InnovAge Holding Corp.

Hello, and welcome to N of H fourth quarter fiscal 2023 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to your speaker, Ryan Cabuto. Sir, you may begin.

Thank you, operator. Good afternoon, and thank you all for joining the N of H Fiscal 2023 Fourth Quarter Earnings Call. With me today is Patrick Blair, President and CEO, and Ben Adams, CFO. Dr. Rich Pfeiffer, Chief Medical Officer, will also be joining the Q&A portion of the call. Today, after the market close, we issued a press release containing detailed information on our quarterly and annual results. You may access the release from our company website, innovH.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, September 12, 2023, and have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures. The reconciliation of these measures to the most directly comparable GAAP measures can be found in our fiscal fourth quarter 2023 earnings release, which is posted on the investor relations section of our website. We will be making forward-looking statements, including statements related to our guidance for fiscal year 2024, future growth prospects, Florida and Downey-Denovo Centers, potential acquisitions, our payer capabilities and clinical value initiatives, status of current and future regulatory actions, and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that could cause our actual results interiorly from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K Annual Report for Fiscal Year 2023 and our subsequent reports filed with the SEC. 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 extending my deepest appreciation and gratitude to our InnovAGE employees, participants, government partners, and investors who continue to support us. Today, we'll provide several updates, results for fiscal year 23 of the fourth quarter, initial guidance for fiscal year 2024, a brief regulatory update, and progress in our key focus areas. Let me start with fiscal year 2023. For the full year, we reported revenue of $688.1 million, a decline of approximately 1.5% compared to fiscal year 2022, and center-level contribution margin of $101.3 million, which represents a 14.7% margin. Consolidated adjusted EBITDA was negative $1.3 million for the fiscal year. While not reflective of our go-forward potential, these results were in line with our expectations in a period that was negatively impacted by enrollment restrictions in Colorado and Sacramento. Moving to the fourth quarter, we reported revenue of $176.9 million, a sequential improvement of approximately 2.5% compared to the third quarter, and center-level contribution margin of $28.5 million, which represents a 16.1% margin. Consolidated adjusted EBITDA was $700,000 for the quarter. Overall, the year demonstrated considerable progress in our core focus areas and positions us well to build on this momentum. Second half of fiscal year 2023 center-level contribution margin was $57.3 million, an increase of approximately 30% relative to the first half center-level contribution margin of $44 million. Importantly, we still have approximately 50% center capacity across our portfolio, excluding the Florida de novos we were hoping. Utilizing the SLAC center capacity in each of our centers to serve additional seniors is a top priority. But more broadly, I want to acknowledge what we accomplished in fiscal year 2023. We resolved compliance audit deficiencies and had all enrollment restrictions lifted. We improved the core operational processes in every center, We strengthened our relationships with our federal and state regulatory partners. We implemented a pay-specific instance of EPICS EMR in 14 of our 17 centers, which will make us more efficient and bolster our compliance capabilities. We built essential payer capabilities that we believe will better position us to manage medical costs. And we weathered the negative financial impacts of the sanctions and are now entering a phase of growth and margin recapture. The last 18 months have been a difficult period in every sense. but we are pleased with our progress and now have a solid foundation for improving performance. I'm proud of our team for rising to the challenges with grit and humility, all while keeping our participant care our top priority. Turning to fiscal year 2024 guidance, we project a census range of 6,800 to 7,400. Member months of 79,000 to 83,000. Total revenue of $725 to $775 million. and consolidated adjusted EBITDA of $12 to $18 million. It is important to note that this guidance includes some conservatism given where we are in our journey and does not reflect our long-term optimism for the business. Fiscal year 24 guidance is by no means a destination. It is a waypoint to stronger financial performance as we resume growth, reach targeted staffing ratios, and continue filling the excess capacity in our centers. As a result, we anticipate seeing improvement in our profitability as the year progresses and exiting the year at a higher run rate. Further, we expect the rate of change in profitability to continue to increase until we reach mature margins. We appreciate that the initial adjusted EBITDA range is wider than most precedents. As we better understand how growth is going to