ModivCare Inc. (MODVQ) Earnings Call Transcript & Summary

All right. Good morning, everyone. I -- this is Dan Greenleaf, and I'm here with Kevin Dotts, our Chief Financial Officer; as well as Scott Kern, our VP of Corporate Development. And we're part of the ModivCare team, and we're excited to have an opportunity to present to all of you today. We do have 40 minutes for the call. I would expect the slide presentation to run about 20 minutes. And then the balance of the meeting, we will open it up for Q&A. The way the process will work on the Q&A is that those questions will go to Kevin Dotts. And Kevin Dotts will read the question. And ultimately, the 1 of the 3 of us will answer it. So with that, if we could move to the opening slide, the ModivCare slide. I'm not sure how that's working, but I guess, we'll just keep going here, folks. So the forward-looking statements, usual and customary things that go into a public company. So I'm moving on to Slide 3, which is who is ModivCare. And ModivCare is a combination of a number of rebranding efforts that we have done over the course of several years. The company was formerly known as Providence Service Corp. And as on January 6, 2021, LogistiCare and Providence Service Corp. rebranded as ModivCare to align our entire organization around our core purpose, which is making connections to care. The company is headquartered in Denver, Colorado. It generates about $2 billion in revenue. Its market cap as of today is somewhere in the neighborhood of $2.4 billion. The focus of the company is in the area of social determinants of health. Social determinants of health are those things that contribute to the outcome and well-being of a patient to include transportation, to include nutrition and to include personal care, and we'll talk more about that as we go forward. We are the largest nonemergency medical transportation company in the country. We deliver over 75 million rides a year. We manage over 30 million capitated lives, and we have approximately 5,800 transportation providers, which represent 20,000 drivers in our network. On the personal care side, we have 14,000 caregivers and -- which represents about -- over 20 million hours of care per year. We're -- from the personal care side, it's approximately the second largest company in this space. I'll spend some more time talking about what's going to happen in that market going forward, but it's extremely attractive. And we also hold a minority equity investment in Matrix Medical, which Keith and his team have done an incredible job of redefining that business, and we'll be excited to share that slide with you a little later in the presentation. So if we move to Slide 4, this is our view is where ModivCare is going, which is the one-stop shop for social determinants of health solutions. Personal care is part of that. Nutrition is part of that as well as transportation. And we, from our perspective, are extremely well positioned to move in this market in a way that, we believe, we can make a significant difference for our patients as well as our partners, our state partners as -- including our payer partners as well. And at this point, I don't think there's a company better positioned to do this than ModivCare. And we also believe that there's opportunities to expand in the areas of medication management, remote monitoring as well as behavioral and social. But from a big picture perspective, what we see in terms of offering an integrated solution for patients is that we have a patient, a referral that comes from a hospital, ModivCare takes that patient to the home where a patient aid from Simplura is waiting for that patient. That patient aid checks medication. We may play a role in getting that medication to and from that patient. That patient aid assigns a -- or is involved in signing a doctor visit where ModivCare will play a role in bringing that patient to and from the follow-up doctor visit. And then the third piece of this is that the patient aid will also look at what's happening in terms of food and are there food needs in the home. And then we play a role -- ModivCare plays a role in getting that food to and from the patient. No one else has the capabilities of doing this. And the way this has been managed in the past is on a very line item basis. In other words, somebody would handle the personal care. Somebody would handle the medication management. Somebody would handle the transportation. Somebody would handle the food or nutrition needs of the patient. We are the first company that is offering an integrated solution to our payers and to our state partners, so that we can do a better job of managing that patient population. Slide 5 is an overview of the leadership team. 7 of 8 of us are -- have been here since August of '19. Kevin is from August of 2018. So none of us have been here very long. This is my fifth CEO job, and the blessing that I have of being in a number of different opportunities that have been successful is that there are a number of people I've worked with in the past. And Kathryn Stalmack was my General Counsel at BioScrip. Walt Meffert was my Chief Information Officer at Coram. John McMahon was my Chief Accounting Officer at BioScrip. Laurel Emory was a partner with me at Coram. And then Jody Kepler was my Chief Compliance Officer at BioScrip and worked with me at Coram. So we have a team that have worked very closely together. Kenny Wilson came over in May. He had worked with Walt at Hanger for 5 years. So there is a -- I think one of the advantages we have as an organization, and I can't underscore this enough, is the speed of trust. And a lot of the changes that we've made, which have been pretty dramatic and pretty extensive, are a function of that we have a team that, I believe, works as well together as any team I've been part of. So that's been a big part of the success that we have this year. And if I had to say what's the key variable for our success in the future, I would share with you that it's unequivocally this management team. So if you move to Slide 7, this gives you a breakdown of the NEMT 2019 revenue, which is -- was approximately $1.5 billion. From a funding standpoint, 92% of it is Medicaid. 