InnovAge Holding Corp. Q4 FY2024 Earnings Call

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. 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 watermark 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 as we move out of the rebuilding period of our transformation and into the next phase of responsible growth and margin recapture. To recap a few fiscal 2024 operating performance milestones, we exceeded our employee engagement, participant satisfaction, and quality targets. We acquired two California centers, executed a joint venture with Orlando Health, opened two new state-of-the-art centers in Florida, and further strengthened our essential payer capabilities. We increased center utilization by 440 basis points in our established centers and completed the Epic EMR rollout in all 20 centers, while selling a non-core senior living facility and reinvesting in our core business. We outlined an ambitious agenda last year, and we believe we delivered. I'm proud of our team for their perseverance while keeping high-quality compliant care as our top priority. We plan to do the same in fiscal 2025. We feel confident that we have created a differentiated and powerful platform from which to grow responsibly and profitably in fiscal 2025, and we believe we are on track to achieve the full potential of the organization in the years to come. Turning now to our fiscal year 2025 guidance, we project a census range of 7,300 to 7,750, member months of 86,000 to 89,000, total revenue of $815 million to $865 million, consolidated adjusted EBITDA of $24 million to $31 million, and de novo losses of $18 million to $20 million. We anticipate seeing improvement in our profitability as the year progresses, exiting the year with a higher run rate earnings. Consistent with the targets we provided at our February Investor Day, we expect our adjusted EBITDA margins to reach 8% to 9% over the intermediate term. Ben will take you through a more detailed fiscal 2025 guidance review in a few minutes. Now, on to existing center growth. We used fiscal 2024 to test and learn. We launched a new telephonic inside sales team to handle the increased lead volume from our referral partners and digital marketing campaigns. We built new referral partnerships that have created greater awareness of the PACE Program and extended our reach into the communities we serve. We also optimized our digital campaigns, which increased the volume and yield of qualified leads, and we invested in tools and technology to make our enrollment teams more effective and productive. However, as we mentioned on the last couple of quarterly calls, challenges persist with enrollment processing times in some states. Specifically, we have been experiencing state delays completing the level of care assessments required for enrollment in PACE. We continue working closely with our state partners to address these delays and are beginning to see improvement. Despite this headwind, we anticipate healthy overall top-line growth and remain encouraged by robust demand for the PACE model of care. While we remain confident that these challenges will be resolved, the exact timing is not clear, and the uncertainty is reflected in our guidance. Should these challenges abate more quickly than anticipated, we would expect modest upside to our census this year. In our de novo centers, we continue to make progress despite a slower start than we anticipated. Our new centers in Florida are gaining traction as we build awareness of PACE and InnovAge. In Orlando specifically, we created a joint venture with Orlando Health, consistent with our strategy to find new avenues for growth by establishing partnerships with leading health system brands in our communities. The partnership is in the early stages, but we are excited by the potential and honored to be working with such an outstanding organization. In our new Crenshaw center, we are beginning to see our enrollment trend up on a month-over-month basis, and we are largely hitting the mark on our expectations. It's important to note that the full-year impact of these new centers will create additional year-over-year operating losses in fiscal 2025, as we work through the maturity curve of each of these de novo centers. On the regulatory front, our focus is on bringing our California audits to conclusion. The San Bernardino State audit commenced in March, and the exit interviews are anticipated within the next two months. In Sacramento, we submitted our corrective action plans to the State in March and are still awaiting final feedback. Recall, in March, CMS officially closed its portion of the audit. Following resolution of the audits and corrective actions in San Bernardino and Sacramento, we expect to resume discussions with the state regarding the reinstatement of our Downey and Bakersfield expansion plans. Operationally, we remain laser-focused on delivering compliant high-quality care with strong medical management and operating discipline at every center. To that end, our fiscal 2024 external provider cost PMPM increased by approximately 3% in an inflationary environment where core healthcare cost trends significantly exceeded this level. This provides confidence that our operational and clinical teams are focused on the right levers which drive high-quality care while reducing unnecessary utilization. While we implemented several new clinical value initiatives last year, we expect to see the full year impact this year and will accelerate actions to drive continuous improvement in new initiatives in fiscal 2025. As we enter year two on the Epic system, we are beginning to experience the benefits in care coordination, documentation, compliance, and risk score accuracy. Furthermore, we have introduced Operational Value Initiatives, or OVIs, to complement our clinical value initiatives. These initiatives are focused on identifying value creation opportunities at the center level and the corporate SG&A level to drive staff productivity, operational efficiency, and improve vendor unit economics from better leveraging people, processes, and technology. The foundations for operational excellence are in place across the organization. Now we must execute a little better every day. In closing, we continue to make tangible progress every quarter. We have more top and bottom-line work to do, but we are pleased with our fiscal year 2024 performance and are confident in our fiscal year 2025 guidance. We view Fiscal 2025 as an important year to achieving our long-term goals, and you can expect the same execution focus that you've seen from this team for the last two years. Lastly, I want to extend my deepest gratitude to our more than 2,000 employees who embrace our mission every day and enable our participants to have more healthy days. With that, I'll turn it over to Ben.

