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

Thank you, operator. Good afternoon and thank you all for joining the InnovAge 2024 Fiscal Fourth Quarter and Fiscal Year-End Earnings Call. With me today is Patrick Blair, President and CEO; and Ben Adams, CFO. Today, after the market close, we issued a press release containing detailed information on our fourth quarter and annual results. 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, September 10th, 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 2025 year projections, future growth prospects, and growth strategy, our clinical and operational value initiatives, Medicare rate increases, census headwinds, 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 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 Annual Report on Form 10-K for fiscal year 2024 and any subsequent reports filed with the SEC. 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. Today, we will provide several updates on our financial results for the fourth quarter and full year fiscal 2024, initial guidance for fiscal year 2025, and progress in our key focus areas. Let me start with our fourth quarter performance. Today, we reported revenue of approximately $199 million, a sequential improvement of approximately 3.3% compared to the third quarter. Center level contribution margin was $36.6 million, which represents an 18.3% margin. As Ben will cover in more detail, we have revised our definition of adjusted EBITDA this year, resulting in fourth quarter adjusted EBITDA of approximately $5.2 million, which represents a 2.6% margin. We finished the year with a census of approximately 7,020 just shy of the company's high water mark of 7,074 in mid fiscal 2022. Our fourth quarter completes a solid year of operating and financial performance. Moving to full year performance, we reported total revenue of approximately $764 million, an increase of approximately 11% compared to fiscal year 2023. Center level contribution margin was approximately $132 million, which represents a 17.3% margin. Year-over-year, center level contribution margin increased by approximately 260 basis points from 14.7% to 17.3%, driven by census growth, disciplined medical cost management and administrative cost controls. Consolidated adjusted EBITDA was $16.5 million under our revised presentation, which represents a 2.2% margin compared to negative $3.4 million in fiscal 2023, an improvement of approximately $20 million. Under the previous presentation our fiscal 2024 EBITDA would have been $19.8 million, which compares favorably to our full year guidance of $12 million to $18 million. We are proud of the strong year-over-year financial results and the positive momentum…

Thank you Patrick. Today I will provide some highlights from our fourth quarter and fiscal year end 2024 financial performance, followed by our fiscal year 2025 guidance. Starting off with fiscal 2024 highlights, I am pleased with our overall performance and our strong finish to the year. The businesses total revenue improved each quarter during the past fiscal year and as Patrick and I have reiterated, we believe we are on the path to normalized margins over the intermediate-term. Starting with census, we served approximately 7,020 participants across 20 centers as of June 30, 2024. This represents an increase of 9.6% from 2023 and a 2.8% increase compared to the third quarter of 2024. We reported 80,840 member months in fiscal 2024, a 4.5% increase compared to the prior year. Total revenue increased by 11% to $763.9 million for fiscal year 2024. The increase was primarily driven by an increase in member months, primarily due to the release of sanctions in our Sacramento, California center and at our Colorado centers, and an increase in both Medicaid and Medicare capitation rates. Compared to the third quarter, total revenue increased by 3.3% to $199.4 million in the fourth quarter, primarily due to an increase in member months coupled with retroactive Medicare risk adjustment payments recognized in the fourth quarter. We incurred $403 million of external provider costs during the fiscal year, a 7.6% increase compared to fiscal year 2023. The increase was primarily driven by an increase in member months, coupled with an increase in cost per participant. The cost per participant increase was primarily driven by higher assisted living utilization and unit costs, as well as an increase in costs associated with higher utilization of professional services. These costs were partially offset by a reduction in permanent nursing facility utilization. For…

Thank you. And at this time we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Jason Cassorla from Citi. Your line is open.

Great, thanks. Good afternoon. It sounds like you are expecting a more linear progression on EBITDA this year or for fiscal '25, but maybe can you just give us -- can you just walk us through those puts and takes? It sounds like that's driven more on like, the fixed cost leverage with census continuing to build throughout the year? And then separately, are there any one-time items inside that $16.5 million of EBITDA you did for Fiscal '24 that we just need to contemplate as we think about growth for the '25 guidance range, or is that $16.5 million up a pretty clean kind of baseline number for jump-off in your view?

