ModivCare Inc. (MODVQ) Earnings Call Transcript & Summary

Thanks, everyone, for joining us. Thank you, as always. But I especially want to thank the team from ModivCare for joining us. Heath Sampson, President and CEO; and Barbara Gutierrez, who is Chief Financial Officer. Welcome to the team. Welcome to the presentation. And thank you both again for joining us, as always. I was talking over to Barbara and Heath. Just to level set us is a review of the kind of recent -- the quarter and just kind of an overview of maybe some of the parameters and initiatives within each of your 3 business lines and where you see them today and maybe a little -- and we can kind of jump off from there, if you will.

Yes, you bet. Well, thanks for having us as well. Good to see many people, faces. So yes, it's a great time to be here. We'll probably get into just a little bit more detail if necessary. But last quarter was strong and in line with everything that we said we're going to do. Thanks to all the people that we have and the changes we put in place. It's taking hold and we were able to generate $40-plus million of free cash flow, as said, exceeded our EBITDA targets, showing strong sales growth across the business. So you could keep going through and we did what we said we were going to do and probably more. So it was something very excited about. So how a little bit more generically on the business, for us, we're really the only platform company that has this suite of support of care services. So I'll start with that, because it is a suite. You think about supportive care, people need trips to the doctor, people need help in their home, specifically now for long-term care, which is supportive care, where technology is going and the needs of payers and providers, devices are necessary. So we have this broad suite of services. And together, we have a unique access that nobody has, the payers or providers don't have. We can -- we drive people. We're in their home 4 hours to all day or we have a device nonstop. So that unique access that really cuts across is what we're really proud about at ModivCare. But underneath that, and a lot of the focus and questions is around those individual services. Because right now, our growth and our benefit happen at this point solution way. So that's transportation. We're by far the largest, have about 40% of the share. And lot of efforts in that business to ensure that we're doing the right thing from a transportation perspective, but also adding value to our payers around understanding their members. We have a personal care business. We're kind of one of the largest in personal care in the -- primarily the Northeast, and the Northeast is very supportive of personal care. So we're growing in that market as well. And of course, we have devices, whether that's emergency devices or other devices like blood pressure. And then we also have these services where we're connecting to people in their home or on the phone. But this layer of technology that will help support and facilitate that. So our caregivers or our drivers or our contact center people are more knowledgeable and educated to push information or pull information. And that could happen to facilitate the service and even do more for our members and our providers and payers. So we have this touch point, coupled with data, coupled with access that has really put us in a unique point.

Okay. Great. I think one of the questions I probably get is kind of the mix, and understanding the business a little bit, digging out to NEMT in particular. The contractual structure, the at-risk versus shared, got it, so forth. Can you explain how that drives your model on NEMT and drives the margin profile? And are you trying to move that mix one dial, one way or the other, kind of post-COVID, if you will?

Yes. So the NEMT or nonemergency medical transportation or mobility business segment, which is just over 60% of our EBITDA is a critical part for our business, and there -- over these last 24 months and really over the last 12 months, there's been a shift in how we engage with our customers and how we contract with our customers. And it really gets back in line with the strategy of where our customers want to go. It really is, the trip is important, critically important to health care. So ensuring that we do that with the right quality is important, but really, it's what you do more. And that's what we're doing now. And that's why we're able to move these contracts to where 20% are full risk, so more of the traditional capitated model, 15% are fee-for-service. And in the middle of that is the shared risk or win-win, where utilization or costs we share in that with our customers. And that's the common way now of contracts we do primarily with managed Medicaid. So that mix, I expect to stay -- it shifted a lot over the last 12 months. I expect it to be in line for at least the next, call it, 12 to 24 months. So we're at the right structure. We have the right profile. We have the right relationships in all our contracts that we have, whether that's full risk fee-for-service or managed Medicaid, all in line with our expectations now. Now that we're through COVID. That was a bigger push, right?

Yes, that was a big push, yes. But today, if you look at the context of snapshot today, are there -- is there a material difference in the margin profile amongst those contracts?

