InnovAge Holding Corp. (INNV) on Q3 2021 Results - Earnings Call Transcript
Operator: Good afternoon and welcome to Earnings Call for 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 result made in the present situation constitute forward-looking statements that are based on our current competitive and regulatory expectations are subject to risk and uncertainties that could cause actual results to vary materially.
Maureen Hewitt: 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. Barb will then provide more details on our financial results and guidance before we open the call for questions. 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. In 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 over utilization 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.
Barb Gutierrez: 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 gross, annual rate increases, and the delay of sequestration. External provider costs of $75.4 million were 6% higher than 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.
Operator: Our first question comes from Jamie Perse from Goldman Sachs. Your line is now open.
Jamie Perse : 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: Hi, Jamie. It is Barb. Thanks for the question. So likely, that’s really just a factor of mix. So, it would just be likely a factor of mix amongst the various centers that have different rates.
Jamie Perse : Okay. Then I’ll move to the EBITDA margin, it came around 13% in the quarter. Can you just talk to how much you’re benefiting on the EBITDA line from the centers being closed? And how we should think about that returning to some more normalized level as you get through the reopening process?
Barb Gutierrez: Yeah, sure. So as we indicated, in our 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 so that that would be the drop to EBITDA.
Jamie Perse : Okay, great. And then one more just forward-looking question, I know we’re a little early here, but you’re coming up on the end of your fiscal year. Any early comments on how we should think about census growth next year -- next fiscal year? Any key rate changes we should be thinking about? You mentioned in the release and prepared remarks on the impact on census from temporary slowing of referrals and mortality. I presume those will be behind you pretty soon, if not already. So how should we think about the census figure kind of accelerating, as we get beyond COVID?
Barb Gutierrez: Sure. So 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. Little too early to give the guidance for FY22 at this point but we’ll just tie back to the comments that we did make for this quarter.
Jamie Perse : Okay, thank you.
Operator: Thank you. And our next question comes from Chris Neamonitis from Piper Sandler. Your line is now open.
Chris Neamonitis: 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 are 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: 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 actually seeing are primarily related to the facility operating costs, so 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 -- again, 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: Got it. And then obviously, just recognizing the temporary slowing in the new enrollments, so hoping if you could touch on any highlights around participant recruitment relative to the more recent enhancements to your digital marketing strategies?
Maureen Hewitt: Hi, this is Maureen. And yes, I mean, digital has been such a positive for this organization. And we’re starting to see more increases there in the funnel and development there. So we expect to see continued positive trends in that area as well.
Chris Neamonitis: Great. And then just last one for me and I will hop back in the queue. Just touching on labor quickly, any challenges surfing there for you guys. Keep hearing about challenges, obviously, with nursing but wondering 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 to your clinical specialist that looks like that’s something that needs to grow with participant growth or the team is maybe a little more leverageable?
Maureen Hewitt: So on the first question for healthcare, healthcare and staffing around health care in this country, as you probably know, is something that needs to grow to be able to continue to serve patients, young and old, going across. I think InnovAge has done an excellent job of really ensuring that we’ve kept our turnover rates down. And certainly, they’ve been very successful as compared to other long-term care organizational results, as well. So it’s -- for us, it’s an ability really of recruiting people, continuing with our great place to work initiatives, this will be our third year in a row of being able to secure that. But our recruitment of looking for staff is one -- is something that’s 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: Thank you. And our next question comes from Steven Borthwick from Barclays. Your line is now open.
Steven Borthwick: Thanks and good afternoon, everybody. So I guess I was just curious to hear more on the progression of EBITDA throughout fiscal ‘21 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 4Q. 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: Sure. Hi, Steve. It is Barb. So for Q1 and Q2, again, we saw some -- we had some leverage there because our centers were not open, so we did have some leverage there in terms of our facility operating costs. And then in Q3, while we had some of that, that our centers started to open, so we started seeing some of those costs come back starting in Q3 is when we had the census challenges that we mentioned earlier. And so again, into Q4 indicated that we’ve seen some recovery initially from -- on those growth enrollments, as it relates to census and those costs – those facility cost will go back into line once those centers are open. So I think If I could summarize it, I would say that fiscal year Q1 and Q2 were on the -- definitely on the higher side of the entire year. And in contrast, when you compare fiscal one -- fiscal Q1 and Q2 of the prior year in that comparison, fiscal Q2 of the prior year was actually one of our lower EBITDA quarters, primarily due to some seasonality related to participant expenses. So I guess, like, again, in summary, the fiscal year -- this fiscal year Q1 and Q2 were actually some of our higher quarters than we’ve seen, and we think in Q3 and Q4, returning to more normal levels.
Steven Borthwick: Okay. Because 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 cost more than anything else, just to kind of give a summary answer is the way to think about that.
Barb Gutierrez: Yes.
Steven Borthwick: Okay. Perfect.
Barb Gutierrez: Yeah, the medical return of medical costs as well as those facility operating costs.
Steven Borthwick: Got it. Okay. All right. Thanks.
Operator: And our next question comes from Ralph Giacobbe from Citi. Your line is now open.
Ralph Giacobbe: 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 3Q 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: Sure, Ralph. So we gave the guidance for the quarter for that that census -- the ending census there to be between 6,800 and 6,900, so we ended this quarter fiscal Q3 at 6,655. So I think that hopefully gives you a sense of where we think we’ll end up from the end of this quarter to the end of the fourth quarter.
Ralph Giacobbe: Understood. I guess I’m just trying to get a sense of that visibility of -- I know, that’s obviously the guidance just give us a little bit of sense. Given sort of some of your commentary around sort of the gross new adds post quarter, I guess I was hoping to get a little bit of an understanding of sort of that bridge and how close you are to that number, just given the census is a little bit softer, I think in the in the fiscal third quarter.
Barb Gutierrez: Yeah. Sure. Without giving you that specific numbers yet, just because they’re embedded in the Q4 numbers. We do have visibility for April and May already. So that’s why I guess we feel confident in that range for that ending census because we already have visibility for April in May.
Ralph Giacobbe: Okay. Alright. Fair enough. And then, can you just give us even more on how many centers are either fully opened or maybe just the 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 talked -- mentioned getting 90% of your staff vaccinated by July, I wasn’t sure that was meant to sort of determine that you’re going to get to 90% of the sort of normal business at that point as well.
Maureen Hewitt: 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 are been working on implementing that in phases. And of course, the vaccination rates are important, right, that’s going to be a really important key indicator in communities along with the community COVID rates as well. And, 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. And as you know, our organization has implemented reopening as we-- reopen the centers, we’re doing them in phases and safely. And 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: Okay. That’s helpful. And one more if I could squeeze in, just as you reopen, are there any type of staffing challenges even beyond clinical or maybe greater inflationary pressures that you’re seeing to bring back staff?
Maureen Hewitt: So, I will tell you that even during the pandemic, we kept our employees together, we kept our operations together. So we never laid off employees, we repurposed employees. So it’s great to see them back to work and having the new normal, we will call it that going forward, and we will continue with our recruitment efforts as we have been, and continue to staff at the ratios of which we implement within our organization. So I would I will tell you things are going very positively there.
Ralph Giacobbe: Okay, thank you.
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: Thank you, everyone, for joining us this evening. We do appreciate all of your time and 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. So thank you very much for this evening. Barb?
Barb Gutierrez: Thank you very much, everyone. Thanks for joining.
Operator: Thank you. This concludes today’s conference call. Thank you for participating and you may now disconnect.
