Ladies and gentlemen, thank you for standing by and welcome to the InnovAge First Quarter 2022 Earnings Conference Call. 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 a 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 the 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 a 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 timeline. 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. Regarding vaccinations, last week, the Biden administration announced that COVID-19 vaccinations will be required for healthcare facilities that participate in the Medicare and Medicaid programs and that all eligible employees must be fully vaccinated by January 4th, 2022. I am pleased to announce that we continue to increase our employee and participant vaccination rates. As of November 1st, 98% of our employees and 89% of our participants have been fully vaccinated. We are pleased that we continue to increase our vaccination rates, and we are targeting a 90% vaccination rate for our participants as we did with employees. During the quarter, we also began flu vaccinations for our employees and participants, and we are targeting a 90% vaccination rate for the flu vaccine as well. We continue to carefully monitor COVID trends in each of our markets and centers. All of our 18 centers are open with the appropriate COVID safety protocols in place. If COVID cases rise to a level where it is no longer safe to operate a center, we have the protocols in place to close the centers fully or partially and deliver our comprehensive care model in the home and virtually and ultimately reopen centers in a phased approach. Participant health and safety remain our primary focus, and we believe we have the appropriate protocols should any of our staff or our participants test positive for COVID. Enrollment growth continues to improve and has surpassed pre-pandemic levels. Our participants continue to serve as ambassadors for the InnovAge brand, and referrals we receive from our own InnovAge participants have historically made up approximately 25% of census growth. In addition, our recently launched digital marketing strategy has continued to grow our referral base. In the first quarter, digital referrals grew 65% compared to the previous quarter, and we continue to invest in this channel and refine our strategies to maximize the impact on census growth. I now want to briefly discuss labor and wage inflation as we continue to receive questions about this topic. As we mentioned on the last call, it is no secret that the healthcare sector has historically faced a shortage of licensed practical nurses, registered nurses, certified nursing assistants, and other frontline healthcare workers like drivers, and the COVID pandemic has not helped the situation. The historical shortage of healthcare workers has long required us to think outside the box to fill our recruiting needs, and that adaptability is a strength that we continue to use as we grow our business. To mitigate potential labor disruption, we have made wage adjustments for key positions throughout our centers, which we have factored into our fiscal year 2022 guidance. We are also continuing to evaluate our recruiting competitiveness on an ongoing basis. We are experiencing longer lead times for recruiting new talent. As a result, we are focused on expanding our employee referral program, and we have developed our own pilot program in Colorado to train certified nursing assistants that we can then employ. Our top priority is ensuring that we are appropriately staffed to care for our participants. In markets where recruitment has been slower than anticipated, we have been able to supplement with temporary labor in order to maintain appropriate staffing levels. Importantly, our guidance for fiscal year 2022 reflects our expectation that the labor market continues to remain tight. I will now provide a brief update on the regulatory environment. We continue to see positive federal and state legislative activity reflecting bipartisan support of PACE. Regarding the current federal legislative activity, the pending budget reconciliation package is still being discussed in the House and Senate. The package could provide additional funding for PACE providers through home and community-based services, known as HCBS, and beneficial policy changes that would increase access to PACE. The House Committee on Energy and Commerce has recommended $190 billion of HCBS funding. We believe this increase in funding will ultimately benefit the PACE program, and we remain strong advocates for program support that will help increase market awareness and participant access for PACE beneficiaries. On October 20th, the Centers for Medicare and Medicaid Innovation, or CMMI, published its strategy refresh plan that charts a path for the next 10 years. The first objective in the strategic plan is to drive accountable care. CMMI cites PACE specifically as a program that could be included as an accountable care entity. We also believe the PACE model of care lines up well with CMMI's key priorities as we provide a more holistic approach to care, incorporate social determinants of health and participant care plans, and empower beneficiaries as consumers, ultimately improving outcomes. As we prepare for new programs from CMMI, we have begun to work with the National PACE Association or NPA, and other PACE organizations to evaluate models that may fit within the key themes that CMMI is looking for. Also, in late October, the Federal Department of Health and Human Services announced each state's plan for how they will spend the additional 10% increase to the state, federal match for Medicaid, home and community-based services. This announcement, which is part of the American Rescue Plan Act, is expected to add approximately $12.7 billion nationally and provide additional funding to encourage states to expand home and community-based services and strengthen their Medicaid programs. Regarding state legislation, in Michigan, pending Senate Bill 203 remains active and is pending committee vote, and they have until the legislature adjourns in December 2022 to vote on it. I will now provide a brief update on the status of our audits in Sacramento and Colorado. We have worked and continue to collaborate with our regulators as we seek to constantly improve our processes and outcomes to better serve our participants and their families. In Sacramento, we submitted our corrective action plan last month, and we received an additional request for information in early November. We expect to provide the requested information in the next few weeks, and at that time, the corrective action plan will be under review by CMS and the state. We began implementing the proposed corrective actions even prior to submitting the plan. If and when CMS accepts the corrective action plan, they will then begin monitoring its execution and, if satisfied, will then allow the center to run unmonitored for an unspecified amount of time. Once and if CMS is satisfied that the issues raised have been remediated and are not likely to reoccur, they may lift the freeze. While we can provide a general overview of the expected process, there is no standard time frame for these events to occur, and there is no guarantee that CMS will be satisfied with the corrective actions or will not impose additional sanctions. For context, there were less than 200 participants in our Sacramento center as of the beginning of this month. In Colorado, as previously indicated, the state and CMS completed their audit work in July. And in October, we received validation results from CMS. In conjunction with the validation results, the agencies referred our case to the compliance and enforcement division of CMS for review and possible further action. With respect to the Colorado audits, to date, we have no indication of whether the agencies intend to freeze or otherwise curtail our program or impose other sanctions. Additionally, given the recent referral to the compliance and enforcement division, we do not have an indication of what further action, if any, the division may take. We cannot guarantee the outcomes of these audits. Finally, we will begin a routine audit in New Mexico that will be handled remotely. We are committed to quality improvement and comprehensive care coordination in each of our centers. We believe the audit process is important to the integrity of the program, and each audit we undergo is an opportunity for us to improve the PACE program, improve our services, and ultimately, the outcomes of our participants. These audits will continue to make our program better over the long term, and we are taking lessons we have learned from these audits and applying them as we continue to grow. Finally, before I turn the call over to Barb to review our financial performance in more detail, I want to thank all of our employees for their hard work and dedication, providing high-quality care for the participants that we serve every day.

