Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Privia Health Second Quarter 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the conference over to Robert Borchert, SVP, Investor and Corporate Communications. Please go ahead.

Thank you, Regina, and good morning, everyone. Joining me are Parth Mehrotra, our Chief Executive Officer; and David Mountcastle, our Chief Financial Officer. This call is being webcast and can be accessed in the Investor Relations section of priviahealth.com. Today's financial press release and slide presentation are posted in the Investor Relations section of priviahealth.com. Following our prepared comments, we will open the line for questions. So please limit yourself to one question only, and return to the queue if you have a follow-up, so we can get to as many questions as possible. The financial results reported today are preliminary and are not final until our Form 10-Q for the second quarter ended June 30, 2024, is filed with the Securities and Exchange Commission. Some of the statements we will make today are forward-looking in nature based on our current expectations and view of our business as of August 8, 2024. Such statements, including those related to our future financial and operating performance, and future business plans and objectives, are subject to risks and uncertainties that may cause actual results to differ materially. As a result, these statements should be considered along with the cautionary statements in today's press release and the risk factors described in our company's most recent SEC filings. Finally, we may refer to certain non-GAAP financial measures on the call. Reconciliation of these measures to comparable GAAP are included in our press release and the accompanying slide presentation posted on our website. Now, I'd like to turn the call over to our CEO, Parth Mehrotra.

Thank you, Robert, and good morning, everyone. Privia Health posted another strong quarter of financial performance as we are executing well operationally and continue to drive growth across all of our markets. This morning, I'll cover some key highlights and provide a business update. Then David will discuss our recent financial performance and provide an update to our 2024 guidance outlook given our strong results in the first half of the year before we take your questions. During the second quarter, Privia's momentum continued across all aspects of our business. We are making great progress towards our long-term vision to build one of the largest ambulatory care delivery networks in the nation. Implemented providers increased 16.4% from a year ago. This strength in same-store growth and new provider additions is reflected in our top line performance. Q2 practice collections grew 4% year-over-year and increased more than 12% when you exclude the impact of the restructured MA capitation contracts at the beginning of the year. Adjusted EBITDA was up 14% as we continue to drive operating leverage while absorbing incremental new market investments. Our pipeline for both existing growth and new market business development remains robust. We have $387 million in cash, no debt and a strong conversion of annual EBITDA to free cash flow, which positions us well for durable long-term growth. Given our solid first half performance across all metrics and high visibility into the rest of the year, we are increasing our guidance to the mid to high end for all metrics. The combination of our diversified value-based platform and strong underlying fee-for-service business, serving the entire physician practice continues to be a key differentiator in attracting community providers to the Privia model in today's environment. Privia's national footprint continues to expand. At the end of Q2, we had 4,504 implemented providers, caring for more than five million patients across 13 states and the District of Columbia. We are working diligently to expand into new states and increase our provider density in every state we operate in. Our aim is to build large-scale, high-quality community-based medical groups that will become one of the most important assets in the health care ecosystem. We have very high patient satisfaction as reflected in the Net Promoter Score of 85. Our gross provider retention has averaged more than 98% over the past three years. On a net basis, our provider retention is over 100% given same-store growth in existing geographies. We continue to expand our diversified value-based platform across reimbursement models. Privia now serves over 1.2 million attributed lives across 100-plus commercial and government programs. Total attributed lives increased more than 10.5% from Q2 a year ago, which places Privia as one of the broadest and most balanced value-based care players in the industry. Our commercial attributed lives increased 11.6% from last year to reach 741,000. We earn care management fees and generate shared savings that are incremental to our predictable fee-for-service management fees. This offers a highly differentiated value proposition to our medical groups and is core to our long-term strategy to opportunistically increase attribution in various risk arrangements over time to drive future earnings growth. We continue to perform well in our Medicare shared savings book of business and have taken proactive steps to navigate the challenging MA environment as we discussed last quarter. Now I'll ask David to review our Q2 and year-to-date financial results and our updated 2024 guidance outlook.

