Q3 2024 InnovAge Holding Corp Earnings Call
Yeah.
Good day, and thank you for standing by.
Speaker Change: Welcome to the intervention third quarter 2024 earnings conference call.
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Speaker Change: Please be advised today's conference is being recorded.
I would now like to turn the conference over to your Speaker for today, Ryan Kubota Director of Investor Relations. Please go ahead.
Ryan Kubota: Thank you operator.
Ryan Kubota: Good afternoon, and thank you all for joining the <unk> fiscal 2024 third quarter earnings call.
Ryan Kubota: With me today is Patrick Blair, President and CEO.
Patrick Blair: And then Adams CFO.
Patrick Blair: Dr Rich feature.
Patrick Blair: Medical Officer will also be joining in the Q&A portion of the call.
Patrick Blair: Today after the market closed we issued a press release containing detailed information on our quarter results.
Patrick Blair: Our fiscal third quarter of 2024.
Patrick Blair: You may access the release on the Investor Relations section of our company website.
Patrick Blair: <unk> Dot com.
Patrick Blair: For those listening to the rebroadcast of this call.
Patrick Blair: Mind, you that the remarks made herein are as of today Tuesday may seven 2024.
Patrick Blair: And have not been updated subsequent to this call.
Patrick Blair: 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.
We will also be making forward looking statements.
Patrick Blair: <unk> statements related to our full fiscal year projections future.
Patrick Blair: Future growth prospects.
Patrick Blair: Florida is novo centers.
Patrick Blair: Our acquisition of concerto care pace, our pair capabilities and clinical value initiatives.
Patrick Blair: The status of current and future regulatory actions.
Patrick Blair: And other expectations.
Patrick Blair: 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.
Patrick Blair: 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 on Form 10-Q.
Patrick Blair: After the completion of our prepared remarks, we will open the call for questions.
Patrick Blair: I will now turn the call over to our President and CEO Patrick Blair Patrick.
Patrick Blair: Patrick.
Patrick Blair: Thank 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 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 us.
Patrick Blair: Their value based care models in this unique inflection point in the company's history.
Patrick Blair: Given the internal transformation over the last two years.
Patrick Blair: 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 lines.
Patrick Blair: As discussed on prior earnings calls, we normally experienced 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.
Patrick Blair: 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 paid services. We are confident in the industry tail wins at a unique benefits to the stakeholders pace offers.
Patrick Blair: 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 cidra level contribution margin of $34 million, which represents a 17, 6% margin and is generally consistent with the second quarter.
Patrick Blair: Adjusted EBITDA was $3 $6 million for the quarter importantly in the quarter, we incurred increased global losses, as we are now open and Tampa in Orlando and Europe.
Patrick Blair: Recall last quarter's results included a one time risk adjustment true up benefit, making the sequential progression less comparable.
Patrick Blair: On a year over year basis quarterly revenue has increased by approximately 12% and adjusted EBITDA is up $5 6 million.
Patrick Blair: Quarterly loss of approximately $2 million in the third quarter of fiscal year 'twenty three.
Patrick Blair: <unk> increased to 6820, which represents a quarter over quarter improvement of approximately 1%.
Patrick Blair: Overall, our results reflect solid performance in the areas of topline growth medical cost management center level staffing costs and SG&A.
Patrick Blair: We remain focused on day to day execution and exiting fiscal year 2004 with solid earnings momentum.
Patrick Blair: The portfolio of initiatives that we've launched over the past two years are creating tangible impact that we're seeing translate into earnings.
Patrick Blair: 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 sector level contribution margin of 20% or more over time.
Patrick Blair: While we now operate 20 centers across six states, including the opening of Orlando's sugar, which occurred on April <unk>.
Patrick Blair: Health care is delivered locally and there are differentiated opportunities and share with just to address each city.
Patrick Blair: We are bringing best practices to centers into departments within shippers that we believe can be approved 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.
Patrick Blair: We also remained 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.
Patrick Blair: We use a five pillar metrics to track operational performance at the center and enterprise level and we link our managements Should've program to the results are strong performance against our target metrics continued this quarter.
