Ladies and gentlemen, thank you for standing by and welcome to the InnovAge First Quarter 2022 Earnings Conference Call. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Ryan Kubota. You may begin.

Thank you, operator. Good afternoon, and thank you all for joining InnovAge's fiscal 2022 first quarter earnings call. With me today are Maureen Hewitt, President and CEO; and Barb Gutierrez, CFO. Today, after the market closed, we issued a press release containing detailed information on our quarterly results. You may access the release on our company website, innovage.com. For those listening to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, Tuesday, November 9, 2021, and have not been updated subsequent to the initial earnings call. During this 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 fiscal first quarter 2022 press release, which is posted on the investor relations section of our website. During the call, we will be making forward-looking statements, including statements related to our growth prospects, regulatory, and other expectations, and our outlook on fiscal year 2022. Listeners are cautioned that all of our forward-looking statements involve certain assumptions and 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 2021 and subsequent reports filed with the SEC. After the completion of our prepared remarks, we will open the call to take your questions. I will now turn the call over to our president and CEO, Maureen Hewitt. Maureen?

Thank you, Ryan, and thank you all for joining us this afternoon. I am pleased to report that we have strong start to our 2022 fiscal year and that we are reaffirming the guidance that we provided on our last earnings call in September for fiscal year 2022. As of the end of the quarter, InnovAge served approximately 6,990 participants. This represents an increase of approximately 7.2% compared to the first quarter of fiscal year 2021, when including Sacramento census, which was not consolidated in the first quarter of fiscal 2021. We reported strong first quarter revenue of approximately $173 million, an increase of nearly 13.5% compared to the previous fiscal year as a result of census growth and an increase in rates. We also reported a center-level contribution margin of more than $42 million and corresponding center-level contribution margin ratio of 24.5%. I will now provide an update on our growth strategy. We remain on track with the three De Novo centers we expect to open in fiscal 2023, two in Florida, Tampa, and Orlando, and one in Louisville, Kentucky. All three of the sites that we have selected are in the process of being renovated, and we continue to work diligently through the development process. While currently on track, as with every development, there are factors beyond our control that may impact our expected time line. We also continue to evaluate locations for two additional centers, and our current plan is to have those two additional centers operational in fiscal year 2024, subject to factors beyond our control. Regarding acquisitions, we continue to pursue acquisition opportunities in new markets with experienced community partners who have established footprints and where the economics make sense. We are also continuing to look for joint venture opportunities that provide strong strategic value.…

Thank you, Maureen. Before we open the call to questions, I want to provide some highlights from our first quarter fiscal year 2022 performance. Given the impact on our results of decreasing COVID transmission rates during the period, in some cases, I will refer to sequential comparison to our fourth quarter of fiscal 2021 in order to provide a more meaningful picture of our performance. We produced strong financial results in the first quarter and ended the period with 18 centers and a census of approximately 6,990 participants as of September 30th, 2021. Compared to the prior year period, when including Sacramento census, which was not consolidated in the fiscal first quarter of 2021, this represents an ending census increase of approximately 7.2%. Compared to the fourth quarter, this is an increase of over 2% and in line with the guidance, we provided last quarter. We reported over 20,900 member months for the first quarter, a 7.8% increase over the prior year when including Sacramento census in the first quarter of fiscal 2021 and an increase of over 2.5% over the fourth quarter of fiscal 2021. During the first quarter, we continued to grow referrals and census following the favorable trends we experienced in the fourth quarter of fiscal 2021. We believe our digital marketing efforts are key to driving additional census growth, and we continue to optimize these strategies to reach those searching for senior care alternatives. In addition to the nearly 65% growth in referrals from our web qualifier tool, our digital lead conversions grew more than 20% compared to the fourth quarter of fiscal 2021. Revenue of $173.1 million in the first quarter of fiscal year 2022, increased by 13.4% compared to the first quarter of fiscal year 2021. The drivers of this growth are an increase…

[Operator Instructions] Our first question comes from the line of Vikram Kesavabhotla with Baird.

