Good day and thank you for standing by. Welcome to the InnovAge Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker today, Ryan Kubota, Director of Investment Relations. Please go ahead.

Thank you, operator. Good afternoon and thank you all for joining the InnovAge fiscal 2024 second 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 the Q&A portion of the call. Today, after the market closed, we issued a press release containing detailed information on our quarterly results for our fiscal second quarter 2024. You may access the release on our Investor Relations sections of our company website, innovate.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, February 06, 2024, and have not been updated subsequent to this call. During our call, we 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, including statements related to our full fiscal year projections, future growth prospects, Florida de novo centers, our acquisition of ConcertoCare, 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 and are inherently subject to risk 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 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. Patrick?

Thank you, Ryan, and good afternoon, everyone. I want to begin by expressing my continued appreciation to our colleagues, participants, government partners and the investor community who support InnovAge. The company's second quarter results were consistent with our expectations and highlight the ongoing performance improvement across the business. It further demonstrates incremental progress in our broader transformation plan to accelerate responsible growth while restoring operating margin lost during the regulatory sanction period. We reported revenue of $189 million for the quarter, an increase of approximately 3.5% compared to the first quarter, and center-level contribution margin of $34 million, which represents a 17.8% margin. Adjusted EBITDA was $7.8 million for the quarter, which represents a significant improvement compared to the first quarter, which was approximately $2.2 million. Census increased to 6,780, which represents a quarter-over-quarter improvement of 3%. Now a few highlights. Participant net enrolment growth for the quarter was solid at 195, which continues to strengthen our confidence in the value proposition we are delivering. Our clinical value initiatives, CVIs, as we refer to them, which focus on unnecessary utilization and lowering medical cost trends are maturing in line with our expectations and beginning to translate into enhanced quality and greater operational efficiency, as evidenced by a quarter-over-quarter decrease in our participant expense, PMPM, of 0.7% and we're still in the early innings of this work, but we're pleased with the progress we're making. We are managing our non-center costs effectively in our enterprise service functions, resulting in a sequential decrease in general and administrative expenses as a percentage of revenue from 15.9% to 13.4% and we completed the implementation of the new Epic EMR in all locations. On December 01, we acquired ConcertoCare Pace, which added two new centers in the highly strategic Southern California market. On January 01,…

Thank you, Patrick. Today, I'll provide some highlights from our second quarter fiscal year 2024 financial performance, a reaffirmation of our fiscal 2024 guidance, and some insight into some of the trends we are seeing heading into the spring. While it is still early in our margin improvement initiatives, we continue to track to our internal targets and are pleased with the progress we have made so far this fiscal year. Starting with census, we ended the second quarter of fiscal year 2024 with 18 centers and approximately 6,780 participants as of December 31, 2023. We also reported 20,130 member months in the second quarter, a 3% increase to both ending census and member months compared to the first quarter. Total revenue increased by 3.5% to $188.9 million in the second quarter compared to the first quarter, due primarily to an increase in member months coupled with an increase in capitation rate, primarily due to a one-time Medicare true up outside the regular payment cycle recorded in the second quarter. We incurred $101 million of external provider costs during the second quarter of fiscal 2024, a 1.6% increase compared to the first quarter. The sequential increase was driven by an increase in member months, partially offset by a decrease in cost per participant. The cost per participant decrease was driven by lower permanent nursing facility utilization, partially offset by an increase in inpatient utilization, which is not uncommon in the winter months. Cost of care, excluding depreciation and amortization of $54.3 million decreased 1.7% compared to the first quarter. The decrease was due to lower cost per participant, partially offset by the increase in member months. The cost per participant decrease was driven by a reduction in fleet expense, including contract transportation, fuel costs and vehicle repairs and maintenance, as…

Thank you, and at this time, we'll conduct a question-and-answer session. [Operator instructions] Our first question will come from Jason Cassorla from Citi. Your line is open.

