time. But that's a pretty reasonable algorithm. And then what we're talking about is that product layering on those new products, BST, the growth in HST, payments, things like that. And hopefully, we're going to add more to that. So you're going to see that in 2024. You're going to see how that starts layering up. And I'm not, it's not the same algorithm every single year. It's over the long term. But as we go into 2024, one of the things that's going to be absent is a giant 8% concession across our book. And that allows the underlying trends of the business to lift. And then we've got plenty of new products coming online that's going to help our growth rate. So we feel good about that.

Great. That's helpful. Maybe you talked about NSA. Can you just maybe talk to us a little, I mean, there's so many different ways to think about this and your participation now a little bit differently with the payers maybe than before arbitration. Can we -- maybe ask the question kind of on a net basis, like is this positive, negative, neutral to like EBITDA? Or I'm not even sure what that the best way to ask a question would be.

Well, why don't we, let's think about, I'll try a couple of dimensions because here's how we think about it. For instance, the legal world, that's Texas Medical Association, all these rulings, et cetera, are making it more complicated. So that's a plus, okay? That doesn't -- it's not hurting us. It's making it more complex. So the payers have a more complex set of decisions on how to handle the NSA claims. Okay. From a revenue perspective, the volumes are actually very, very steady, okay? So, and we've seen that since the beginning because it's just kind of a core as COVID receded, they started picking up, but they just leveled off. And it's because it's emergency room visits largely. So that's very stable. Most of the claims that we're processing are going through in the old-fashion way, albeit with the NSA twist to them which is going through all our solutions. QPA is part of it, but the vast majority of those claims are going through. So we're reaping revenue, et cetera, and it's high-margin business, okay. Where it gets a little trickier is on the last bit, the IDRs. Now I know a lot of folks follow other providers who are very focused on this because it's a very important part of their business model. And last bit of yield, if you will, on their revenues. For us, it's a pretty small percentage of our revenues. We've had to put cost against that because it's, at this stage of the game, a very manual, and there's been a little bit of a burden. But we're not worried about the kind of the ebbs and flows of this IDRs have paused for a moment. That's just not a big effect on our business. We don't, we're not spending a lot of time worrying about that. We could have a little cost pressure on that. But in the end, this is good for our business. This is a differentiated platform for us.

Okay. That's helpful. And then you talked about TMA [ 1, 2, 3, 4 ]. Is there any comment that you'd be willing to make just in terms of kind of the broader landscape? I mean would this longer-term results in more people going in network? Is that not...

Yes. I think about it the other way around. I think as the, and we've talked about this along the way. And when NSA first started, the QPA probably held a stronger role in the overall set of outcomes. And you could argue that might motivate some of these providers to go into network if they're going to get the QPA. What's happened in the intervening 5, 6 quarters is that it's getting a little bit more provider-friendly. It is not turned to be provider-friendly, but it's getting less onerous, if you will. And as a result, it's actually the opposite, which is if you can get a little bit better yield on your book you're motivated to stay out of network. And so we just haven't seen -- we've seen some moves in network. We saw U.S. anesthesiology and some of these other folks move in network across the various books some of the air ambulance providers, et cetera, but we just haven't seen a massive shift. And one of the reasons why is the out-of-network space is that last fashion of yield for a lot of these providers.

Okay. Great. And then maybe just moving to contracts or customers. You had some renewals. I think you talked about in your Q2 call that, these are fully reflected in the Q2 numbers. I think you also mentioned that there could be kind of a negative 1% headwind. I'm not sure if this was just a January impact or if this was more broadly the renewals. But, is there anything else to be done like on the contract side, on the renewal side? Where do [ you stand on that ]?

Well, may be that's -- just step back, the, as you're aware, we had 3 major large contract renewals in starting at the end of last year and going through the beginning of this year. By second quarter that largely washed -- the second quarter results had washed out. There was a little bit of January, as you said, Miles. So the first half had January part of it, but the second quarter is washed all the way through, and you'll continue to see that. So that's all, that is basically through. And the portfolio of our contracts after that drops off in terms of size and in terms of call it, risk profile, et cetera, because these are oftentimes 1-year contracts with some of our smaller clients, and we've been with them forever. And I'll just remind everybody that, these are wholesale contracts because in the end, they're going out to self-insured plan sponsors, i.e., employers like a Deutsche Bank. And Deutsche Bank is making decisions on their benefits plans, including out-of-network, out-of-network services and they're the decision maker. So you can't unilaterally just stop distributing something that employers want. We just, it was a great little [ win ] a couple of weeks ago. One of our -- one of the plans had mentioned to us that they just -- we're getting close to winning 1 of the largest employers in the state that they're in. And they demanded the MultiPlan be put on their system. And it's because they're so used to it so embedded in ecosystem, the plan sponsors and the decision makers.

Got you. That's helpful. Bouncing around here. So I think there was a filing Friday, it was an antitrust filing. I was wondering maybe if you could just touch on that and give us a little sense of what all that means and how you guys are thinking about it?

Yes, maybe a little bit of a tour of the environment, if you will. So I guess, 4, 6 weeks ago, I'm going to get the day wrong, there was an antitrust filing. By one of the hospital systems against us. I'm not at liberty to speak to that, but we did do a filing on Friday. It's a pre motion filing. It's a little 3-page summary of our thoughts on the case. We think it's [ without merit ], but if you go on PACER, which is like the legal version of EDGAR, you can see our point of view on that. But meanwhile, in Washington, there's a lot of stuff going on around the provider realm. You've got the FTC going after anesthesiology practice roll-ups. You've got Congress scrutinizing some of the anti-streering or exclusivity contracts. There was a -- an interesting article last week in The Wall Street Journal where the Indian employer association had found out that they're paying the highest hospital rates in the country and the employers didn't like that. And so you're going to start seeing a lot of scrutiny on this. And what the -- the real story here is, is that the rates vary so dramatically between Medicare in-network commercial and out-of-network. And the in-network commercial and Medicare are already negotiated. So what you have is that last bit of ambiguity is the out-of-network space. And yield management is, seems to be the strategy for a lot of providers to try and optimize that and our job is to try and mitigate that. But the out-of-network where trade clear in the out-of-network space is far higher than the in-network space and far, far higher than Medicare. So Medicare is the one that's getting the best price by far. And it's putting pressure on the rest of the system, including commercial payers.

Right. Okay. Jumping around. So you've talked about a leverage target of 7x by the end of '23. I just wanted to confirm, that we're talking about the same EBITDA and the same apples-to-apples. Is that consistent with the $643 million of LTM and 7.1x of leverage that we have...

Yes. If you go to our guidance and think about where we could end up, it kind of mathematically gets you there, we're kind of there, I think as the second quarter we'll get close, and so it's going to be 7-ish at the end of the year. And the reality is that's where we existed for a long time as a private company, but that's not where we need to be as a public company or as a company that wants to emphasize growth. So, we've been very clear on this one that in second quarter call, we spoke to our priorities. We do it every quarter, but that retirement is primary. We're going to invest in the business, and that's marginal. That's not using up all of our free cash flow, but invest in the business prudently. That's CapEx and things like that. And then right after that comes to debt retirement. And M&A, I think we're going to be a little bit slow on that for the time being, largely because we have so much going on, and we've got so many new products coming through the system. We want to get those right. And we feel like we've got plenty of room to grow off that base. And we're trying to address one of the primary issues that all of you are focused upon.

And in that vein, you bought back a decent amount of debt in the last few quarters and a little bit of stock in the recent quarter. Going forward, is that more opportunistic on the equity side? Is that, so that we're not going to see that?