Good day and thank you for standing by. Welcome to the InnovAge Third Quarter 2024 Earnings Conference Call. [Operator Instructions] 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 Kubota, Director of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and thank you all for joining the InnovAge fiscal 2024 third quarter earnings call. With me today is Patrick Blair, President and CEO; and Ben Adams, CFO; Dr. Rich Feifer, 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 quarterly results for our fiscal third quarter 2024. You may access the release on the Investor Relations section of our company website, innovage.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, May 7, 2024 and have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. 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 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 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 gratitude to our colleagues, participants, government partners in the investor community who support InnovAge. 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 are different than other value-based care models and this unique inflection point in the company's history given the internal transformation over the last 2 years. The company's 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. 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 from the top down, we're pleased to see the steady growth in the demand for PACE services. We're confident in the industry tailwinds and the unique benefits to the stakeholders that PACE offers. 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 de novo losses as we're now open in Tampa and Orlando. And you'll recall, last quarter's results included a onetime risk adjustment true-up…

Thank you, Patrick. 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 over time. 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, a 1.2% increase over the second quarter. This reflects the anticipated third quarter enrollment softness that 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 a onetime 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 by an increase in member months. 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 head count and increased wage rates associated with the annual reset of employee benefits and taxes, an increase in software license fees associated…

[Operator Instructions] The first question today will be coming from Jason Cassorla of Citi.

I saw you guys maintain '24 guidance. Given year-to-date trends, 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? And then just as a follow-up, as you have that 7% to 9% kind of margin target over the next 2 to 4 years, I know recognizing you're not providing fiscal '25 guidance yet but can you maybe give us a sense on the puts and takes to margin progression for next year?

This is Patrick. Good to hear from you, Jason. I'll get it started and then maybe kick it over to Ben. As Ben said, we remain focused on exiting fiscal year '24 with as much momentum as possible as we head into fiscal year '25. And I think we're trending in that direction. We're pleased with where we are. If you recall, we did intentionally set a larger range for guidance. We're still comfortable that we're going to fall within that range. At the same time, we're also 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 are, in some ways, a turnaround story and there's still a lot of unknowns in the business. I think about it as we're taking premium from both the federal government and the state government. We're a small business. And so building in some conservatism for the one-timers that kind of naturally flow through our business of this sort of profile, I think for those reasons, we feel comfortable maintaining our guidance. And I'll let Ben add a little extra color here maybe on the ranging.

Yes. Look, I think Patrick actually pretty much nailed it for you. Because we are a business that had sort of a complex history over the last year or so, there are a number of items that can roll in, 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 evolve and look and move into the future, we'll have greater and greater precision around our estimates. But we've started this year with what we thought was a pretty straight down the middle of the fairway guidance range. We kept it a little bit wide to account for any variability. We think we're tracking nicely against that guidance range. And as Patrick said, our real goal here is to make sure that we're operating as well as possible by the end of this fiscal year, so we can move into '25 with a lot of positive momentum. 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 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, at the Investor Day presentation in a thoughtful way based on what we think the business is really going to do over time. So I think if you look at what we've done this year, sort of extending that forward, looking at those guidance ranges for margin down the road, that should give you a pretty good sense of the trajectory of the business.

Yes. I might maybe make one final punctuation to that, that when 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, third quarter came in a bit below what we had hoped due to some seasonality that was exacerbated. Medical cost trends have been looking good. There's a number of drivers for that. And we've talked about just the ongoing improvements in our staffing ratios. As we grow, that's one aspect of our business that we anticipate getting some leverage from. And so how we sort of end the year in each of those is really going to play a big role in sort of what we're expecting for fiscal year '25.

Great. That's super helpful. And maybe just to your point around the census side of the fence. I know you called out MA plan development switching. It sounds like census came in a little bit below your expectations. You noted Colorado specifically, the processing delays. I guess, with the bottleneck being there, I mean, would you expect a bolus of numbers kind of coming online as those issues are resolved? Or I guess, in the meantime, how should we think about kind of the impacts of the Colorado dynamics against the fourth quarter census development as you see it, just any risks there or otherwise to think about.

What I would say, Jason, is we are working through it with the state. And there are some good examples of where the constraints we've experienced, to a degree, in the 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 in this. I know there's already some system changes going in that are going to relieve some of the constraints. There's 2 case management organizations that our enrollments flow through. One of those is showing steady improvement but it was still an impact in this quarter. And so the Q4 is going to be a nice predictor of the kind of the rate of change on that situation but it's not going to change overnight. But I think we're doing a nice job, certainly, on generating strong demand in Colorado and both InnovAge and the 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 get through it.

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

Yes. I think if you look at our incoming participants, our freshmen who come into the program, they've got a good mix between folks that are sort of higher acuity, lower acuity and a good mix by living situation and they are graduating as they flow into the system, slowly changing the mix of our patients and changing our acuity mix as you would expect it to happen. I think one of the tricks is if you look at the number of people that enroll with us every single month and compare it to the overall census, you get a sense for it takes a little time for this to wash through the system. So we're seeing what we would expect to see which is a gradual improvement on those metrics and it 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 underline PACE rates in the first place, so we're kind of moving in the right direction. It just takes a little bit of time.

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

I'd just like to say again how much we appreciate your interest in the organization. We're excited about the progress and momentum that we have. And we'll be back with you next quarter and hopefully talk about additional progress we're making. Have a terrific evening.

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