Sure. Hey, it is Ben Adams. Sort of breaking it apart, I guess. I would think about the guidance for next year is very much of kind of a building off of the growth trends that we've seen this year. If you think about our census numbers and our member months, we've actually now had almost an entire year post-sanctions of pretty good enrollment trends. So we've actually got a pretty good handle on what's going on. We've spoken a little bit in the past about some of the state processing delays that we've had, and so we factored those into the trends that we've seen in the business going forward. And so, what you see there is very much a building off of the trends that we've seen this year. Obviously, we've got a couple of new de novo centers that are rolling into those numbers to a lesser degree, but it is very much of a trend-based analysis. I think if you look on the revenue side, I think we talked about some of the guidance we had in there about Medicare Part C, Part D rates, and also what's going on in state Medicaid rates. I think, you think about those generally as kind of like mid-single-digit rates. So, the delta between that and the revenue growth is really built off of volume for the most part. And then when we are thinking about EBITDA, obviously we go through sort of a center-by-center buildup. There is some assumptions in there that Patrick may want to comment on here around OVIs and CVIs. We had a lot of success last year with our clinical value initiatives, so we've got a whole new set of them rolling in this year, as well as a number of ones on the operational side, which we call OVIs. So, what we see in the guidance is basically an expectation about how those are going to mature over the course of the year. So -- and then the last thing I would say, in terms of de novo losses, obviously, we've got basically four new centers that are in various states of immaturity, and we've got a pretty good handle on what the run rate of those expenses are going to be like over the next year. And so those are basically just built off of those assumptions for those de novo centers. So, it is a pretty straightforward build in terms of the analysis going forward. I think we feel pretty good about the range that we put out there.

Okay, great. Thanks. And maybe just a little bit more color. I know you kind of put up that 3.5% or so margin target midpoint of guide. I guess, can you just give us a little bit more on how you are thinking about that target relative to the 8% to 9% intermediate that you gave at your Investor Day? I guess, would you expect a little bit more of a J curve type of ramp in the margin trajectory of the business in the '26 and beyond? Just kind of like thinking about how that you're positioning kind of your margin expectation for this year against kind of the growth and expectation for 8% to 9% over time. Thanks.

Yes, sure. So, when we look at -- so when we think about the margin progression over time, when we went through our Investor Day, I guess it was in February, I think we talked about getting to sort of an 8% to 9% margin range over the intermediate-term, which we kind of defined as two years to four years. And so I would just look at it and basically say we stand by that ramp. Where we are today is very much sort of a stop along the journey. We think it will probably progress pretty linearly over that period of time. And as we sort of look at where we are right now and how the business is trending and what we think is going to happen next year, it feels like we are tracking right according to expectations for that target. So again, I think that two years to four years from the Investor Day is probably the right timeframe to look at. So whatever we are six or eight months beyond that Investor Day, so.

Yeah, I would just say that we're just providing fiscal year '25 guidance today, but as the year develops, we will have increasing visibility into fiscal year '26 and the slope of the margin recapture, and we'll be sure to keep everybody informed of how that progresses.

Great, thanks. If I can squeak in one more. Can you just give us a sense, if I'm understanding right, just '24 revenue with the bad debt change? I guess just kind of do the back-of-the-envelope math. It would suggest like aggregate PMPMs are only up slightly for 2025, but you kind of applied that mid-single-digit rate increase. Curious, like what if acuity has a dampening effect on that as you're bringing on new members? Just any color in and around that as we think about modeling for this year.

Yeah. Let me give you some general guidance here. If you go back well, the simple answer is basically, this doesn't affect profitability. This is strictly moving, and I -- the geography of an expense and the income statement. So instead of being an expense item down below, it basically is going to be contra revenue in the future. If you were to look at that expense related to 2024, think about a number that's probably in kind of like the $6 million, $7 million range. So if you were trying to go back and adjust 2024 to sort of put on an apples-to-apples basis, so you could look at the growth rates, you know, think of like a $6 million to $7 million number is an adjustment to '24. And then the guidance we gave you for '25, and then off of that, you can kind of compute an apples-to-apples growth rate. And when you think about what's going on there. There's nothing really related to the acuity of the population or anything else going on other than it's just being booked as Contra revenue now because in consultation with our auditors, because of the characteristics of the bad debt expense, they just view it as under 606, as a contra revenue item now.

Okay, awesome. Thank you for the color.

Thank you. One moment for our next question. Our next question comes from John Stansel from J.P. Morgan Securities. Your line is open.

