ModivCare Inc. (MODVQ) Earnings Call Transcript & Summary

Thank you, everyone, for joining us this afternoon. And obviously, thank you to the team, broadly speaking, I think a handful of people here from ModivCare. Joining me on the stage today is Heath Sampson, President and CEO of ModivCare. We met with Heath earlier today, we had a lot of great conversations.

So I thought I'd just walk through kind of some of our conversations from earlier, but most notably, just starting off and kicking off with I thought just a broad overview of the 3 lines of business, kind of some of your initiatives and kind of coming off of 1Q and what your thoughts are with each of those business lines, what your kind of growth priorities are?

Okay. Great. Yes. Well, thanks for having us in my second year, and you guys have been good partners, and it's a good conference. So I really appreciate it. So second year here, when you think about these last 2 years and specifically for us from -- first, from a strategic perspective, I'll get into this in more detail around each of our business lines in the supportive care space. So all of our lines are in that. And why I want to bring that up first to talk before strategy is kind of where health care is going. I think everybody that's probably set up in this stage, especially somebody that's in health care services that is in front of the clinical side, it is a great opportunity for companies like us because access, quality and cost, the conundrum of the triangle, the services that we do really do change outcomes down the stream. So that's from a strategic perspective, why we're so excited. And to do that, there's a lot of work that we have done and need to do. But -- so with the strategy then with that vision on where health care is going, with the strong backdrop of what's happening in the U.S. health care system, we have a 2-pronged approach. One, I don't get to capture that future value of changing outcomes and improving primarily cost and access. But really, our individual point solutions. Our point -- those individual point solutions should be at scale, should be at the right cost, which is typically the lowest cost with the best member experience. So those solutions are about 60% of our business is called mobility or nonemergency medical transportation. We're the largest. We're about 40% of the market share, and we're across the nation. And those services that we provide anywhere from somebody that needs heavy service around an ambulance, all the way down to just meeting the sedan to take them to appointment just down the street. So across the board, really those services. That business, again, about 60%, the target margin is around 9% to 10% of a range. The other part of our business in this division but there's 2 segments within that. Personal care, where those personal care services where we offer all the supportive care services of everyday life, and we're one of the largest within that space, but concentrated in the Northeast right now. And then the other side of the home business is monitoring business. Devices in the home, whether that's emergency devices or monitoring devices that help people with chronometers or blood pressure. So those suite of services are what we have, which we call supportive care services. So the strategy is to grow those with the market tailwinds we have, rigid margins under a rigid payment model because those are all offered both within Medicaid and Medicare under current structures. So that's a great base to build on to grow. But then the tying back to the future is all those services within the people that utilize those services, those are typically the people that are most sick, whether that's LTSS and really need transportation, need personal care and need devices. And there's not a lot of people that bring that together. So we're going to bring that together both from an efficiency perspective, but then I get to the second part of the strategy. When you have access to those people in the car, in their house or with a device, you can start collecting data and impacting outcome. So that's why we're really excited about the strategy, grow within the current point solutions, rigid margins and then take advantage of where health care is going.

And how do you kind of ring fence the kind of the market or the total addressable market, if you will. I mean how large -- is there a data point out there that references what is that total addressable market?

Yes. So well, it's interesting. I'll give you the individual point solutions. So from a personal care perspective, $55 billion market. Transportation, $9 billion market. And on the monitoring side, about a $9 billion market as well, all growing at rates higher. When you bring them together and go beyond the services, just that were point solutions, that market is growing and much larger, too. So lots of opportunity to grow within the point solutions from a market growth perspective as well as especially when we bring them together.

And from a competitive balance perspective, who effectively within each of these segments, do you kind of compete with? This is probably not a traditional single platform, I imagine.