So in the full risk contracts, just by the nature, just like in -- because we're taking risk, those margins are higher. But we give the blended for that. So they're in line with what we expect the future to be. So a lot of these contracts have been repriced or will be repriced to be in line with post-COVID, post redetermination. So we're comfortable with that margin profile, which is higher. And then the shared risk and fee-for-service margins are relatively similar.

Got you. And you talked about the -- I believe there's $138 million new contract, I think you said. Does -- is -- do you -- would you prefer to be in the shared services structure in that company -- in a new contract, so to speak? New contract, new Medicaid contract.

Yes. So that $138 million that we disclosed last quarter, that was total contract value. That's on top of $108 million from the previous quarter. And then even incremental to that $108 million and $138 million, which is getting total contract value, so think about dividing that by 3 for annual. We also retained in one more Medicaid, which is state business as well. So our go-to-market strategy and our historical win rate and new win rate is definitely accelerating, which is we're really proud of. Though a lot of that -- so the next question may come under that, when does that come on, right? The sales cycle is about 12 months. The implementation is anywhere from 6 to 12 months. So a lot of those wins that we're having now, which are great, and we expect to continue to do that, a lot of those start coming on in 2024, whether it's early or late. So coming out of 2024, all these will be fully baked in, and you'll see the full run rate exiting 2024.

'24? okay. But the pipeline remains -- you saw pipeline...

Yes. We also disclosed that we have about -- so in just the MCO Medicaid side, we've about $700 million of pipeline and the TAM is much larger, but that $700 million is real deals, that we're in discussions with, feel really good about continuing this quarterly win rate that we are at. It's really, the mobility business, because of where we are, we feel good about what we've done. It really is about us growing on top of that, and this is why we're so proud and why we'll continue to disclose the sales wins that we get.

And to that end, can you speak to the -- within that, the NEMT business, the competitive landscape, like who are you competing with? Is it tied to the state legacy contracts, what does that competitive landscape look like?

Yes. So it's -- the right way to think about it is to break out state business versus managed Medicaid and MA. Managed Medicaid and MA are different than state business from a competitive perspective. And from a state perspective, there's not a lot of competitors, mainly because you need to be large and have scale and have reputation. It's primarily, we'll get the whole state or a good chunk of a state, and there's only a few players that are in that market. The managed Medicaid and MA space, there are other competitors that have led for last 5 to 10 years on the tech side. And they do have kind of bespoke market share in certain regions. The companies that win in NEMT, one, have that technology to facilitate this member engagement, have lower costs, and then also have scale. And then the third component, this is really what's driving a lot of our wins, that you can do more with that member and provide insight. So people that have scale and tech, and these are continuing to grow and we'll continue to win in this market space.

And we always get this question, but the Uber-Lyft model does not really factor in it from a competitive balance perspective.

They're partners with us, and we've grown heavily with Uber and Lyft, and they view us that same way. They're not in the business of claims management, call centers, billing. They're in the business of, in certain areas, for certain types of illnesses to help us with that transportation. So I expect them to be partners and continue to grow with us -- in line with us. So not a competitor, a partner.

Okay. Great. And does -- so is it fair to say that the better balance is more of a local regional player typically?

Yes. It typically is. On the state side, there's a couple of other big players, but there's more than enough, that TAM on the state side is $1.8 billion. So there's more than enough for the big guys to stay big. We expect to continue to grow there and retain in that business as well.

And that's just the state side.

That's just the state side.

Okay. Margins, I think you're up 120 basis points in NEMT. Can -- I guess -- and I know technology plays into this equation and managing service expenses moving forward is vital to this. Can you talk about those dynamics and how that can lead you to expand margin going forward?

Yes. So from a margin perspective, we're just around -- between 6% and 7% right now. To get that back up, there's 2 things that need to happen. The normal automation of engagement with our members, whether that's text messages, whether that's apps, whether that's facilities integration, customer integration, there's many things that are common that will allow us to take the manual nature out. So that cost structure getting out, coupled with continuing these sales. So these sales that start coming on, you're going to get leverage. So those 2 things, you'll start seeing our margin continue to increase in line with those cost savings and in line with those services coming online.

