ModivCare Inc. (MODVQ) Earnings Call Transcript & Summary

[Technical Difficulty] Heath Sampson, Chief Financial Officer, for joining us at the conference. I love the fact it's in person.

But I thought where we'd kick it off, Dan. I know we were discussing it earlier a little bit. Maybe you could just walk us through how you're coming off the numbers and the results and so forth. Maybe you compare that with just maybe a little bit of description, your 3 lines of business and how they all play together, and some of the key drivers and trends about where you're at today, what you see, going forward, especially in this COVID environment and challenging labor supply environment. So maybe you could just discuss some of those trends as well as you walking through the business lines.

Sure. First of all, I want to thank you guys. Larry and I have known each other since 2008, and first time Larry and I met was right after the crisis. [indiscernible] So anyway, I really appreciate what you guys have done for us, and thank you for putting us in such a good time to speak today. So a little bit about ModivCare. We're the preeminent social [ determinants of ] health company in the country right now. We generate somewhere in the neighborhood of $2.4 billion in revenue. We are tracking towards a 10%-plus EBITDA margin, and we're also tracking over time to a 10%-plus growth trajectory, as well. We've redefined the business pretty significantly. When I came on board in December of 2019, the company did $52 million of EBITDA. This year, we did $50 million of EBITDA in the first quarter. And we've done 6 acquisitions, and it's all been around this notion that our payer states and case managers want a one-stop shop for supportive care. And so what does supportive care consists of? It consists of transportation. It consists of meal delivery. It consists of personal care, so activities of daily living, not clinical, and it consisted of remote monitoring. And we're the only company out there that has done this and put these pieces together at scale. And there's nobody, frankly, even close. We're the #1 transportation company, NEMT company by a factor of 4. We're getting very close to being the #1 company in the area of remote monitoring. We are #2, approximately in personal care. And then, we launched a meals business that we feel very strongly about in terms of what it's going to be able to deliver our customer base. But again, really great results. We've done a fairly significant transformation leadership team. At this point, there's only one number of leadership team that is part of the team today when I joined. And again, I think that speaks to a number of things. One is that it needed to be done. I think, 2, that we've got a really great product and it's attracting top talent. And so, frankly, in many respects, we're getting the pick of the litter. But that's what I would highlight. And so, I mean, one of the questions we get is around, and know Larry talked about it, is labor trends. We've got 30,000 employees, so 25,000 of them are in the caregiver range. We are actually feeling pretty good. I mean, I know this is contrary to what you hear, but we're seeing paychecks, which measured a number of people that actually are servicing our members, [ growing ] up. Overtime is going down, which again speaks to supply and demand. So overtime, historically, is at 10%. It got up to 21% during COVID. It's back down to kind of the 16%, 17% range. We think it'll eventually get down to that 10% range on top of it. The hours on a weekly basis of continuing to edge up in kind of the 520,000 hour range on a weekly basis. Reimbursement's been really favorable. Reimbursements increased from the fourth quarter of '21 to the first quarter '22 by 7%. And we're in 7 states, and the states that we're in have favorable views, at least the states do, on leave. And so we've seen it in Connecticut, New York, New Jersey, West Virginia and Massachusetts, and it's affecting our ability to recruit caregivers, as well. I would also say, on the caregiver side, there's more to it that meets the eye because we are doing things differently that make us more attractive. One of the things is we help them out with their cell phone usage. And we buy in bulk and we offer them the opportunity to purchase off our plan, which is significantly less than what they would pay. We pay daily, which is another significant advantage. Again, if you're a caregiver and you can get that money as soon as you're done working, makes a difference. And the third thing is our benefit profile is much, much better. So we're becoming, if you will, the entity of choice when it comes to caregivers. In our contact centers, and I'll use this as an example, we've done a lot of work there in terms of training, of leadership changes. And during kind of Omnicron (sic) [ Omicron ], we saw historic, historic lows in both absenteeism and attrition. So this is our world. And the other one is we look at training yield. Historically, the company had run at about 63%. And what does that mean, is that when we go after somebody and we put them in a training class, what percent of them get to actually become a contact center employee full-time. Our yield has gone up from 63% to 85%. And so, again, we feel good about where we are from a labor perspective. I know this flies in the face of a lot of the other stuff you hear. The other thing I would say, we are not in the business of recruiting clinicians. Some of the other healthcare or home care companies are clinically-based. We are a personal care-based home care company, and so we're focused on activities of daily living, and in many respects, nonskilled labor. And in unskilled labor, we think there's perhaps an inverse proportion in inflation and people coming back to work, because inflation is forcing people to say, listen, gas is much more expensive, food is much more expensive, and I have to go back to work.

