NASDAQ:INNV InnovAge Q3 2024 Earnings Report $3.05 -0.02 (-0.65%) Closing price 04:00 PM EasternExtended Trading$3.03 -0.02 (-0.66%) As of 04:05 PM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. Earnings HistoryForecast InnovAge EPS ResultsActual EPS-$0.04Consensus EPS -$0.04Beat/MissMet ExpectationsOne Year Ago EPSN/AInnovAge Revenue ResultsActual Revenue$193.07 millionExpected Revenue$188.64 millionBeat/MissBeat by +$4.43 millionYoY Revenue GrowthN/AInnovAge Announcement DetailsQuarterQ3 2024Date5/7/2024TimeN/AConference Call DateTuesday, May 7, 2024Conference Call Time5:00PM ETUpcoming EarningsInnovAge's Q3 2025 earnings is scheduled for Tuesday, May 6, 2025, with a conference call scheduled at 5:00 PM ET. Check back for transcripts, audio, and key financial metrics as they become available.Q3 2025 Earnings ReportConference Call ResourcesConference Call AudioConference Call TranscriptPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfilePowered by InnovAge Q3 2024 Earnings Call TranscriptProvided by QuartrMay 7, 2024 ShareLink copied to clipboard.There are 5 speakers on the call. Operator00:00:00Good day, and thank you for standing by. Welcome to the Innovage Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. Operator00:00:36I would now like to turn the conference over to your speaker for today, Ryan Kubota, Director of Investor Relations. Please go ahead. Speaker 100:00:48Thank you, operator. Good afternoon, and thank you all for joining the Innovage fiscal 2024 Q3 earnings call. With me today is Patrick Blair, President and CEO and Ben Adams, CFO. Doctor. Rich Pfeiffer, Chief Medical Officer, will also be joining the Q and A portion of the call. Speaker 100:01:09Today, after the market closed, we issued a press release containing detailed information on our quarter results for our fiscal Q3 2024. You may access the release on the Investor Relations section of our company website, innovage.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, May 7, 2024, and have not been updated subsequent to this call. During our call, we will refer to certain non GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. Speaker 100:01:53We will also be making forward looking statements, including statements related to our full fiscal year projections, future growth prospects, Florida de novo centers, our acquisition of Concerto Care PACE, our payer capabilities and clinical value initiatives, the status of current and future regulatory actions and other expectations. Listeners are cautioned that all of our forward looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10 ks Annual Report for fiscal year 2023 and our subsequent reports filed with the SEC, including our most recent quarterly report on Form 10 Q. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our President and CEO, Patrick Blair. Speaker 100:02:54Patrick? Speaker 200:02:55Thank you, Ryan, and good afternoon, everyone. I want to begin by expressing my gratitude to our colleagues, participants, government partners and the investor community who support Innovage. I'd also like to thank those of you who attended our 1st Investor Day in late February. We believe it effectively reintroduced the company, including the investment thesis, how we're different than other value based care models and this unique inflection point in the company's history given the internal transformation over the last 2 years. The company's Q3 results were largely consistent with our expectations. Speaker 200:03:29We continue to see ongoing performance improvement in every facet of our operations, which is driving greater stability in our financial results and increased confidence in our ability to deliver high quality care and a great participant experience, while also growing our top and bottom lines. As discussed on prior earnings calls, we normally experience seasonality in the Q3. This year, it was exacerbated because of what we believe to be a few moment in time drivers, which I'll cover in a moment. Critically, when we look at the momentum of our business from the top down, we're pleased to see the steady growth in the demand for PACE services. We're confident in the industry tailwinds and the unique benefits to the stakeholders that PACE offers. Speaker 200:04:12Respect to quarterly financials, we reported revenue of $193,000,000 for the quarter, an increase of approximately 2% compared to the 2nd quarter and center level contribution margin of $34,000,000 which represents a 17.6% margin and is generally consistent with the 2nd quarter. Adjusted EBITDA was $3,600,000 for the quarter. Importantly, in the quarter, we incurred increased de novo losses as we're now open in Tampa and Orlando. And you'll recall, last quarter's results included a one time risk adjustment true up benefit, making this sequential progression less comparable. On a year over year basis, quarterly revenue has increased by approximately 12% and adjusted EBITDA is up $5,600,000 from a quarterly loss of approximately $2,000,000 in the Q3 of fiscal year 2023. Speaker 200:05:05Since this increased to $6,820 which represents a quarter over quarter improvement of approximately 1%. Overall, our results reflect solid performance in the areas of top line growth, medical cost management, center level staffing costs and SG and A. We remain focused on day to day execution and exiting fiscal year 2024 with solid earnings momentum. The portfolio of initiatives that we've launched over the past 2 years are creating tangible impact that we're seeing translate into earnings. As we discussed at our Investor Day, we continue to challenge ourselves to continuously identify new value creation at the center level with the goal of achieving an overall center level contribution margin of 20% or more over time. Speaker 200:05:52While we now operate 20 centers across 6 states, including the opening of our Orlando center, which occurred on April 1, healthcare is delivered locally and there are differentiated opportunities and challenges to address each center. We are bringing best practices to centers and to departments within centers that we believe can be improved. We are pleased with our recent work in this area. We are starting to see the contribution margin impact and we have confidence that we will achieve our future goals. We also remain focused on our 5 pillar performance management framework, which uses a balanced scorecard to assess our delivery of high quality compliant care in a financially responsible way. Speaker 200:06:33We use the 5 pillar metrics to track operational performance at the center and enterprise level and we link our management incentive program to the results. Our strong performance against our target metrics continued this quarter. As a couple of examples, our participant experience, which is measured by Net Promoter Score, was 46 in fiscal year 2024 against a target of 35. Our proprietary quality composite score was 4.2, which is slightly above our target level of 4 out of 5 stars. We believe the continued strong performance in the pillars of employee engagement, participant satisfaction, care quality and compliance are an excellent leading indicator for future growth and financial performance. Speaker 200:07:17Now turning to the details on the quarter. You'll recall last quarter and during our Investor Day, we touched on anticipated Q3 seasonality. This quarter seasonality was exacerbated by