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 in census, coupled with a healthy increase in Medicaid rates. Regarding Medicaid rates, as we mentioned on our last call, we received a combined rate increase of just over 5.3% in Colorado, Pennsylvania, and Virginia for fiscal year 2022, and we are still working with the state of New Mexico to finalize those rates. External provider costs in the first quarter were $90 million, a 22.2% increase compared to the first quarter of fiscal 2021. While some of this variance is due to census growth, we experienced higher per-participant costs in inpatient, housing, outpatient, and specialist care as medical costs in the current quarter normalized post COVID. As we mentioned on the last earnings call, we continue to see elevated utilization levels as participants catch up on services that were delayed as a result of the pandemic. Compared to the fourth quarter of fiscal 2021, external provider costs increased 5.8% primarily due to higher housing costs associated with an annual increase in rates in Colorado and Virginia, coupled with an increase in housing utilization. The increase in housing rates is determined by the states and incorporated in their rate-setting methodologies when establishing our PACE rates each year. Our cost of care, excluding depreciation and amortization, was $40.7 million for the first quarter, a 6.4% increase over the first quarter of fiscal year 2021, driven by an increase in census, and a 5.8% increase over the fourth quarter of fiscal 2021, primarily due to an increase in cost per employee associated with annual merit and market increases coupled with an increase in overtime, contract, services, and temp labor. Center-level contribution margin, which we define as total revenue less external provider costs and cost of care excluding depreciation and amortization, was $42.3 million for the first quarter, compared to $48 million in the previous quarter, and $40.6 million in the first quarter of fiscal 2021. As a percentage of revenue, center-level contribution margin for the quarter was 24.5%, compared to 28% in the previous quarter, and 26.7% in the first quarter of fiscal 2021. As we mentioned on the last earnings call, we continue to see elevated utilization levels as participants continue to catch up on medical services delayed as a result of the pandemic. This medical cost normalization dynamic is the primary driver of the year-over-year decline in center-level contribution margin as a percent of revenue. While the normalization of medical costs that we are seeing began in the fourth quarter of fiscal 2021, our center-level contribution margin in that period benefited from a revenue adjustment due to risk score and Part D bid true-ups and a rate estimate adjustment, and slightly lower cost of care due to gradual reopening of centers, which are the key drivers of the quarter-over-quarter decline in center-level contribution margin as a percent of revenue. Excluding the impact of those revenue adjustments in the prior quarter, our center-level contribution margin as a percent of revenue expanded approximately 130 basis points in the first quarter. Sales and marketing expense for the first quarter was $6.3 million, an increase of $2.2 million compared to the first quarter of fiscal 2021, primarily due to an increase in headcount to support growth and costs associated with new advertising campaigns to raise PACE awareness. Corporate, general, and administrative expense for the first quarter was $21.1 million, a decrease of $50.5 million compared to the first quarter of fiscal 2021, primarily due to $58.5 million in fees incurred as a result of the APAC transaction in fiscal 2021. Excluding the APAC fee, the year-over-year increase of $8 million is primarily due to company growth and the addition of costs associated with becoming a publicly traded company. Net income for the first quarter was $7.6 million, compared to a loss of $49.8 million in the first quarter of fiscal 2021 and up from $6.3 million in the fourth quarter of fiscal 2021. We reported earnings per share for the first quarter of $0.06 on both a basic and diluted basis. Our fully diluted share count was 135,516,513 shares for the first quarter ending September 30th, 2021. Adjusted EBITDA, which we calculate by adding interest, taxes, depreciation, and amortization and one-time adjustments for transaction and offering-related costs and other nonrecurring or exceptional costs to net income, was $18.2 million for the first quarter, a 5.7% decrease quarter-over-quarter, and a 21.2% decrease year-over-year. Our adjusted EBITDA margin was 10.5% for the first quarter compared to 11.3% for the fourth quarter of fiscal year 2021 and 15.1% for the first quarter of fiscal year 2021. The year-over-year change in adjusted EBITDA and adjusted EBITDA margin is a reflection of three primary dynamics: one, as discussed earlier on the call, the impact of medical cost normalization on center-level contribution margin as COVID transmission declines; two, higher sales and marketing expense as a result of our investment in digital marketing and other sales initiatives; and three, higher corporate, general and administrative expenses, partially as a result of the costs associated with being a publicly traded company. The quarter-over-quarter change in adjusted EBITDA and adjusted EBITDA margin is primarily a function of, one, the revenue adjustments recorded in the fourth quarter of fiscal 2021; two, increased housing utilization, coupled with higher cost of care, as mentioned previously; and three, partially offset by a reduction in SG&A as compared to the fourth quarter of fiscal 2021. We do not add back any losses incurred in connection with our De Novo centers in the calculation of adjusted EBITDA. De Novo center losses, which we define as net losses related to pre-opening and start-up ramp through the first 24 months of De Novo operations, were $0.2 million for the first quarter. This includes our Tampa and Orlando centers in Florida and our Louisville center in Kentucky. Turning to our balance sheet, we ended the quarter with $215.5 million in cash and cash equivalents and had $83.3 million in total debt on the balance sheet, representing debt under our senior secured term loan plus capital leases and other commitments and a secured net leverage ratio of 0.82 times as calculated pursuant to our credit agreement. For the first quarter ended September 30th, 2021, we had $3 million of capital expenditures, and we generated $20.6 million of cash from operations. Turning to guidance for fiscal year 2022, we are affirming the guidance for fiscal year 2022 that we provided on our last earnings call in September. We expect our ending census to be between 7,500 and 7,750 and member months to be in the range of 86,500 and 87,800. We are forecasting total revenues in the range of $712 to $725 million and adjusted EBITDA in the range of $60 to $72 million. In estimating adjusted EBITDA for fiscal 2022, we did not add back any expected losses associated with our De Novo centers. De Novo losses for fiscal 2022 are expected to be approximately $10 million. Finally, we did not include any potential acquisitions in our guidance for fiscal year 2022 given the timing of acquisitions can be hard to predict. In summary, we had a strong start to fiscal year 2022. We are affirming the guidance for fiscal year 2022, which does not reflect any potential acquisitions, and we continue to consistently generate positive cash flow from operations. We believe interest in the PACE program will continue to grow as we build market awareness among eligible participants. That concludes our prepared comments.