85% of it is capitated. So we get a per member -- a fixed per member per month on a monthly basis. And then 50% approximately is managed care organizations, and 50% are states. These contracts that we have, we've had them for extended periods of time. They are very, very, very stable. We've renewed 6 major contracts this year alone, and our retention rate is in the neighborhood of 90%. When we don't have a retention, oftentimes, it's us saying, listen, this contract just doesn't work for us anymore. And we're going to agree to agree to part ways. So that's a breakdown of the revenue. We also launched, on Slide 8, our 6-pillar strategy to drive transformational growth. I've mentioned already the first one, which was to put the right people in the right seats. But I'll also say that one of the beauties of bringing in really talented people is that the people they bring in. And so we're already seeing this next level down transformation as well. And ultimately, I believe, organizations transform when the noncommissioned officers, if you will, who drive, for this example, the Army, are on board. And this is -- and we're seeing that now in the organization. The voice of the customer, this is something that we completely reoriented the organization around. I believe the -- this is one of the areas that the organization, if you will, before I got here, lost its way. But voice of the customer is we care what happens to the member. And that member is in the center of our ecosystem. And on the outside of the ecosystem are our teammates, our transportation providers, our states, our referral partners and our payers. And all of their voices matter, but the voice that matters the most is of the member. But we have to partner with ecosystem in order to provide the best possible solution for that member. On transformational growth, the acquisition of National MedTrans as well as Simplura as well as our move in the social determinants of health are all examples of that. The single repeatable model is we do have -- on the NEMT side, we have 15 locations around the country. My goal and our goal is to standardize those and to create single repeatable models and to drive out waste and to reduce variation and ultimately improve quality in the member experience. And then enhanced technology platform. We are going digital. We expect to have our network digitized -- 90% of our network digitized by the end of this year. We've also implemented an IVR -- a new IVR solution, which is fully implemented across the country. And we are going to continue to make investments in technology that, we believe, will enhance the member experience as well as allow us to scale appropriately as an organization. And then the rebranding efforts. You saw our name change. It's really nice to have a name change, but arguably, the most important part of the name change is the cultural change. And we've spent a lot of time on redefining our culture. We recently got an engagement survey out, and we've got the information back. And I'm proud to say that our scores are world-class. And if the country is -- there's -- you go from a 1 to a 5, our 4s and 5 are in the 80% range, but the 5s are above 50%. The national average prior to COVID was in the 30s. After COVID, it's actually in the 20s. So again, I think we've done, despite the headwinds of dealing with COVID on a day-to-day basis. We are essential employees, so we haven't gone anywhere. And in fact, I've gone to the office every day just about that -- we've done, I think, an incredible job of not only rebranding the company externally but rebranding the company internally. As it relates to the market size, which is on Slide 9, ModivCare is the largest company by a factor of 3. Scale matters in this space. One of the reasons why the National MedTrans acquisition was so successful is that we could literally just put those contracts into our network, and that speaks to the transportation provider efficiencies. Because of the scale, size and scope of the company, we've been able to recruit top talent, which you saw in an earlier slide. And then we are doubling down our investment in technology, whether that be go digital, whether that be IVR, whether that be workforce management, automatic call distribution, whatever it is. We have the finances to do the work that needs to be done. We bought the preferred with cash -- bought out the preferred with cash. We bought out -- we bought National MedTrans with cash. And we're going to continue to look to keep the company, from the standpoint of its leverage ratio, low and continue to use the proceeds from the company to continue to drive our leverage rates down. So Slide 10 speaks to the addressable market. And there's a significant opportunity in the Medicare Advantage space. There is also opportunity in adjacent markets like workmans' comp, veterans administration, food delivery and retirees. Slide 11 talks about the industry growth drivers. We've seen a 7% to 10% increase in Medicaid enrollment. I don't think that's going away, given what we saw with the jobs reports today. Medicare Advantage is expanding dramatically. It's moving from -- the eligible beneficiaries are expected to increase from $59 million to $80 million, and within the Medicare population, Medicare Advantage piece is growing much faster. We are seeing an increase in the emphasis on social determinants of health. We are very focused on tackling inequities in the health care system. And as of December of this year, our nonemergency medical transportation benefit has been codified. And that took a lot of work, but I'm very proud to say that, that's behind us. And then on the National MedTrans acquisition on Slide 12. I've mentioned some of this already. We purchased it for $80 million. It's $200 million of revenue. It certainly deepens our presence as the #1 company in the industry. So while we acquired this from United, in many respects, United chose us. They could have chosen a number of different companies but felt that we were the best one for their patients. And I think what's going on with the service levels would certainly represent that. We brought, as a result of it, 2 million more members to the ModivCare platform, and then it added $50 million of Medicare Advantage revenue, which, again, as we look out to the future and think about where the growth opportunities are on the NEMT side, Medicare Advantage is a significant opportunity for us. On Slide 13, we talk a little bit about our response. A lot of stuff that we're extremely, extremely