Thank you, Parth. Our strong operating and financial performance continued through the second quarter of 2024. Our implemented provider count grew 145 sequentially from Q1 to reach 4,504 at June 30, an increase of 16.4% year-over-year. Solid ambulatory utilization trends, new implemented providers, and additional attributed lives led to practice collections increasing 4% from Q2 a year ago to reach $728 million. As we previously mentioned, the balance and flexibility of our operating model enabled us to shift attributed lives out of capitated agreements for improved contribution margin. Excluding second quarter 2023 revenue from our renegotiated Medicare Advantage capitation agreements, practice collections increased more than 12% year-over-year in the second quarter of 2024. Quarter-to-quarter variability in shared savings revenue was as expected due to accrual true-ups over 100-plus value-based contracts. As we mentioned previously, it is most helpful to look at our shared savings revenue trend on an annual basis to smooth out the quarterly variances. Adjusted EBITDA was up 14% over Q2 last year to reach $22 million as we continue to generate operating leverage despite investing in existing and new markets. For the first half of 2024, practice collections increased 5.7% to reach $1.44 billion. Care margin was up 10.8%, and adjusted EBITDA grew 15.9% to reach $41.9 million. With strong first half performance and high visibility through 2024, we are raising our 2024 guidance. We now expect attributed lives to be at the high end of our initial guidance range and all other metrics to be in the mid- to high end of our initial ranges. Recall that our full-year practice collections guidance assumed a reduction of approximately $198 million from 2023, given lower risk exposure from MA capitation agreements. Our balance sheet and capital position continue to be very strong with cash of more than $387 million and no debt. Given our capital-light operating model, we expect approximately 80% of our full-year adjusted EBITDA to convert to free cash flow. Consistent with past years, we expect to receive a significant portion of our shared savings cash payments in the second half of the year. Privia’s business momentum and diversified book of business has positioned us well to drive organic provider growth and increased operating leverage for long-term adjusted EBITDA and free cash flow growth as we build our national footprint. We would like to thank all our physician partners and employees for their continued dedication and hard work to help us achieve these results. We are now ready to take your questions.

We will take our first question from the line of Josh Raskin with Nephron Research. Please go ahead.

Hi. Thanks, good morning. First question, maybe I'll sneak into. The first question is, I know you've gotten this before, but you'll have safely over $400 million in cash by the end of the year with no debt. So how are you thinking about updated capital priorities? And then, just secondly, maybe if you could give us an update on utilization trends and if there were any differences as the quarter progressed or even maybe compared to the first quarter.

Yes. Thanks for the question, Josh. I appreciate it. Just top of mind for a lot of our shareholders. So on the cash, look, I think broadly, a few big picture comments and then the framework. I think what's important to recognize is a lot of our organic growth is expensed fully on the P&L. So if you're looking to add, as we've said previously, 400-500 implemented providers each year, that growth is fully expensed in the P&L. So despite that, we are now converting over 80% of EBITDA to free cash flow over the past few years. If you look at it relatively, that conversion rate is 2x the next best comparable in the industry. So you could almost double the EBITDA and still get the same free cash flow as our business, which is pretty incredible. And as you rightly pointed out, if we don't spend any cash in business development activity or otherwise, we lend probably close to somewhere between $425 million to $450 million by the end of this year. And so I think the framework that we are looking at is as follows. The first bucket we've always said is sleep well at night money, which is just to make sure as we grow our risk book, if you have one-off events like pandemics, hurricanes, etc., that can impact your results, we have sufficient liquidity to support our medical groups. It's very dilutive to rely on external financing when something like that happens. And so approximately 25% of the cash balance plus our revolver, which is undrawn at about $125 million, we kind of keep it in that bucket. Number two, our big priority will be to utilize the cash for bigger business development transactions. So that will be either new market entries. We're just in 13 states. Our aspirations ought to be in many more states, become a national company. You should expect us to keep doing transactions, like acquiring tax IDs or medical groups, ACO entities, or MSO entities, like we've done in Washington, Connecticut, or California in the past few years. So I think that will be the predominant use of cash, as well as doing transactions in our current existing states to build more density. Finally, I think a lot of the Board and the management team have a pretty high ownership, so we're looking at opportunities to return capital if the stock price materially deviates from what we think is intrinsic value. That's the framework that we are using, but we'll do this in a pretty judicious manner in a thoughtful and patient manner, which is accretive to shareholders. And then on your second question on utilization, I think as we've bifurcated it before, between ambulatory and then, let's say, inpatient or downstream utilization. You can see from our results, the ambulatory utilization continues to be really high. We think that is good utilization. It really benefits our fee-for-service business. It's utilization for patients and our members to come visit the primary care doctors, and we think that's really good engagement. That benefits us on both the fee-for-service as well as value-based book. And then I think we continue to see elevated utilization downstream on the inpatient side. Despite that, I think our value-based book is really balanced and really hedged in the nature of the programs we have. You're seeing that in our accruals, and our updated guidance reflects that, but we continue to see good utilization trends.