Patrick Blair: A couple of examples are participant experience, which is measured by net promoter score was <unk> 46 in fiscal year 'twenty four against a target of 35.
Patrick Blair: Our proprietary quality composite score was $4, two which is slightly above our target level of four out of five stars.
Patrick Blair: We believe that continued strong performance in the pillars of employee engagement participant satisfaction care quality and compliance or an excellent leading indicator for future growth and financial performance.
Patrick Blair: Now turning to the details on the quarter.
Patrick Blair: Youll recall last quarter and during our Investor day, we touched on anticipated third quarter seasonality.
Patrick Blair: This quarter seasonality was exacerbated by several moment in time factors.
Patrick Blair: We continue to experience ongoing enrollment processing delays in Colorado in part due to the competing priorities of Medicaid Redetermination.
Patrick Blair: As a reminder, the barriers were experiencing includes state enrollment resource constraints post public health emergency policy changes that now require in person level of care assessments versus telephonic and new vendors, who are still ramping up to targeted service lines.
Patrick Blair: While these delays do not affect the eligibility of potential participants the protracted nature of the enrollment processing delays have resulted in some prospects opted to pursue other service options. We continue to work with the state to resolve these issues as quickly as possible.
Patrick Blair: Additionally, due to physician and nurse practitioner staffing vacancies and recruitment challenges in our Sacramento and San Bernardino shippers.
Patrick Blair: 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.
Patrick Blair: While 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 to books.
Patrick Blair: 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.
Patrick Blair: The amount has increased materially from years past and the breadth of where cash benefits can be spin has expanded as well.
Patrick Blair: As a result, we believe this had a marginal impact on both our ability to enroll new participants at a higher number of existing participants who discern role for an alternative plan.
Patrick Blair: 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 into our enrollment and operation teams are working to educate our participants and potential participants on the benefits of pace. We also.
Patrick Blair: So believe that margin pressure, which has recently materialized across the EMEA industry will result in a reduction of EMEA value added benefits in 2025, which will only enhance our relative competitiveness.
Patrick Blair: Despite these temporary headwinds the overall demand for our services has continued to grow as evidenced by sequential increase in sales qualified leads of 10% with the total number reaching over 600 leads in the third quarter. This underpins our ongoing confidence that far more individuals interested in pace than we are enrolling.
Patrick Blair: And today.
Patrick Blair: 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 300 participants at maturity.
Patrick Blair: Enrollment efforts are underway and job number one is to begin expanding access to the many deserving eligible participants in acuity.
Patrick Blair: We're hosting a grand opening on may 29th to bring awareness and to celebrate this important milestone in Orlando.
Patrick Blair: And our recently acquired Crenshaw, California sooner, we're encouraged to see momentum build under our ownership as Q3 enrollment began to ramp in line with our expectations.
Patrick Blair: 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.
Patrick Blair: Our last call we touched on the ongoing activities in our San Bernardino sooner with the California Department of Health care services.
Patrick Blair: DHS conducted their targeted medical review in March and we await notification on a date for the exit interview.
Patrick Blair: Regarding Sacramento, we submitted proposed corrective actions to DHS in March and at the beginning of this month CMS officially closed its portion of the audits we are awaiting feedback from D. HCS.
Patrick Blair: Following resolution of the audits and corrective actions in California, we expect to resume discussions with the state regarding your Downey and Bakersfield expansion plans.
Patrick Blair: Turning to operating performance, we continue to see improvement in our management of external medical cost as evidenced by a sequential decrease of participant expense <unk> P. M.
Patrick Blair: <unk> $3903 last quarter to $3823 this quarter, which represents an approximately 2% improve the largest driver of our sequential improvement was the decrease of permanent placement nursing home costs.
Patrick Blair: 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 supported housing and those in an institutional setting as we continue to enroll new participants who are living independently in the community where.
Patrick Blair: 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.
Patrick Blair: Said differently, our mixes 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 CMS of our state partners.