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 business's 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, primarily driven by an increase in member months, 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 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 the fourth quarter of fiscal 2024, we incurred $102.7 million of external provider costs, a 2.7% increase compared to the third quarter. The sequential increase was primarily driven by an increase in member months coupled with an increase in inpatient and assisted living facility unit costs. Cost of care, excluding depreciation and amortization, was $228.8 million for fiscal year 2024, a 7.8% increase compared to fiscal 2023. The increase was primarily due to an increase in cost per participant coupled with an increase in member months. The increase in cost per participant was driven by an increase in salaries, wages, and benefits associated with increased headcount to support growth and higher wage rates, an increase in contract provider expense in California to support growth, increased fleet expenses, and contract transportation as a result of higher average daily attendance, an increase in external appointments, higher fuel costs, increased building maintenance and security, and an increase in software license fees. This was partially offset by a reduction in costs associated with third-party audit and compliance support. In the fourth quarter, cost of care increased by 1.8% to $60.1 million compared to the third quarter. The increase was primarily due to an increase in headcount and contract providers in California. Center-level contribution margin, which we define as total revenue less external provider costs and cost-of-care, excluding depreciation and amortization, was $132.1 million for fiscal year 2024, a 30.4% increase compared to fiscal year 2023. As a percentage of revenue, our center-level contribution margin ratio increased approximately 260 basis points to 17.3% compared to 14.7% in the prior year. For the fourth quarter, center-level contribution margin was $36.6 million compared to $34 million in the third quarter. As a percentage of revenue, center-level contribution margin increased approximately 70 basis points to 18.3% compared to 17.6% in the third quarter. Sales and marketing expense was $25 million for fiscal year 2024, an increase of $5.3 million compared to fiscal year 2023, primarily driven by increased marketing spend and an increase in salary, wages, and benefits associated with increased headcount. In the fourth quarter, sales and marketing expense was $6.5 million, a decrease of approximately $600,000 compared to the prior quarter. The decrease was primarily due to lower marketing spend in the quarter, as we continue to refine our digital strategy and focus on lead quality. Corporate, general and administrative expense decreased to $111.3 million, a $4.3 million decrease compared to fiscal year 2023. The decrease was primarily due to reductions in third-party legal expense, insurance expense, and consulting costs associated with improving organizational capabilities. The decrease was partially offset by costs associated with an increase in headcount, bad debt expense, and consulting costs, including SOX compliance, internal audit support, and public relations. Corporate, general and administrative expense increased to $29.6 million in the fourth quarter, a $2 million increase compared to the third quarter, primarily due to an increase in third-party legal expense, partially offset by a reduction in D&O insurance expense. We reported a net loss of $23.2 million in fiscal 2024, compared to a net loss of $43.6 million in fiscal 2023. On a per-share basis, we reported a net loss of $0.16 compared to $0.30 in fiscal 2023. For the fourth quarter, we reported a net loss of $2.3 million compared to a net loss of $6.2 million in the third quarter. We reported a net loss per share of $0.01 on both a basic and diluted basis, and our weighted average share count was approximately 136 million shares for the quarter. Effective for fiscal 2024, we revised our calculation of adjusted EBITDA to reflect the impact of other investment income and to no longer exclude de novo center development costs. We believe this revised