several moment in time factors. We continue to experience ongoing enrollment processing delays in Colorado in part due to the competing priorities of Medicaid redetermination. As a reminder, the barriers we are experiencing include state enrollment resource constraints, post public health emergency policy changes that now require in person level of care assessments versus telephonic, and new state vendors who are still ramping up to targeted service levels. Speaker 200:07:58While these delays do not affect the eligibility of potential participants, the protracted nature of the enrollment processing delays have resulted in some prospects opting to pursue other service options. We continue to work with the state to resolve these issues as quickly as possible. Additionally, due to physician and nurse practitioner staffing vacancies and recruitment challenges in our Sacramento and San Bernardino centers, we made the proactive decision to temporarily slow the rate of enrollment despite market demand that surpassed expectations to ensure the workload of onboarding new enrollment matched our primary care staffing levels. While serving more seniors remains a top priority, ensuring we deliver a high quality participant experience is bedrock to our responsible growth strategy. We have now filled the open positions and have resumed normal enrollment tempos. Speaker 200:08:52This year, we also experienced an unusually competitive environment due to the richness of the Medicare Advantage supplemental benefits when compared to past annual enrollment periods. The amount has increased materially from the years past and the breadth of where cash benefits can be spent has expanded as well. As a result, we believe this had a marginal impact on both our ability to enroll new participants and a higher number of existing participants who disenrolled for an alternative plan. We have strong conviction that the integrated and personalized nature of the PACE model offers a superior value proposition to frail seniors struggling to maintain their independence when compared to other Medicare Advantage options. And our enrollment and operation teams are working to educate our participants and potential participants on the benefits of PACE. Speaker 200:09:40We also believe that margin pressure, which has recently materialized across the MA industry, will result in a reduction of MA value added benefits in 2025, which will only enhance our relative competitiveness. Despite these temporary headwinds, the overall demand for our services has continued to grow as evidenced by a sequential increase in sales qualified leads of 10% with the total number reaching over 1600 leads in the Q3. This underpins our ongoing confidence that far more individuals are interested in PACE than we are enrolling today. On the de novo front, we're excited to announce that we're operational at our new Orlando center. Like Tampa, this new state of the art facility has the capacity to serve approximately 1300 participants at maturity. Speaker 200:10:29Enrollment efforts are underway and job number 1 is to begin expanding access to the many deserving eligible participants in the community. We're hosting a grand opening on May 29th to bring awareness and to celebrate this important milestone in Orlando. In our recently acquired Crenshaw, California Center, we're encouraged to see momentum build under our ownership as Q3 enrollment began to ramp in line with our expectations. On the regulatory front, we're pleased to report that our post sanction monitoring in Colorado, which was initiated in January of 2023, has been closed out by CMS. We continue to engage with the State of Colorado to finalize the outstanding process improvements. Speaker 200:11:10On our last call, we touched on the ongoing activities in our San Bernardino Center with the California Department of Health Care Services. DHCS conducted their targeted medical review in March and we await notification on a date for the exit interview. Regarding Sacramento, we submitted proposed corrective actions to DHCS in March and at the beginning of this month, CMS officially closed its portion of the audit. We are awaiting feedback from DHCS. Following resolution of the audits and corrective actions in California, we expect to resume discussions with the state regarding our Downey and Bakersfield expansion plans. Speaker 200:11:47Turning to operating performance, we continue to see improvement in our management of external medical cost as evidenced by a sequential decrease in participant expense PMPM from $3,903 last quarter to $3,823 this quarter, which represents an approximate 2% improvement. The largest driver of our sequential improvement was the decrease of permanent placement nursing home costs. As discussed on previous calls, our goal is to have our population reflect the population of the communities we serve. And these communities are made up of a mix of people that are living independently, those that are receiving some type of supportive housing and those in an institutional setting. As we continue to enroll new participants who are living independently in the community, we're seeing a decrease in the percentage of our participants permanently residing in nursing homes. Speaker 200:12:38We believe this change in the composition of living situation demonstrates a modest improvement in risk mix relative to where we were while under enrollment restrictions. Said differently, our mix is migrating back in line with the underlying assumptions used to derive our rates. Over time, improved mix should help offset external medical cost trends, while supporting the independent living goals of CMS and our state partners. Additionally, we've piloted an end of life comfort care program in Denver, which supports our participants with palliative care expertise and 20 fourseven access to our own team of nurses as a means of improving participant experience, while also reducing lower value external hospice costs. In addition to better coordination with our interdisciplinary care team and participant and family satisfaction, the program reduced external spend by 43% from the baseline in November, while improving overall quality of care. Speaker 200:13:35We're currently developing the business case to scale this program to other markets. Our portfolio of clinical value initiatives or CVIs as we refer to them internally are performing in line with our expectations. As you would expect, some are ahead of plan and there are a few which are delayed and we don't anticipate seeing the run rate benefits until fiscal year 2025. Further, we're seeing improvement in our center level staffing ratios, which has improved approximately by 5% relative to where we started the fiscal year, while holding our quality and compliance resources constant during a period with the same level of CMS and state auditing activity. Recall, center level staffing ratios were negatively impacted by the effect sanctions had on our census and because of the additional internal and external resources required to meet the demands of the audits. Speaker 200:14:25In summary, we believe we are continuing to improve the business every quarter. The combined effect of our broad set of initiatives in the areas of top line growth, cost management, quality and compliance over the course of the past 2 years is accelerating as evidenced by our improving results. We will continue our