Yes. So from having the assets, we have -- there's really nobody that has all the assets we have. Within each of our point solutions, there's a number of competitors and do a very good job, which I think is good for the industry, especially where healthcare is going, what I talked about. So yes, there are from a size perspective, again, we're #1 in transportation/inMT, again 40% of the market. And there's a number of flares that are kind of 20% down. In the personal care side, there's probably 3 or 4 large companies, and we're one of those large companies. But on this publicly on this stage, probably at us, as you know, and a great company. And then on the monitoring side, specifically in the PERS or personal emergency device, there's probably 3. And we're kind of 1 or 2 from a size perspective. So the good obvious things is that we're one of the largest is within that, which gives us the scale, relationships, but at the same time, to your question before that, within the addressable market, still a lot of headroom to grow.

Okay. Digging now a little bit on NEMT. I know there's been a lot of questions that came up on Medicaid redetermination which kind of kicked off April 1, if you will. And you've given us some parameters kind of 10% to 50% risk potentially on the membership over the next, I think, 4 or 5 quarters. Can you just elaborate on that for us and kind of how you're thinking about the risk and you've given some other data points around that as well?

Yes. So the good thing for us is we have been planning for this for multiple years. So it's just going to hit everybody in the face these last couple of months. For us, we've been planning for this for the last number of years. It benefits us coming out of COVID and also it allows us to be proactive in Medicaid redetermination that's happening now. So the good thing of this for us, we're aligned with all our specific states and understand what needs to happen. So part of what we prepared for is changing how we contract with our states and our payers. And that primary is a move to a kind of win-win relationship. So when there is a fluctuation in utilization, which redetermination would be, the cost, which could relate to redetermination, those we share. So we're protected from a margin perspective on the P&L. So that's an important point. So that has happened and some of the stuff that we talked about prior to COVID, we would have had a lot more exposure. About 60% of our contracts plus we're exposed in the event that this happened. Benefitted us during COVID, now we're down to 20%. And that 20%, we know where they are. We have relationships with them. based on historically how we have reset and redone pricing, we feel really good our ability to partner and manage through that with each of the areas.

Okay. And I know it's a question I've got the contract payables as an extension of that. A little bit of a headwind in 1Q. You talked about a headwind 2Q, but it kind of turns positive second half of the year. Can you just again elaborate on that for the audience?

Well, it's a really important point, and you really have to dive into our contracts to look it as simple as possible. Starting off the bat again, with the changes we've made, the margin in the P&L is protected with these changes. So how -- why is that the case? Because we actually either -- we throw it on the balance sheet. Whether if there's a change, and it's higher, we -- it's a payable. If it's lower, it's a receivable. So looking at the receivables and payables is an important part. And right now, as we're moving through that, because of the movements in the receivables and the payables, it's causing and has caused the near-term working capital timing issue for us. But when you break that apart, it's timing. So looking at those is really important. And I do think for the next -- this quarter and what I said for next quarter, those timing things are going to hit us. But the cash flow generation that each of these business lines have are there, and you'll see that improvement in Q3 and Q4, where we will be generating cash flow as well back to that -- those rates that we talked about before.

I think your initiatives really on the NEMT side, targeted at the transportation and costs, the outsourcing in the said the call. And you talked about getting down from low 40s. I guess, sequentially, you were down in the quarter, right?

Yes. So from a cost perspective, yes, the initiatives are taking hold. You can see that in the numbers, and I expect that to continue. It's tangible items that we've implemented now it's just about scaling them. So the team has done an amazing job. And the initiatives that we can go through probably at a later date are showing high member satisfaction as well as allowing us to take out costs as well which is why we reaffirmed our guidance and reaffirmed our long-term margin targets as well.

And long term, when you're talking about getting -- I think it's roughly $42 unit, if you will, getting down to high 30s, which I know is important to your margin story in NEMT. What are you thinking in terms of time frame?

So it's already improved quarter-over-quarter. So we're going to see a quarter-over-quarter improvement. That high 30s is over the next couple of years. So we continue to anchor back to what we said for 2025. So the guidance that we give there will have that kind of straight line up to that guidance in 2025.

So that's a big part of that initiative to get to $300 million at the end of '23 through '25?