presentation more closely reflects our operating core performance as we return to growth. All numbers for prior periods have been recast to conform to this revised presentation. Fiscal year 2024 adjusted EBITDA was $16.5 million compared to an adjusted EBITDA loss of $3.4 million in fiscal 2023, an approximately $20 million improvement. Our adjusted EBITDA margin was 2.2% for fiscal 2024 compared to an adjusted EBITDA margin loss of 0.5% in the prior fiscal year. We reported adjusted EBITDA of $5.2 million for the fourth quarter compared to $3 million in the third quarter, and our adjusted EBITDA margin was 2.6% for the fourth quarter compared to 1.5% in the third quarter. 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. De novo losses, defined as net losses related to pre-opening and startup ramp through the first 24 months of de novo operations, were $12 million for fiscal 2024, and primarily related to our centers in Florida and the recently acquired Bakersfield and Crenshaw centers. This compares to $4 million of de novo losses in fiscal 2023. For the fourth quarter, de novo losses were $4.2 million compared to $4.1 million in the third quarter. Turning to our balance sheet, we ended the quarter with $56.9 million in cash and cash equivalents, plus $45.8 million in short-term investments. We had $83.3 million in total debt on the balance sheet, representing debt under our senior secured term loan and other commitments. For the fourth quarter, we recorded cash flow from operations of $1.9 million, had $3.3 million of capital expenditures, and repurchased approximately 45,000 shares of our common stock for an aggregate of approximately $225,000 under the company's $5 million share repurchase plan. Regarding our fiscal 2025 guidance, we expect our ending census for fiscal 2025 to be between 7,300 and 7,750, member months to be in the range of 86,000 to 89,000, total revenue in the range of $815 million to $865 million, and adjusted EBITDA in the range of $24 million to $31 million. Finally, we anticipate that de novo losses for fiscal 2025 will be in the $18 million to $20 million range. I will also provide some additional color on a few of the components that comprise our guidance assumptions. Starting with revenue, our Medicaid rates are based on county-specific rates that are adjusted by CMS in January, coupled with prospective risk score adjustments in January and July. Our rates are contractually determined based on cost for PACE or comparable populations in each state. In fiscal year 2025, we are updating our reporting methodology by recording bad debt as a contra revenue item rather than as an expense. Our fiscal year 2025 guidance takes this updated methodology into account, and we expect a combined mid-single-digit rate increase comprised of the following: a low single-digit Medicare Part C increase, a mid-single-digit Medicare Part D increase, and for Medicaid, a mid-single-digit rate increase inclusive of an 8.8% increase in Colorado, effective July 1, 2025, and an estimated mid-single-digit rate increase in Pennsylvania. We do not anticipate a rate increase in New Mexico at this time. We've made demonstrable progress in the business over the course of fiscal 2024. We believe that in the intermediate term, we can achieve adjusted EBITDA margins in the high-single digits. We continue to focus our efforts on maintaining high-quality and compliance standards while working diligently to offset annual cost trends with ongoing clinical value initiatives. Our fiscal 2025 guidance factors in the strong foundation we've laid for ourselves in fiscal 2024, the initiatives we are implementing to offset annual cost trends, and the temporary census headwinds that Patrick highlighted, driven by state processing delays. We continue to make significant investments in the business and maintain a disciplined approach to costs while being ever mindful of providing high-quality service in each of our centers. In closing, we believe we are continuing to make improvements to the business every quarter. We remain focused on day-to-day operational execution and continuing the earnings momentum we laid the groundwork for in fiscal 2024. Operator, that concludes our prepared remarks. Please open the call for questions.