Great, thanks for taking my questions. Ben, you noted a Medicare true up in the quarter. Apologies if I missed this, but can you help size that true up? And I guess in that context, you've previously discussed or suggested a strong kind of back half EBITDA ramp, as the fruits of your clinical value initiatives come to fruition, but in your prepared remarks, you talked about seasonality related to MA open enrolment period and other nuances. Maybe in all that, can you just walk through how you're thinking about EBITDA progression for the rest of 2024 as well?

Sure, sure and nice to hear your voice. So a couple of things are embedded in that question. The first is, sorry, the first is that we are on track for our guidance that we issued earlier in the year, so we're reaffirming our guidance. I'd say over the course of the year, not unexpectedly, there are some puts and takes that get us there. So we had a final, final adjustment, which was a rate true up related to 2022, and it had to do with the fact that CMS gave us a little extra time in terms of submitting that, and it was a COVID-related factor. That came through in the second quarter, and that was a sort of meaningful increase to what we received in terms of Medicare rates in that quarter. We haven't disclosed or broken out the numbers specifically in part because there are a number of factors that go into the course of the year. We just chose not to break out individual ones, but that gave us a good boost going into the back half of the year. Another factor that came into play here was a reduction in rates in California, which we're going to see in the back half of the year. That was an unexpected reduction versus a modest increase that we had in the forecast or in the budget going forward. And those two items, to a large extent, sort of offset each other, and so that puts us on path towards getting to guidance for the back of the year. A couple other things I would say about enrolment. There is a seasonal component to enrolment, and Patrick, I know, will want to comment on that a little bit further, but that affects us as we go into the first quarter of the year, but by and large, all of these things together, as we look at the components together, end up with us reaffirming guidance and ending up with us being where we think we're going to come at, but as we indicated earlier in the year, we're quite confident on the destination towards which we're heading, but in any one particular quarter, or we'll have slightly different factors that get us to that destination.

Hey, Jason, good to hear from you. Just two things maybe I may add to what Ben said is, those relates to risk adjustment accuracy. You probably recall us highlighting that as one of the core sort of pillars of building out our payer capabilities, and CMS had extended a deadline for submission of 2022, calendar year 2022 risk scores. And so it gave us some extra time, and we were probably a little conservative on, given it was the first time we'd gone through it, really as a team, an initiative like that, a bit conservative on our accrual. I think we're dialing that in and getting a better sense of that. We've got some third parties helping us to produce better estimates of risk or accuracy changes. I think in the future, I'm hoping that it's going to optimize our forecasting as well, and we'll just do a better job of understanding what period things are going to hit, and how does it compare to our accrual and then on Ben's point related to seasonality, this was a fairly sort of loud and frenetic Medicare Advantage year. There was more direct-to-consumer marketing than I think we've ever seen in our markets and I think what Ben's hitting on is, we'd really like to get a full fiscal year under our belt to see all the cycles, to see all the seasonality that's relevant to our business and I think for those reasons, some of what's coming from that kind of annual election period doesn't hit us until Q3, and we're starting to try to understand what that means and does it have any impact on our growth, etcetera and then the CDI delays, I won't call out a specific, but for example, we had a nice opportunity that we saw where we were paying significantly above market rates for some ancillary services and we were very successful in negotiating the contract. We probably under clubbed the implementation complexity to get that rolled out on the timeline that we thought, it as a result that CDI impact is delayed later in the year and I think that's the kind of thing that Ben's hitting on by suggesting we're going to sort of stick with our guidance because there's a lot of puts and takes.

Yeah, and I think of that one CDI point, it's important to recognize that we're going to get the targeted amount of dollar savings that we always intended to get, but the contract really just started a couple of months later because it took a little longer to implement and negotiate.

Got it, okay, all very helpful, appreciate it. Maybe to the point around California, right? I wanted to ask just broadly around the PMPM rate development backdrop, how should we think about the moving pieces on the Medicaid side, right? Perhaps if you expect any other material changes to kind of mid calendar year rate development, how rate discussions with state partners developing, now that the enhanced FMAP is winding down. And then I'll just tell me, I may come in on the other component, right? The proposed 2025 rate would suggest another sort of kind of tough year on that front. I guess I'm curious on how you're thinking about the MA side of the rate equation for the second half of this fiscal year and moving into 2025, will be helpful, thanks.