Yes. Thanks for taking the question. My first one is on Sacramento. You mentioned some of the progress that you've made around the corrective action plan there. Just curious if you can give us some more color on what some of those corrective actions are and any more color on the specific steps that you're taking there to address the issues. And then just as a follow-up to that, I'm curious to know how your recent observations in Sacramento and Colorado are influencing your strategy around future De Novo launches. And in particular, is there any reason to think that the ramp in census or margins at the upcoming De Novos in fiscal '23 and '24 might be different from what you previously thought before these recent audits came up? Just any color on how all this is informing your execution strategy would be great. Thank you.

Sure. Thank you, Vikram, this is Maureen Hewitt. I'll kick it off, and then I'm going to ask Melissa Welch, our chief medical officer, to give a more specific update regarding the audit and some of the primary areas that we focused on. We're continuing to work collaboratively with our regulators and we are continuing to be focused obviously and committed on commitment to quality. We have submitted our corrective action plan to CMS, and that's currently in process. Melissa, would you like to identify and discuss some of the areas that we're using to remediate some of the issues?

Yes. Sure. So we really tried to focus on the primary areas that were under review on the audit and that we have been working on for our corrective action. They include closing our network and provider contracting gaps, in particular making sure that we can secure contracts with some of those critical specialty providers as well as obtaining backup providers for some of those specialties. We focused on staffing both in terms of ensuring that we're staffing up particularly on schedulers, medical assistants, and the like as well as staff training has been a huge focus across all of our staff roles with primary care and home services a particular attention. And then we've been working on two other areas: one, documentation, ensuring that we do audit oversight reads of all of our charts in primary care as well as in-home care; and then making sure that any consults or referrals that we had to defer or delay during the pandemic that we got those schedules. So the staff has been working really hard on all of those areas, and we do believe that this will help us with regard to the corrective actions.

Thank you, Melissa. Sorry. Barb, go ahead.

Yes. I was just going to jump in and answer the third part of that question. And that was Vik; we have not made any adjustments to our assumptions as it relates to our De Novos, whether that is the ramp or any of the enrollment assumptions. So I think Maureen said early on that we're incorporating all of these lessons learned in our planning for the De Novos, but we have not made any changes to our assumptions.

Our next question comes from the line of Ralph Giacobbe with Citi.

Hi. Good afternoon. This is Jason Cassorla on for Ralph Giacobbe. Thanks for taking my question. But I guess, first, it looks like census came in line with your 2% sequential growth expectations, but did COVID have an impact on that growth at all, including perhaps better underlying expenses than that was originally expected, maybe partially offset by any COVID impacts? Or how does that dynamic play out in the quarter? Thanks.

Hi. Jason, it's Barb. Thanks for the question. COVID really hasn't had any impact on those projections. It really was as expected for the quarter. As we announced in our annual call in September, that's what we expected for this quarter given the ramp in referrals and enrollments. We also noted, however, in our remarks that we're seeing some very high levels of referrals from our digital campaigns. We're very pleased with that. And we also noted that that level of referral activity is well back to the pre-COVID levels. So it's really what we expected for this quarter.

Got it. Okay. That's helpful. So I guess -- and then just my follow-up here, I guess, with guidance unchanged and then maybe outside of the potential impact from the audits, can you help frame maybe what the largest swing factors that could impact trends moving throughout the year, maybe anything along the lines of COVID flare-ups? I mean you've talked about labor trends or anything that you're seeing that you could think worth delving into at this point. Thanks.

Barb?

Yes. So as we mentioned, we're keeping very close tabs on labor trends, and we are -- we have a lot of efforts underway to mitigate some of those labor trends, including the CNA program that Maureen talked about, various types of other recruiting functions, so keeping close tabs on that. And so far, we're managing that quite well. But certainly, if that deteriorated, that could have an impact. Certainly, another outbreak of COVID would have an impact for everyone. So we are fingers crossed that doesn't happen. We talk about our vaccination rates. So we're quite pleased with that. So I think those would be a couple of the big swing factors. In our guidance, we indicated early on that we have factored in the Sacramento enrollment freeze. We had already factored that into our guidance. So that's already factored in.

Our next question comes from the line of Matt Larew with William Blair.