impact our cost and our performance improvement initiatives are going to mature, we will evaluate refining guidance for the year after the end of the second quarter. We also plan to use this mid-year inflection point to refresh the investor community on the critical drivers of our business. As such, we'll be hosting our first investor day after second quarter earnings to review the business in detail. Regarding leadership, we continue to enhance the organization with additional high-impact talent. Ben Adams, our new chief financial officer, is the latest addition to the leadership team. Ben brings decades of operational finance experience and strategic expertise within the healthcare sector. I also want to take a moment to thank Barb Gutierrez for her innumerable contributions to the organization over the last six years and wish her all the best in her future endeavors. We also welcome Teresa Sparks to the board and to the audit committee. Teresa's public company health care and finance expertise will serve us well in the years ahead. We're enthusiastic to enter fiscal year 24 unencumbered to pursue our goals of responsible growth and to expand access to the many deserving seniors who would benefit from the PACE program. As we've methodically strengthened our business, I believe we begin this new year with the strongest foundation of the company's history, which we believe will result in consistent, responsible, profitable growth. Simply put, this is a year of laser focus on execution, margin recapture, and operational excellence. On the regulatory front, let me begin by expressing my appreciation to our government partners for their confidence in us and for the ongoing spirit of partnership, notably I'm happy to report we were released early from post-sanctioned monitoring in Sacramento by CMS and the state because of our strong and consistent audit results. We take the trust CMS and our state partners have placed in us with the utmost seriousness, and we will endeavor to continue to deliver highly compliant care at each of our centers. Our near-term priorities remain unchanged. to sustain a highly compliant, operationally excellent business that delivers exceptional patient care while executing a responsible, profitable growth strategy. Regarding existing center growth, we continue to experience sequential improvements in prospect lead volumes in gross enrollments in almost every market. Specific to sales qualified leads, we've seen this metric increase by approximately 90% over the last six months. We're also making significant strides in the productivity of our enrollment team. effectiveness of our digital marketing campaigns through the lead volumes coming from our digital channel and referral partners. We're also investing in a small internal sales team that will enable us to pre-qualify the increased lead volume in a cost-effective manner to increase our conversion metrics. In time, this will enable our field-based enrollment specialists to focus on moving prospects through the enrollment process more quickly. The enrollment ramp in Colorado and Sacramento, our formerly sanctioned markets, is tracking to our expectations. We're currently at pre-sanctioned levels of gross monthly enrollments in Colorado and trending positively in Sacramento. At the same time, the rest of our portfolio continues to perform with growth at or above pre-sanctioned levels in almost every market, reflecting our improved execution in this area. It is important to remember that enrollment is a joint effort between InnovAge and our state partners who process the applications and activate a new enrollment. We have observed some recent delays in the processing of enrollment applications, and we attribute this to state resource constraints, which may become further exacerbated by the ongoing Medicaid redetermination processes in some states. While this does not impact the eligibility of our prospective participants, it can delay enrollments and potentially cause eligible participants to seek other solutions. We continue to challenge ourselves to improve each stage of the enrollment funnel to be more productive, consistent, and efficient each month. As we pivot to new center growth, building a strong pipeline of new centers that will provide a sturdy base of embedded future earnings is paramount. In Florida, we continue to make progress on the administrative requirements to open centers in Tampa and Orlando. We recently completed the on-site state readiness review inspection in Tampa. In Orlando, we have received our adult daycare license and are working with the state to schedule the state readiness review. We continue to hold ourselves accountable to get these two centers operational as quickly as possible. Depending on the timeline of the remaining administrative steps, which can fluctuate, we anticipate that both centers will be open around the end of the calendar year. These two centers will expand our total center and census capacity by over 20%, and we're excited at the opportunity to meaningfully increase our visibility into double-digit top-line growth over the coming years. We are also pleased to announce that we have worked with the California Department of Health Care Services to