Earnings Call Transcript - INNV Q3 2021

Operator, Operator

Good afternoon and welcome to the Earnings Call for the Third Quarter of Fiscal Year 2021. My name is Justin and I’ll be your facilitator during the call. On the call with me today are Maureen Hewitt, President and Chief Executive Officer of InnovAge, and Barb Gutierrez, Chief Financial Officer. Before I hand the call over to Maureen to make some opening comments, I will take you through the legal safe harbor and cautionary statement. Certain statements and projections of future results made in the present situation constitute forward-looking statements that are based on our current competitive and regulatory expectations and are subject to risks and uncertainties that could cause actual results to vary materially. We undertake no obligation to update publicly any forward-looking statement after this presentation, whether as a result of new information, future results, changes in assumptions or otherwise. Please see our registration statement on Form S-1 initially filed on February 8, 2021 for discussion of risk factors, as they relate to forward-looking statements. And note, in particular, that these forward-looking statements may be affected by risks relating to the spread and impact of the COVID-19 pandemic. In today’s presentation, we will use certain non-GAAP financial measures. We refer you to the appendix in the presentation materials available on our Investor Relations website for reconciliation to the most directly comparable GAAP financial measures and related information. You’ll find a link to the webcast on our investor relations website at https://www.innovage.com/investors/relations. After the call, the presentation and webcast will be archived on the website for 12 months. With that, I will turn the call over to Maureen Hewitt, President and Chief Executive Officer of InnovAge.