Patrick Blair: Additionally, we've piloted and end of life comfort care program in Denver, which supports our participants with palliative care expertise and 24 seven access to our own team of nurses as a means of improving participant experience, while also reducing lower value external hospice costs in.
Patrick Blair: In addition to better coordination with our interdisciplinary care team and participate and family satisfaction. The program reduced external spend by 43% from the baseline in November while improving overall quality of care.
Patrick Blair: Currently developing the business case to scale. This program to other markets our portfolio of clinical value initiatives, where CVI is 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.
Patrick Blair: 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 the period with the same level of CMS and state auditing activities.
Patrick Blair: Recall similar 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.
Patrick Blair: 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 has accelerated as evidenced by our improving results. We will continue our tireless efforts to make each center better.
Patrick Blair: 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.
Ben: Thank you Patrick.
Ben: 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.
Ben: 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 overtime.
Ben: Starting with census, we served approximately 6820 participants across 19 centers as of March 31, 2024, which represents quarter over quarter growth of 0.7%.
Ben: We reported 20000.
Patrick Blair: 360 member months in the third quarter of one 2% increase over the second quarter.
Patrick Blair: This reflects the anticipated third quarter enrollment softness.
Patrick Blair: <unk> discussed.
Patrick Blair: Total revenue of $193 1 million increased two 2% compared to the second quarter due primarily to an increase in member months, coupled with an increase in Medicare capitation rates.
Patrick Blair: This was partially offset by a California rate decrease of approximately two 5% effective January one 2024, and a one time Medicare true up outside the regular payment cycle that was recorded in the second quarter.
Patrick Blair: We incurred $100 million of external provider cost during the third quarter of fiscal 2020 for a 1% decrease compared to the second quarter.
Patrick Blair: Sequential decrease was primarily driven by lower permanent nursing facility utilization.
Patrick Blair: <unk> and a decrease in cost per participant.
Patrick Blair: Partially offset by an increase in member months.
Patrick Blair: Cost of care, excluding depreciation and amortization of $59 1 million incur.
Patrick Blair: Increased eight 8% compared to the second quarter.
Patrick Blair: The increase was due to a higher cost per participant coupled with an increase in member months.
Patrick Blair: Cost per participant increase was driven by an increase in salaries wages and benefits due to higher head count and increased wage rates associated with the annual reset of employee benefits and taxes.
Patrick Blair: An increase in software license fees associated with a new pharmacy software program that we rolled out in January.
Patrick Blair: De novo occupancy at administrative costs associated with our new Crenshaw and Bakersfield centers acquired in the Concerto care pays acquisition and third party expenses associated with the annual part D bid creation in a retrospective coding review.
Patrick Blair: 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.
Patrick Blair: As a percentage of revenue center level contribution margin of 17, 6% was relatively unchanged compared to 17, 8% in the second quarter.
Patrick Blair: Sales and marketing expense was $7 2 million, an increase of approximately $1 3 billion compared to the prior quarter.
Patrick Blair: The increase was primarily due to increased head count coupled with increased marketing spend for our newly opened Tampa Center and our recently acquired Crenshaw Center.
Patrick Blair: Corporate general and administrative expense increased to 27 5 million.
Patrick Blair: A $2 3 million increase compared to the second quarter.
Patrick Blair: The increase was primarily due to an increase in benefits expense due to annual reset of employee benefits and taxes.
Patrick Blair: An increase in bad debt.
Patrick Blair: An increase in software license and maintenance costs, including user licensing costs associated with epic.
Patrick Blair: And an increase in third party legal expense.
Patrick Blair: The increase was partially offset by a decrease in costs associated with the epic conversion that we completed in the second quarter.
Patrick Blair: Net loss was $5 $9 million compared to a net loss of $3 8 million in the second quarter.
Patrick Blair: We reported a net loss per share of <unk> <unk> on both a 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 basis.
Patrick Blair: Adjusted EBITDA, which we calculate by adding net interest expense taxes.
Patrick Blair: Appreciation and amortization.