tireless efforts to make each center better every day as the centers are the heart of our business. And with that, I'll turn it over to Ben to walk through our quarterly financial performance. Speaker 300:14:54Thank you, Patrick. Today, I'll provide some highlights from our Q3 fiscal year 2024 financial performance and insight into some of the trends we are seeing in the quarter. While it is still early in our margin improvement initiatives, we continue to track to our internal targets and we are pleased with our progress and with the opportunity for additional margin recapture over time. Starting with Sensus, we served approximately 6,820 participants across 19 centers as of March 31, 2024, which represents quarter over quarter growth of 0.7%. We reported 20,360 member months in the 3rd quarter, a 1.2% increase over the 2nd quarter. Speaker 300:15:48This reflects the anticipated 3rd quarter enrollment softness that Patrick discussed. Total revenue of $193,100,000 increased 2.2% compared to the 2nd quarter, due primarily to an increase in member months, coupled with an increase in Medicare capitation rates. This was partially offset by a California rate decrease of approximately 2.5% effective January 1, 2024 and a one time Medicare true up outside the regular payment cycle that was recorded in the Q2. We incurred $100,000,000 of external provider costs during the Q3 of fiscal 2024, a 1% decrease compared to the 2nd quarter. The sequential decrease was primarily driven by lower permanent nursing facility utilization, resulting in a decrease in cost per participant, partially offset by an increase in member months. Speaker 300:17:03Cost of care, excluding depreciation and amortization of $59,100,000 increased 8.8% compared to the 2nd quarter. The increase was due to higher cost per participant coupled with an increase in member months. The cost per participant increase was driven by an increase in salaries, wages and benefits due to higher headcount and increased wage rates associated with the annual reset of employee benefits and taxes. An increase in software license fees associated with a new pharmacy software program that we rolled out in January. De novo occupancy and administrative costs associated with our new Crenshaw and Bakersfield centers acquired in the ConcertoCare PACE acquisition and 3rd party expenses associated with the annual Part D bid creation and retrospective coding review. Speaker 300:18:08Center level contribution margin, which we define total revenue less external provider costs and cost of care, excluding depreciation and amortization, was $34,000,000 for the quarter compared to $33,600,000 in the 2nd quarter. As a percentage of revenue, center level contribution margin of 17.6% was relatively unchanged compared to 17.8% in the 2nd quarter. Sales and marketing expense was $7,200,000 an increase of approximately $1,300,000 compared to the prior quarter. The increase was primarily due to increased headcount coupled with increased marketing spend for our newly opened Tampa Center and recently acquired Crenshaw Center. Corporate, general and administrative expense increased to $27,500,000 a $2,300,000 increase compared to the 2nd quarter. Speaker 300:19:17The increase was primarily due to an increase in benefits expense due to annual reset of employee benefits and taxes, an increase in bad debt, an increase in software license and maintenance costs, including user licensing costs associated with Epic and an increase in 3rd party legal expense. The increase was partially offset by a decrease in costs associated with the EPIC conversion that we completed in the 2nd quarter. Net loss was $5,900,000 compared to net loss of $3,800,000 in the 2nd quarter. We reported a net loss per share of $0.04 on both the basic and diluted basis and our weighted average share count was approximately 135,900,000 shares for the quarter on both a basic and fully diluted basis. Adjusted EBITDA, which we calculate by adding net interest expense, taxes, depreciation and amortization, M and A and de novo center development expenses and other non recurring or exceptional costs to net loss was $3,600,000 for the quarter, compared to $7,800,000 in the 2nd quarter. Speaker 300:20:47The decrease was due to the one time Medicare true up payment in the Q2 as well as the increase in de novo costs associated with Tampa, Orlando and Crenshaw in the Q3. Our adjusted EBITDA margin was 1.9% for the 3rd quarter compared to 4.1% in the 2nd quarter. De novo losses, which we define as net losses related to pre opening and start up ramp through the 1st 24 months of de novo operation for the Q3 were $4,100,000 and primarily related to the recently acquired Bakersfield and Crenshaw Centers and our centers in Florida. This compares to $2,200,000 of de novo losses in the 2nd quarter. Turning to our balance sheet. Speaker 300:21:45We ended the quarter with $54,100,000 in cash and cash equivalents, plus $45,200,000 in short term investments. We had $81,300,000 in total debt on the balance sheet, representing debt under our senior secured term loan plus finance lease obligations and other commitments. For the Q3, we reported cash flow from operations of $3,500,000 and we had $450,000 of capital expenditures. We are reaffirming our fiscal 2024 guidance, which as we said last quarter includes the ConcertoCare PACE acquisition. Based on the information as of today, we expect our ending census for the year 2024 to be between 6,800 and 7,400 participants and member months to be in the range of 79,000 to 83,000. Speaker 300:22:52We are projecting total revenue in the range of $725,000,000 to $775,000,000 and adjusted EBITDA in the range of $12,000,000 to $18,000,000 Finally, we anticipate that de novo losses for fiscal 2024 will be in the $10,000,000 to $12,000,000 range, which again is inclusive of our recently acquired Bakersfield and Crenshaw centers. In closing, I want to reiterate Patrick's comments as we believe we are continuing to make improvements to the business every quarter. We remain focused on the day to day operational execution and exiting fiscal 2024 with solid earnings momentum. Operator, that concludes our prepared remarks. Please open the call for questions. Operator00:23:52Thank The first question today will be coming from Jason Kaczonia of Citi. Your line is open. Speaker 400:24:18Great. Thanks. Good afternoon. Just how you guys maintained 2024 guidance. Given year to date trends, are you considering 4th quarter would shake out at least towards the higher end of the range, just given where you're at? Speaker 400:24:32Or are there offsets that we should be thinking about for the 4th quarter? And then just as a follow-up, as you have that 7% to 9% kind of margin target over the next 2 to 4 years, I know recognizing you're not providing fiscal 2025 guidance yet, but can you maybe give us a sense on the puts and takes to margin progression for next year? Thanks. Speaker 200:24:55Hey, this is Patrick. Good to hear from you, Jason. I'll get us started and then maybe kick it over to Ben. Just as Ben said, we remain focused on exiting fiscal year 2024 with as much momentum as possible as we head into fiscal year 2025. And I think we're trending that direction. Speaker 200:25:14We're pleased with where we are. If you recall, we did intentionally set a larger range for guidance. We're still comfortable that we're going to fall within that range. At