resume our application and downing. large market southeast of Los Angeles. Recall, the state suspended our application when the Sacramento sanction was issued two years ago. While the timing of the application process remains entirely in the state's control, we believe this could enable us to open the center in mid-calendar year 2024. The addition of Downey would increase our census capacity by approximately 500 participants in this highly strategic California market. We couldn't be more excited to support the state of California in their mission to deliver affordable, integrated, high-quality healthcare. Lastly, we are also seeing increased state interest in the PACE model of care across the country. Increasingly, PACE is viewed as the gold standard in community-based care for dual eligible struggling to remain independent. We believe these models serving high-cost dual eligibles are the most compelling, forward-looking source of government program growth over the foreseeable horizon. In addition to the focus on our existing center and new center opportunities, We continue to observe a healthy pipeline for new partnership and tuck-in acquisitions as well. While the timing of transactions is difficult to predict, the level of activity we're seeing in the market gives us confidence that the inorganic opportunities can remain a key facet of our multi-program growth strategy. Healthcare delivery remains hyper-local, and we believe that partnerships can also unlock significant value in some of our markets. We will be opportunistic and focus on collaborating with organizations that share our commitment quality and participant-centric care. Regarding rates, I'll let Ben walk you through what we're expecting, but our overarching goal is to be more proactive and data-driven in our rate negotiations with states. We believe that the PACE model drives meaningful savings for our government partners when compared to alternatives. It is incumbent on us to empirically demonstrate the value we are delivering and to be paid a financially suitable rate for the services we offer. Turning to medical costs, our portfolio of clinical value initiatives is building momentum, and we're getting better every day at executing on the fundamentals of medical cost management. You'll recall that we stood up this foundational capability in fiscal year 2023 to manage core medical trend in a more professionalized and impactful manner. We have set up the analytics, team structure, and accountability models to continuously identify trend mitigation opportunities and to track our execution from ideation to P&L impact. To provide a few examples, we are improving the quality of our external provider networks while reducing our costs. We anticipate our current initiatives will deliver more than $4 million of annualized run rate improvement in the long term. We've reduced our short-stay skilled nursing utilization rate, which ended the fiscal year at 2%. This is a 60 basis point improvement, or approximately 23% reduction over fiscal year 2022. We estimate that every 10 basis points of improvement saves approximately $1 million. We are also expanding our case management capabilities to support the needs of our most complex participants to reduce the risk of avoidable emergency room admits and inpatient utilization. While our core medical trends have remained at elevated levels relative to pre-sanctioned periods, we believe our portfolio of initiatives will begin to mitigate the elevated trends we have observed. As context, our external provider costs were approximately 54.4% of revenue in fiscal year 2023. well above pre-sanction level results of 48.5% in fiscal year 21. Clinical priority number one is to get these costs back in line with historic levels while improving quality of care where possible. On an annualized basis, we estimate that a 1% improvement in external provider cost as a percentage of revenue represents almost $7 million of incremental profitability. You will recall from my comments last quarter, these will be dials, not switches. And while we are pleased with our progress, significant work remains. Lastly, we now have 14 of our 17 centers live on the new Epic EMR. As we have discussed previously, we view Epic as a chief enabler of increased operational productivity, efficiency, compliance, and clinical staff satisfaction going forward. As I mentioned last quarter, it will take months to achieve full adoption and the expected benefits of the new system. That said, we're highly encouraged by the operational efficiencies that are emerging and the positive feedback from our administrative and clinical teams. In closing, our team has moved mountains over the last 18 months to transform the business and position us to unlock our full potential. I am humbled by the privilege to lead this group as we enter the new year with an intentional balance of a caregiver's heart and an owner's mindset. We look forward to continuing to demonstrate incremental improvement quarter over quarter in each of our focus areas while we seek additional catalysts to deliver breakthrough impact and value to the organization over time. With that, I'll turn the call over to Ben for additional insight on the financials. Ben?