Our first question comes from 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 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 scheduled. 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, with guidance unchanged and considering the potential impact from the audits, can you clarify what the main factors might be that could influence trends throughout the year? Perhaps anything related to COVID flare-ups or labor trends, or other insights you believe are important to discuss at this time? Thanks.

Barb?

Yes. As we mentioned, we're closely monitoring labor trends and have various initiatives in place to address them, including the CNA program that Maureen discussed and other recruiting efforts. So far, we are managing these issues effectively. However, if the situation worsens, it could have an impact. Another COVID outbreak would affect everyone, and we hope that doesn't occur. We are pleased with our vaccination rates. These factors would be significant considerations. In our guidance, we have already accounted for the Sacramento enrollment freeze.

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. First, we have not received a final report for Colorado, but we hope to see something by the beginning of the year. Regarding Sacramento, it would be speculative to provide a time frame at this moment, as that depends on CMS. I want to emphasize that we are putting in a lot of effort, as Melissa mentioned, in various areas such as the network, provider agreements, staffing, training, referrals, and documentation. Once we finalize our plan of correction with CMS—hopefully soon, although we can't provide a specific date—they will begin monitoring from that point. In the coming months, we expect to share more updates as we move forward. It's important to note that surveys involve some judgment from CMS, which they are evaluating. That's why collaboration between our staff and regulators is crucial, as we all prioritize patient care. Melissa, would you like to add anything?

