Q3 2024 InnovAge Holding Corp Earnings Call

Participants

Ryan Kubota; Director of Investor Relation; InnovAge Holding Corp

Patrick Blair; President, Chief Executive Officer; InnovAge Holding Corp

Benjamin Adams; Chief Financial Officer; InnovAge Holding Corp

Jason Cassorla; Analyst; Citigroup Inc

Presentation

Operator

Good day and thank you for standing by, and welcome to the innovation 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 to ask a question. During the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, ryan Covanta, Director of Investor Relations. Please go ahead.

Ryan Kubota

Thank you, operator. Good afternoon, and thank you all for joining the innovation fiscal 2024 third quarter earnings call. With me today is Patrick Blair, President and CEO, and Ben Adams, CFO, Dr. Rich Pfeiffer, Chief Medical Officer, will also be Joining in the Q&A portion of the call today after the market closed, we issued a press release containing detailed information on our quarter results for our fiscal third quarter 2024. You may access the release on the Investor Relations section of our company website, Inivata.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 web. We will also be making forward-looking statements, including statements related to our full fiscal year projections, future growth prospects for the 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-K annual report for fiscal year 2023, and our subsequent reports filed with the SEC, including our most recent quarterly report 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 Blake. Patrick?

Patrick Blair

Thank you, Ryan, and good afternoon to everyone. I want to begin by expressing my gratitude to our colleagues, participants, government partners in the investor community who supported of age.
I'd also like to thank those of you who attended our first 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 two years, the company's third quarter results were largely consistent with our expectations. We 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 line.
As discussed on prior earnings calls, we normally experience seasonality in the third quarter 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. Just from the top down, we're pleased to see the steady growth in the demand for pay services. We're confident in the industry tailwinds and the unique benefits to the stakeholders that pays off.
With respect to quarterly financials, we reported revenue of $193 million for the quarter, an increase of approximately 2% compared to the second quarter and center level contribution margin of $34 million, which represents a 17.6% margin and is generally consistent with the second quarter adjusted EBITDA was $3.6 million for the quarter.
Importantly, in the quarter, we incurred increased denovo losses as we are 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 was up $5.6 million from a quarterly loss of approximately $2 million in the third quarter of fiscal year '23.
Census 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 in SG&A. We remain focused on day-to-day execution and exiting fiscal year '24 with solid earnings momentum. The portfolio of initiatives that we've launched over the past two 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 opportunities at the center level with the goal of achieving an overall central level contribution margin of 20% or more over time. While we now operate 20 centers across 6 states, including the opening of Orlando sooner, which occurred on April 1, health care is delivered locally and their differentiated opportunities and challenges to address it.
We are bringing best practices to centers into departments with incentives 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 five pillar performance management framework, which uses a balanced scorecard to assess our delivery of high-quality compliant care in a financially responsible way. We used the five 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 '24 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.
Now turning to the details on the quarter, you'll recall last quarter and during our Investor Day, we touched on anticipated third quarter 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 redeterminations.
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 services. While these delays do not affect the eligibility of potential participants, the protracted nature of the enrollment process and 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 well, certainly 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 tempo this 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 years past and a 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 did enroll for an alternative plan. We have strong conviction that the integrated and personalized nature of the PACE model offers a superior value proposition.
Frail seniors are struggling to maintain their independence when compared to other Medicare Advantage options in our enrollment and operation teams are working to educate our participants potential participants on the benefits of pets. We also believe that margin pressure, which is recently materialized across the MA industry will result in a reduction of MA value-added benefits in 2025, which will only enhance our relative content.
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 1,600 leads in the third quarter. This underpins our ongoing confidence that far more individuals are interested in pace, and we are enrolling on the de novo front. We're excited to announce that were operational at our new Orlando Center like Tampa.
This new state-of-the-art facility has the capacity to serve approximately 1,300 participants at maturity. Enrollment efforts are underway and job number one is to begin expanding access to the many deserving eligible participants in the communities. We're hosting a grand opening on May 29 to bring awareness to celebrate this important milestone in Orlando in our recently acquired crucial 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.
Our last call, we touched on the ongoing activities in our San Bernardino center with the California Department of Healthcare 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 <unk>. We are awaiting feedback from DH following resolution of the audits and corrective actions in California. We expect to resume discussions with the state regarding their downing and Bakersfield expansion plans.
Turning to operating performance, we continue to see improvement in our management of external medical costs as evidenced by a sequential decrease in participant expense PMPM from $3,903 last quarter to $3,823 this quarter, which represents an approximately 2% improved. The largest driver of our sequential improvement was the decrease of permanent placement nurses.
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 support of 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 we 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 independent living goals. Cms or state parts additionally, we piloted an end-of-life Comfort Care program in Denver, which supports our participants with palliative care expertise and 24/7 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 program reduced external spend by 43% from the baseline in November, while improving overall quality of care, we're currently developing the business case to scale this program to other markets.
Our portfolio of clinical value initiatives or CDI.s, 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 were 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 senior-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.
In 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 two years is accelerating as evidenced by our improving results. We will continue our tireless efforts to make each central better every day at the centers of the heart of our business.
And with that, I'll turn it over to Bill to walk through our quarterly financial performance.