And can it run north of 6% or 7%?

Yes, it will. So the range that we gave a couple years ago, kind of that 9% to 12% margin, I expect that coming out of 2024, we came the lower end of that.

Okay. Just my last question on the NEMT, maybe. I know you've highlighted Medicaid redetermination. Does -- is that kind of playing out with -- in line with your expectations the $20 million to $40 million that you've kind of highlighted? Has anything changed or anything different in that dynamic relative to what you anticipate?

So yes, for the country and us, as each month goes by, everyone gets tighter and tighter, what it means to their specific business. What we said in 2023 was 5 to 10, and it's right there. So it's right in line. And what we've said, I know this is a broad range for '24, it's an incremental $20 million to $40 million. So we gave those ranges to ensure you all can model it, but we have deep understanding on how that membership flows through our specific contracts and what states there are. So I feel really good about that range still. So...

Yes. Okay. Anyone in the audience on -- taking any questions on NEMT? Go ahead, [ Jango ]. Ask your question.

I'm going to ask more generally about Matrix for those of us who don't have access to the site. Can you talk a little bit about issues that they've had and what's been successful in the turnaround and what the outlook is near term?

Yes. So the Matrix team over these last 12 months to have -- a little bit more 18 months, have been tremendous on focusing on the valuable business, which is the risk adjustment, risk assessment business. We're #2 from a size perspective and our performance is really strong. But in the historical numbers, there were restructuring. We had 3 other businesses that benefited in COVID that we divested or closed down and restructured. So that noise in the P&L is gone. And the management team is performing very well with new tech, new process. So I feel really good about the performance of that team and their position and ability to grow and do well in that. So it's a great business. And like I said, the last quarter sometime, and I gave the range of 2024, that we would monetize that. While I haven't given any specifics because the most important thing is the value to the company as a whole. Because it's performing, if we need to wait a quarter, we'll wait a quarter, and it's to get the best value, the highest value out of that. So -- but the main reason why it's performing and growing, so this is the right time to start the process sometime in 2024.

So you think you could monetize that potentially in 2024?

Yes. That's the right way to think about it.

Got it. And if you provide a framework of what that EBITDA target is?

Yes, we've been -- similar questions we got these last -- Heath, why is the range so broad, I think there's $50 million to $100 million? That was 2 quarters ago that I gave that. And I'm going to be consistent with that. The most important thing is for me and my partners to ensure that we keep as much information to ourselves, so we don't mess up or hurt our ability to monetize. So I'm just consistent with that. And you can pick a point in that and show whether that's at that low end, high end, middle point that it is -- it provides little value to us.

Okay. But that is a range -- target range and that becomes the -- I don't know, the trigger for monetizing. That's the way to think about it.

Yes.

Okay. Time frame could be -- it could be as early as 2024.

Yes.

Okay.

Can you talk about the proceeds?

Yes. So for us, the 3 -- net 3 leverage is an important long-term target for us. So it depends on where we are because we're generating cash flow and able to pay down our line. If it happened earlier and our line doesn't pay down, we'd use it to pay off that. And then we'd be also in the spot to what do we do with all those other proceeds on our other debt structure. Our goal is to get to 3x. How we do that and when we do that, I think we're in a good spot to be patient. But the priority is to get to that 3x.

Is that near-term goal? Is that a 3-year goal, a 5-year goal?

It's not a 5-year goal. It's probably not a 1-year goal considering where we are. But 3 years is the right way to think about it. I don't -- there's a lot that we have done that we're proud of and has shown up in the numbers, have shown up in the execution. So for me, what we do in middle of 2024 of these proceeds, there's lots of options for us. Getting the leverage down at the right point is a top priority for us, but there may be something else that I do in the middle of 2024.

Could acquisitions play into that?

Yes. So until our leverage is in the right spot, until it's likely not any acquisitions, longer term, absolutely, it makes sense. But in 2024, it is about us executing and continuing to do what we've been doing.

Okay. Great. Personal Care segment, relatively small, I guess, by definition. Is that scalable? Is that -- what is the kind of longer-term outlook? Can you scale that business?

