ModivCare Inc. (MODVQ) Earnings Call Transcript & Summary

Thank you, Abby and thank you, everyone, for joining us this afternoon or late this morning as it may be. With our next presentation, we have the team from ModivCare Incorporated. I appreciate ahead of time. Thank you. Thanks to both of you for taking the time for joining us in our conference. Hopefully, this is the first of many. From the team, we have Heath Sampson, Chief Financial Officer and Zach Miller, Head of Corporate Development and Investor Relations. Thank you, again, both for joining. I know this is not a presentation. So, I think -- I still think a great place to kind of kick us off Heath would be, just turning it over to you to give kind of an overview of -- I guess the best way to put it is transformation of the business model over the past couple of years from a traditional transportation business to a much more broader-based business model. So, I thought if you could just walk us through kind of and then maybe walk through some of the trends on what you're seeing in each of the individual business lines.

Okay. That sounds great. Well, thanks, Larry, and thanks to Bank of America for giving us the opportunity to speak with all of you. So, yes, again, I'm Heath Sampson. I've actually been here for 9 months and our CEO, Dan Greenleaf has been here since December of 2019. And as Larry alluded, since his arrival here, there's been a major transformation in this business. Historically, our platform has been in the transportation business, in the non-emergency medical transportation area and that was the company. And we were the dominant player for many years in that space and we remain the dominant player. However, since Dan came and ever since then, we've been transforming the business using that platform as a stable part of our business because we actually have 30 million Medicaid and Medicare members that we have and it's allowing us to actually cross-sell with all the other products we have. And the reason for the transformation really is following the market. The market is moving to care into the home. And then with us, care into the home and then also, when appropriate, taking people to and from the necessary doctors visits. So what happened in really late 2020, we made our first acquisition into that strategy of care into home with the acquisition of Simplura, which is in the personal care space. We made additional acquisitions that helped with our technology and increased the size and profitability in EMT business as well. But then we also, within our strategy, made another acquisition in the personal care space that was also in the Northeast, CareFinders. And then at the same time, not on purpose, but we also made the acquisition of VRI, which is in the monitoring space. And then we -- at that over the last also 12 to 18 months, we've developed a meals business, in food business. So now we have really the parts of the strategy of providing supportive care into the home. So, we have transportation, we have personal care, we have meals, and we have monitoring. It fulfills that entire kind of semi-circle around supportive care. So that's the strategy that we've been moving on strategically. And I'll get into what our customers and payers are saying about that in a second. But also an important point, within our transportation business, I said that we are the largest and we still are the largest, we have about 40% of the market. The other strategic action we took is, we have invested a lot in technology to modernize and automate the business. Frankly, technology was our [indiscernible] prior to us doing this. So one, this transformation into technology is enabling us to have a better member experience, but as importantly, also allowing us to transform the cost structure. So everyone is familiar with Uber and Lyft app. You have that on your phone, you can see where your driver is, your driver can see where you are that's the technology that we're building. So there's a lot of benefits that you can imagine from an automation and modernization spectrum, but also below that, there's a lot of benefits around reducing waste. Right now, we have 400 plus people that manually route trips. We have over 100 people that manually bill, we have this decentralized. So the strategic decisions to follow the market to where it is moving into the home and us modernizing and automating the NEMT business is allowing us to take out costs, meet the members where they need to be in technology and now we can really execute on this future strategy on bringing these services together as one supportive care unit and then continue to develop that technology to ensure we're meeting the members where they are and meeting the needs of where the payers are. The payers want a one-stop shop. The states want a one-stop shop around the services we provide. So that's the transformation we've made in all our businesses. And really, we made these 2 final acquisitions in September. So we're really at the beginning of this exciting time. Individually, they generate strong EBITDA, strong cash flow even during COVID, but as we come out of COVID and as we put them together, that's really where the value happens for us.

I think just following up, but I think it's some of your commentary, can you -- and suspense has really been topical in many of our calls. Your contract were about 50% state, about 50% managed commercial. Can you talk about your value proposition, specifically to the customer and how that has kind of transitioned over the last, particularly over the last, as you said, you kind of touched on a little bit there for the last couple of years. I think [indiscernible] emergency vehicles, but Zach, can you just talk about your -- like you said, your specific value proposition with new portfolio of assets?