Just to follow up real quick on that labor point, as far as the caregiver, is there, I'll call it, any background that you need to source in any way being it's nonclinical? Or is it just the training that you really need to provide to that individual at that point in time? Is there any structural background that individual has to have?

Well, I think what I would say the structural background is, do they live in the communities they serve. Do they, candidly, look like the communities they serve? That's the structural piece. And all the data supports that people prefer to have people that, again, not a popular converse (sic) [ conversation ] look like that. So what we've really tried to do is put our caregivers -- and this is why we have 94 locations, and I share with people that the personal care business is not a state business, it's a zip code business. And so we plop our centers into these zip codes, and then we recruit around those zip codes so that they can serve the communities that are around those locations. And so that's what I would say, Larry. I mean, there's obviously screening and other things we have to do. But it's really making sure that the population we're recruiting to do the care reflects the populations that we serve.

I know we got away from it a little bit. On the NEMT side, you recently detailed a few initiatives, 3 or 4 initiatives. Can you just walk us through those initiatives, including some of the new team that you brought on board? I know you've made some changes on the NEMT side. So if you can just walk us [indiscernible]?

So we've got 30,000 employees, and we have 20,000 transportation providers we manage. And historically, the company had treated those transportation providers, I would say, as a necessary evil. And how they dealt with it is they would just oversupply, and then just drive down unit costs. And our view is that's not the model, going forward. Our model, going forward, is looking at how do we partner with them? How do we get them volume for price, right? And so we're spending a lot of time doing that. At this point, we've got about 25% of our driver in network that represents 80% of our rides. So it's really around figuring out what do those 25% of those transportation providers need, and over the last 7, 8 months, we've had 3 Transportation Provider Advisory Councils, where they come in and provide feedback to us. We launched Qualtrics, which gives them kind of immediate feedback to us on how we're doing. And then, we've done things like ModivCare Academy, where we're working with minority and women-based businesses and helping them grow their businesses. And so the Champion program is a big part of our future. We also have a product called Provado, and Provado, we've had it for some time. We've predominantly used it in, for example, California and Florida. And believe it or not, there are parts of our country where Uber, Lyft and us can't service. And so we've really focused them into those areas. Might be rural, that kind of makes sense, right, where they can pick up the slack there, and that's making a big difference. Also optimizing our technology. We're spending $100 million this year alone on our technology platform. And yes, some of it's tech debt, so it's systems, infrastructure and security, but it's also product development and really looking at what do our members need and how do they want to interface with the system, Larry. So I think all those things combined is -- when I got here, the NEMT business was doing about 5% EBITDA. We think run rate basis that we exit this year will be consistently at the 10% to 12% range. And so these operational improvements, whether they be the contact centers, our engagement with the transportation providers, our investment technology, are really playing out quite well in terms of the operational improvements, and also the improvements around member experience where, at the end of the day, that's what we really care about, is how do we enhance that member's experience. We've got 32 million members, too, 32 million, up from 30 million a quarter ago. So we manage about 10% of U.S. population, just kind of an order of magnitude about the company, as well.

To that end, can you touch on the Uber? I know you've talked about the Uber relationship and how that structure feeds into that [ 25% ], 80% mix, if you will.

