GMR Solutions Inc. (GMRS) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Craig Hettenbach. I cover the providers from Morgan Stanley. Just before we get started, for disclosures, you can go to the Morgan Stanley website, www.MorganStanley.com/researchdisclosures. So with that, very pleased to have with us Global Medical Response Solutions. So CEO, Nick Loporcaro; and CFO, Brian Tierney. Welcome.

Thank you.

Thank you.

So I thought we'd just start with an overview of the business. I mean recent IPO, and as people are kind of getting up to speed on the name, just start with kind of key secular growth drivers on the EMS side and we can build from there, if that works?

Great. Well, let me start at sort of the proverbial 40,000-foot level. We refer to us as an integrated EMS provider. And I'll stick with -- if you think about a 911 system, you dial 911 when you have a perceived medical emergency. And when you're dialing at that local level, that call gets determined on whether you need police, fire or EMS. Once it's determined you need EMS, a provider like ourselves who has the contract for that community are going to be the responders. That's a traditional 911 model. And if you have that contract, you're an exclusive provider for that community. Where we, GMR, have evolved the model and hope to bring the market there as well is intercepting that call to determine whether you truly need; one, an ambulant dispatch. And is that an advanced life support where you have lights and sirens and we're showing up in 9 minutes? Or is that a basic life support unit, still urgent, still needs clinical care, but we can get there in 30 minutes. We don't need the lights and sirens. Or do you need treatment in place? Is there a treatment, no transport? We have highly qualified clinicians that can do that. Should we get you to an urgent care? Should we get you connected to a telemedicine call? And so the level of acuity and distance is what's going to determine whether or not we're doing that with a ground asset, a rotor asset or a fixed wing asset. That's probably the simplest way to think about EMS. When you think about GMR, we're national. We're of scale and size. We're physically situated in 46 states, service all of the states in the U.S., 34,000 team members, 24,000 of which are clinicians, over 500 air assets and over 75 underground assets. That's a sort of good snapshot of who we are. Now as to the trends, you look at the demographic trends, but more importantly is think about the state of health care. Where are the real pain points, access, clogged up emergency rooms, people not getting to the right level of care. And we believe, when you look at EMS, we're the tip of the spear. There's no one further upstream pre-hospital than we are as a service. And so we can help, and I don't -- I intentionally don't use the word steer, we can actually help get people to the right sites of care and the right type or modality of care that they require in the communities we serve.

It's a great level setting in terms of the business, so I appreciate that. You mentioned you're the largest provider. It's a very fragmented business as well. So can you maybe touch on that, like what that means in terms of your size and scope in terms of you in your markets versus maybe some regional competitors and kind of different nuances in the market?

So I'll start and invite Brian to give you a little bit more granularity. If you look at us as an integrated national player, we truly are and end of one. When you look at it from that perspective, there are a couple of midsized players that are now taking on a little bit more of integrated. These are traditionally medium-sized ground service providers who have either partnered with some air offerings or started investing on their own. So you'll see some of that. If you were to compare us traditional air and ground, which we don't typically like to do, but if you were to do that, we're still the largest on the air. We have a second provider, a close second with air methods. And then you have PHI and Metro that probably occupy the third spot and then drops precipitously from there on a share perspective. On the ground side, no one in our scale on the ground side. A couple of good midsized players, and we have seen some private equity investment in grouping and rolling up a few of the other smaller players. I don't know, Brian, if you want to offer up some of the stats?

Yes, let me approach it from a slightly different angle. Of the overall private providers, we're roughly at close to $6 billion of revenue, we're roughly 25% million to almost 30% of the overall private space that it covers all of our services. If you include the municipal run fire systems, again, we're about $5 billion to $6 billion of revenue of $35 billion total addressable market. So really sizable by just about any measure. If you call 911 in this country, about 9% of the time we're the group that will respond. And at a north of 500 aircraft, 7,500 vehicles that Nick mentioned. We're the ninth largest commercial air fleet in the world, American, United, Delta so on, we're down at #9. So size and scale in an industry where size and scale really matter. They give us synergies. They give us ability to grow EBITDA faster than revenue, where we really have the size.

All right. I think that's a good buildup to kind of just how you think about your long-term targets of like mid-single-digit revenue growth, high single-digit adjusted EBITDA growth. Maybe talk about just some of the building blocks that kind of underpin that target.