proud of. We delivered over 1 million meals in the state of New Jersey. We did not have a food or nutrition business or delivery business prior to COVID. And we saw a need in the communities, and we've been working with community organizations, states and payers. We've delivered over 300,000 meals in the state of Pennsylvania. And then over 180,000 meals in the state of Florida, predominantly at the Dade County school level. So we've also partnered with schools in this area. So again, very, very proud of the work we've done. We've done some, I think, some very appropriate things with our transportation providers related to bridge loans as well as assistance with insurance. And then I think we're very well positioned as this goes on, we continue to withstand the storm. We're obviously the largest company in this space. We've got the strongest transportation provider network. We've got the longest-standing contracts with -- than anybody else has. And I see that the partnership that we've developed with our payers and states over the last year has changed the perception, I would say, to you of ModivCare in the marketplace. Slide 15 talks about the Simplura acquisition that was announced on September 2020, immediately accretive to earnings before synergies. We like Simplura a lot, in part because there was overlap in 5 very specific states, namely New York, Pennsylvania, Florida, New Jersey and West Virginia. Simplura also has high customer retention rates, very low employee turnover relative to the industry. If the industry is at 60%, Simplura is at the 30% level. They also have -- they were substantive. They were in the $500 million range with $50 million -- approximately $50 million of EBITDA. And as we went out and looked at opportunities, this was something that really jumped out at us. And it really provides us a foundation to continue to grow in this marketplace. And it is a significant marketplace. And if we go to Slide 16, it's approximately a $55 billion market right now, highly fragmented. The top 5 companies less -- represent less than 5% of the overall market. The market is expected to grow to $100 billion by 2024. And our customers are looking for someone who can deliver transportation, who can deliver nutrition and can deliver personal care. And this was -- from our standpoint, this was one of the crown jewels of that and really excited about what we're going to be able to do with that business. And we're going to be very active on the M&A front. And why is that? Well, on Slide 17, there are 18,000 of these companies. As I mentioned, I guess, I said the top 5, but the top 3 make up less than 5% of the market. The trend is moving towards narrowing networks. And again, I think we're very well positioned as a result of our size. We expect industry consolidation to accelerate, and Simplura has a robust pipeline of acquisition candidates. Typically, the deal range is in the 5.5 to 6 area. And we know the multiple on the -- what's happening in the public markets, if you look at LHC or Amedisys or Addus for that matter. On Slide 18, ModivCare has multiple growth levers. I talked about deliver on organic growth pillars. But on the NEMT side, there is significant opportunities to drive out cost, to reduce variation, to reduce waste and ultimately drive quality and improvements in the member experience. I mentioned the go digital. I mentioned what we're doing in the IVR side. We've also -- we're working on and have implemented a business process outsourcing relationship. On the Simplura side, we are going to look to expand this rapidly. And we're going to be looking in markets that we may not be in currently but we're also -- maybe markets where we could double down. And ultimately, when I think about our voice of the customer, this is all about a one-stop shop for social determinants of health. And again, I don't think there's a company in a better position to do this going forward. I've mentioned that I would address Matrix, I'm on Slide 20. We own a 44% minority stake in Matrix Medical. It is a hidden value in this organization. Keith and team are doing a phenomenal job. We -- at this stage, it's estimated that it has a greater than $330 million on a pretax valuation potential for ModivCare shareholders. And again, they've done a tremendous job in the area of clinical solutions, new employee health and wellness programs. And their in-home business continues to ramp up, and they've also launched a telehealth program as well. So this is extremely attractive, having, again, a phenomenal year, and we are very proud to be -- partner with Matrix. So to sum up, why we're so excited about ModivCare. We have a strong competitive advantage that was developed over 20 years. Our network is second to none, especially on the NEMT side, where we have 20,000 drivers. And again, the National MedTrans acquisition is a great example of how quickly we can integrate a business like that into our company because of our network scope, scale and size. We have a new leadership team, I mentioned with you. We've spent a lot of time, energy and effort putting in the right people in the right seats, and you can already see the difference it's made in the company. We launched a 6-pillar strategy to drive transformational growth, and we are executing on that plan every single day, and we'll continue to execute on that plan. We are a clear leader in the NEMT industry, also in the social determinants of health, with lots of adjacent opportunities. We also have a long-tailed growth opportunity in nonmedical home care. The care is going to the home, folks. People want to age in place. And the Simplura business positions that beautifully to take advantage, if you will, and to provide more comprehensive care in that marketplace. We are an attractive -- we have a very attractive financial profile because of the very asset-light businesses, virtually no CapEx in this business. I mean there's your standard CapEx of around 1% but it's really -- it's designed to generate cash flow. And then there's also a significant opportunity to unlock the value from the Matrix equity investment, and I would describe that as a hidden value. So that concludes my presentation today. I appreciate you participating in this -- on this presentation today, and I would like to open it up to the participants to see if they have any questions.