Yes. So we manage mobility, as I like to share with people. So we manage ambulances, right? We manage wheelchair access. We manage sedans. We manage mass transit. 60% of our rides in Philadelphia are mass transit. We manage mileage reimbursement. Mileage reimbursement is where a family member can drive someone to their appointment. Well, in West Virginia, for example, 60% of our rides are mileage reimbursement. We manage taxis, and we manage Uber and Lyft. And so we look at this as there are areas where Uber and Lyft help us with on-time performance and getting our member to their appointment on time. And so we'll continue to partner with them. They'll probably always be in that under 10% range, I think, is what when we look at the marketplace and where they can play. But they've been a good partner, both Uber and Lyft, and they're a valuable service. And at the end of the day, it's about the member experience and where we can enhance the member experience by getting them on time to their appointment and picking them up on time. We'll continue to use Uber in those instances where it's appropriate. I will also say that 50% of our rides are standing orders. So standing orders, what's a standing order? Well, it's a dialysis visit. These aren't on-demand trips, right? These are trips that we know about months in advance, and we can preschedule, and you don't need slick technology. You need SMS, right? You need somebody texting to say, "I'm outside." What's different about what we do is we go door-to-door. So our drivers who are in that 20,000-person network will walk into a home and take somebody into a sedan, and then walk them into their [indiscernible]. Very different than a curb-to-curb service that, if you think about Uber and Lyft, it's a curb-to-curve service. So a good partner, appropriate place for them, and we'll continue. Again, that relationship will continue to evolve.

And you said that, that market, I believe, is about a $4 billion market you made reference to?

Yes. We actually refreshed that, so it's a $5.6 billion market now, and it's growing at 7.6% [ compound annual ] growth rate. And so we expect it over the next couple of years be an $8 billion market. The personal care market is a $55 billion market, growing to $100 billion. The remote monitoring market is about a $9 billion market, which is about 13% penetrated. And the food business is a $9 billion market growing to $15 billion. So a big part of where we started, when I got here, we had an opportunity set of about $8 billion. Our opportunity set currently is about $90 billion. So the market opportunity for us is massive from where it was just a couple of years ago.

And your share is 40%-ish, 30%, 35%, 40%-ish?

Yes, I think that's right.

I mean, what does the landscape look like away from that odd -- I assume a very fragmented market?

Very fragmented. And as a result, our scopes get size and the desire of whether it be United or Centene or Humana, they want really one partner. And there's nobody that can partner at the scale and scope and size that we can. And so, I think that market is going to evolve. Again, it's still fragmented, but we do believe that we are at a significant advantage as a result of our size. In many instances, if you're looking for a national partner, we're the only one you could partner with.

Yes. The other, we're probably 3x to 4x larger than the smallest. And the differentiator also is we're more than transportation. Even the people that are in the market on the transportation side, they're just that. And as Dan talked about earlier, a lot of our discussions with our top payers are "transportation and" now, and we're the only one that can do that, as well.

I mean, where the market has shifted just so dramatically over the last [ 2 years ], Larry, they are looking for a social determinants of health partner. And we are the only company that can do that. We're the only company that can bring personal care, that can bring meals, that can bring remote monitoring and can bring transportation. There's no other company that can do that. And every conversation we're having now with the payers is they want a one-stop shop for those services. And again, we're the only ones that can do that.

Right. And that's typically a capitated relationship?

In transportation, it has been, historically. We've got about 85% has some capitated component. 44% is full risk. Heath has laid that out very beautifully in a couple of transcripts ago, so if anybody is interested. Our remote monitoring is on PM-PM per member-per month. Meals is largely set up on a per-meal. And then, on the personal care, it's a hourly fee. But ultimately, we're going to bundle all those things. And again, we have a bundled pilot we're going on with a large payer right now. And we're going to be in a place to be able to go out to the large payers and say, "We want that entire population, and we'll take full risk for it. And again, I would tell you, there's nobody in a position to do that other than us at this point."

Okay. And the [ counterpart ] away from -- I don't want to call it the public health side, but I mean the states, the counties, other [indiscernible], is it a hand-to-hand relationship? Are you selling to the states and counties, public entities, as well as the payer? Is it kind of a twofold approach in terms of that capitated arrangement, if you will?

It is. I mean we've got significant contracts with specific states, like in New Jersey, and then we've got significant contracts with certain payers. And so yes, and in some instances, like with meal delivery, you have to get certifications on a state-by-state basis. So yes, that's exactly right, Larry. It's a little bit of both.