Maureen Hewitt, CEO

Welcome and thank you all for joining us this afternoon for our first earnings call as a publicly traded company and to discuss our fiscal third quarter earnings results. Joining me on today’s call is Barb Gutierrez, our Chief Financial Officer. I want to start the call by providing a bit about the InnovAge story. Then I’ll provide an update on our operations, growth strategy, de novo and development activity and the regulatory environment. InnovAge is at the forefront of value-based senior health care. We are a market leader in managing the care of high-cost dual eligible seniors. We call our seniors participants because they participate in the design and implementation of their own care. Our participants are among the most frail and medically complex individuals in the country. The high-quality care coordination management we provide enables them to age independently in their homes for as long as possible. We contract directly with Medicare and Medicaid through the program of all-inclusive care for the elderly, otherwise known as PACE, which is a risk-bearing 100% globally capitated program. We operate a high-touch patient-centered care model designed to improve the quality of participant care while reducing overutilization of high-cost care settings. Our care model benefits our participants, their families, government payers, and providers. Our model keeps families together, both emotionally and financially, while the government saves money, as evidenced by the National Pace Association report, which found the cost of PACE care was approximately 13% lower than traditional care for a comparable Medicaid population. As of Q3 fiscal 2021, we have 18 centers in five states: Colorado, New Mexico, California, Virginia, and Pennsylvania; and two more states under development in Florida and Kentucky. We grew our member months by 6% on a year-over-year basis to over 19,900, despite headwinds from COVID-19. Turning to our fiscal third quarter performance at a high level, we reported a strong quarter, as revenue increased 8% year-over-year to 156 million. Center-level contribution margin improved by 270 basis points over Q3 prior year and adjusted EBITDA grew 15% year-over-year to 20.3 million. The ongoing COVID-19 pandemic impacted our business in late fiscal year 2020 and through Q3 of fiscal year 2021. So I’ll provide a quick update on what we’re seeing on that front. During the quarter, we began to see some normalization, with centers starting to reopen in Colorado and California. And we are pleased to announce our center in New Mexico has also opened. As more people get vaccinated and states continue to loosen restrictions, we think we’ll get closer to normal trends. However, it’s hard to predict when we will be back to full capacity as some things are outside of our control. That being said, we’re working toward a goal of having 90% of our staff and participants vaccinated by the end of July. We believe the COVID-19 vaccine is tremendously important to our staff, participants, communities, and the country, as it is critical to turning the corner on the pandemic and restoring the face-to-face connections that we all need and value. Shifting to growth, our multi-pronged strategy consists of organic growth, which is driven by increasing participant enrollment and capacity within existing centers, opening de novo centers in new and existing markets, tuck-in acquisitions, and reinvesting in the InnovAge platform to drive greater efficiencies and optimize performance. Over the last few years, this growth strategy has resulted in meaningful census growth, and we have completed a number of tuck-in acquisitions, increased our geographic footprint to five states, and became the largest PACE provider in the country based on the number of participants served. We remain on track to open PACE centers over the next 18 months in two new states: Florida (Tampa and Orlando) and Kentucky (Louisville), which is a new state for PACE. We also expect to open two more de novo centers by the beginning of calendar year 2023. We have good visibility on our PACE center expansion into at least three additional states where we don’t have a presence today. And we are in active discussions with joint venture partners for some of our de novos. We also intend to pursue growth-enhancing acquisitions of PACE centers in large markets with experienced community partners that have established footprints. As you can see, we have a number of irons in the fire, which have the potential to foster some significant growth avenues for InnovAge for several years to come. We have built a strong leadership team, as I’ve stated before. Leadership starts with a vision. Our team has a strong operational experience, including successfully executing on de novos, acquisitions, and turnarounds. Culture is very important to us, and we are an inclusive organization, which is reflected in our leadership team’s commitment to diversity. InnovAge has been named a great place to work for three consecutive years and this is consistent with our low voluntary turnover rate, which is only 20% compared to the long-term care industry average turnover, which ranges from 30% to 60%. We believe in developing our teammates and have created what we call three feet deep succession planning to ensure our team is always trained and ready. We also continue to add talented experienced members to our team. For example, during the quarter, we added Alice Raia as Chief Information Officer. Alice has over 25 years of healthcare and technology experience, including most recently as Vice President of digital experience engineering at Kaiser Permanente. Alice brings significant experience and expertise in developing technological strategies to improve customer engagement while driving meaningful improvements to patient outcomes. She will lead our strategy and development for data management, digital technology integration, information technologies, and technical transformation. She’s also responsible for data and technology integration across our organization and she’ll help modernize and develop technical data digital platforms to enhance patient care. To this point, we continue to enhance the care provided for participants through technology. For example, we utilize telehealth today as a complement to our in-person visits, which allows our providers and other clinicians to spend more time with each participant. Since the pandemic began, we’ve performed more than 93,000 telehealth visits through the end of March and are actively working on the development of a PACE-specific telehealth platform. Our clinical operations and technology teams are working closely with a third party to design and deploy this solution. We are excited to roll out the first phase of this new solution later this calendar year. Before I turn the call over to Barb to review our financial performance, I want to provide a quick update on the reimbursement and regulatory environment. We continue to be well-positioned to leverage our skill set from the PACE program to participate in federal demonstration models. The Center for Medicare and Medicaid Innovation (CMMI) indicated in early April that they no longer intend to solicit applications from new organizations interested in participating in the direct contracting models for the performance year commencing on January 1, 2022. However, we do expect new opportunities to be released by the Innovation Center in the near future. The work that we’ve already done to prepare for the direct contracting application can be repurposed, for example, to explore the possibility of sub-contracting arrangements where InnovAge manages high-needs dual-eligibles for managed care organizations that are currently at risk for those populations. As the largest provider of PACE based on the number of participants served, InnovAge is encouraged by the PACE Plus Act legislation introduced by Senator Casey. The need for comprehensive home-based caregiver and health services for older Americans continues to grow. And since the onset of the COVID pandemic, we believe it has become even clearer that PACE is one of the most effective care models for frail seniors. The PACE Plus Act would result in the creation of new PACE programs and the expansion of existing ones through federal funds, providing more aging Americans the option of living life on their terms, independently, and in their own homes for as long and safely as possible. While we don’t have specifics on the impact from the American Jobs Plan, we generally think it will be positive for InnovAge and PACE since there will be a continued focus on the importance and quality of home and community-based services like PACE, which should drive further expansion of the PACE model. We think this should lead to higher provider rates for home and community-based services, which would have a direct and indirect positive impact. Because it is an all-inclusive model, PACE would directly benefit from an increase in capitated Medicaid payments, as Medicaid rates would increase for home and community-based services. The jobs plan also seeks to improve wages and quality of life for essential workers in home and community-based services. To wrap things up, we had a strong first quarter as a public company. I’m honored to lead this company and I want to thank each and every one of our team members for their dedication and hard work. They are the heartbeat and foundation of InnovAge, and we wouldn’t be successful without them providing the highest quality care to our most frail population. Now, I’ll turn the call over to Barb to review our financial performance in more detail and provide our outlook for 2021. Barb?