This is Kevin. [Operator Instructions] At this point, I'm not seeing yet any questions coming in.

All right. They -- just got a note from [ Kathy ], the producer, and she said, "Talk, they may not come." I'm not -- I really -- I'm not sure exactly what to talk about. But again, we appreciate you all participating on the call today. Again, we're -- we've had a great, great year in 2020, I think it exceeded all our expectations. And we're in the early innings, and we think the best is yet to come. And we're going to continue to be aggressive. We're going to continue to do the right thing when it comes to capital allocation. And I'm getting a note here -- a question here. Wait. Okay. So I guess I'm not shutting down yet. Kevin, do you want to talk about -- did you take advantage of the CARES Act funding?

Yes. What we were able to do is we had a carry-backward loss from a sale of previous assets that we were able to avail ourselves of. And in total, that was worth about $27 million of cash. We collected some of that in 2020. There's still an amount outstanding that we are seeking from the IRS that will be received in early 2021.

So there's a question here, Kevin. Can you ask about appetite for larger M&A or more tuck-in in home care? I don't know what you define as tuck-in. I think it's a highly fragmented industry. There aren't many assets like Simplura out there. I think arguably, if there is something like Simplura out there, I think we'd probably take a hard look at it. We just, frankly, haven't seen it. I will say that there's some other companies out there that are a little larger that I think the multiple on those businesses, for me, don't seem that attractive. And so when I look at the environment and where we're trying to get to, our view is that these smaller, I guess, I don't know if I'd call them tuck-in because in some instances, they really get us a footprint in states that we have NEMT in but we don't have a presence in the personal care space. So they will provide us -- we're looking at opportunities to have a footprint in certain markets. And so we're going to be very aggressive. And we've got a strong pipeline. And we've got capital. And we've got capital off our balance sheet that we feel very strongly about that can be used to accelerate our footprint in the home care space. Scott, is there anything you else would add to that?

No. I think that's right, Dan. We're pretty low, from a leverage standpoint, on a pro forma basis, closer to 2x. And the focus right now is expanding the personal care footprint. And we just made a significant acquisition that we're integrating right now and being very thoughtful in successfully integrating it. So on the horizon, unless something extremely attractive comes across the day, we're focused on smaller M&A for the foreseeable future.

Thank you, Scott. All right. I -- well, with that, I don't see any more questions coming in again. I appreciate your participation on this call today, and we look forward to a terrific 2021 and very grateful for the JPMorgan team for giving us an opportunity to present. And I hope you all stay safe, and I hope you have a wonderful day. Take care.

Thank you.