the same time, we're also waiting some outcomes on a few risk adjustment payments, which also underpins our current expanded range given the lack of uncertainty at the moment. We are in some ways a turnaround story and there's still a lot of unknowns in the business. Speaker 200:25:48I think about it is we're taking premium from both the federal government and the state government. We're a small business. And so building in some conservatism for the one timers that kind of naturally flow through our business of this sort of profile. I think for those reasons, we feel comfortable maintaining our guidance. And I'll let Ben add a little extra color here maybe on the ranging. Speaker 300:26:14Yes. Look, I think Patrick actually pretty much nailed it for you. Because we are a business that's had sort of a complex history over the last year or so, there are a number of items that can roll in any one particular quarter. Some of them are related to prior periods, some of them are related to current periods. And so there is that kind of natural variability in the business still. Speaker 300:26:37I think as we continue to evolve and look at and move into the future, we'll have greater and greater precision around our estimates. But we've started this year with what we thought was a pretty straight down the middle of the fairway guidance range. We kept a little bit wide to account for any variability. We think we're tracking nicely against that guidance range. And as Patrick said, our real goal here is to make sure that we're operating as well as possible by the end of this fiscal year, so we can move into 25 with a lot of positive momentum. Speaker 300:27:14Obviously, we haven't put out 25 guidance yet. We'll reserve that until we get to our year end earnings release. But I think if you were to look at our business, we would expect a lot of the progress you've seen over the course of this year to sort of continue going into 2025 beyond. We put out those margin targets, both for the intermediate term and for the longer term at the Investor Day presentation in a thoughtful way based on what we think the business is really going to do over time. So I think if you look at what we've done this year, sort of extend that forward, look at those guidance ranges for margin down the road, that should give you a pretty good sense of the trajectory of the business. Operator00:28:01I might maybe make Speaker 200:28:03one final punctuation to that, that when we think about rate of margin improvement and we think about the drivers of that, we were very focused right now on enrollment growth. Obviously, Q3 came in a bit below what we had hoped due to some seasonality that was exacerbated. Medical cost trends have been looking good. There's a number of drivers for that. And we've talked about just the ongoing improvements in our staffing ratios. Speaker 200:28:29And as we grow, And so how we sort of end the year, And so how we sort of end the year on each of those is really going to play a big role in sort of what we're expecting for fiscal year 2025. Speaker 400:28:53Great. That's super helpful. And maybe just to your point around the census side of the fence, I know you called out MA plan development switching. It sounds like census came in a little bit below your expectations. You noted Colorado specifically the processing delays. Speaker 400:29:07I guess with the bottleneck being there, I mean, would you expect a bolus of members kind of coming online as those issues are resolved? Or I guess, in the meantime, how should we think about kind of the impacts of the Colorado dynamics against the Q4 Census development as you see it? Just any risks there otherwise to think about? Speaker 200:29:28What I would say, Jason, is we are working through it with the state. And there are some good examples of where the constraints we've experienced to a degree in the Q2 and Q3 are starting to be resolved. It's going to take some time before it sort of flows through. But there were system elements of this. I know there's already some system changes going in that are going to relieve some of the constraints. Speaker 200:30:00There's 2 case management organizations that our enrollments flow through. One of those is showing steady improvement, but it was still an impact in this quarter. And so the Q4 is going to be a nice predictor of the kind of the rate of change on that situation. But it's not going to change overnight, but I think we're doing a nice job certainly of generating strong demand in Colorado. And both innovation and state are very focused on making sure those people get the services they need as quickly as possible. Speaker 200:30:36So I think we're going to get through it. Speaker 400:30:41Okay, great. If I could just ask one more. On the census acuity mix, it sounds like you're seeing improvement there, which is certainly encouraging. Can you maybe give us a sense on where that your current acuity mix kind of stands today against where it needs to be to reflect underlying reimbursement? Do you think this is something that's going to take kind of multiple quarters to come to fruition? Speaker 400:31:05Or how would you frame the lead time there to balance assuming kind of like a normalized census growth going forward? Just any color around that would be very helpful. Speaker 300:31:16Yes. I think if you look at our incoming participants, our freshmen who come into the program, they've got a good mix between folks that are sort of higher acuity, lower acuity, have a good mix by living situation And they are gradually as they flow into the system, slowly changing the mix of our patients and changing our acuity mix as you would expect it to happen. I think one of the tricks is, if you look at the number of people that enroll with us every single month and compare it to the overall census, you get a sense for it takes a little time for this to wash through the system. So we're seeing what we would expect to see, which is a gradual improvement on those metrics. And it'll take a little time before it goes through. Speaker 300:32:06But as we come into the right kind of mix, we're kind of coming into alignment with the assumptions that underlie pace rates in the 1st place. So we're kind of moving in the right direction. Just takes a little bit of time. Speaker 400:32:21Okay. Thank you for all the color. Operator00:32:26Thank you. And now I'll return the call back over to Patrick Blair, President and CEO for closing remarks. Please go ahead. Speaker 200:32:36Just like to say again how much we appreciate your interest in the organization. We're excited about the progress, the momentum that we have and are eagerly back with you next quarter and hopefully talk about additional progress we're making. Have a terrific evening. Operator00:32:54This does conclude today's conference call. You may all disconnect.