Barb Gutierrez, CFO

Thank you, Maureen. And thanks to everyone for joining the call today. Before we open the call to questions, I want to provide some highlights from our IPO, review our fiscal third quarter financial performance, and then provide our fiscal 2021 guidance. First, we completed our Initial Public Offering on March 8, 2021, where we raised gross proceeds of approximately $399 million through our offering of almost 19 million shares at $21 per share, which was at the high end of the upside price range. We used the net proceeds from the offering combined with our new credit facility to repay our term loan and to fund a $20 million earn-out arrangement related to the August 2018 acquisition of the New Courtland LIFE program in Pennsylvania. The remainder of the proceeds will be used for general corporate purposes, including working capital and capital expenditures. Moving on to our fiscal third quarter financial performance, we produced strong financial results in our initial quarter as a public company. We ended fiscal Q3 with 18 centers and a census of 6,655; compared to Q3 in the prior year, ending census increased by 5%. Member months for the quarter of 19,958 were 6% higher than the prior year. As a result of the second wave of COVID in late 2020, census growth was adversely impacted due to an increase in mortality among existing participants and a temporary slowing of new participant referrals. By the end of the third quarter, referrals returned to the levels experienced prior to the second wave of COVID, and we have seen early indications that gross enrollments are in excess of pre-second wave levels. Our revenue of $156.3 million grew 8% year-over-year due to census growth, annual rate increases, and the delay of sequestration. External provider costs of $75.4 million were 6% higher than the prior year, due primarily to census growth mentioned previously. Sales and marketing expense was $5.6 million during the quarter, representing an increase of 21% year-over-year due to an increase in headcount to support enrollment growth, as well as a shift in the timing of marketing spend to the latter part of FY21. General and administrative expense was $18.6 million in the third quarter, an increase of 33% year-over-year, primarily due to increases in headcount to support organizational growth, costs associated with being a public company, and transaction costs associated with the IPO. Net loss for the quarter was negative $10.9 million compared to prior year fiscal quarter net income of $8.0 million. The loss was expected and relates to the $20 million earn-out payment mentioned previously, coupled with a $13.5 million loss on extinguishment of debt, both incurred as a result of our Initial Public Offering. These losses were partially offset by a tax benefit related to the earn-out payment and a gain of $10.9 million, as a result of an increase in fair value from the consolidation of our Sacramento, California joint venture. During the quarter, we increased our investment in our Sacramento, California joint venture, and we are now consolidating the results of the Sacramento center for this JV. GAAP earnings per share for fiscal Q3 was a loss of $0.09, using a weighted average basic and diluted share count of 121,324,980 shares. We expect our fully diluted share count to be 135,516,513 shares at the end of fiscal 2021, reflecting the timing of our March IPO. Adjusted EBITDA, which we calculate by adding interest, taxes, depreciation and amortization, one-time adjustments for transaction and offering-related costs, and other non-recurring or exceptional costs to net income, was $20.3 million for the quarter. Adjusted EBITDA for the quarter grew 15% over the prior year. We did not add back any losses incurred with our de novo centers in the calculation of adjusted EBITDA. De novo center losses, which we define as net losses related to the preopening and startup ramp for our de novos through the first 24 months of operations, were approximately $300,000 for our Sacramento center in California and our Pennypack Center in Philadelphia for the third quarter period. Adjusted EBITDA margin for the quarter increased to 13%, as compared to 12% in Q3 of the prior year. Turning to our balance sheet, we ended the quarter with $201.5 million in cash and cash equivalents and had $82.8 million in debt, representing debt under our senior secured term loan plus capital leases and a secured net leverage ratio of 0.75 times, as calculated pursuant to our credit agreement. For the nine months ending March 31, 2021, we had $14.7 million of capital expenditures. Turning to guidance for fiscal year 2021, we will end the year with 18 centers. And we expect our ending census to be between 6,800 and 6,900 and our member months to be between 79,000 and 79,500. We are forecasting fiscal Q4 revenues in the range of $160 million to $162 million and adjusted EBITDA in the range of $17 million to $19 million. When combining the actual results through Q3 as a Q4 forecast, we expect revenues in the range of $626 million to $628 million and adjusted EBITDA in the range of $83 million to $85 million for the full fiscal year. Again, in estimating adjusted EBITDA for future periods, we did not add back any expected losses associated with our de novo centers. De novo losses for fiscal 2021 are expected to be approximately $2 million. That concludes our prepared comments. Operator, we will now open the call to questions.

Operator, Operator

Our first question comes from Jamie Perse from Goldman Sachs. Your line is now open.

Jamie Perse, Analyst

Good afternoon and congrats on doing that. Let me just start with a couple of quick ones on the quarter. First, on the per member, per month rate that you guys realized there, a little bit below what I had modeled and low prior trends. Maybe you could just bridge either quarter-over-quarter or year-over-year, anything that might have impacted that and maybe more importantly, your outlook on that from here.

Barb Gutierrez, CFO

Hi, Jamie. It is Barb. Thanks for the question. So likely, that’s just a factor of mix. It would just be likely a factor of mix among the various centers that have different rates.