And on the transportation side, it's kind of typically all or none. So you get the whole state even if it's managed. You get the whole state, or 1/3 of the state, so it's big chunks.

It's big chunks.

Yes. And the nature of the contracts are single year, a couple years?

Yes. Well, so on the state side, anywhere from 3 to 5. Our relationships have been, in many cases, 10-plus years. You perform, you get it. And then on the MCO side, they're evergreen, so every year. And again, for them, especially this last year, it's about customer experience. So if you perform on the customer experience side, you just keep renewing.

Yes. And we got a 98% retention rate last year, so we've been very, very successful in maintaining. And some of these relationships have been multi-decade, so [indiscernible] the turnover in these contracts. And again, as we continue to evolve our business model and it continues to get more sticky because of what we're doing from a technology standpoint, I think separating from us is going to continue to be more challenging.

Flipping over the personal care side specifically, I know you get a lot of questions, and I get those same questions, the labor trends. You said, I guess, reimbursement on labor was up 7% year-over-year. And again, that's the same counterparty. How challenging was it to get those types of -- and we're hearing for other, call it, providers, hearing 2%, 3%, 4% kind of pass-throughs and so forth, but 7% seems like obviously a very good level. Is that a reflection of recognition of your business model or relationships, or a little bit of both?

Well, it's really the value that these specific states see in in-home personal care. So it's us performing, but it's just in general the state valuing that. It's the lowest cost way to keep people out of the hospital. So that's probably the biggest driver. The states that we're in are very supportive of that. So that's been very beneficial.

And your primary markets are those 3 markets, right?

We've got Pennsylvania, New Jersey, New York. We've also got Connecticut, Massachusetts, West Virginia and Florida.

And to grow outside of that footprint, is it an M&A trade? Or can you grow that organically?

Outside of the states, it's probably M&A. Within, so even though we're the #1 or #2 in those states, we have a lot of room to grow, gaining share or opening up community-based locations. That's another way to grow organically. But to grow outside of the state, it makes sense the easiest way is to buy.

And what's the competitive dynamic look like?

Well, so it's a very fragmented market, similar to what it's been. So the smaller ones, kind of 6x, 7x and obviously immediately accretive, and then the larger ones kind of in that 10%, 12%. But we feel good about the large ones we've made. So likely, right now, it's the smaller ones that make a lot of sense to us right now.

And you said you're the #2 player in that space in terms of market share [indiscernible], and number one is?

It's a private company.

Oh, is it a private company?

It is.

It is. Okay. Yes, so you have to acquire your way to other states [indiscernible].

I would share with you, Larry, you do from the standpoint of if our customers are saying, "Hey, we want to layer all 4 services," so we'll need to do that. But if you're talking about growing, I think the states we're in, we could have a $3 billion to $5 billion company in the states we're in right now. The demand is 50% higher than the supply. And as we continue to become the place that caregivers want to go, that the market could again, I think, just move exponentially. And so again, we think the states we're in, we're in incredible position. And if we just stayed in those states, I mean, it could be a $3 billion to $5 billion business.

Yes. These communities, we open up a de novo location, and we haven't been doing that. And we just started doing that. In a community where you know you can hire, that paybacks months. So it's an exciting time for us to grow within those states.

Does home health come into play as a competitive balance, or no?

No, it's completely separate, right? Home health is episodic. And when someone needs clinical, this is all front-end supportive care, so [indiscernible] life.

Yes. So 75% are duals. Average length of service for personal care is 4 years. Again, very different than clinical. Average length of service for personal [ emergent ] response, which is "I've fallen and I can't get up", 3.5 years. Average length of service for vitals, 2 years. So we're really in the business of, like, managing that patient multiyear, unlike home health, which is episodic, 30 days, 60 days. That is a massive difference and a massive advantage for us, because the payers want somebody to help them manage the last mile. And to do it in a longitudinal way, which we do, is just the virtue of the businesses we are involved with.

Along those lines, can you talk about integrating CareFinders and Simplura? Are they relatively fully integrated at this point, and where does that stand?