Yes. It is.

Okay. Jumping around a little bit, but maybe you could just elaborate on pipeline and your reference, I believe you're really looking for a little bit of a headwind potentially for your determination, but you feel you can offset it with either new opportunities or existing state MCO. Can you just elaborate on that as well?

Yes. So we've implemented a new kind of go-to-market strategy that focuses not only on our current customers, but also on customers that we haven't talked to. So that is paying off. We just signed a large payer that is definitely top 10 that we weren't talking to 4 months ago. Another one that I announced there is in similar nature not to that size. So growing beyond our current customers and growing within our current customers is happening and is a priority. And there's a lot of opportunity to do that, like I talked about with the market size. So we're really bullish on our ability to expand and again, a driver on how it gets us ahead of redetermination and even grow above that.

Okay. Great. Flipping over to Personal Care. Your thoughts on kind of what it is a platform that is very scalable, depending on kind of the resources and caregivers and retaining caregivers You just talk about really -- I'm very curious, I think it 8%, 9% growth in the quarter, if I'm correct. What can that be, if you will?

Well, so that's -- so the business size on that is the market opportunity is large, state, the federal government, everyone knows this is an important service to quality and access and also to outcome changes. And so that market is very large, primarily made up of mom pops, but there are companies like us that have really grown in that space. And what that's allowing us to do is to centralize and standardize kind of the back office, free up those dollars to reinvest back in the caregiver, whether that's wages or whether that's benefits like a cell phone. So we're in the middle of that centralization and standardization. And the benefits of that are twofold. Strong margins get to the higher end of our 10% to 12% and then probably more importantly, being able to recruit and retain outside of the market, which will allow us to grow fast. So that business, we're really bullish on. The team has done a great job in 2023, like it is in mobility, finishing off these initiatives are critical.

Is the retention or retaining caregivers or expanding just that footprint? Is that the key to it?

It really is that. And I don't mean to minimize that because it's the retention and the hiring, but it's also what they are doing. So the services of whether that's giving a bath or helping with meals, as importantly as upskilling them, supporting them with clinical resources as well as technology to change outcomes. These people are in their home for 3 hours to all night. And these are the thickest people. They have the best ability with support with a tablet that's easy to see changing conditions, get in front of it. So it is enabling that caregiver with our services and technology that is as important as retention and recruiting.

Okay. Remote. You acquire Guardian. I mean how does -- again, can you speak a little bit about digging out the acquisition, how the acquisition plays into your kind of strategy and your initiatives on?

So remote patient monitoring, that team and a lot of the data that we have around that is the tip of the spear on our value-based care. The bulk of the business right now is personal emergency device. So it's the device that someone hits when they need help. The difference for us is that we have technology in a care center behind that, that the 9 out of 10x when they hit that button, we engage with that member. That engaging with that member that a lot of our customers or payers have a tough time getting with. So we can collect data and push information. that automatically will allow us to get paid differently, whether that's a bonus payment or some type of sharing of risk. So we term that the E3 platform. So we get the benefit again of the fee-for-service, the revenue in -- for every person that we have on a monthly basis. But now because of the ability to collect data and change outcomes, that's really expanding. It's probably our biggest cross-sell across mobility is really how do we get this service into our 36 million members that we currently have on the transportation side?

That's right. That's the overlap there.

Yes. It's a lot of great work that the team has done, and it's a top priority for a lot of the innovation that we're doing. Understanding that member, having the technology to do that on a dynamic basis is really important. And in fact, we actually -- we've invested a lot in that technology, and we actually just acquired a company called Higi, who their technology platform is superior and is really going to leapfrog our abilities to dynamically monitor and manage all these members across the country.

I know we had talked about this a little bit earlier, but on the call side, you're saying is roughly it was $4 per transfer the call. Does that play into the...