Patrick Blair: M&A and de Novo Center development expenses, and other nonrecurring or exceptional cost to net loss.
Patrick Blair: Was $3 6 million for the quarter.
Patrick Blair: Compared to $7 $8 million in the second quarter.
Patrick Blair: The decrease was due to the onetime Medicare true up payment in the second quarter as well as the increase in de Novo cost associated with Tampa, Orlando and Crenshaw and the third quarter.
Patrick Blair: Our adjusted EBITDA margin was one 9% for the third quarter compared to four 1% in the second quarter.
Patrick Blair: De novo losses, which we define as net losses related to Preopening and startup brands through the first 24 months of de Novo operation for the third quarter were $4 1 million.
Patrick Blair: And primarily related to the recently acquired Bakersfield, and Crenshaw centers and our centers in Florida.
Patrick Blair: This compares to $2 $2 million of de Novo losses in the second quarter.
Patrick Blair: Turning to our balance sheet, we ended the quarter with $54 $1 million in cash and cash equivalents, plus $45 2 million and short term investments.
Patrick Blair: We had $81 3 million and total debt on the balance sheet, representing debt under our senior secured term loan plus finance lease obligations and other commitments.
Patrick Blair: For the third quarter, we reported cash flow from operations of $3 $5 million, and we had $450000 of capital expenditures.
Patrick Blair: We are reaffirming our fiscal 2024 guidance, which as we said last quarter includes the concerto care pace acquisition.
Patrick Blair: Based on the information as of today, we expect our ending sensitive for the year 2024 to be between 6000 807400 participants.
Patrick Blair: And member months to be in the range of 79.
Patrick Blair: To $83.
Patrick Blair: 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.
Patrick Blair: Finally, we anticipate that de novo losses for fiscal 2024 will be in the $10 million to $12 million range.
Patrick Blair: Which again is inclusive of our recently acquired Bakersfield and Crenshaw centers.
Patrick Blair: In closing I want to reiterate Patrick's comments as we believe we are continuing to make improvements to the business every quarter.
Patrick Blair: We remain focused on the day to day operational execution and exiting fiscal 2024 with solid earnings momentum.
Speaker Change: Operator that concludes our prepared remarks, please open the call for questions.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: The thing I would like to ask a question. Please press star one on your telephone we asking Robert 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.
Speaker Change: The first question today will be coming from Jameson portfolio.
Jameson: Citi. Your line is open.
Jameson: Okay.
Jameson: Great. Thanks, good afternoon.
Jameson: Yeah, just thought you guys maintained 24 guidance given year to date trend are you considering fourth quarter would shake out at least towards the higher end of the range, just given where you're at or are there offsets that we should be thinking about for the fourth quarter.
Speaker Change: And then just as a follow up.
Jameson: You have that 7% to 9% kind of margin target over the next two to four years, recognizing you're not providing fiscal 'twenty five guidance, yet, but can you maybe give us a sense on the puts and takes to margin progression for next year. Thanks.
Jameson: Hey, this is Patrick good to hear from you Jason.
Patrick Blair: Started and then maybe I'll kick it over to Ben just to.
Jameson: As Ben said, we remain focused on exiting fiscal year 'twenty four with as much momentum as possible as we head into fiscal year 'twenty five and I think we're trending that direction. We're pleased where we are if you recall, we did intentionally set a larger range for guidance.
Jameson: We're still comfortable that we're going to fall within that range.
Jameson: At the same time, we're also waiting some outcomes on a few risk adjustment payments.
Jameson: Which also underpins our current expanded range given the lack of uncertainty at the moment.
Jameson: We are always a turnaround story and Theres still a lot of unknowns in the business.
Jameson: I think about it is we're taking premium from both the federal government and state government, where small business and so building in some conservatism for the one timers that kind of actually flow through our business.
Jameson: Of this sort of profile I think for.
Speaker Change: For those reasons, we feel comfortable maintaining our guidance and I'll, let Ben a little extra color here, maybe on the regime.
Ben: Yeah look I think Patrick actually pretty much nailed it for you.
Ben: Because we are a business sense.