Thank you.

Our next question will come from the line of Andrew Mok with Barclays. Please go ahead.

Hi. Hoping you can comment on the development pipeline and just the evolution of your sales process. You seem to be doing pretty well adding implemented providers, but a lot has changed over the last two years with respect to value-based care. So maybe just comment on how the sales process differs today in terms of pitch process and duration versus, say, three years ago?

To answer the question, Andrew, I think it's largely the same. We've had a very consistent sales growth engine, which is organic in our existing states. We are pitching the entire business model, which is very differentiated across all lines of business for any physician practice, every single patient, and payer walking in the door for every specialty. That has truly differentiated us. I think the last couple of years with all the changes in the risk-based environment and Medicare Advantage, physician practices are looking at us for a much more holistic solution rather than just a one-off solution for a particular risk contract. I think that truly differentiates Privia. On top of that, we are deeply embedded in the workflows of the practice from our technology stack and then through revenue cycle and care management teams and value-based operations workflow perspective. A practice joining Privia really understands all that value proposition and you can see that in our results. We continue to focus on adding 400 to 500 implemented providers in our existing and then entering many more new geographies, but the engine is pretty strong and it's running.

Great. I would like to follow up on the stock-based compensation. It increased by another $2.5 million sequentially and is now up 80% year-to-date. What is the full-year expectation for this, and what is driving the significant increase? I thought that line was supposed to moderate as we moved further from the IPO. Thank you.

Yes. Part of the change is effectively when we issued the equity each year. Last year, we issued our annual grants in the middle of Q2. This year, we issued them in the middle of Q1. So we're still getting a little bit of residual impact from a stock comp perspective from the timing difference there. We're looking at, on an annual basis, probably $55 million to $60 million in total stock comp expense. And then on a go-forward basis, again, we're still sort of targeting the 1.5% to 2% range.

Got it. But I guess I'm still a little confused like what's driving that significant increase you're saying, it's all timing? Or is it something else?

It's all about timing regarding when we issued both grants. The explanation is similar to what we discussed in Q1. Last year, we issued our annual stock compensation in Q2, while this year we did it in Q1. As a result, there was a larger variance in Q1 compared to Q2, due to a longer period without both years of compensation expense. This year, it involves only half a quarter versus the full quarter in Q1.

Our next question will come from the line of Jailendra Singh with Truist Securities. Please go ahead.

Hi. Good morning, guys. This is Eduardo Ron on for Jailendra. Thanks for the question. Just curious if you can provide some color around the EBITDA margin progression and your long-term growth and targets. And maybe just piggybacking on Andrew's question. If we think about the current development pipeline, does it tend to skew more towards expanding in new states? Or is it more building the breadth out in your existing markets?