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallInnovAge Q3 202400:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsPress Release(8-K)Quarterly report(10-Q) InnovAge Earnings HeadlinesInnovAge to Announce Fiscal Third Quarter 2025 Financial Results and Host Conference Call Tuesday, May 6, 2025April 22, 2025 | globenewswire.comWall Street Set to Open Mixed Thursday as Investors Parse Key Employment, Manufacturing DataApril 17, 2025 | msn.comTrump Treasure April 19Thanks to President Trump… A $900 investment across5 specific cryptos… Could gain 12,000% so quickly that, just 12 months later…April 28, 2025 | Paradigm Press (Ad)InnovAge Champions PACE at State Capitols to Protect Critical Care for SeniorsApril 17, 2025 | globenewswire.comInnovAge Announces Participation at the KeyBanc Capital Markets Healthcare ForumMarch 4, 2025 | globenewswire.comInnovAge Reports Mixed Sentiment in Latest Earnings CallFebruary 5, 2025 | tipranks.comSee More InnovAge Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like InnovAge? Sign up for Earnings360's daily newsletter to receive timely earnings updates on InnovAge and other key companies, straight to your email. Email Address About InnovAgeInnovAge (NASDAQ:INNV) manages and provides a range of medical and ancillary services for seniors in need of care and support to live independently in its homes and communities. The company manages its business through Program of All-Inclusive Care for the Elderly (PACE) approach. It also offers in-home care services consisting of skilled, unskilled, and personal care; in-center services, such as primary care, physical therapy, occupational therapy, speech therapy, dental services, mental health and psychiatric services, meals, and activities; transportation to the PACE center and third-party medical appointments; and care management. The company serves participants in the United States; and operates PACE centers in Colorado, California, New Mexico, Pennsylvania, Florida, and Virginia. The company was formerly known as TCO Group Holdings, Inc. and changed its name to InnovAge Holding Corp. in January 2021. 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There are 5 speakers on the call. Operator00:00:00Good day, and thank you for standing by. Welcome to the Innovage Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. Operator00:00:36I would now like to turn the conference over to your speaker for today, Ryan Kubota, Director of Investor Relations. Please go ahead. Speaker 100:00:48Thank you, operator. Good afternoon, and thank you all for joining the Innovage fiscal 2024 Q3 earnings call. With me today is Patrick Blair, President and CEO and Ben Adams, CFO. Doctor. Rich Pfeiffer, Chief Medical Officer, will also be joining the Q and A portion of the call. Speaker 100:01:09Today, after the market closed, we issued a press release containing detailed information on our quarter results for our fiscal Q3 2024. You may access the release on the Investor Relations section of our company website, innovage.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, May 7, 2024, and have not been updated subsequent to this call. During our call, we will refer to certain non GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. Speaker 100:01:53We will also be making forward looking statements, including statements related to our full fiscal year projections, future growth prospects, Florida de novo centers, our acquisition of Concerto Care PACE, our payer capabilities and clinical value initiatives, the status of current and future regulatory actions and other expectations. Listeners are cautioned that all of our forward looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10 ks Annual Report for fiscal year 2023 and our subsequent reports filed with the SEC, including our most recent quarterly report on Form 10 Q. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our President and CEO, Patrick Blair. Speaker 100:02:54Patrick? Speaker 200:02:55Thank you, Ryan, and good afternoon, everyone. I want to begin by expressing my gratitude to our colleagues, participants, government partners and the investor community who support Innovage. I'd also like to thank those of you who attended our 1st Investor Day in late February. We believe it effectively reintroduced the company, including the investment thesis, how we're different than other value based care models and this unique inflection point in the company's history given the internal transformation over the last 2 years. The company's Q3 results were largely consistent with our expectations. Speaker 200:03:29We continue to see ongoing performance improvement in every facet of our operations, which is driving greater stability in our financial results and increased confidence in our ability to deliver high quality care and a great participant experience, while also growing our top and bottom lines. As discussed on prior earnings calls, we normally experience seasonality in the Q3. This year, it was exacerbated because of what we believe to be a few moment in time drivers, which I'll cover in a moment. Critically, when we look at the momentum of our business from the top down, we're pleased to see the steady growth in the demand for PACE services. We're confident in the industry tailwinds and the unique benefits to the stakeholders that PACE offers. Speaker 200:04:12Respect to quarterly financials, we reported revenue of $193,000,000 for the quarter, an increase of approximately 2% compared to the 2nd quarter and center level contribution margin of $34,000,000 which represents a 17.6% margin and is generally consistent with the 2nd quarter. Adjusted EBITDA was $3,600,000 for the quarter. Importantly, in the quarter, we incurred increased de novo losses as we're now open in Tampa and Orlando. And you'll recall, last quarter's results included a one time risk adjustment true up benefit, making this sequential progression less comparable. On a year over year basis, quarterly revenue has increased by approximately 12% and adjusted EBITDA is up $5,600,000 from a quarterly loss of approximately $2,000,000 in the Q3 of fiscal year 2023. Speaker 200:05:05Since this increased to $6,820 which represents a quarter over quarter improvement of approximately 1%. Overall, our results reflect solid performance in the areas of top line growth, medical cost management, center level staffing costs and SG and A. We remain focused on day to day execution and exiting fiscal year 2024 with solid earnings momentum. The portfolio of initiatives that we've launched over the past 2 years are creating tangible impact that we're seeing translate into earnings. As we discussed at our Investor Day, we continue to challenge ourselves to continuously identify new value creation at the center level with the goal of achieving an overall center level contribution margin of 20% or more over time. Speaker 200:05:52While we now operate 20 centers across 6 states, including the opening of our Orlando center, which occurred on April 1, healthcare is delivered locally and there are differentiated opportunities and challenges to address each center. We are bringing best practices to centers and to departments within centers that we believe can be improved. We are pleased with our recent work in this area. We are starting to see the contribution margin impact and we have confidence that we will achieve our future goals. We also remain focused on our 5 pillar performance management framework, which uses a balanced scorecard to assess our delivery of high quality compliant care in a financially responsible way. Speaker 200:06:33We use the 5 pillar metrics to track operational performance at the center and enterprise level and we link our management incentive program to the results. Our strong performance against our target metrics continued this quarter. As a couple of examples, our participant experience, which is measured by Net Promoter Score, was 46 in fiscal year 2024 against a