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 no 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. I have a couple of questions. First, I wanted to ask about the Colorado audit and get your insights on that. Regarding the referral to the compliance and enforcement division, can you provide some context on how typical that is? Was this expected, and can you share whether this is a standard part of the process or if there was something specific that prompted the referral in the CMS review?

Sure. Hi, this is Maureen. CMS has the ability to refer issues or surveys to this department at any time during enforcement. It's common for them to use different departments within their agency to examine matters. We haven't received any information indicating that the agencies plan to suspend, limit our program, or impose sanctions. At this point, we simply don't know. They need to go through their review process, assess our information, and may come back with additional questions or requests for more details. Our role is to provide that documentation to substantiate our position. I do think Colorado differs slightly from Sacramento, and I’ll ask Melissa to elaborate on that.

Yes, thank you, Maureen. I would like to address the other part of your question regarding any results we have received. In October, we received verbal communication from CMS indicating that two out of six areas under review for validation had issues. Validation involves exchanging information between us and CMS, and they noted that we did not provide some information that was considered missing. However, this information was available in our records and in other validation samples that they reviewed, which led to their inability to validate our findings. That was the information communicated to us. Regarding the Colorado audit, we believe that the information we submitted to CMS is solid, and the missing items were minor details we had documented. At this time, I agree with Maureen that we have no insights into the agency's next steps. We will continue to work with them and provide any information they request.

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, thank you for the question. There are two comparisons to consider. One is to the same quarter last year. Our external provider costs increased by approximately 3.5% from the previous quarter and slightly more on a per member per month basis. This increase is connected to the factors you mentioned. As our centers return to normal operations, we see some increases in inpatient, housing, and specialty outpatient care as our participants catch up on their healthcare needs. In comparison to the previous quarter, costs rose mainly due to housing rates and utilization. We indicated that in fiscal year 2022, in states like Colorado and Virginia, housing rates were higher, and these costs are included in our overall rates. Overall, those costs increased by 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 in 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 expected 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, thank you for your question. Just as Maureen mentioned, in our overall model and guidance, we included merit increases as well as additional funds for market adjustments that were largely implemented at the beginning of our fiscal year. We are not experiencing significant retention issues; instead, we are facing challenges with recruitment, which is a common trend across the healthcare industry. As I mentioned earlier, we are utilizing additional overtime, temporary, and contract staff to address the gaps caused by recruitment difficulties. We are also exploring innovative solutions, such as the CNA program, to fill those vacancies. From a cost perspective, the primary impact is on the staffing component of our care costs. This situation is not affecting our enrollment, and again, it is not primarily a retention problem.

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.

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. We are beginning to evaluate that with several states and have not yet determined the exact impact. We'll keep you updated as we progress. We consider this a positive development, but we don't have specific figures at this time. I believe you had another part to your question.

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.

I believe what we've done is acknowledge that in healthcare, there have long been shortages of staff. We try to anticipate as much as we can while preparing our budgets, and we shared several insights today. Increases from the states are always beneficial. 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 agree with that. We've experienced significant success in the few quarters we've reported, but we need a bit more time to quantify and analyze the trends. However, we are very pleased with the results, which are positive and becoming increasingly meaningful. As mentioned, the referrals from those digital leads increased by 20% from one quarter to the next, so we anticipate even more growth 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 believe those are precisely the goals we aim to achieve based on your comments. As we continue to develop this and monitor our progress, we'll be able to demonstrate its success, and we are very enthusiastic 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. I have a couple of questions. Maureen, I heard you mention looking for joint venture opportunities, which I don't recall hearing about before. Is that a new approach? Also, when you mention that, are you referring to joint ventures with nonprofit PACE programs currently in the market instead of pursuing acquisitions?

I don't believe it's a choice between one or the other. We're definitely open to the possibility of joint ventures, as we've done in the past. For example, we partnered in the Sacramento market with the Aventis Health System and another nonprofit to establish a PACE program. We're certainly open to similar opportunities. This idea is also part of our three-pronged strategy, where acquisitions could potentially include joint ventures down the line. I hope that clarifies things.

Got it. And just 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.

The audit in Sacramento was the first-year audit that took place. In Colorado, we conducted what we refer to as a focused survey, which was initiated based on a complaint that we have previously disclosed. I'm not sure if I fully grasp your question; it's a bit different.

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.