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spk01: Good day and thank you for standing by. Welcome to Innovate's second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during a session, you will need to press Start 101 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press Start 101 again. Please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker today, Ryan Kubota. Director of Investor Relations. Please go ahead.
spk02: Thank you, Operator. Good afternoon, and thank you all for joining the End of Age Fiscal 2024 Second 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 closed, we issued a press release containing detailed information on our quarterly results for our fiscal second quarter 2024. You may access the release on our investor relations sections of our company website, Innovate.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, February 6, 2024, and have not been updated subsequent to this call. During our call, we refer to certain non-GAAP measures, A reconciliation of these measures to the most directly comparable gap 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 year projections, future growth prospects, Florida de novo centers, our acquisition of ConcertoCare, our payer capabilities, and clinical value initiatives, 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 risk 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 2023 and our subsequent reports filed with the SEC, including our most recent quarterly report on Form 10-Q. 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?
spk00: 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. The company's second quarter results were consistent with our expectations and highlight the ongoing performance improvement across the business. It further demonstrates incremental progress in our broader transformation plan to accelerate responsible growth while restoring operating margin lost during the regulatory sanction period. We reported revenue of $189 million for the quarter, an increase of approximately 3.5% compared to the first quarter, and center-level contribution margin of $34 million, which represents a 17.8% margin. Adjusted EBITDA was $7.8 million for the quarter, which represents a significant improvement compared to the first quarter, which was approximately $2.2 million. Census increased to $6,780, which represents a quarter-over-quarter improvement of 3%. Now a few highlights. Participant net enrollment growth for the quarter was solid at 195%, which continues to strengthen our confidence in the value proposition we are delivering. Our clinical value initiatives, CVIs as we refer to them, which focus on unnecessary utilization and lowering medical cost trends, are maturing in line with our expectations and beginning to translate into enhanced quality and greater operational efficiency, as evidenced by a quarter-over-quarter decrease in our participant expense PMPM of 0.7%. We're still in the early innings of this work, but we're pleased with the progress we're making. We are managing our non-center costs effectively in our enterprise service functions, resulting in a sequential decrease in general and administrative expenses as a percentage of revenue from 15.9% to 13.4%. And we completed the implementation of the new Epic EMR in all locations. On December 1st, we acquired Concerto Care Pace, which added two new centers in the highly strategic Southern California market. On January 1st, we officially opened our new center in Tampa and are now operational in six states, Colorado, California, Pennsylvania, New Mexico, Virginia, and Florida. With half our fiscal year behind us, we're pleased with our progress and remain laser focused on exiting fiscal 24 with solid earnings momentum. While we have demonstrated strong sequential quarter-over-quarter progress, significant work remains to achieve our financial goals for the second half of fiscal 24 and to create a glide path for a successful fiscal 25. As I mentioned last quarter, we have a great team, confidence in our plan, and it continues to come down to consistent execution. We remain focused on the levers that drive near-term performance while continuing to build a long-term foundation of compliance and operational excellence. Simply put, We believe we're on track to unlocking the full potential of the organization at an intentional pace, which will take perseverance and time. Before turning to our quarterly performance, I want to take a moment to address the California regulatory update included in our 10Q. As you'll recall, we were released from enrollment sanctions in our Sacramento Center by CMS in November of 2022 and by the California Department of Healthcare Services in May of 2023. Underpinning that release was validation from both agencies that corrective actions had been resolved to their satisfaction and that there were no remaining systemic concerns. In October of 2023, CMS and DHCS conducted the final annual routine audit of our Sacramento Center as required for all new PACE Centers during their first three years of operations. Following that audit, CMS approved our corrective actions in accordance with their findings. DHCS notified us two weeks ago that it had identified deficiencies. Last week, they shared the specific findings with us. After careful review of the findings, which are similar to the CMS findings, which we were in the process of remediating, we are confident that we have in place the policies, processes, and systems to correct the identified issues. DHCS also communicated that it will be conducting targeted medical review of our San Bernardino Center. DHCS has suspended its state attestations in support of our Plan de Novo centers in Downey and Bakersfield, which were scheduled to open this summer, but has indicated it will evaluate lifting the suspension upon resolution of the matter. We remain confident that we will successfully address any issues to the full satisfaction of DHCS. and upon satisfactory remediation, the DHCS will reinstate the attestations. We also remain confident with regard to our expansion plans. This is a highly regulated area, rightfully so. Audits and corrective actions are a normal course for all PACE organizations, given the populations we serve. We have seen the benefits of the foundational changes we've made in every center over the last two years to provide high-quality care. We work closely with our regulators on their audits and conduct our own audits in each center every month, and we've consistently seen a clear, positive trend line. When opportunities for improvement at one center are identified, we make them quickly and then cascade learnings across the organization. I want to be clear. Compliance has been my North Star since I joined the company two years ago, and that will always be the case. Our leaders share my commitment to transparency, and embraced the opportunity to collaborate with state and federal regulators to continuously improve our business. I felt it was important to share this context and draw the critical distinction of where we are today relative to two and a half years ago. Now I'll turn to details about our recent performance, starting with existing center growth. New participant monthly enrollment continues above pre-sanction levels for the second consecutive quarter, consistent