Yes. So -- and it's right to talk about the states versus the MCOs because they -- though there's a lot of similarities, there are some important differences that makes sense to highlight. So, on the state side, the main driver for them right now is stability and member experience. So that dominates most conversations and is the reason why we continue to renew and maintain our NEMT contracts. We've renewed 100% this year, over 90% last year. So having a strong member experience, providing that stability is top of mind. And then even how the states currently buy, they love that we have all these 4 providers, but they really actually buy it individually. At the same time, when we're talking to the Medicaid Director of that specific state, it goes a long way that we have all these offerings. So, there is a lot of value in that, but they're maybe not as progressive as our MCO partners or yes, they're looking for stability and strong member experience, but they're really looking for how we actually, not just cross seller, but how we bundle and eventually provide opportunities for value-based care. We actually -- we meet quarterly with the largest payers in the country that are our customers as well and we are brain starting about the future of where health care is going. Specifically, now that we have these assets, one of the large payers is working with us directly. We are sharing data, we've developed pricing models. So we are piloting a bundled profit model, coupled with a back end risk share. So, they are really excited about us having these assets. And then even from a cross-sell perspective right now, now that we have all these assets together, actually, if you look how a lot of health care services offerings are offered, it's at that case manager level. So that case manager is making a decision for that specific patient. And now they have all on one list that they can get us for all these offerings. Jason Anderson, who is the CEO of our monitoring business that we just start. He historically, he's seen, okay, I can offer monitoring, but he sees on their MEO, he sees on their personal care. So, right now, we have the opportunity to cross-sell to those case managers just with the offerings we have today, let alone moving to a bundled or capitated or value-based model. So they do care about the member experience, both states and MCOs, but the MCOs are more progressive around moving to value-based care.

The states are typically, I should say, capitated contracts, regional capitated contracts by service line?

Well, so the capitated contracts are only in the NEMT business. The other business lines are fee-for-service and typically a per member per month or in the personal area side [indiscernible].

And but you're saying on the MCO side, they will bundle and ultimately, will they capitate across the bundle potentially?

Yes. No, that's exactly what they're moving towards. And really, tactically, the way we're doing it now, we're putting all those services together and coming up with a PMPM based on the individuals and how they come together. And then we're developing a back-end risk share. So if you look at -- if in the home if somebody has personal care, if somebody has meals, if somebody has monitoring whether that's ensuring that they're taking their medication that their vitals are remaining appropriately and then also if somebody get to and from their hospital visit when they want, you have that as a control group compared to somebody doesn't have that. And there's a benefit there and we're going to share them that.

Okay. In terms of that product offering and particularly in the home setting, is there anything -- I know you talked about the technology, which I think is a question of itself, but that sounds like more of a cost opportunity. But from a kind of a rounding out a product delivery portfolio in regard to home setting, is there anything in kind of the nonmedical universe that you need to either, a, acquire, build out organically? Or is there anything to round out that product offering that you need?

We really have all the offerings now that we've made these acquisitions, all in the supportive care space. So it's not clinical. So in supportive care space and we know there's a lot of studies around in-home care, around personal -- all these offerings and even just broader the development of how important social determines of health are to someone's health outcomes. So we have all the pieces now. Now it's just a matter of bringing them together and executing on what we have. That being said, in the personal care space, it's the only offering that's not national yet. So, we need to continue to build out that technical platform in the personal care space and we'll continue to do that. As you know, that market is extremely fragmented, primarily made up of moms and pops and then a few big people. So, we'll continue to do a small tuck ins.

So that's going to be a small tuck-in driven kind of growth model?

Yes, it will be. The multiples are better. That's also where the market is anyway. So that's the right approach. The unique thing as well, in the supportive care area, so we have competitors in each vertical. We have competitors in personal care, we have competitors in transportation and so on, but nobody has it all coming together. So we are in a unique position to actually do that. And again, specifically, our payers are really excited about what we're doing. To digress a little bit and you guys probably know this, 3 months ago, United came out with their MA priorities. It was food, personal care and transportation. Right now, we're their transportation partner and we look forward to partnering with them in general. So that's where MA is moving as well.

How does -- how do you -- or do -- how do you work with kind of the home nursing side of the equation?

Yes. So right now, it's not necessary. But, likely and some of our competitors have both nursing as well as personal care like ours and there is some synergy there. There are some handoffs there. Right now, we don't see that that's necessary because we want to focus on the other offerings that we have. Down the road, what we'd like to happen is if you have all these offerings, coupled with technology, a lot of what is done in nursing is really not clinical. So, you'll see us start moving further up that value chain, not all the way to nursing, but we'll be able to do a lot of the services that are currently being performed by clinical people.