Jamie Perse, Analyst

Okay. I’ll move to the EBITDA margin, which was around 13% for the quarter. Can you discuss how much you're benefiting on the EBITDA line from the centers being closed? Also, how should we anticipate that returning to a more normalized level as you go through the reopening process?

Barb Gutierrez, CFO

Yeah, sure. So as we indicated in our release that our central level contribution margin for the quarter was 26.5%, and so that was up quarter-over-quarter. The increase there in the range of 1% to 2% really relates to the fact that our centers were either partially closed or completely closed. So the centers opened in various phases throughout the quarter and that would affect the drop to EBITDA.

Jamie Perse, Analyst

Okay, great. I have one more forward-looking question. I know we’re a little early, but as you approach the end of your fiscal year, can you share any initial thoughts on census growth for the next fiscal year? Are there any key rate changes we should consider? You mentioned in the release and your prepared remarks that the temporary slowdown in referrals and mortality has impacted census figures. I assume those issues will be resolved soon, if they aren't already. How should we anticipate census figures to improve as we move past COVID?

Barb Gutierrez, CFO

Sure. In the prepared comments, we did comment that we have seen an uptick in the referrals to the pre-second wave levels and we’re seeing some early indications as well, as it relates to gross enrollment. So those were in those prepared comments. A little too early to give the guidance for FY22 at this point, but we’ll tie back to the comments that we made for this quarter.

Operator, Operator

Thank you. And our next question comes from Chris Neamonitis from Piper Sandler. Your line is now open.

Chris Neamonitis, Analyst

Hey guys. Congrats again for the first public quarter out there. I want to pick up a little bit on Jamie’s question around margin. So I’m just wondering specifically, just with your growth in telehealth and also the commitments to ramping on the efficiency initiatives, where are you seeing some of those savings come from? And should we expect any changes to the outlook on cost structure?

Barb Gutierrez, CFO

Sure. Hi, Chris. Thanks for calling in and thanks for the warm regards there. As it relates to the cost structure, the savings that we’re seeing are primarily related to the facility operating costs, not as much related to telehealth. It’s definitely a different delivery modality, but the savings that we’re seeing is really related to the facility operating costs, which as our centers return back to normal or start opening, we will see those costs come back into play, as they have been historically.

Chris Neamonitis, Analyst

Got it. And then obviously, just recognizing the temporary slowing in the new enrollments, so hoping you could touch on any highlights around participant recruitment relative to the more recent enhancements to your digital marketing strategies?

Maureen Hewitt, CEO

Hi, this is Maureen. And yes, I mean, digital marketing has been such a positive for this organization. We’re starting to see more increases in the funnel and development there. So we expect to see continued positive trends in that area as well.

Chris Neamonitis, Analyst

Great. And then just last one for me and I will hop back in the queue. Just touching on labor quickly, any challenges surfacing for you guys? I keep hearing about challenges, obviously, with nursing, but I’m wondering if that’s impacting you guys in any of your clinical staff. And then just one more follow-up to that would be about the capacity of your clinical specialists that looks like that’s something that needs to grow with participant growth or the team might be a little more leverageable?

Maureen Hewitt, CEO

So on the first question regarding healthcare staffing around health care in this country, as you probably know, is something that needs to grow to continue serving patients of all ages. InnovAge has done an excellent job of ensuring that we’ve kept our turnover rates down. They’ve been very successful compared to other long-term care organizational results as well. So for us, it’s an ability to continuously recruit people, continuing with our great place to work initiatives, which will be our third consecutive year of being able to secure that. Our recruitment of looking for staff is ongoing, as it would be for any other health care organization out there, and we’re going to continue to do that and continue to recruit excellent team members into the organization.

Operator, Operator

Thank you. And our next question comes from Steven Borthwick from Barclays. Your line is now open.

Steven Borthwick, Analyst

Thanks and good afternoon, everybody. So I guess I was just curious to hear more on the progression of EBITDA throughout fiscal 2021 so far. Just using round numbers, EBITDA was obviously 23 million or so in the fiscal first quarter, then 22.5 million in the fiscal second quarter, and now it’s 20.3 million reported today and you’re projecting 17 million to 19 million in fiscal Q4. With all the moving parts, perhaps checking just provide your own view on how much of this sequential trend is driven by expense trends versus top-line trends, and just remind us about any seasonality within the business as well. Thanks.