As will usually be the case, let me start at a high level and Brian can provide a bit more of the details. So the reason we're pretty adamant about talking about being an integrated EMS provider, and we operate and manage the business geographically, years ago, we introduced a system called Nurse Navigation, 2 other innovations, Transport.NET, Concierge. And these are not separate businesses. These are all integrated into our offering. So Nurse Nav is going to intercept some of those calls that may not require that ALS call. Why is that important? That's important internally for our own operations. We see a pickup of 1% to 2% margin improvement by just adopting those types of innovations. From the perspective of the payer, what we've been able to do in some of the communities we're in, as we put Nurse Nav in, we're actually able to negotiate better rates and reimbursement for things like treatment, no transport in the communities that we're serving. So you see an uplift. So why the demarcation or that almost 2:1 growth of EBITDA over, some of its scale, we see that. But some of it is as well the efficiencies by cross-selling, introducing these new services in the markets we're in. So if we have a market where we primarily have a strong ground presence, we have opportunities through the likes of Nurse Nav, Transport.NET, our Concierge offering with health systems to then get their air business, to go get the local EMS contract when it comes up for renewal because we're already in that community. And that's sort of the flywheel we keep looking for is cross-selling is big, looking at adjacent communities, are we better off to just winning the business through a competitive RFP or potentially acquiring a smaller player and then using that. It's a whole lot easier proverbial tuck-in when we have an adjacent market.

I think Nick has just hit on a lot of the growth algorithms for expanding in our land and expand strategy. Let me hit on the -- some of the same-store basis as well. We've got some really natural demographic tailwinds that really support the business growth. Population growth is the first one. It drives increased patient encounters. Rural hospitals continue to close. They're under a significant amount of financial pressure that drives volume into the EMS system as folks use 911 as their health care provider. From a rate perspective, we have CPI plus in just about all of our contracts. And so as we leverage those, that gets you low single-digit volume growth, it gets you low to mid-single-digit revenue rate growth, and that gets you mid-single-digit plus right before what Nick just talked about, which is all of the different mechanisms that we use are better offering to get additional volume.

Great. And what's still a fragmented -- even though you're the largest player, still a fragmented industry, and you've used acquisitions to kind of scale up and grow capabilities. What are you seeing kind of the M&A landscape today? How do multiples look? How are you kind of approaching M&A versus deleveraging the balance sheet versus organic growth?

So 3 -- I'd put it in 3 stages. During COVID, M&A was frozen, and I'm boring from the term Brian has used in the past. We started seeing a bit of a thaw and we were the leaders in expressing some interest in looking at some M&A. And we probably had a pipeline of about 15 or so targets. And as we were lining up with the IPO, had hoped to get some arbitrage value between what we had anticipated our multiple to trade at and what expectations are. Suffice it to say, we're trading at a multiple that's made that a little more difficult currently. That said, Brian and I have entertained a couple of potential targets that our operations and BD teams have brought to us. So we do think there are some opportunities, but really do believe we need to bring that valuation or our multiple up in order to get to be a little more competitive on the M&A perspective. On the balancing, no pun intended, of the balance sheet, I'll leave it to Brian. We just announced recently as well. But trying to make sure we're not losing sight of some good deals while also working on deleveraging.

Yes. The M&A targets will fit in our core EMS space, small -- as Nick mentioned earlier, in regions where we have a service, it's sometimes easier just to go buy somebody who's adjacent as opposed to trying to compete or wait for an RFP that may be several years down the line. From a use of cash perspective, we'll continue to use the cash to grow the business. We've got pretty clear line of sight on the capital needs. We are going to delever, right? And we just did reprice the term loan last week. We announced commitments on Friday. We are using $200 million to buy down a little bit of the debt as part of our deleveraging strategy. And then M&A that makes sense will fit in there as well. And so we've got -- as Nick mentioned, we've got a number of things in the pipeline making sure that they all make sense as we go forward. But that's really the deployment of capital.

And Brian, from a leverage perspective, is there kind of a longer-term target or a band that you kind of want to run the business within?

Sure. We came out of the IPO at 3.5x and said that we will look to get to 3x by the end of 2027. And this last week's and this week's activity, when we do pay down the term loan, is just the next step in that. So the business continues to generate cash. It's growing EBITDA and a top line, and those will help get us into that 3 range in '27.

Got it. And then, Nick, I know the company had a strategic review in 2022, and you've been really thorough in terms of looking at contracts and what makes most sense to you, also what are -- from an urgent care perspective or not. Can you maybe just go into that in terms of the genesis of that review, kind of how it's performed and what that really means for the business?

Look, I think, post-COVID, as people started getting their bearings and revenue started to decline and costs went up, never a good formula. Started scrutinizing all of our bases. And what we noticed, not 100% of the time, but the vast majority of times, a lot of the more nonurgent, so high volume, lower margin and candidly not what we're built for. I mean we're built for emergency and what I call the right non-emergent, which is still urgent and needs clinical interventions. So the team did a lot of great work. And obviously, not easy, shuttering some bases and getting focused on the urgent. The other were 3 significant business divestitures. I often say these weren't good or bad businesses. They just weren't the right businesses for us. So we had a fire business with fire engines and the like. We knew we weren't going to invest in that space. We ultimately found a better home. We found a group that actually was interested in getting into specialty fire. We had an organ transfer business, at least on the surface was organ transfer, ended up being more of a commercial jet business. We offloaded. Wheels Up at the time needed that type of aircraft, divested to them. And then the third one was more of when you think about sort of wheelchair transfers, very high volume, spun that business off to MTM. We've kept relationships with all 3 of those. Wound down a small international business and an investment we had in the hospital at home space. That did a couple of things. One, and I don't like using the term distraction, but sort of took away a distraction so we could focus on the core. And what we saw, which was a little counterintuitive from a traditional metrics perspective, a drop in traditional volume being transports, but more margin and EBITDA growth because we're now focused on our core competency, plus one of the other real benefits of that, our employee engagement from the field side has continued to grow year-over-year with that focus. That's what these folks are trained for. It's what they sign up for, and it's what we're built for.