And the clinical side is not, in any way, had bridged over coming the other way into food or nutrition or personal care and over?

Yes. No, it's really not. Yes, they're really not. They complement in the home as a whole, but for us, for strategic focus, for the complications and risks that come with clinical care, the market is large enough, the uniqueness in what our offering is coupled with where the industry is moving, we feel good about the assets we have and sticking with the strategy.

Sticking with strategy. Okay. And you see the personal care side is one more tuck-in driven in terms of acquisitions, some smaller. Okay. Just to touch on, I think, one of the more call it sure probably one of your greater challenges and again, it's something shared by the industry broadly. Labor, obviously, you had talked about in your most recent calls and so forth. Can you just highlight kind of where you're at -- where you see you are in terms of how you can address it going forward? I know the Uber relationship has moved in that direction. Can you just talk about how you're framing the whole labor model right now, which I know is not the easiest of those environments in which to address, but kind of get your thoughts on that front?

Yes. So, it makes sense to talk about the labor challenges that we're having on the personal care side and then the transportation side. Our monitoring side has actually been insulated by that and it's been growing at double digits at strong margins in the 30% plus. So that has not been affected by these labor challenges. So, really, it's the transportation business and the personal care business. I'll start off with the personal care business and consistent with what the rest of it, the industry has been feeling. The stimulus was a major challenge for us. People could stay home and make more money. But those have rolled off for the most part in September. However, that is continued with delta and potentially with the new variant that some people are afraid to go in the home. So that's a component as well. And for the states that we're in, specifically New Jersey, New York and Pennsylvania, there's been vaccination mandates. So that's also been challenging for us getting the aides back. So on the personal care side, it's really been about not being able to grow. The amazing performance has been -- we've been stable. Our EBITDA is slightly lower from a percentage perspective, but it's been stable through COVID. So, really, that suppressed our growth. So as we move out of this year, there's not -- typically in this industry, there's not a lot of hiring. We don't expect a lot of hiring for the remainder of this year. But assuming the variant is at par with data because we've been vaccinated for most of our aides, we feel good that we'll start meeting that demand. And as everybody knows or what everything said by us and other people, there's -- the demand is there, anywhere from 10% to 30%. So we're optimistic with our model with ensuring that we can get these aides, the right number of hours and the right number of days that we'll get people back to work starting in Q1.

Does that become a -- does the growth in the personal care side is that now in a sense reflects some of your ability to source more labor and aides and so forth. Is that kind of hand-to-hand, one-to-one?

It's that simple, really. That business right now is a staffing business. And it's important that we have density because that's -- we'll be able to attract the aides because we can give them more hours. And then 2, our approach to ensure that we have locations in communities that can serve those patients and those members -- those aides live in those communities is a critical strategy that's enabling us to, one, maintain and grow. So, we're optimistic that as COVID rolls off, that we'll be able to compete in that marketplace. And then the reimbursement in those states that we have are stable. And history has shown if there is a minimum wage increase, there's also a reimbursement increase. So, we're confident in that business coming back.

Okay. And you're saying on the NEMT side, is that like a different dynamic, I'm presuming.

Yes. Well, it's actually the same items. If you think about we have these transportation providers and there's a bunch of drivers. They make about the same as what an aide does. And just like the transportation industry in general, Uber, Lyft, truck drivers, they have had a lot of challenge recruiting drivers and we've had the same challenge on our end. So actually, costs are up because of simple supply and demand, costs are up because no longer can we just service the community, we actually have to get drivers from farther out, so distance is longer. So those costs are up during COVID. The analogy -- like pre-COVID, we're at $30, now we're at $34. I think as COVID comes down, we'll get to like $32. We'll never get back down into about $30, but that's in line with our expectations. Effect is with our longer-term guidance that we've given around the EBITDA targets that we put in place. And again, that's why scale matters for us. So as -- we've also -- in the transportation business, we've seen the benefit of our capitated contracts in COVID that have been somewhat offset by this increased cost as COVID comes off that increased cost is going to go away and that benefit is going to also go away because we're going to be having more trips, again, why we're comfortable with those margins that we've historically said around that 7% to 10% range.

Okay. And how does the Uber relationship maneuver? How does that fit in within the context of what we just discussed?