target of 35. Our proprietary quality composite score was 4.2, which is slightly above our target level of 4 out of 5 stars. We believe the continued strong performance in the pillars of employee engagement, participant satisfaction, care quality and compliance are an excellent leading indicator for future growth and financial performance. Speaker 200:07:17Now turning to the details on the quarter. You'll recall last quarter and during our Investor Day, we touched on anticipated Q3 seasonality. This quarter seasonality was exacerbated by several moment in time factors. We continue to experience ongoing enrollment processing delays in Colorado in part due to the competing priorities of Medicaid redetermination. As a reminder, the barriers we are experiencing include state enrollment resource constraints, post public health emergency policy changes that now require in person level of care assessments versus telephonic, and new state vendors who are still ramping up to targeted service levels. Speaker 200:07:58While these delays do not affect the eligibility of potential participants, the protracted nature of the enrollment processing delays have resulted in some prospects opting to pursue other service options. We continue to work with the state to resolve these issues as quickly as possible. Additionally, due to physician and nurse practitioner staffing vacancies and recruitment challenges in our Sacramento and San Bernardino centers, we made the proactive decision to temporarily slow the rate of enrollment despite market demand that surpassed expectations to ensure the workload of onboarding new enrollment matched our primary care staffing levels. While serving more seniors remains a top priority, ensuring we deliver a high quality participant experience is bedrock to our responsible growth strategy. We have now filled the open positions and have resumed normal enrollment tempos. Speaker 200:08:52This year, we also experienced an unusually competitive environment due to the richness of the Medicare Advantage supplemental benefits when compared to past annual enrollment periods. The amount has increased materially from the years past and the breadth of where cash benefits can be spent has expanded as well. As a result, we believe this had a marginal impact on both our ability to enroll new participants and a higher number of existing participants who disenrolled for an alternative plan. We have strong conviction that the integrated and personalized nature of the PACE model offers a superior value proposition to frail seniors struggling to maintain their independence when compared to other Medicare Advantage options. And our enrollment and operation teams are working to educate our participants and potential participants on the benefits of PACE. Speaker 200:09:40We also believe that margin pressure, which has recently materialized across the MA industry, will result in a reduction of MA value added benefits in 2025, which will only enhance our relative competitiveness. Despite these temporary headwinds, the overall demand for our services has continued to grow as evidenced by a sequential increase in sales qualified leads of 10% with the total number reaching over 1600 leads in the Q3. This underpins our ongoing confidence that far more individuals are interested in PACE than we are enrolling today. On the de novo front, we're excited to announce that we're operational at our new Orlando center. Like Tampa, this new state of the art facility has the capacity to serve approximately 1300 participants at maturity. Speaker 200:10:29Enrollment efforts are underway and job number 1 is to begin expanding access to the many deserving eligible participants in the community. We're hosting a grand opening on May 29th to bring awareness and to celebrate this important milestone in Orlando. In our recently acquired Crenshaw, California Center, we're encouraged to see momentum build under our ownership as Q3 enrollment began to ramp in line with our expectations. On the regulatory front, we're pleased to report that our post sanction monitoring in Colorado, which was initiated in January of 2023, has been closed out by CMS. We continue to engage with the State of Colorado to finalize the outstanding process improvements. Speaker 200:11:10On our last call, we touched on the ongoing activities in our San Bernardino Center with the California Department of Health Care Services. DHCS conducted their targeted medical review in March and we await notification on a date for the exit interview. Regarding Sacramento, we submitted proposed corrective actions to DHCS in March and at the beginning of this month, CMS officially closed its portion of the audit. We are awaiting feedback from DHCS. Following resolution of the audits and corrective actions in California, we expect to resume discussions with the state regarding our Downey and Bakersfield expansion plans. Speaker 200:11:47Turning to operating performance, we continue to see improvement in our management of external medical cost as evidenced by a sequential decrease in participant expense PMPM from $3,903 last quarter to $3,823 this quarter, which represents an approximate 2% improvement. The largest driver of our sequential improvement was the decrease of permanent placement nursing home costs. As discussed on previous calls, our goal is to have our population reflect the population of the communities we serve. And these communities are made up of a mix of people that are living independently, those that are receiving some type of supportive housing and those in an institutional setting. As we continue to enroll new participants who are living independently in the community, we're seeing a decrease in the percentage of our participants permanently residing in nursing homes. Speaker 200:12:38We believe this change in the composition of living situation demonstrates a modest improvement in risk mix relative to where we were while under enrollment restrictions. Said differently, our mix is migrating back in line with the underlying assumptions used to derive our rates. Over time, improved mix should help offset external medical cost trends, while supporting the independent living goals of CMS and our state partners. Additionally, we've piloted an end of life comfort care program in Denver, which supports our participants with palliative care expertise and 20 fourseven access to our own team of nurses as a means of improving participant experience, while also reducing lower value external hospice costs. In addition to better coordination with our interdisciplinary care team and participant and family satisfaction, the program reduced external spend by 43% from the baseline in November, while improving overall quality of care. Speaker 200:13:35We're currently developing the business case to scale this program to other markets. Our portfolio of clinical value initiatives or CVIs as we refer to them internally are performing in line with our expectations. As you would expect, some are ahead of plan and there are a few which are delayed and we don't anticipate seeing the run rate benefits until fiscal year 2025. Further, we're seeing improvement in our center level staffing ratios, which has improved approximately by 5% relative to where we started the fiscal year, while holding our quality and compliance resources constant during a period with the same level of CMS and state auditing activity. Recall, center