Hi. Good afternoon. I understand on the audits that there's maybe no standard time frame or average outcome. But in your research, could you just maybe give a sense for what the high and low end of the time lines might look like and the range of possible outcomes you've observed in similar audits in the past?

Yes. This is Maureen. So first off, please note that we have not received a final report, for example, in Colorado, but we do expect to see something hopefully by the first of the year. The ranges in regards to Sacramento, it really is under -- it would be speculative to give you a time frame at this point because it's really up to CMS. I will say that we are working hard, as Melissa described, in many of the areas, the network, the provider agreements, the staffing, the training, referrals, and consults, and ensuring that we're getting our documentation in line. And then once that plan of correction is finalized with CMS, which hopefully -- we hope it will be soon but we can't say for sure the date, then they will begin to really start to monitor things from that point. So hopefully, in the next few months, we'll have even more updates to give you as we progress through that process. A lot of this, too, with surveys, they can be -- there is some judgment that CMS is using and they want to evaluate. That's why it's so important that the staff is collaborating with the regulators because ultimately, at the end of the day, we both care about the patient. And that's what we have to work together. Melissa, did you want to add anything to this?

No, I think you really covered it, Maureen. We don't have any indication of what further action might be taken or when the corrective action will be finally accepted. And in Colorado, we're still waiting for our final reports.

Okay. The second part of my question actually is a follow-up to Vikram's question. A piece of what he asked about was the assumptions around revenue ramps from De Novos. The second part, which I don't think was answered, was just around the margin ramp for future De Novos. And again, just trying to understand the corrective actions you described for Sacramento all seem like things would be sort of a sustainable higher cost profile for the center in terms of more staff, more documentation. So is it fair to assume that for future De Novos, they are going to incorporate similar infrastructure in place and thus maybe have a different margin ramp than you had anticipated?

Barb, do you want to take that? And I'll jump in.

Yes. Absolutely. Matt, thanks for the question. At this point, we're not assuming any material change in the margins. And the reason for that is we do have staffing ratios in our centers. And we are reviewing that and are closely reviewing that. But the changes that we've made are not materially different. It's just really trying to get those positions filled and supplement them. So not material changes to those assumptions. Melissa can answer better as it relates to documentation, but that, in large part, is a workflow as opposed to any kind of investment in people or systems. Although we are implementing a new EMR in the future, but that, in large part, is a workflow process improvement as opposed to a resource investment.

That's correct, Barb.

Our next question comes from the line of Jamie Perse with Goldman Sachs.

Hi, there. A couple of questions from me. I wanted to start with the Colorado audit and to see what you can say about that. The referral to the compliance and enforcement division, can you just give us some sense of how normal that was -- or sorry, how normal that is, if that was expected, just any color on if this is sort of a normal part of the process or if there was something that caused it to be referred in the CMS review.

Sure. Hi, this is Maureen. So CMS has the ability to refer issues or surveys to this department. So they can do this at any point with enforcement. It's not unusual for them to utilize the departments within their agency to review matters. So that's not an uncommon practice per se. And we haven't been given -- just so there's been no information as far as the agencies are intending to suspend or otherwise curtail or programs or impose other sanctions. We just don't know at this point. So again, they have to go through their review process. They review our information. They may come back and ask us for more questions. They might ask us for additional information. And our job at that point is to provide that documentation to them to be able to substantially. I do think Colorado is a little bit different than Sacramento, and I'm going to ask Melissa to touch base on that.

Yes. Thanks, Maureen. I just want to answer the other piece of the question I heard -- I think you asked if we received any results. We did get some verbal communication from CMS in October that we had two of six areas under review in the validation, and validation is information we provide back and forth to them where they saw that we didn't provide some missing information. The information was available in our records and in other validation samples that they were missing in the two samples that CMS looked at so they could not validate our findings. So that was what was communicated to us. And the Colorado audit, we think that what we provided was pretty sound information to CMS. The missing information was minor items that we did have in the record. And at this point, I think Maureen is correct. We have no indication of what the agency is going to do. And we're going to continue to collaborate with them and provide any information that they ask us.