Benjamin Adams

Thank you, Badree. Have today. I'll provide some highlights from our third quarter 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.
Starting with census, 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 third quarter, 1.2% increase over the second quarter.
This reflects the anticipated third quarter enrollment softness. As Patrick discussed, total revenue of $193.1 million increased 2.2% compared to the second 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 the one-time Medicare true up outside the regular payment cycle that was recorded in the second quarter. We incurred $100 million of external provider costs during the third quarter of fiscal 2024 a 1% decrease compared to the second quarter. The sequential decrease was primarily driven by lower permanent nursing facility utilization, resulting in a decrease in cost per participant, partially offset why an increase in member wants cost of care, excluding depreciation and amortization of $59.1 million increased 8.8% compared to the second 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 tax, an increase in software license fees associated with a new pharmacy software program that we rolled out in January. You know, occupancy and administrative costs associated with our new Crenshaw and Bakersfield centers acquired in the Concerto care piece acquisition and third party expenses associated with the annual Part D bid creation and the retrospective coding review central level contribution margin, which we define as total revenue, less external provider costs and cost of care, excluding depreciation and amortization, was $34 million for the quarter compared to $33.6 million in the second quarter.
As a percentage of revenue, central level contribution margin of 17.6% was relatively unchanged compared to 17.8% in the second quarter, sales and marketing expense was $7.2 million, an increase of approximately $1.3 million 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. Corporate, general and administrative expense increased to $27.5 million, a $2.3 million increase compared to the second quarter. The increase was primarily due to an increase in benefits expense due to an 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 third-party legal expense. The increase was partially offset by a decrease in costs associated with the Epic conversion that we completed in the second quarter.
Net loss was $5.9 million compared to a net loss of $3.8 million in the second 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 135.9 million shares for the quarter on both a basic and fully diluted base. Adjusted EBITDA, which we calculate by adding net interest expense, taxes, depreciation and amortization, M&A and denovo center development expenses and other nonrecurring or exceptional costs to net loss was $3.6 million for the quarter compared to $7.8 million in the second quarter the decrease was due to the one-time Medicare true-up payment in the second quarter, as well as the increase in denovo costs associated with Tampa, Orlando and Crenshaw in the third quarter our adjusted EBITDA margin was 1.9% for the third quarter compared to 4.1% in the second quarter. Denovo losses, which we define as net losses related to preopening and start-up ran through the first 24 months of denovo operation for the third quarter were $4.1 million and primarily related to the recently acquired bakers field and Crenshaw centers and our centers in Florida. This compares to $2.2 million of de novo losses in the second quarter.
Turning to our balance sheet, we ended the quarter with $54.1 million in cash and cash equivalents plus $45.2 million in short-term investments. We had $81.3 million in total debt on the balance sheet, representing debt under our senior secured term loan plus finance, lease obligations and other commitments.
For the third quarter, we reported cash flow from operations of $3.5 million, and we had $450,000 of capital expenditures. We are reaffirming our fiscal 2024 guidance, which, as we said last quarter, includes the Concerto care Pace acquisition. Based on the information as of today, we expect our ending census for the year 2024 to be between 6,807 and 7,400 participants and member months to be in the range of 79,000 to 83,000.
We are projecting total revenue in the range of $725 million to $775 million and adjusted EBITDA in the range of $12 million to $18 million. Finally, we anticipate that de novo losses for fiscal 2024 will be in the $10 million to $12 million range, which again is inclusive of our recently acquired Bakersfield and trenchers.
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.

Question and Answer Session

Operator

Operator, that concludes our prepared remarks, please open the call for questions from the banking, which as a reminder, if you would like to ask a question, please press star one one on your telephone. We ask that you wait for your name and company to be announced before you proceed with your question one moment while we compile the Q&A roster. Sorry, our first question today will be coming from Jason Pennsylvania of Citi. Your line is open.