I'll start, Ben, you may clean me up. I think we're probably more focused on Medicaid rates, it is still probably a bit too early to know what that's going to look like in the next fiscal year. I think what Ben pointed out is in California, we came in below what we had targeted. I would qualify that by saying that, think of that as an industry impact in terms of pace and not an InnovAge specific impact. Lots of moving parts, but one notable part is -- notable driver would be the periods of time that states use in the rate build-up and with the passage of time, the further we get from COVID, the more reflective, actual experiences, predicting future experience, reclaims perspective. There's still a lot of noise, if you will, in the rate setting process that I think is a little bit of the lingering impacts of the data set related to COVID. So California's, I think, are only staying on a fiscal year. So, it's having an unexpected impact in the back half of this fiscal year. Ben, can you add?

No, I think it's absolutely right.

Okay, understood, thanks. If I could squeeze in one last one, I just wanted to quickly follow up on cash flow. It looks like there's a $25 million headwind on deferred revenue year to date. Can you just help reconcile what that was related to? If there's any color there?

Yeah, the deferred revenue really relates to Medicare and it relates to how the first day of a month falls relative to a weekend. So what happens is if the first of the month falls on like a Sunday, if you will, well, Medicare payments or reimbursements are due in the first of the month. What happens is we receive it on the Friday beforehand. So essentially in the prior month, if you will, by a couple of days. So when that occurs, we set up a deferred revenue account to adjust for that. When all of a sudden the first of a month falls on a weekday, that gets cleaned up in the following quarter. So when you think about that deferred revenue payment, think about it as does the first of the month fall on a weekend or not and how does that impact the timing of the Medicare payment?

And our next question will come from Jared Haase from William Blair. Your line is open.

Yeah, hey guys. Good afternoon and thanks for taking the questions. The first one from us, we're just hoping to dig into the de nova ramp a little bit. Congrats on getting the Tampa facility open. Could you maybe just walk through or remind us a little bit on what the expectations are in terms of how both census and profitability ramp for a de nova facility? And I think a related question here, obviously with the concerns of acquisition in mind, maybe you could talk a little bit about how that profitability ramp kind of informs the equation in terms of your perception of sort of a build versus buy opportunity in terms of future growth. Thanks.

Yeah, sure. Why don't I start it off here and then Patrick will jump in with some comments here. First of all, thanks for the congrats. It was a great transaction for us. We're really excited about it. If you were to think about the Concerto acquisition, I guess really think of it as two facilities. There's one which is in Crenshaw, which is up and running, but it's a very small census. So think of that as almost like a de-risk de novo because our census is in the, call it 20 folks. And then think about the Bakersfield one, which is a center that's essentially fully constructed, basically awaiting approval to open, right? So when we look at that acquisition, we think of it as a basically de-risk de novo. But generally the way we think about de novo's is that it will take us on the order of six quarters, probably to fill them up to the point where we get to a positive center level contribution margin. And then it'll take us some time beyond that before they hit maturity. But really it's in that first six quarters that we really watch the cash flow impact, especially carefully, because we obviously want to get them up to be contributors as quickly as possible. And so when we do our forecasting and we go through our strategic analysis about do we want to do de novo's or do we want to do acquisitions, or in this case kind of a hybrid de novo, that's the way we model out the business.

Yeah, I'll just add, I mentioned the Investor Day on February 27. One of our goals at Investor Day is to bring more clarity to the de novo ramp up and sort of the unit economics of the business. So we'll do that. In terms of what to expect with the de novo, each market is different. There's different density, there's different managed care landscape, different alternatives, but I would say that Sacramento's probably not a bad proxy for what we think we can accomplish in say a Tampa or an Orlando. It's a big market. There's a lot of opportunity and we feel pretty good about our offering and we've got a great team on the ground and we've got a grand opening scheduled I think on March 03rd, 04th, excuse me and so we've got a great opportunity just to introduce that product to the community and we're feeling really good about it. And we're also feeling good about Sacramento growth. Just as, while it's not a new market, in terms of a timeline, it was sanctioned not long after it was operational. So in many ways, Sacramento is a new market as we think about the ramp and we're really pleased with how the team is doing there.