Okay, thanks for that. I wanted to just move to the quarter for a minute. And not entirely clear just what the COVID impact in the quarter was from a cost perspective and ultimately EBITDA. Was that negative or positive in the quarter just as it relates to kind of your inpatient cost trends? I assume those were elevated and partially offset by non-acute utilization. But what was the net impact of COVID during the quarter that you can quantify?

Barb?

Yes. Thanks for the question. So compared -- there's two comparisons, right? There's the comparison to the prior year quarter. And our external provider costs were up about 3.5% quarter over quarter and on a PMPM basis, a bit more than that. And that is really related to the things that you mentioned. As our centers got back to normal, it's some impatient, some housing, and some specialty and outpatient care as our participants get caught up on their care. So that's the dynamic there. Compared to the prior quarter, it's up a bit primarily due to the housing rates and some housing utilization. So we noted in the comments that in FY '22, in a couple of states, primarily Colorado and Virginia the rates for housing else were actually higher but that is also built into our overall rates. So those costs were up about just under 3% as well.

Okay. That leads me to my last question which is just on the guidance for the full year. If I take what you did this quarter and apply it to the revenue base for the full year implies close to the top end of the range maybe some upside in terms of EBITDA. So I'm curious just where you see margin compression for the rest of the year. If there's a flu dynamic to call out, if how lean was previously not contemplated or not a big factor in the first quarter and that's supposed to be a bigger factor throughout the rest of the year. Just any color on where you know where that kind of implied margin compression comes from.

So, yes, I think the margins for our first quarter were very solid and really right in line with what we typically see margins of that 24.5%. We do see some signs of those external provider costs coming down in the near term. I think we said that on our last call and we are seeing signs of that. So we think that those costs will be coming down which is actually helpful to our central level contribution margins. Where we'll see some compression as our De Novo costs start to ramp up a bit we'll see some compression there. But as it relates to the external provider costs we're seeing some signs of that coming down. That housing rate increase was already included into our guidance. So the extent to which the rate impact that's included in the guidance.

Okay. So just to be clear it sounds like the biggest factor is probably those 10 million of losses that you expect you only $200,000 in this quarter, and those will ramp in?

That's correct. Yes. That is correct.

Our next question comes from the line of Sarah James with Barclays.

Thank you. I was hoping you could walk us through how the labor pressure is impacting the model. So are you guys seeing it impact census capacity and revenue? Or is it more just on the cost side? And then on the costs, are you seeing it in wages? Or is it more temporary items like retention and signing bonuses?

Sure. I'll start it off, and then Barb; you can take it because I know we've built these things into our modeling. But we have done some things. Obviously, staffing is something we care very deeply about. And we did do some across-the-board wage increases and have done that for some departments within our organization that makes sense to do, and we're continuously monitoring that going forward. Barb?

Yes. Hi, Sarah, thanks for the question. Exactly what Maureen said, we -- in our overall model and in our guidance, we not only included those merit increases, but we included some definitely dollars in there for market increases that we have implemented in large part at the beginning of our fiscal year. So we've included that. We're not seeing so much the retention pressures as the recruitment pressures. So from a retention standpoint, very consistent from a retention standpoint. It's more just the recruitment as all healthcare industry is experiencing. And in some of my remarks, I noted that we have some additional overtime temp and contract, and that is really filling those gaps, where we're having some challenges on the recruiting. But again, we're doing some, hopefully, creative things like the CNA program to fill those gaps as well. So from a cost perspective, it's primarily in that cost of care on the staff component. It's not affecting our enrollment, and it's, again, not really from -- not really a retention issue.

Okay. Great. And now that you have the plans from the states on the enhanced SMAP, does it offer you any insight on to how your rates and your payments may be changing in key markets? And what can you tell us about the correlation between changes in your rates and then your ability to recruit?

Sure. Barb, do you want to take the rates?

Yes. So we're just starting to work through that, Sarah, with a couple of the states. So we have yet to get the exact impact and just starting to work through that with many of the states. So we'll keep you posted. We do see that as positive, but we don't have any quantification of that just yet. And I think you had a second part to that question. Was that on --

Just if you've seen a relationship when your rates go up if it makes a meaningful difference on your recruiting ability.