It really does. So there's a couple -- where you're going there. There's the cost side and there's the strategy side. By having 27 million calls a year just on the transportation side, that shows how, you got a lot of engagement. So think about that. That's a lot of engagement that allows us to collect data, push data. On the cost side for us on the transportation side, a lot of that is just happening via phone. 27 million calls $4 a call. And the majority of that for mobility business is via phone. So we have an initiative that is taking hold right now is to how do we make the member experience better by sending a text message, understanding that member. So when they pick up the IVA, Mrs. Smith , do you have an appointment. So leveraging technology, an app to improve member experience, but that will also take at least 1/3 of those calls away. 27 million times $4. So it's a win-win.

As far as the -- and I think of it correctly, taking the 3 primary lines business is the biggest opportunity absent just in terms of scale, just expanding the footprint into new states, new MCOs? Is that really where it's at? Or is it right now it's addressing the models in your given markets obtain your margins and you have the footprint from your 3 lines of business, do you need other incremental lines?

No, I don't think we need other incremental lines. Our services we have are the top supportive care services. They were the ones that change outcomes. Right now, executing is critically important in the footprint we have, and there's a lot of runway. This is why we're confident in our 3 and 3 and even growing beyond that. But eventually, we want to be national across all of it. So they're both critical. It's just the timing issue.

If absent contract payables kind of how you think of kind of capital allocation the acquisitions so far, debt reduction, where you want your leverage profile and you've talked about your leverage targets and so forth. But how do you think about as you're here today?

Yes. So capital allocation, critical teammates that have helped us get to where we are. We have a great debt structure right now, fixed rate debt that is proving very well. We have a strong line. And then the acquisitions we made really over the last kind of 18 months, we're large. Like we made a couple of big large acquisitions, but that leapfrogged our ability to execute on the strategy that I articulated before. We're at the point now that we knew we're going to be at our highest point of leverage, and it's too high. So 4.3x. Again, we knew where we are, and we're consistent with saying that, but we like that down our 3x target is the right target to do. And why we feel good about that is because of these point solutions generating cash, being CapEx-light that we are. So capital allocation for us get the debt down but at the same time, ensure that we have the flexibility to take advantage of the growth that I talked about, whether that's investing in technology and investing in de novos, investing in people and then eventually investing in buying new companies.

The 25 to 3 by 3 for 25, the keys to getting there from kind of the 235 this year, what takes us to that point, if you were to say the top 3 data points?

So the good thing is from an initiative perspective, it's about execution. So there's not -- we need to create a new technology. We need to create a new business model. The initiatives are in place, though early, we need to execute. So that gets us 75% there. The other component is selling, right? We need to ensure that our current customers, which make us who we are today, we were pretty concentrated, and we need to expand outside of that. So our go-to-market strategy, our One motive care strategy that enables us to sell and expand across the country and customers that we currently don't have, it's critical, too. So selling and executing right in front of us, all controllable, which is a great place to be. A lot of work, but that's what we get paid for.

And the cash generation and you deploy it back into the business, so to speak. Yes, really, if I think about the churn of cash, you get into second half of this year in '24.

Yes, it is. It is deploying. And we're doing that right now, right? If you look at it, we have been putting back into the business right now. And as we come out of this COVID/redetermination/pricing that is hurting the kind of timing of our capital in Q1 and Q2, we'll be back to those going away, generating cash and be back to really generating cash after that. So a chunk of that will be deploying back in the business, a chunk will be delevering and then provide us the broader opportunity to do other things.

Okay. What -- from a risk perspective, so I get asked this question occasionally, do the Ubers and Lyfts of the world or any other derivative present any challenges to the NEMT model or I should say, what's the value prop that they can't bring?