with our expectations. As I mentioned at the outset, we enrolled 195 participants in the quarter and have enrolled more than 375 participants in the first half of the fiscal year. As we approach the third fiscal quarter, we anticipate some modest seasonality related to the Medicare annual enrollment period. This organic growth contributes to two key objectives, efficiently utilizing excess capacity in our centers and new growth, especially in Colorado, helps rebalance the overall mix of our participant risk pool. We're pleased to see that our new participants reflect an appropriate balance of individuals living independently in the community and those that may require some level of supportive housing. We continue to see strong demand for our integrated solution that allows seniors to stay in their homes and communities and out of nursing homes. This demand is most evident in the sequential increase in total sales qualified leads, which is up approximately 11% from the prior quarter. Last quarter, we touched on enrollment as a joint effort between InnovAge and our state partners. While we are seeing aggregate enrollment consistent with our expectations, we continue to observe challenges in select markets which have resulted in enrollment processing delays, in part due to Medicaid redetermination. The barriers we're experiencing include state enrollment resource constraints, post-public health emergency policy changes that now require in-person level of care assessments versus telephonic, and new state vendors who are still ramping up to targeted service levels. Recall that this does not affect the eligibility of potential participants, but rather the speed through which we can get them enrolled into PACE. However, lengthy delays can result in prospects evaluating other options and can translate into missed enrollment opportunities. Our state partners remain active and committed to resolving these issues with us as rapidly as possible. To state the positive, we're finding more eligible participants interested in joining InnovAge than we're currently enrolling today. On the de novo front, we're pleased to announce that we're operational at our new Tampa center. Recall, this state-of-the-art center is approximately 42,000 square feet and is expected to serve approximately 1,300 participants at maturity. Enrollment efforts are underway, and job number one is to begin expanding access to the many deserving eligible participants in the community. We believe Florida is an attractive sixth state, given the number of eligible individuals and the lack of integrated solutions for the frail dual-eligible population. We're also in the final push of pre-launch activities for our Orlando Center. Like Tampa, it's comparably sized and represents our latest best practices in terms of building design, technology enablement, and operating model. We anticipate Orlando Center will be ready to accept new participants in the fourth quarter, barring any unforeseen delays. On December 1st, we completed the acquisition of two PACE centers in Southern California from ConcertoCare. We consider this transaction more of a hybrid between an acquisition and a de novo, as it included a recently opened center in the Crenshaw neighborhood of Los Angeles with minimal census and a center in the final stages of the application for licensure in Bakersfield. We've been evaluating several alternatives to continue responsible growth in this market, and these centers facilitate a faster and more cost-effective expansion compared to building the centers from scratch while enabling us to implement our operating model from day one. Of note, we anticipate these centers will add modest operating losses to our fully consolidated EBITDA near term as we work through the maturity curve. Taken together, we believe these new centers, along with our pending de novo center and downing, demonstrate our ability to augment existing center growth with cost-effective expansions. We are excited for the opportunity to serve more seniors in more geographies over the next several months while also increasing our overall portfolio capacity by approximately 30% once all of these centers are open, which we believe will be a meaningful driver of growth in the near term and represent significant uplift in embedded earnings long term. You'll recall that we measure and drive accountability for results through our five-pillar performance framework. which includes people, service, quality, growth, and financial KPIs. We measure these in every center every month. We continue to see strong results across our people, service, and quality pillars, and we'll continue to invest in the people and resources necessary to further strengthen quality and compliance in each of our centers. Separately, we continue to see improvements in reducing external provider costs as our portfolio of clinical value initiatives matures. In the aggregate, we're trending ahead of internal targets on most initiatives fiscal year to date, with strong progress in areas such as inpatient admissions and skilled short-stay utilization. We've also observed meaningful improvement this quarter in areas such as reduced end-of-life costs and contract transportation costs. One new area of focus in the last quarter is ensuring we have the highest performing supportive housing network from a quality, compliance, and cost perspective. We're continually learning and improving as we go through compliance and quality audits. One of our key learnings is how dependent our quality, compliance, and financial performance is on the quality of nursing facilities and assisted living facilities in our network, given we have ultimate accountability for the care that is provided and administered in these settings. With this in mind, we have increased our focus on the quality and value of our supportive housing network. By ranking our providers on the dimensions of quality of care, compliance, cost, and cooperation, and by narrowing our network around higher performing facilities, we're able to ensure our participants have access to the highest performing providers in their community. We're seeing similar progress in the management of our general administrative expenses. This quarter, we saw a sequential decrease in G&A of approximately $3.6 million. Importantly, Ongoing growth will help to right-size our overall cost structure as we continue to expand revenue through existing center enrollment and new center development. Lastly, we're pleased to report that we're now operational across our entire portfolio with the first-ever PACE-specific instance of Epic. As we've discussed previously, this was a significant investment in dollars and time for the organization, and we view our new EMR as a chief enabler of increased operational productivity, efficiency, compliance, and clinical staff satisfaction going forward. While it will take some time to achieve full adoption and the expected benefits in our newer markets, we're already seeing early wins in terms of operational and clinical efficiencies. In summary, we believe we are improving the business every quarter, and I again want to thank my 2,100 InnovAge colleagues nationally who are working tirelessly to make this wonderful program a reality for
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