level staffing ratios were negatively impacted by the effect sanctions had on our census and because of the additional internal and external resources required to meet the demands of the audits. Speaker 200:14:25In summary, we believe we are continuing to improve the business every quarter. The combined effect of our broad set of initiatives in the areas of top line growth, cost management, quality and compliance over the course of the past 2 years is accelerating as evidenced by our improving results. We will continue our tireless efforts to make each center better every day as the centers are the heart of our business. And with that, I'll turn it over to Ben to walk through our quarterly financial performance. Speaker 300:14:54Thank you, Patrick. Today, I'll provide some highlights from our Q3 fiscal year 2024 financial performance and insight into some of the trends we are seeing in the quarter. While it is still early in our margin improvement initiatives, we continue to track to our internal targets and we are pleased with our progress and with the opportunity for additional margin recapture over time. Starting with Sensus, we served approximately 6,820 participants across 19 centers as of March 31, 2024, which represents quarter over quarter growth of 0.7%. We reported 20,360 member months in the 3rd quarter, a 1.2% increase over the 2nd quarter. Speaker 300:15:48This reflects the anticipated 3rd quarter enrollment softness that Patrick discussed. Total revenue of $193,100,000 increased 2.2% compared to the 2nd quarter, due primarily to an increase in member months, coupled with an increase in Medicare capitation rates. This was partially offset by a California rate decrease of approximately 2.5% effective January 1, 2024 and a one time Medicare true up outside the regular payment cycle that was recorded in the Q2. We incurred $100,000,000 of external provider costs during the Q3 of fiscal 2024, a 1% decrease compared to the 2nd quarter. The sequential decrease was primarily driven by lower permanent nursing facility utilization, resulting in a decrease in cost per participant, partially offset by an increase in member months. Speaker 300:17:03Cost of care, excluding depreciation and amortization of $59,100,000 increased 8.8% compared to the 2nd quarter. The increase was due to higher cost per participant coupled with an increase in member months. The cost per participant increase was driven by an increase in salaries, wages and benefits due to higher headcount and increased wage rates associated with the annual reset of employee benefits and taxes. An increase in software license fees associated with a new pharmacy software program that we rolled out in January. De novo occupancy and administrative costs associated with our new Crenshaw and Bakersfield centers acquired in the ConcertoCare PACE acquisition and 3rd party expenses associated with the annual Part D bid creation and retrospective coding review. Speaker 300:18:08Center level contribution margin, which we define total revenue less external provider costs and cost of care, excluding depreciation and amortization, was $34,000,000 for the quarter compared to $33,600,000 in the 2nd quarter. As a percentage of revenue, center level contribution margin of 17.6% was relatively unchanged compared to 17.8% in the 2nd quarter. Sales and marketing expense was $7,200,000 an increase of approximately $1,300,000 compared to the prior quarter. The increase was primarily due to increased headcount coupled with increased marketing spend for our newly opened Tampa Center and recently acquired Crenshaw Center. Corporate, general and administrative expense increased to $27,500,000 a $2,300,000 increase compared to the 2nd quarter. Speaker 300:19:17The increase was primarily due to an increase in benefits expense due to annual reset of employee benefits and taxes, an increase in bad debt, an increase in software license and maintenance costs, including user licensing costs associated with Epic and an increase in 3rd party legal expense. The increase was partially offset by a decrease in costs associated with the EPIC conversion that we completed in the 2nd quarter. Net loss was $5,900,000 compared to net loss of $3,800,000 in the 2nd quarter. We reported a net loss per share of $0.04 on both the basic and diluted basis and our weighted average share count was approximately 135,900,000 shares for the quarter on both a basic and fully diluted basis. Adjusted EBITDA, which we calculate by adding net interest expense, taxes, depreciation and amortization, M and A and de novo center development expenses and other non recurring or exceptional costs to net loss was $3,600,000 for the quarter, compared to $7,800,000 in the 2nd quarter. Speaker 300:20:47The decrease was due to the one time Medicare true up payment in the Q2 as well as the increase in de novo costs associated with Tampa, Orlando and Crenshaw in the Q3. Our adjusted EBITDA margin was 1.9% for the 3rd quarter compared to 4.1% in the 2nd quarter. De novo losses, which we define as net losses related to pre opening and start up ramp through the 1st 24 months of de novo operation for the Q3 were $4,100,000 and primarily related to the recently acquired Bakersfield and Crenshaw Centers and our centers in Florida. This compares to $2,200,000 of de novo losses in the 2nd quarter. Turning to our balance sheet. Speaker 300:21:45We ended the quarter with $54,100,000 in cash and cash equivalents, plus $45,200,000 in short term investments. We had $81,300,000 in total debt on the balance sheet, representing debt under our senior secured term loan plus finance lease obligations and other commitments. For the Q3, we reported cash flow from operations of $3,500,000 and we had $450,000 of capital expenditures. We are reaffirming our fiscal 2024 guidance, which as we said last quarter includes the ConcertoCare PACE acquisition. Based on the information as of today, we expect our ending census for the year 2024 to be between 6,800 and 7,400 participants and member months to be in the range of 79,000 to 83,000. Speaker 300:22:52We are projecting total revenue in the range of $725,000,000 to $775,000,000 and adjusted EBITDA in the range of $12,000,000 to $18,000,000 Finally, we anticipate that de novo losses for fiscal 2024 will be in the $10,000,000 to $12,000,000 range, which again is inclusive of our recently acquired Bakersfield and Crenshaw centers. In closing, I want to reiterate Patrick's comments as we believe we are continuing to make improvements to the business every quarter. We remain focused on the day to day operational execution and exiting fiscal 2024 with solid earnings momentum. Operator, that concludes our prepared remarks. Please open the call for questions. Operator00:23:52Thank The first question today will be coming from Jason Kaczonia of Citi. Your line is open. Speaker 400:24:18Great. Thanks. Good afternoon. Just how you guys maintained 2024 guidance. Given year to date trends, are you considering 4th quarter would shake out at least towards the higher end of the range, just given where you're at? Speaker 400:24:32Or are there offsets that we should be thinking about for the 4th quarter? And then just as a follow-up, as you have that 7% to 9% kind of margin target over the next 2 to 4 years, I know recognizing you're not providing fiscal 2025 guidance yet, but can you maybe give us a sense on the puts