Recruiting ability for staffing? Just to clarify.

Yes.

So I think what we've done is because we are -- because being in healthcare, there is, as we've mentioned about the shortages of staff and have historically been that way for healthcare for many, many years. We try to be and forecast as much as we can as we're putting our budgets together and some of the things that we did mention here today as well. So certainly, when we get increases from the states, that's always helpful. Barb?

Yes. I think it's helpful. I would say that it helps us make those increases more affordable. But at the same time, we know what we need to do to recruit folks regardless of those increases or not.

Our last question comes from the line of Jeff Garro with Piper Sandler.

Hi. Good afternoon. Thank you for taking the question. Want to ask about the digital marketing strategy. It's nice to see the success there. But I was hoping you could translate that success into a contribution on growth expectations either near or long term?

Well, as you may know, we've just started really with our digital approach, and we are seeing some improvement there. I think we'll be better able to quantify that as we begin to build out a call center in the future, and we'll be able to give you better projections with that. Barb?

Yes, I would say that's the case. We've seen great success in the few quarters that we've reported, but we need a little bit more time to do some quantification and really identify the trends. But we are very pleased. It's very -- they're very positive results, and it's starting to be very meaningful. And as we noted in our remarks that the referrals from those digital leads were up 20% quarter over quarter. So more in the future.

Excellent. All helpful there. Maybe a follow-up a little bit there just great to see that referrals are back to pre-COVID level broadly and you noted the different metrics on referrals may be growing a little bit faster than conversions on the digital front. And I think no surprise that digital strategy creates a wider top of the funnel, but I want to ask how we should think about the efficiency of that channel as it grows and you build out the call center and how that ultimately impacts the margin and growth profile long term.

Yes. I think that those are -- that's exactly what we're trying to achieve, are some of the comments that you've just made. And I think as we begin to build this out and track it, we'll be able to show the success here, but we're very excited about it.

We do have another question in the queue, and it's from Gary Taylor with Cowen. Your line is open.

Hi. Good evening. Just a couple of questions. Maureen, I also heard you mention looking for JV opportunities. And I'm not sure I recall hearing that before. Maybe I've just forgotten. But would that -- is that something new? I just forgot. And when you think about that, is -- are you just saying JV with a nonprofit PACE program that currently are in the market versus acquisition?

I don't think it's an either/or. I think we're open to the opportunity of joint ventures. We have done this before. We did one obviously in the Sacramento market with the Aventis Health System and another nonprofit where we formed the JV to provide a PACE program there. So I think we're open to that. We certainly -- it is part of -- when we think about our three-pronged approach of De Novo's acquisitions, that acquisition could be -- could also mean a JV in the future as well. So I hope that's helpful.

Got it. And just my -- yes. Appreciate that. And then my last one, just going back to Colorado and the referral to the compliance enforcement department. That was not a route that was taken in Sacramento. Is that correct?

So the Sacramento, are you talking about the audits again? Just so I'm clear.

Yes. Sorry.

So yes, the audit, as you may recall, in Sacramento was the first year audit where that occurred. In Colorado, that was what we call a focused survey. And in this case, it was based upon a complaint, which we've disclosed before as well. Yes. Maybe I'm not understanding your -- yes. It's a little different.

No. I think I appreciate it. It sounds like it's different origin, so sort of different pathway and progression through that process. I appreciate it. Thank you.

Thank you. I would now like to turn the call back over to Maureen for closing remarks.

Thank you. So before I close, I just would like to tell everyone today that our focus as an organization, of course, is quality, compliance, people, talent, building of the infrastructure, and growth as an organization. I also want to just to let you all know that in the very near future, hopefully, I will likely be announcing a new De Novo in a new state, so look for a future at least here soon. And with that closing comment, I'd just like to thank everyone. On behalf of InnovAge, the management team as well, thanks everyone on today's call for your time. We're excited about our organization and excited of InnovAge and PACE, and we look forward to continued discussions with all of you and serving more seniors. Thank you again.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.