Okay, that's super helpful. Thank you for that. And then I wanted to follow up and I think the theme of some administrative delays kind of at the state level, that's maybe creating a little bit of a headwind for enrolment trends. I think that's come up in recent quarters. I was curious, is there anything that you guys are able to do internally in terms of once you've identified an eligible potential participant, sort of working with them, working with their families, maybe helping them get through that process and maybe speed up some of that time? Is that something that you have any control over or is it largely out of your hands?

Well, it is a great question. I tend to ask the team the same question as well. When there are delays that are sort of outside of our locus of control, are there things we can do to still help the family see the end of the process and feel confident that this is going to be the right solution and it's kind of worth the wait? So we certainly do engage with individuals and their family and make them aware of administrative processing delays and set their expectations of when we think enrolment will occur. And more times than not, we're certainly able to achieve that and keep that individual in the funnel and get them access to the services that they need. At the same time, we're dealing with a very vulnerable population and most of the individuals that are looking to access PACE are in need of rather immediate services and so delays with the processing of applications at the state can and do result in people making alternative choices. Sometimes it's going back into the state fee-for-service program. Sometimes it could be, if it's in California, it could be with a PACE competitor in the same territory or they could pursue maybe Medicare Advantage in the belief that there's an option there, but it is definitely something we do our best to manage. We're working very closely with our states audit. The states have been great partners. It's just the reality that they often use subcontractors for this work and that adds a layer of complexity for us to manage.

Okay, that makes sense and I appreciate that context there. And maybe I'll just sneak in one more question. It sounded like you launched a new marketing campaign during the quarter. Would love to just hear any specifics in terms of anything that's maybe unique or has changed from prior years in terms of just how you're sort of communicating the message about InnovAge services.

Yeah, another great question. We'll be sharing some of our latest creative, if you will, at our Investor Day. And so people get a better sense for it if they haven't seen at least our broadcast TV work. I think one of the things that we're trying to do is to dispel that PACE is only for the absolute most vulnerable. There are a lot of individuals that qualify for PACE that see PACE as a place to enjoy socialization, meet new friends, address nutritional deficits and that's a large senior population. And so I think we've tried to use our creative to drive a message home that PACE is a real resource to a broad segment of the frail senior community. I think maybe a second thing that's new is we're trying to appeal more directly to family members. I think in many cases, family members find PACE as much a solution for them as they do for their loved one. And I think our messaging is starting to appeal to the eldest daughter. Our data will tell us that that's a big decision maker as an example and so I think we're just trying to appeal to a broader market segment and I think we've been successful with that. We've got a lot of great feedback on the creative.

Perfect, makes a lot of sense. I'll go ahead and leave it there and hop back in the queue. Thank you.

[Operator instructions] Our next question comes from Jamie Perse from Goldman Sachs. Your line is open.

Hey, thanks. Good afternoon. Maybe just starting with the Colorado enrolment trends, can you provide a little more detail on just the census rebuild there and patient mix that you're getting? I think you mentioned some balance between community versus facility patients broadly, but any surprises there just in terms of the patient mix and the broader trends on Colorado census rebuild?

Jamie, I think I would say that everything's going as we expected and hoped in Colorado. I think we're on the other side of what might've been some pent-up demand and I would say that that pent-up demand was maybe less reflective of a traditional participant mix. I think we're on the other side of that. At the same time, I think that, at least our gross enrolments are back to sort of the best period in the company's history. So, coming out of sanctions, we set a goal for ourselves, at least near term, to let's get the company back on kind of the track it was in sort of doing all the right things. And I think we're seeing that. At the same time, it's an example of a market where, the demand is probably a bit larger than what's getting processed through the funnel and we are working closely on that issue, but still it's leading to responsible growth in Colorado and we're feeling really good about it.