and takes to margin progression for next year? Thanks. Speaker 200:24:55Hey, this is Patrick. Good to hear from you, Jason. I'll get us started and then maybe kick it over to Ben. Just as Ben said, we remain focused on exiting fiscal year 2024 with as much momentum as possible as we head into fiscal year 2025. And I think we're trending that direction. Speaker 200:25:14We're pleased with where we are. If you recall, we did intentionally set a larger range for guidance. We're still comfortable that we're going to fall within that range. At the same time, we're also waiting some outcomes on a few risk adjustment payments, which also underpins our current expanded range given the lack of uncertainty at the moment. We are in some ways a turnaround story and there's still a lot of unknowns in the business. Speaker 200:25:48I think about it is we're taking premium from both the federal government and the state government. We're a small business. And so building in some conservatism for the one timers that kind of naturally flow through our business of this sort of profile. I think for those reasons, we feel comfortable maintaining our guidance. And I'll let Ben add a little extra color here maybe on the ranging. Speaker 300:26:14Yes. Look, I think Patrick actually pretty much nailed it for you. Because we are a business that's had sort of a complex history over the last year or so, there are a number of items that can roll in any one particular quarter. Some of them are related to prior periods, some of them are related to current periods. And so there is that kind of natural variability in the business still. Speaker 300:26:37I think as we continue to evolve and look at and move into the future, we'll have greater and greater precision around our estimates. But we've started this year with what we thought was a pretty straight down the middle of the fairway guidance range. We kept a little bit wide to account for any variability. We think we're tracking nicely against that guidance range. And as Patrick said, our real goal here is to make sure that we're operating as well as possible by the end of this fiscal year, so we can move into 25 with a lot of positive momentum. Speaker 300:27:14Obviously, we haven't put out 25 guidance yet. We'll reserve that until we get to our year end earnings release. But I think if you were to look at our business, we would expect a lot of the progress you've seen over the course of this year to sort of continue going into 2025 beyond. We put out those margin targets, both for the intermediate term and for the longer term at the Investor Day presentation in a thoughtful way based on what we think the business is really going to do over time. So I think if you look at what we've done this year, sort of extend that forward, look at those guidance ranges for margin down the road, that should give you a pretty good sense of the trajectory of the business. Operator00:28:01I might maybe make Speaker 200:28:03one final punctuation to that, that when we think about rate of margin improvement and we think about the drivers of that, we were very focused right now on enrollment growth. Obviously, Q3 came in a bit below what we had hoped due to some seasonality that was exacerbated. Medical cost trends have been looking good. There's a number of drivers for that. And we've talked about just the ongoing improvements in our staffing ratios. Speaker 200:28:29And as we grow, And so how we sort of end the year, And so how we sort of end the year on each of those is really going to play a big role in sort of what we're expecting for fiscal year 2025. Speaker 400:28:53Great. That's super helpful. And maybe just to your point around the census side of the fence, I know you called out MA plan development switching. It sounds like census came in a little bit below your expectations. You noted Colorado specifically the processing delays. Speaker 400:29:07I guess with the bottleneck being there, I mean, would you expect a bolus of members kind of coming online as those issues are resolved? Or I guess, in the meantime, how should we think about kind of the impacts of the Colorado dynamics against the Q4 Census development as you see it? Just any risks there otherwise to think about? Speaker 200:29:28What I would say, Jason, is we are working through it with the state. And there are some good examples of where the constraints we've experienced to a degree in the Q2 and Q3 are starting to be resolved. It's going to take some time before it sort of flows through. But there were system elements of this. I know there's already some system changes going in that are going to relieve some of the constraints. Speaker 200:30:00There's 2 case management organizations that our enrollments flow through. One of those is showing steady improvement, but it was still an impact in this quarter. And so the Q4 is going to be a nice predictor of the kind of the rate of change on that situation. But it's not going to change overnight, but I think we're doing a nice job certainly of generating strong demand in Colorado. And both innovation and state are very focused on making sure those people get the services they need as quickly as possible. Speaker 200:30:36So I think we're going to get through it. Speaker 400:30:41Okay, great. If I could just ask one more. On the census acuity mix, it sounds like you're seeing improvement there, which is certainly encouraging. Can you maybe give us a sense on where that your current acuity mix kind of stands today against where it needs to be to reflect underlying reimbursement? Do you think this is something that's going to take kind of multiple quarters to come to fruition? Speaker 400:31:05Or how would you frame the lead time there to balance assuming kind of like a normalized census growth going forward? Just any color around that would be very helpful. Speaker 300:31:16Yes. I think if you look at our incoming participants, our freshmen who come into the program, they've got a good mix between folks that are sort of higher acuity, lower acuity, have a good mix by living situation And they are gradually as they flow into the system, slowly changing the mix of our patients and changing our acuity mix as you would expect it to happen. I think one of the tricks is, if you look at the number of people that enroll with us every single month and compare it to the overall census, you get a sense for it takes a little time for this to wash through the system. So we're seeing what we would expect to see, which is a gradual improvement on those metrics. And it'll take a little time before it goes through. Speaker 300:32:06But as we come into the right kind of mix, we're kind of coming into alignment with the assumptions that underlie pace rates in the 1st place. So we're kind of moving in the right direction. Just takes a little bit of time. Speaker 400:32:21Okay. Thank you for all the color. Operator00:32:26Thank you. And now I'll return the call back over to Patrick Blair, President and CEO for closing remarks. Please go ahead. Speaker 200:32:36Just like to say again how much we appreciate your interest in the organization. We're excited about the progress, the momentum that we have and are eagerly back with you next quarter and hopefully talk about additional progress we're making. Have a terrific evening. Operator00:32:54This does conclude today's conference call. You may all disconnect.Read morePowered by