Yes, they've gone great. I mean I think that, again, CareFinders and Simplura were mostly overlapped. I mean, if you look at the states, Pennsylvania overlap, New Jersey overlap. So that made it a lot easier. And then, when we acquired the remote monitoring business, we hired a gentleman by the name of Jason Anderson. Jason's a rockstar. Jason's in charge of our home business, which includes meals, personal care and remote monitoring, and is just doing an unbelievable job. I mean, it is becoming one company. And I would say that, for those of you who are familiar with acquisitions, what you find out is that, when you buy a company who's done a lot of acquisitions, oftentimes they haven't integrated [ it even ]. That was kind of the situation with Simplura, and we're integrating all this. We're going to overachieve on our synergies as a result of this. And again, I talked to you about what we've hired. Jason's also hired 2 Chief Operating Officers underneath him; one, Mia Haney, who's doing personal care, and [ Jessica Highlander ], who's responsible for the VRI remote monitoring and meals business. So again, we're just in a really good place. The other thing I would say about that business from a call point standpoint, a sales [ team ], it's case managers. So the case manager is the one that's making all these decisions around what service is, and they want a one-stop shop. They don't want to have to go through 10 companies for that business and 5 for this. And if we can show that they can do this all with us, we have a huge sales advantage. And we're doing that. We're selling into those case managers. Once we've got the hunting license, if you will, or certification, it's selling into the case managers. And that's why we put that under Jason. I don't know, anything else?

Yes. The integration, primarily the benefit is back office. That's where you get the scale. And so that's relatively straightforward. It's just execution.

I don't want to [indiscernible]. I realize I should reach out the audience. Anyone have any questions in the audience?

[indiscernible]

Yes, they run a very different model. I mean, for us, it's very convenient to think like, hey, we'll just do this on-demand stuff. But it's just we do fraud, waste and abuse. We have contact centers because, if you think about our members, and again, what's not well understood is the digital divide and digital literacy. We have members who oftentimes don't have WiFi. We have members who oftentimes have limited data plans. We have members who oftentimes don't have an iPhone and don't have computers in the home. And then we take full risk. So we're paying claims, too. And again, Uber and Lyft can be a partner. And I would say where their area of expertise will be for us is in recovery. So for some reason, somebody cancels a ride. We can immediately get an Uber and Lyft over there. And that's where they play really well. But the rest of the stuff they just don't do. And again, keep in mind, this is an unsophisticated, relatively speaking, population we serve as we think about the digital divide and digital literacy. I don't know what else you would add.

Well, the other thing is most people need some engagement, obviously, the wheelchair or the stretcher. So there's a large population that actually need the physical lifting. But to a T, our drivers get outside and help the member in, engage, ensure the seatbelt's on. And that's not the model of Uber and Lyft. So it's just different, just adding on what Dan said.

Yes. And I also think, and again, they're a good partner, but this isn't a bar, restaurant, airport service, right? And these are folks who are in these communities, which, again, these transportation providers live in these communities, are tied to these communities. And again, there's certain folks who are not interested in going into those communities. And that's why having this transportation provider network that is community-based is so important to the well-being of our patients, because they're actually part of those communities, which, again, oftentimes Uber and Lyft aren't.

Dan, in looking at your product suite and selling into the case manager or the payer, state or otherwise, is there anything else from a product profile perspective, going outside of kind of your 3 primary lines, is there anything else incrementally that you would want to add that to sell as a product into your customer, kind of round out this [indiscernible]?

Well, so we've got a medication management product through remote monitoring that I think needs to evolve. So medication management is a big issue, right? We see the medication is either sitting in a cookie jar in a box, so we've got to have a more sophisticated approach to that. We've got a product. We've got to make sure it's being used. I think you can make an argument for behavioral-social. I think, listen, look at the mental illness spikes that are occurring in our country. We've got people who are sick, who've been isolated for years. We've now gone through COVID. So I think those would be things that a behavioral social product would be something. But by and large, the products that we have right now are exactly the products that our payers in particular want to be servicing their patients with.

Okay. Great. Thank you. I think we'll go ahead and wrap up. We're out of time. Thank you, Dan. Thank you, Heath. This is always [indiscernible].

[indiscernible], Larry.

Thank you.

Thanks, everyone. Thanks for joining.