Great. Thanks for taking the question. Just a quick one on cadence of enrollment. Obviously, with some of the enrollments trending up in, say Crenshaw, how are you thinking about the balance of membership ads across the year. And then conversely, the cadence of de novo losses for that $18 million to $20 million headwind to just EBITDA?

I'll start with the enrollment that you add from there. In terms of how we expect the enrollment to come in, I don't see a lot of difference between fiscal year '24 and fiscal year '25. We still expect the preponderance of aroma to come, and so say in California and Colorado in particular. Our three new centers in Tampa, Orlando and Crenshaw are still ramping up. We are pleased with the traction we're starting to see in all those markets. Admittedly, Florida is taking a little longer to get to the ramp that we're seeing now. And we've learned a lot about de novos. These are our first de novos in several years, and we are starting to see that progress that we expected the last couple of months. And we are excited about our partnership with Orlando Health in particular. And so I feel like the enrollments going to track pretty much the way it did in fiscal year '24. Ben?

Yeah. And I would just say your question about de novo losses, I would just think them as kind of being spread generally evenly over the course of the year. These facilities are up and running. They change slightly quarter-to-quarter. But in terms of modeling purposes, just think of them as kind of a linear progression over the course of the year.

Great. And then I know you called out, I think, a mid-single digit increase in Medicare Part D. Is there anything you'd highlight as we enter calendar 2025 around IRA impacts to how you're thinking about that side of the business?

No, I don't think so. I think that the guidance sort of it is what it is on that. That's probably how I think about it from a modeling perspective.

Okay. Thank you.

Thank you. [Operator Instructions] One moment for our next question. Our next question will come from Jared Haase from William Blair. Your line is open.

Yeah. Good evening. Thanks for taking the questions. Maybe just a quick follow-up. I just wanted to clarify the sort of state delays or the headwinds that are still impacting the census growth. Just to clarify, is that all still kind of related to Medicaid redeterminations largely? I think that was the case last quarter, but just wanted to check on that. And it seems like as we get closer to the end of that wind-down process, that should clear up in relatively short order. Is that something you would agree with? And then also, are those delays still kind of limited to certain markets, or are you seeing that kind of broad-based across the different states that you operate in?

Yes, the first question, I think you are right. I think we are sort of seeing the last of the impacts of redetermination. I think the challenges we're experiencing, as I said in my opening remarks, or more related to sort of the throughput and the level of care assessments that the states perform as a final stage to enrollment. And we've seen some delays. You know, I wouldn't say that it is widespread, but it is impacting us in some of our larger states where we see most of our gross enrollment volume in a month. And so we've made great progress, I think since the last quarter. But there is still vestiges that we've got to work through. And I think that our, you know, our guidance appropriately reflects what we know today, and should we make some progress there, you know, we are going to hopefully see some upside to our gross enrollment for the year.

Okay, that's great. And maybe I will take a step back and ask a bigger picture question. We've seen some signs of health systems kind of increasingly getting interested in launching PACE programs, and I'm thinking specifically about the Kaiser venture in California as one example. How are you thinking about that dynamic, I guess both in terms of maybe a source of competition in the market, as health systems kind of look to launch de novos, or potentially as an unlock to continue to be that partner of choice for joint ventures. Just obviously, given the scale, and the clinical investments and the expertise that you have in terms of this market.

I'd say first and foremost, we are very encouraged by the interest in PACE, and the move by Kaiser to enter PACE is, from our perspective, very welcome. The notion of competition in PACE is primarily relevant in California, where they allow more than one PACE program to operate in a particular territory. And that's relevant to Kaiser's first entree. But as you know, in most other states, the territories are in essence, exclusive. And so I don't think that we view it necessarily as a significant source of competition, but rather, you know a very reputable organization seeing a business opportunity with a large business across the US, and that should have a very positive impact on sort of building PACE awareness. And we look forward to working closely with them and all the other PACE programs to build awareness for PACE. But it really does, I think validate the model. And at the same time, it takes a lot of time for PACE programs from the point of expressing interest to operating a viable program. So we view ourselves as in many ways an early market leader and are continuing to see a significant opportunity in more competition is only going to build awareness for a wonderful program.

Got it. That's super helpful. Thanks for all the color.

Thank you. And with that, this concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.