Barb Gutierrez, CFO

Sure. Hi, Steve. It is Barb. So for Q1 and Q2, again, we saw some leverage there because our centers were not open, so we did have some leverage in terms of our facility operating costs. In Q3, while we had some of that, our centers started to open, so we saw some costs come back starting in Q3 as we had the census challenges that we mentioned earlier. And so again into Q4, we indicated that we’ve seen some recovery initially regarding those growth enrollments, as it relates to census, and those costs will go back into line once those centers are open. If I could summarize it, I would say that fiscal Q1 and Q2 were definitely on the higher side of the entire year. In contrast, when you compare fiscal Q1 and Q2 of the prior year, fiscal Q2 of the prior year was actually one of our lower EBITDA quarters, primarily due to some seasonality related to participant expenses. In summary, this fiscal year Q1 and Q2 were actually some of our higher quarters than we’ve seen, and we anticipate in Q3 and Q4 returning to more normal levels.

Steven Borthwick, Analyst

Okay. Because in fiscal fourth quarter, just based on the guidance where that would be the highest revenue quarter of the year, but the lowest EBITDA is something that just be a return of medical costs more than anything else, just to kind of give a summary answer is the way to think about that.

Barb Gutierrez, CFO

Yes.

Operator, Operator

And our next question comes from Ralph Giacobbe from Citi. Your line is now open.

Ralph Giacobbe, Analyst

Great. Thanks. Good afternoon. I want to go back to census, I just want to get an understanding. At this point, can you just give us a sense of it? Is it sort of above the ending Q3 number or has it built up closer to that year–end target? And maybe just remind us of the visibility there of that ramp?

Barb Gutierrez, CFO

Sure, Ralph. We projected the ending census for the quarter to be between 6,800 and 6,900, and we finished fiscal Q3 at 6,655. I hope that gives you an idea of our expectations for the transition from the end of this quarter to the end of the fourth quarter.

Ralph Giacobbe, Analyst

Understood. I guess I’m just trying to get a sense of that visibility. I know that’s obviously the guidance just give us a little bit of sense. Given some of your commentary around the gross new adds post quarter, I was hoping for a bit of understanding of that bridge and how close you are to that number, just given the census is a little bit softer, I think, in the fiscal third quarter.

Barb Gutierrez, CFO

Yeah. Sure. Without giving you specific numbers yet, just because they’re embedded in the Q4 numbers, we do have visibility for April and May already. That’s why we feel confident in that range for ending census because we already have visibility for April and May.

Ralph Giacobbe, Analyst

Okay. Alright. Fair enough. And then, can you just give us even more on how many centers are either fully opened or maybe just general sense of what percentage of activities are close to normal, if there’s any way to sort of aggregate and say we’re 70% there? Just any sort of framing of that? I know you’ve mentioned getting 90% of your staff vaccinated by July, I wasn’t sure if that was meant to determine you’re going to get to 90% of the sort of normal business at that point as well.

Maureen Hewitt, CEO

Yeah. Hi, this is Maureen, and thank you for the question. We’re working really hard. We’re happy to say that California and New Mexico and Colorado are open. And we have been working on implementing that in phases. Of course, the vaccination rates are important, right? That’s a really important key indicator in communities, along with the community COVID rates as well. So we’re feeling very confident there and we’re also starting to see some improvement on the East Coast as well, and those community COVID rates are starting finally to come down. We’re excited to see that. Our organization has implemented reopening as we reopen the centers; we’re doing them in phases and safely. We coordinate with the states, we work with the regulatory bodies to ensure that we do this accurately and safely for both our participants and employees. So we are starting to see it, and it’s exciting to see it.

Ralph Giacobbe, Analyst

Okay, that’s helpful. And one more if I could squeeze in, just as you reopen, are there any types of staffing challenges even beyond clinical or maybe greater inflationary pressures that you’re seeing to bring back staff?

Maureen Hewitt, CEO

So, I will tell you that even during the pandemic, we kept our employees together. We kept our operations together. We never laid off employees; we repurposed employees. It’s great to see them back to work and having the new normal, we will call it that going forward. We will continue with our recruitment efforts as we have been and continue to staff at the ratios we implement within our organization. So I would say things are going very positively there.

Operator, Operator

Thank you. And I am showing no further questions. I would now like to turn the call back to Maureen Hewitt for closing remarks.

Maureen Hewitt, CEO

Thank you, everyone, for joining us this evening. We do appreciate all of your time, your questions, and your support. We look forward to this journey, and we will continue to do what we set out and what we’ve told you we will do. Thank you very much for this evening. Barb?

Barb Gutierrez, CFO

Thank you very much, everyone. Thanks for joining.

Operator, Operator

Thank you. This concludes today’s conference call. Thank you for participating and you may now disconnect.