Jason Cassorla

Great, thanks. Good afternoon. Yes, I just saw you guys maintained our '24 guidance given year to date trend are you considering Q4 would shake out at least towards the higher end of the range on just given where you're at or are there offsets that we should be thinking about for the fourth quarter.
And then just as a follow-up, as you have that 7% to 9% kind of a margin target over the next two to four years, I know recognizing you're not providing fiscal '25 guidance yet, but can you maybe give us a sense on the puts and takes some margin progression for next year?

Patrick Blair

Hey, this is Patrick Kelly. Could you hear from Jason, I'll get started and then maybe kick it over to Ben. Just to know what has been said. We remain focused on exiting fiscal year '24 with as much momentum as possible as we head into fiscal '25. And I think we're trending that direction. We're pleased with where we are. If you recall, we did intentionally set a larger range for guidance, and we're still comfortable that we're going to fall within that range on at the same time, we're also awaiting some outcomes on a few risk adjustment payments, which also underpins our current expanded range given the lack of uncertainty at the moment, we we are always a turnaround story and there's still a lot of unknowns in the business when I think about it is we're taking premium from both the federal government and the state government were small business. And so building in some conservatism for the one-timers that kind of naturally flow through our business at this sort of profile. I think for those reasons, we feel comfortable maintaining our guidance and being a little extra color here who may be on the range?

Benjamin Adams

Yes. Look, I think, Patrick, actually pretty much nailed it for you because we our businesses have no 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. I think as we continue to involve 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 on guidance range. We kept a little bit, why do count pretty 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.
You know, obviously, 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 so a lot of the progress you've seen over the course of this year to sort of continue going into 2025 and beyond, we put out those margin targets both for the intermediate term and for the longer term with the Investor Day presentation, you know, 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 and for margin down the road, that should give you a pretty good sense of the trajectory of the business.

Patrick Blair

I might maybe make one final punctuation to that that we think about rate of margin improvement. And we think about the drivers of that we're 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 for a number of drivers for that. And we've talked about just the ongoing improvements in our staffing ratios as we grow. And that's one aspect of our business that we anticipate getting some leverage from. And so how we sort of in the year, you know, in each of those is really going to play a big role in sort of what we're expecting for fiscal year '25.

Jason Cassorla

Great. That's all. 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 on either Colorado, specifically on the processing delays. I 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 and I guess in the meantime, how should we think about kind of the impacts of the Colorado dynamics against, you know, the fourth quarter census development as you see it? Just any risks there. Other ways to think about.

Patrick Blair

What I would say, Jason, is we are working through it on with the state. And there are some good examples of where we are. The constraints we've experienced no into degree in the second quarter and third quarter 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, and I know there's already some system changes going in that are going to relieve some of the constraints on, you know, there's two case management organizations that are enrollments flow through, and one of those is showing steady improvement, but it was still an impact, you know, in this quarter. And so the Q4 is going to be a nice predictor of some of the kind of the rate of change on that situation, but we don't change overnight, but I think we're doing a nice job, certainly are generating strong demand in Colorado and both innovation and the state are very focused on making sure those people get that services they need as quickly as possible. So I think we're going to we're going to get through it.

Jason Cassorla

Okay, great. And if I could just ask one more on on the census acuity mix, it sounds like you're seeing improvement there, which is.
Yes, certainly encouraging. Can you maybe give us a sense on where that your current acuity mix kind of stands today again, where it needs to be to reflect underlying reimbursement. Do you think this is something it's going to take kind of multiple quarters to come to fruition? Or maybe 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.

Benjamin Adams

Yes. I think if you look at our incoming participants, our freshmen who come into the program, they've got a good mix between of folks that are sort of higher acuity lower acuity and 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 are role with us every single month and compare 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 will take a little time before it goes through. But as we come into the right kind of mix, we're kind of coming into alignment with the assumptions that underlying base rates in the first place. So we're kind of moving in the right direction. It takes a little bit time.

Jason Cassorla

Okay. Thank you for all the color.

Operator

Thank you. And now we turn the call back over to Patrick Blair, President and CEO for closing remarks. Please go ahead.

Patrick Blair

Just like to say again how much we appreciate your interest in the organization, and we're excited about the progress of the momentum that we have and are getting back with you next quarter, hopefully talk about additional progress we're making have a terrific evening.

Operator

This does conclude today's conference call. You may all disconnect.