Thanks for the question, Eduardo. So on the EBITDA progression, our long-term margin targets are 30% to 35% EBITDA to care margin. That's been very consistent since we went public four years ago. As you can see from the first half results, we are about 22%. Two-thirds of the way there. However, that number fully expenses all of the new markets that we've entered in the last few years as well as all the growth investments; organic growth investments for the sales team, sales, and marketing line is about $30 million. If you pro forma for that, you can see the company is already operating in the most mature markets at a long-term target profile. We're very proud of that. You can see it's a proven business model. The unit economics are proven; the flywheel is proven. We see ourselves achieving those targets in all of our geographies and consistently progressing towards that long-term target profile.

On your second question, I think it's going to be a combination of both. We are acutely focused on building density in our existing states. That's what drives the flywheel, drives EBITDA margin progression, and makes our medical groups very important assets for all the payers. So you will see us do transactions that can meaningfully increase density in the current geographies. Obviously, we are looking to add and get into as many new states. So you'll see a combination of both.

Our next question will come from the line of Elizabeth Anderson with Evercore ISI. Please go ahead.

Thanks for the question. I appreciate how the guidance is provided on an annual basis. Can you discuss any qualitative insights regarding the cadence between the third and fourth quarters for this year? Thank you.

Thank you for the question, Elizabeth. From a seasonality perspective, I believe you will see a similar trend to previous years, which should not significantly change. The second half tends to be somewhat stronger than the first half. We receive our MSSP results in the third or fourth quarter. I anticipate that the same pattern will hold for both shared savings and utilization regarding the fee-for-service segment. At this point in the year, we have sold and implemented all providers that will influence this year's results, giving us strong visibility on the fee-for-service segment.

Our next question comes from the line of A.J. Rice with UBS. Please go ahead.

Hi, everyone. I have a specific question. It seems that in Europe, the commercial lives have shown good year-to-year growth and solid sequential growth as well. The government sector appears to also have improved year-to-year, though it was relatively flat sequentially. Is this shift toward more commercial lives influenced by the new markets? What are your thoughts on the sequential growth variance? Additionally, regarding the recent disruptions within the broader peer group and companies taking different strategic approaches, does this change how you view M&A opportunities? Do you see any potential for larger deals compared to what you've pursued in the past?

Thanks for the question, A.J. On the first piece, the commercial lives generally follow implemented provider growth across all our markets; as we add providers, we get commercial lives on day one, and they get included in the value-based arrangements we have. On the government lives, it's timing based on the data we get on some of the lagged attribution. I think it picks up, and any two ups or two downs, I guess, that's kind of reflected in some of the between MSSP and MA. Overall, we feel pretty good. You can see overall attribution is already at the high end of our original guidance. So I think we've added what we expected. You can see some more additions over the next couple of quarters. There's some lives bleed in, but we're already well ahead of our plan from that perspective overall from an attribution perspective. On your second question, look, I think we're in a very strong position. We have a very pristine balance sheet. We have debt capacity, a solid EBITDA free cash flow profile. You can expect us to look at all kinds of assets. The key is to be really thoughtful and do deals that would be accretive to shareholders from a long-term perspective that are EBITDA and free cash flow accretive. I think we're going to be very disciplined. Our consistent performance over the past seven, eight years has been reflected. The nature of our business model serving the needs of entire practices. I think that's truly differentiated; physician practices and other entities looking to sell or transact are looking at our balance sheet and performance, and I think we'll be opportunistic to take advantage of any dislocations.

Our next question will come from the line of Jeff Garro with Stephens. Please go ahead.

Yes. Good morning. Thanks for taking the questions. So I know it's a little early here, but as we head into fall, I was hoping you could discuss the current environment and previous appetite for growing exposure to upside downside risk contracts next year. Some of the largest payers have discussed a better environment for value-based care contracts that are wins for all stakeholders. So I wanted to check on whether you're seeing the same thing and how that's shaping your views over the next 12 to 18 months. Thanks.