Ben: Sort of a complex history over the last year or so.
Ben: There are a number of items that can roll in in any one particular quarter or some of them are related to prior periods. Some of them 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.
Ben: Have greater and greater precision around their estimates, but we've.
Jameson: It started this year with what we thought was a.
Jameson: Pretty straight down the middle of the Fairway guide.
Jameson: The guidance range, we kept a little bit why do count pretty variability.
Jameson: We think we're tracking nicely against that guidance range and 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 with a lot of positive momentum.
Speaker Change: Obviously, we haven't put out 25 guidance, yet we will reserve that until we get to our year end earnings release, but I think if you were to look at our business.
Jameson: We would expect.
Jameson: A lot of the progress you've seen over the course of this year to sort of continue going into 2025 and beyond.
Jameson: We put out those margin targets.
Jameson: Both for the intermediate term and for the longer term.
Jameson: At the Investor day presentation.
Jameson: In a thoughtful way based on what we think the business is really going to do overtime. So I think if you look at what we've done this year sort of extend that forward look at those guidance ranges.
Jameson: For our margin down the road that should give you a pretty good sense of the trajectory of the business.
Jameson: Maybe make one final punctuation to that that when we think about rate of margin improvement. When you think about the drivers of that were very focused right now on enrollment growth, obviously third quarter came in a bit below what we had hoped due to some seasonality that was exacerbated.
Jameson: Medical cost trends have been looking good news number of drivers for that and we've talked about just the ongoing improvements in our staffing ratios as we grow.
Jameson: That's one aspect of our business that we anticipate getting some leverage from.
Jameson: And so how we sort of in the year and.
Jameson: Each of those is really going to play a big role in sort of what we're expecting for fiscal year 'twenty five.
Jameson: Great.
Speaker Change: Super helpful and maybe just your point around the census side of the pipeline are you called out I may planned development switching it sounds like census came in a little bit below your expectations.
Jameson: Colorado, specifically the processing delays I guess, what's the bottleneck being there I mean would you expect a balsa members kind of coming online as those issues are resolved or.
Jameson: I guess in the meantime, how should we think about kind of the impacts of the Colorado dynamics again.
Jameson: Fourth quarter census development as you see it.
Jameson: The risks there or otherwise to think about.
Speaker Change: What I would say Jason is we are working through it.
Jameson: With a state and there are.
Jameson: Some good examples of where.
Jameson: The constraints we've experienced.
Jameson: To a 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 I know there's already some system changes going in delivering to relieve some of the constraints.
Jameson: Theres two case management organizations that our enrollments flow through.
Jameson: One of those is showing steady improvement.
Jameson: But it was still an impact in this quarter and so the Q4 was going to be a nice predictor.
Jameson: Of the kind of the rate of change on that situation, but.
Jameson: Is that going to change overnight, but I think we're doing a nice job certainly are generating strong demand in Colorado and.
Jameson: Both innovation state are very focused on making sure those people get the services they need as quickly as possible. So I think we're going to we're going to get through it.
Speaker Change: Okay, great if I could just ask one more.
Speaker Change: On the census, acuity mix it sounds like Youre 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 multiple quarters to come to <unk>.
Speaker Change: Question 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.
Speaker Change: Yes, I think if you look at our.
Speaker Change: Incoming participants are freshman who come into the program they've got a good mix between.
Speaker Change: Folks that are sort of higher acuity lower acuity of good mix by living situation.
Speaker Change: 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 that to happen I.
Speaker Change: I think one of the tricks is if you look at the number of people that enroll with US every single month and compare to the overall sense is 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.
Speaker Change: It goes through but as we come into.
Speaker Change: 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, just takes a little bit of time.
Speaker Change: Okay. Thank you for all the color.
Speaker Change: Thank you I'll now return 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. We're excited about the progress the momentum that we have.
Patrick Blair: And our EBIT back with you next quarter, hopefully talk about additional progress we're making.
Patrick Blair: Terrific.
Speaker Change: This does conclude today's conference call you may all disconnect.
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