Yes. So well, first off, they are our partners, and I view them as that, and they view us that way as well. So if you talk to them, how they get into the space of Medicaid and Medicare is working with companies like us. So there are partners, and I expect to continue to grow with them. The differentiation for us, the ride is one component, right, one component. The engagement with the member, I talked about the phone calls or the app or the IDER and/or the engagement with the provider -- or I mean the MCO or the state. That claims, billing, that process Uber and Lyft don't do. That's not their business model. So their business models to do what they do well. Our business is to do that well, but also ensure that the member experience and how we do health care with our payers and other state customers is what we do and what they don't do. So that's the differentiation. And then the last one is gets back to time to the strategy. We want to -- that member or a person in the car or in the home, we want to collect data on that. We want to have the best member experience and then collect the data to help improve that person's life, lower cost, provide access and, of course, support the customers. And that's just not what they do either. But again, they're big partners of ours.

And I presume, again, back that value proposition of the MCO or the state and one -- is that -- where does that mean -- is that -- is it a continuous discussion, it's a continuous process in terms of managing pricing behavior contracts?

Yes. So every discussion I have with a payer state, the first thing and maybe the second thing and for sure, the last thing is member engagement and member satisfaction. That is top of mind for it. And that has really shifted over the last couple of years. So it's also in some of the requirements that come out of CMS, the quality requirements that are coming to our MCOs are yes, clinical, but they've changed, as you know, to engagement and member set. So the government is requiring our payers to think differently about their members, quality and engagement and that's what's happening with us. So that's to -- so if we do anything to help them with that, that far outweighs anything around pricing. Pricing is important. I think across our portfolio, the pricing hit the right level. So pricing is down the road as long as we have high member satisfaction.

The member satisfaction. That is I presume an important dialogue for you to report back to you. How do you do that if you don't mind?

Historically and currently, the primary is, unfortunately, complaints, right -- so it's a good metric because it allows it to happen right away. So that's the biggest item, especially in transportation, which is just challenging in general. And that's kind of across the board and kind of all health care services. Usually, when you do something wrong. It's changing though now. So now it's surveys, and we talk about our NPS scores and outside of transportation, specifically monitoring, our NPS scores are in the 80s. So it is now becoming 2-pronged. The bad complaint side, which we are very good at. And then actually, with engagement, you can start measuring satisfaction and with technology, and that's a big part of where the industry is going.

Can you just walk us through, and if something kind of jump overlooked, the transition from the full risk to the shared risk model. 60 to 20 and how that's been obviously a priority and is an important priority going I think you reached formation. Maybe you could just discuss that.

Yes. So the way we contract, again, that's mobility-centric, which is mobility and EMT, which is 60% of our business. The other 45% is the home business. So this is centered on mobility. And then within that, the big change that we have made is moving to this win-win relationship with our payers, which gets to moving from a fully capitated full-risk contract to a shared risk contract. And that moving to 20% is allowing us to really have stable rigid margins regardless of utilization and cost because it really is about the member experience. So that's -- though, again, from a working capital and timing paying that back because the payables and receivables range from anywhere from 6 to 18 months. Yes, that's a near-term capital issue but we are aligned now. And based on that contract structure, we feel really good about our future and even managing through determination.

We're moving away from that full capitation, if you will, that mitigates the risk of that. The volatility around the payables and receivables.

The true win-win relationship that we have.

One other question I meant to touch on, I'm thinking about through this. The multi-partnership model and the transportation side. You referenced that a key part of that margin opportunity is narrowing your counterparty for your lenders in that business. I guess you went from 11% to 17% in move shift into that model. I mean where can that go? Is that all part of that kind of 40 high 30s equation?

It is. Yes. It's that multimodal partnership model, which is really the people and owners of these cars, ensuring that they're partners of ours, and we ensure they make money. We ensure they buy our values and our commitment to the members, so we can start collecting data. They do very well. We do very well. Just by doing that, ensuring partnership and coordination is a critical part of how we have -- we're able to lower the cost and also increase the quality. That also includes Uber and Lyft, that also includes mass transit, that also includes driving yourself and getting reimbursed. So it depends on the member and how to fit that member to the type of transportation we have.

Yes. Okay. Great. Thank you. If there are any other questions, we are happy to field them. But I don't think we have any. So thanks to the team.

I really appreciate it. Thanks for having us. Thank you.

Thanks, everyone.