Yes. Thanks for the question, Jeff. It's important to recognize we today already do a fair bit of upside downside and take downside risk. If you look at our MSSP book, 76% of our lives are in enhanced track with the maximum risk that CMS allows us. Over 38% of the commercial lives are in upside/downside track. We're one of the very few companies that do commercial risk in that manner in a very sophisticated way; it's a very different value proposition to the payers. As for the environment, we're going to continue to be thoughtful. Every single payer has commented on utilization trends, and we're happy to take as much risk. The key for us is we've got to be compensated to take that additional risk. You have to recognize that care delivery takes place in entities like ours. The insurance mechanisms don't provide care directly. So, the doctors taking good care of patients across entire age cohorts have to be compensated well to assume that risk. In summary, as payers normalize, we are ready to dial up risk when we see a good risk/reward.

Our next question comes from the line of Jack Slevin with Jefferies. Please go ahead.

Hey, good morning. Thanks for taking the question. I wanted to ask you a couple on MSSP. Maybe one, just as we're coming to the end of the BD cycle for 2025, how that's shaping up? And then a couple just to get your thoughts on some of the changes that CMS has announced this year and last year going forward, specifically what benefits you could see from prepaid shared savings and if the elimination of the negative regional adjustment opens up more BD avenues for you than what you thought about previously, or really anything else that stuck out of note to you on some of the adjustments that you announced? Thanks.

Thanks for the question, Jack. From a BD perspective, it's no different than any of the past years. When we add a primary care physician or a provider to our platform, the lives come in day one, and they get attributed into our MSSP program. It's less governed by the January 1 date, even though the program resets from a performance year perspective. We continue to add lives and you can see that in our reported numbers as they grow quarter-over-quarter. We do get a bump up in Q1, but then it normalizes. I don't think from a sales perspective it's any different. On the second question, we have been participants in MSSP with CMS for the past seven, eight years. We've seen many changes over that period of time in the program. That is natural progression through different tracks of MSSP and then the enhanced track. Prepaying some dollars to do care management services, we are ready for. Most of these changes will ensure adequate dollars flow to primary care community doctors to take care of patients. We've performed in such programs over the years. Overall, we look forward to some of these changes, and we're excited about how the program progresses from here.

Our next question will come from the line of David Larsen with BTIG. Please go ahead.

Hi. Can you talk a little bit about your discussions with health plans? I mean, obviously, all of the major plans seem to be under pressure with their MLRs increasing due to rising utilization. Are they introducing you to more physician practice partners in different states? And then part of that, can you talk a bit about how you measure outcomes on a consistent basis and how you're feeding that information to the health plans? Are they looking at declines in inpatient utilization and costs on like a regular basis? Just any color there would be very helpful. Thanks, Parth.

Thanks for the question, David. On the first half, we have a very differentiated relationship with the payers, whether it's the blue plans or the national commercial payers. They now understand our model much better than seven, eight years ago. We've proven for them across our commercial book, across MSSP, across MA and Medicaid on what we can do and what we can achieve in a state once we get density. I think the nature of the conversation is much broader for us. We are often speaking about commercial value-based contracts in addition to MA and Medicaid. The last couple of years have allowed us to get case studies and data from what we've achieved in our existing states today that we can take to the payer teams on a national basis, and they're willing to work with us in a new state that we might enter. We have good payer relationships across the board, and they're happy to work with us and enable us as a low-cost community practice to save dollars for their members. On your second question, we get data across the board from each program within value-based care; it’s not consistent data. On the commercial book, it's very different versus MA and Medicaid. That's why we take the level of risk in each of these buckets. Entering a new state and getting initial attribution, it's unlikely you enter with full risk mindset during those initial phases. Overall, we continue to see elevated utilization trends, and payers are adjusting benefit designs.

Our next question comes from the line of Richard Close with Canaccord Genuity. Please go ahead.

Thanks for the question. Congratulations on the quarter and guidance. Parth, I was wondering if you could provide an update on Ohio and North Carolina, are those health system relationships performing in line with expectations now that we're, I guess, almost two years into them? And then can you talk about any variances in same-store growth across the different markets? Or are they fairly similar?