Great. Nick mentioned that this is key. We're going to run the business by earnings growth, not by maintaining particular volume. And so as we continue to look at all of the contracts we have, if there's a contract that turns south, and we can't get the appropriate reimbursement for the cost structure that it would take to service that contract, well, first, we're going to try to renegotiate it. And if we can't get it there, then we will exit the contract. So most of that is in the non-emergent ground space that Nick just mentioned. Again, that's a lower acuity business, by definition it's going to be lower reimbursing, and we're going to find the right contracts for us. Our focus is on emergent. That's what we're built for, and that's where we'll continue to see the growth.

Great. I want to touch on just the air business in the context of what you said before on the growth algorithm of just, you had really solid growth year-over-year in Q2. How that kind of -- frame that versus like the long term, how you think about airbase openings and just the longer-term outlook on the air side of things?

So yes, we've got -- second quarter was good. We did benefit from a little bit better weather year-over-year, which has a variability in the air business at times. But really, the second quarter this year was pretty normal. And so a good base to grow off of. We have a large number of aircraft coming in the next couple of years, around 50, and that will help fund the growth. We've got good visibility on where those are going to go, very good partnerships with the hospital systems. And so feel good about how that looks going forward. Those airbases, we should get in the high single-digit, low double-digit airbase growth year-over-year. That's what those airbase -- those aircraft will fund. And again, feel good about the visibility.

Great. All right. I want to switch gears to just technology and the buzzword of AI. I know you guys have like 40 or 50 different projects undergoing. You run a very complex business. So I don't think it's going to be obsoleted by AI. So how are you putting kind of technology to work for the company in terms of efficiencies? What are some of the use cases?

So the North Star for us and we live by this is making sure we put care at the center. It's part of our core behaviors. So our first goal with any technology, whether it's AI or any other innovation is to free up our caregivers' time so that they have more time with hands-on patients. Like that's the mantra. Whatever we can do to make sure that our providers have time with their patients and less time needing to chart or code or get bogged down and asking for insurance information, that's the key driver. Now we do have an AI governance committee to make sure we've got the guardrails around what we're doing. But it goes from like the sublime to what you would think is rudimentary things that we're doing, all of it driving value. Revenue cycle, we've seen incredible increase in yield with our ground vendor partner. And what's been really interesting and came up in one of our conversations earlier today, there hasn't been a lot of reduction in force. We've turned coders into auditors. But what we have seen is a 20% to 25% increase in yield. And so what we're doing is getting better quality to these folks so that when we're going out to collect, we're collecting the right amounts from the right payers for the right reasons. We're able to counter any medical necessity denials based on what we're capturing. Brian and team are looking at an effort on the air side as well, how do we start incorporating these things? And it's, again, across the board. So what we ultimately want to do is use AI to bring better information to our providers. And looking at things, we haven't put in ambient listening. We started talking about that opportunity. And aside from HIPAA rules, we actually have some concerns around our teams comfortable with it. But the more they see that we've been using it to improve quality and thus, drive better value for the organization, the more we see people embracing it. It really hasn't been this mantra, we're going to put AI so we can cut cost. It is really about improving yield, improving better care. One of our first test with AI was going through our clinical protocols. We were able to take -- we have over 200 medical directors, an analysis that demonstrated to them 90% of their clinical protocols were the same, which drove better alignment. So when you think about our clinical outcomes data and the efforts around that, AI has been great. We iterate on that data. We get to continue to show outcomes impact, which has then allowed us to get better recognition from the payers translating to better reimbursement. So that's how we see ourselves continuing to leverage AI.

Great. And then maybe, Brian, in the CFO seat, when you think about kind of some of the cost to invest in technology versus return, how are you approaching that? And how are you seeing things kind of play out?

Yes, I think carefully is the right word, proof-of-concept, making sure we have good ways of measuring the projects to make sure that we're going to get the return that we expect. As Nick mentioned, a lot of this is on yield improvement. There's safety elements to this as well. We put AI embedded drive cams in our ambulances that actually look at the eyes of the driver, make sure they're paying attention, kind of mother-like it yells at you if you're not watching the road. It's those types of things where we can see a real return that we're investing in, but being super careful on not signing up for -- again, this is not a cost play for us. This is about how do we provide better care and get the better return.