Yes. So Uber is a relatively recent partners just in the last couple of months. We've been a partner of Lyft for many years. So, now we have Uber and Lyft. They represent around 10% or even less than 10% of our rides. And that will stay consistent. They're an important partner and this will make sense to everybody on the phone. They fit well within our model as in high-density populations where the member is less sick, more mobile and move in a short distance because that's where the cars are. So that's what we primarily partner with Uber and Lyft on because they can move people in short distances in an easy manner. So they'll continue to be partners of ours, but at that kind of 10%-ish range.

Right. Okay. I know we're getting -- a question coming in close to the end here. But your ownership stake in matrix, what's your thought about how you manage that stake? Is it something you would look to monetize? Or what are you kind of your thoughts broadly speaking around that minority stake?

Yes. So that business and our partner in that business is a private equity firm that is -- we had it for many years. So we are aligned with them that we will monetize this asset. The question is, when are we going to do it, right? And a big part of when we're going to do it is the traction on their business that they've diversified into really over the last year. And it's primarily in the decentralized clinical trials business. As that takes hold and is matched with the current assessments business, as that stability in that EBITDA happens, that's when we'll monetize the asset. When is it? It's likely the latter part of 2022, but there's a lot of debate around that too because I'm sure people on the phone would even debate me on that. If you're seeing traction in that, you can trade on forward multiple. So a matter of how long. So we feel really good about that. There's a hole there. We haven't fully got the big contracts with the large farmers yet. We have small contracts with them. We've proven our way into it. We've made the investments. So it's just a matter of when not if. And as you know, in that business, there's a lot of public software that we know we can get something.

A very attractive multiple. Okay. So right now, you kind of ring-fence late '22, early '23?

Yes. Well, that's right. Dan would argue that's a little bit earlier, but I'm the CFO.

I know we're kind of coming up on it here. Last question here, you're obviously -- your leverage profile -- given it's a leverage finance conference, leverage profile, how do you think about -- obviously, there's a lot of moving parts. But how do you think about your leverage profile longer term? And where do you want that profile to be when asked 2 to 3 years down the road?

Yes. So our target that we publicly said to be at that 3x leverage is something we're committed to.

You're going to -- you don't see that changing. How you highlighted that in roadshow and so forth?

Yes. No, I -- right now, it's a little bit higher than that. And it may go a little bit higher over the next couple of quarters if it's a second. But in general, for us, we're in a great place. We want to keep that 3x and the reason why I say we're in a great place because of the strategy that we have laid out. We think if there is a larger acquisition that we want to make, we could do that with equity because there's demand for that. So we're in a fortunate spot that we'll be able to have that long-term target in that 3x range. A little specific on that. So, because we get these contracts like, you're talking about the balance sheet. So, we'll be a little bit higher coming out of Q4 from a leverage perspective and even in the Q1 because we're paying back our large contract payable that we have due to the states because of these capitated contracts. And this is a little bit detailed, but it's important. Right now, we have about $320 million in current receivable -- payables. But really around that, we expect to be net after AR to pay out around $100 million to $125 million of that. So our cash, we don't expect to draw on the revolver, leverage could go up a little bit and then as we move out, we'll be -- as we move out of Q1, our strong performance, our strong EBITDA will allow the cash flow and leverage to come back down.

Just to add on to that comment as well, that cash, as Heath has mentioned, like we can be able to fund that with cash on the balance sheet in the fourth quarter. And so there's not a need to draw on the revolver during the fourth quarter and even into 2022, we do have that modeled out as really kind of being the remainder of that balance after we pay the $100 million to $125 million in the fourth quarter. The remainder really gets paid off ratably over the next 12 to 18 months. And so we feel like we'll be in a really good position from a cash and liquidity standpoint to be able to fund those payments back to our customers. And at the same time, these businesses that we are running generate very strong free cash flow. CapEx is really only about 1% of total revenue. So just very cash-generative businesses. And so we feel like we're in a really good position to fund those remaining contract cables.

Okay. So let's say you don't expect you'll be -- you'll draw into revolver at all in 4Q and 1Q? Or do you?

Yes. We don't expect to -- some of the [indiscernible] are large and lumpy in timing. So, in the unlikely event that it was, it would be for a short period of time.

Okay. Great. I want to thank you, Heath. Thank you, Zach. I appreciate the time. Say Hi to Dan for making it a good experience.

Okay. Thanks, everyone. Have a great afternoon. Thanks again. Thanks, everybody.