I appreciate the question, Richard. Both markets are progressing as planned. They never go in a straight line, but we have two strong partners in Novant and OhioHealth. We're working very closely with them; it's a long-term partnership. The view is to develop those markets over the next few years and build large medical groups like we've done elsewhere. We're pleased with how it's going and it's in line with performance expectations. In terms of growth, our business snowballs as we start getting density. When we enter a state, nobody knows us, and we establish an anchor practice or partnership, as physicians join and start performing better, that starts a good flywheel leading to strong top-of-funnel sales referrals, that ultimately leads to high conversion rates. You'll see the markets have some sort of an inverted or S-curve that they follow. You're seeing that in Mid-Atlantic and Georgia, where we continue to add physicians every quarter. We expect that to happen across all our markets. However, no two progress in the same manner; healthcare ecosystems and payer dynamics differ across regions.

Our next question comes from the line of Jessica Tassan with Piper Sandler. Please go ahead.

Hi guys. Thanks for taking the questions. So it looks like MLR in the 2024 capitated book went from about 99% last quarter to 95% in 2Q. So hopefully, you can just talk a little bit about the positive development in the margin on that book? And how we should be thinking about MLR for the rest of the year in the 2024 capitated book? And then just wondering if you can address the prior year claims in 2Q.

That's a good positive indication for us. We restructured some of the MA contracts to protect our EBITDA margin. The ones that remain, our hope was to continue to perform well. David will comment on some of the prior period impact on the numbers. As for capitation, if we're doing capitation, we want to save the payer money and generate shared savings for our medical group. We'll only take risk if it's EBITDA and free cash flow accretive. We are working diligently, and we'll see how performance continues, but so far, we're pleased.

On the prior period development, we just got some updated payer data showing additional attributed lives for 2023. Although you can see the cost side of that, there was also an approximate revenue increase, resulting in a de minimis overall impact from the prior year development to the bottom line.

Our next question will come from the line of Ryan Daniels with William Blair. Please go ahead.

Yeah. Good morning guys. Thank you for taking the questions. First, maybe a different twist on the commercial risk question for you. A lot of the macro data indicates that employers are facing some of the highest cost trends they've seen in decades. I'm curious if you've in any of your more mature markets or hospital partnership markets gone direct to employer offering them value-based contracts for their workforce given your payer and patient agnostic platform? Thanks.

I appreciate the question, Ryan. It's underappreciated how we can work with the commercial book. What we've done is initiate a couple of pilots where we've gone directly to employers in markets where we have good density. The key here is to build density and an adequate network that we can then offer directly to self-insured employers. We are starting to have discussions with payers about offering narrow network products. However, it needs to be sustainable given the level of inflation in the commercial book before employers act. You're seeing some on-site models appear, allowing employees to attend directly. I think we have a model that allows for commercial risk for self-insured employers. Stay tuned as this develops over the next few years; we're well positioned to pursue this.

Our next question will come from the line of Michael Hall with Baird. Please go ahead.

Hi. Thank you. I have a quick clarification and then my main question. I understand you're anticipating a minimal year-over-year increase in shared savings. It seems that revenue came in slightly below expectations, and typically the second quarter shows a sequential increase. Is this primarily due to your MSSP Lives decreasing by 6,000 sequentially? Is that linked to the Delaware exit? Also, regarding your earlier comment, you mentioned you are one of the few value-based care providers that accept both commercial upside and downside risk. I think you may have addressed my question, but is the key to managing those lives really focused on building market density, developing strong networks, and improving unit economics? Or is there anything different in your clinical care or care management approach needed to better manage commercial lives?

That's an interesting metric, but we track that internally. It’s mostly driven by new markets that come on, where we don't have the full collection number for a provider if they come on midyear. Additionally, our mix between physicians and APPs or NPEs and the specialties we target all contribute. However, on a consistent basis in mature markets, we see steady trends. We have annual inflators in our commercial contracts and a diversified book. Therefore, while those factors influence it, we don't see concern from that perspective.

And that will conclude our question-and-answer session. I will turn the call back to management for any closing remarks.

Thank you for joining us today. We appreciate your interest in the company and look forward to discussing our results next quarter.

Ladies and gentlemen, that will conclude today's call. Thank you all for joining. You may now disconnect.