Okay, thanks for that. And then just on the seasonality comments, you talked about in-patient in the quarter. Any way to put numbers to that just in terms of how that impacted external provider costs in the quarter? And then as we think about your third fiscal quarter, how should we be modelling that rolling off? What's typical from a seasonality perspective as some of those inpatient costs come down?

First I would say the seasonality, the relevance of a seasonality consideration is probably more appropriate through the lens of the third quarter versus the second quarter, because people are going through the annual election period and it's really going to hit us if people decided to leave PACE for Medicare Advantage. We're just now kind of seeing that in the numbers. I don't think we actually have a good read yet on, what's the right seasonality, sort of cycle for the business. One day we will see information that I think gives us confidence that the seasonality could be muted, and the next day we see something to the contrary. And so I think we're still trying to figure out exactly what's the right guidance around seasonality and it's just going to take -- it's going to take some experience, real time to offer that. Ben, anything you would add in terms of?

No, I think the second part of your question, I think was really geared towards how do I think about census and member months for the back half of the year? And I guess I would tell you that, we're not really providing any guidance on a quarter-by-quarter basis. You've got the data now on enrolment and member months for Q1 and Q2. If there's any seasonality in enrolment, it's really probably related to the third quarter, which tends to be a little bit lower for the reasons that Patrick just articulated. But then if you think about where we are in terms of our guidance targets being unchanged from where we were originally, I think you can take those three pieces of information, put them together and come up with a reasonable expectation for how we might perform over the back half of the year.

Okay, and then last quick one for me, just on maybe longer term gross margin progression, you've talked in the past about rebuilding that, maybe with different building blocks between the COGS lines. How are you feeling broadly about that margin recovery? Any areas you'd flag as being ahead or behind of your expectations and level of confidence in rebuilding that over the next 12 months to 18 months?

Yeah, great question. I'll start and let Ben weigh in. I would, when I think about margin, I think we're beginning to think about it across two dimensions in the business. I think the first priority is to get our overall center level contribution margin above 20%. And we want to do that across the portfolio and that's inclusive of the investments we've made to fortify quality and compliance technology over the last year. And then I think, sort of the next consideration is more around this adjusted EBITDA target and we believe we can substantially achieve a high single digit, low double digit adjusted EBITDA. But as we've talked about before, it could have a little different composition on how it's achieved, because we're running a little heavier on the salaries, wages and benefits in the market, not only because of we've hired more staff and fortified our operating model, but there's national, excuse me, natural inflationary factors that are a part of that as well that we and other healthcare organizations are dealing with. And the long-term margin targets, I think we think of those inclusive of additional scale over time, because as we grow, we're going to continue to leverage our corporate G&A, our Epic investment, etcetera. So at this stage, I think we're feeling confident, but we're very focused on the CLCM as sort of that leading indicator of what's achievable further down on the P&L. Ben, anything to add?

No, I think you've captured it perfectly.

Appreciate it, thank you.

Thank you. I'm not showing any further questions at this time. I would now like to turn it back to Patrick Blair for any closing remarks.

Well, appreciate those of you who took the time to dial in and hear more about our progress. I think I'll close with how I opened. We're improving the business every quarter. Delivering on that commitment is extremely important to myself and to the team. And, you know, I think the second is just transparency. We're trying to provide as much information as possible to help you really understand how the business is operating and you can count on us to be as transparent as possible with everything that we face as we transform the company. And then I just would like to encourage everyone to join us, whether that's in person or through a recorded call, Investor Day on February 27 and the goal there is to sort of reintroduce you to the company with a bit more detail than we're able to provide here on these calls and answer your questions and give you just a deeper look at the business and introduce you to what I think is a fantastic leadership team that can run a much larger company and we're excited to share the story with you.

Thank you for participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.