Thank you. And at this time, we will conduct the question-and-answer session. 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 walk us through those aspects? It sounds like that's driven more on 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 a relatively clean baseline number for your view?

Sure. Hey, it is Ben Adams. Sort of breaking it apart, I guess. I would think about the guidance for next year as very much of 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 got a 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. 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 a trend-based analysis. 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. You can think of those generally as kind of mid-single-digit rates. So, the delta between that and the revenue growth is primarily built off of volume for the most part. When we think about EBITDA, we go through a center-by-center buildup. There are some assumptions in there around OVIs and CVIs. We had a lot of success last year with our clinical value initiatives, so we have a new set rolling in this year, along with several operational initiatives which we call OVIs. What we see in the guidance is essentially an expectation about how those are going to mature over the course of the year. The last thing I would say, in terms of de novo losses, we've got four new centers that are in various states of maturity, and we have a good handle on what the run rate of those expenses is going to be over the next year.

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 guidance. Can you just give us a little bit more on how you are thinking about that target relative to the 8% to 9% intermediate targets you provided at your Investor Day? Would you expect a little bit more of a J-curve type of ramp in the margin trajectory of the business in '26 and beyond? Just thinking about how that you're positioning margin expectations for this year against kind of the growth and expectation for 8% to 9% over time.

Yes, sure. When we think about margin progression over time, during our Investor Day in February, we talked about getting to a sort of 8% to 9% margin range over the intermediate term, which we defined as two years to four years. 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. As we look at where we are now, we feel we are tracking right according to expectations for that target. We will have increasing visibility into fiscal year '26 and the slope of the margin recapture as the year develops, and we will 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 doing 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 around that as we think about modeling for this year.

Let me provide some general guidance. The simple answer is that this does not impact profitability. This is merely a reclassification of an expense in the income statement. Instead of appearing as an expense item, it will be listed as contra revenue in the future. If you consider the expense related to 2024, it is likely in the range of $6 million to $7 million. If you want to adjust 2024 for a more accurate comparison, think of that $6 million to $7 million as an adjustment for 2024. From there, you can calculate an apples-to-apples growth rate. There isn't anything related to the acuity of the population or additional factors; it is simply being recorded as contra revenue now.

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 the cadence of enrollment. Obviously, with some of the enrollments trending up in, say, Crenshaw, how are you thinking about the balance of membership additions 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 and 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 enrollment to come from 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 reach the ramp we are now seeing. We have learned a lot about de novos. These are our first de novos in several years, and we are starting to see the progress that we expected over the last couple of months. I'm excited about our partnership with Orlando Health in particular. I expect enrollments to track pretty much as they did in fiscal year '24.

In terms of de novo losses, I would think of them as being spread evenly throughout the year. These facilities are up and running and do change slightly quarter-to-quarter, but for modeling purposes, consider them as a linear progression throughout the year.

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

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

Thank you. 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 wanted to clarify the state delays or the headwinds that are still impacting census growth. Is that all still related to Medicaid redeterminations largely? I think that was the case last quarter, but just wanted to check. 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? Are those delays still limited to certain markets, or are you seeing that broad-based across the different states that you operate in?

Yes, the first question, I think you're right. We are seeing the last of the impacts of redetermination. The challenges we're experiencing are more related to the throughput and the level of care assessments that the states perform as a final stage to enrollment. We've seen some delays, and while I wouldn't say that it is widespread, it is impacting us in some of our larger states where we see most of our gross enrollment volume. We've made significant progress since the last quarter, but there are still elements we need to work through. Our guidance reflects what we know today, and should we make extensions in our progress, we hope to see some upside to our gross enrollment for the year.

Okay, that's great. I will take a step back for a bigger picture question. We've seen some signs of health systems becoming increasingly interested in launching PACE programs, such as Kaiser's venture in California. How are you thinking about that dynamic, in terms of a source of competition in the market or potentially as an unlock for partnerships?

We are very encouraged by the interest in PACE, and the move by Kaiser to enter PACE is 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. This is relevant to Kaiser's first entry. However, in most other states, the territories are essentially exclusive. We don’t necessarily see it as a significant source of competition but rather as a reputable organization recognizing a business opportunity. This should have a positive impact on building awareness for PACE. We look forward to collaborating closely with them and other PACE programs to promote awareness for the model. It validates our approach, and while more competition is forthcoming, it will ultimately help elevate PACE awareness across the board.

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.