Yes. So personal care, in general, and this is not just us, by the way, but this may be helpful for everybody else. That industry is continuing to mature. It's really important to the health care ecosystem. So there's other public companies and other large companies out there that are doing the same thing we are from a standpoint of scaling. And the scaling is really centralizing and automating the back office revenue cycle management. And that gives you a lot of leverage to focus on investing in that caregiver because it really is about recruiting and retaining. There's a higher demand for the services than the caregivers we can provide. So it's not a sales issue or a competitive issue, it really is, have you centralized and standardized and built for scale to reinvest into growth. So that's what we have been doing. And we're halfway through that journey. And we expect that to be the focus of 2024. So right now, we're growing. It's great. The market is great, and we'll continue to grow in line with the market. I expect that we will outpace the market as we finish off this centralization, standardization process.

Is there anyone out there from a competitive landscape that does it well that is kind of the model in personal care, so to speak?

So I'd like to think we are with that business. These other public companies are great. There's other companies that aren't public that I think do a good job as well. And for us, really, it's about how -- it's a unique spot to be. We -- I want them to do well. It's good for the industry that we get better, more sophisticated, even regulated to ensure that we're doing the right stuff. Because there's such a large market opportunity and such a need for our customers. So I think there's probably 3 or 4 of us that are kind of all right in line with doing the right stuff.

Okay. In many respects, I'd like to ask kind of the same question, the ability to scale, the opportunity, and kind of the remote patient monitoring. Does that have -- share a similar landscape? Does it need investment? Does it need infrastructure?

Yes. So for the core services of monitoring, which is primarily personal emergency device, that's a big -- most of the part of our business. And that models in place, teams in place, sales growth in place, that in itself can grow in line within the margins that we've given as well as in those double-digit revenue side. So that's wonderful. Really where the -- even the continued broader opportunity is this engagement with the member. The technology and system behind this engagement that is driven by monitoring is going to allow us to do a lot more, whether that's with transportation or personal care, other devices, that you think where technology is going, and other device from a scale to a glucometer and everywhere in between, that's what we are doing now as well. That's going to allow us to really accelerate growth. But it's not at the expense of the PERS market, which is growing and scalable right now. Larry?

Just looking ahead, what's important to you when looking at a refi? Timing, do you want all unsecured structure? Do you want prepayability through a TLB? Just how do you think about that?

Yes. Barb, do you want to touch on that and I can add? Is that okay? Yes.

Yes, I think all of those things, so the timing, the flexibility, the options, just the right timing. And so we are very actively engaged looking at our options. We feel confident we'll get those refi before they go current. We've got a lot of options. We have options today, but we're just trying to make the best decision that's good for the company and economically the best decision. So all those options are on the table.

Yes. Just a little bit more on that. We have the secured capacity if we wanted to do that. There's other options. It really is -- so we performed in Q2. We expect to continue to perform. We have Matrix. So that improves the credit profile, right? So it really is all the timing of that when is the right thing. We're not naive to the market. We're not going to wait until November '24. But we have some time, but we're not waiting. We're engaged and active and evaluating.

Barbara, it's just the new role, congratulations. What do you view as kind of the challenges and opportunities that you've seen since you've sat down, if you will?

Yes. I think one thing I want to say just right upfront is people ask me, were you surprised about anything? And what I've been surprised about in a good way is just the amount of progress and transformation the company has really gone through over the past 1.5 years, Heath and team. So really, I think the opportunity is to continue that momentum, supporting the company to help deliver our services and positioning the company for growth and performance for all of our constituents: the bondholders, the shareholders, our Board, our teammates. So really, that's the opportunity ahead. I think where I'm going to focus, a couple of areas to focus on is on that capital allocation, that capital structure. And that includes everything from the refinancing to focus on delevering, focus on working capital and cash flow, cash generation, cash preservation. So a lot of focus there. Making sure the team is really well supported, and a big focus on data analytics to help the company really make good data-driven decisions. You ask questions about our contracts and the profitability, and just really continuing to refine that focus on that process.

She's cutting herself a little bit short here too because a lot of this stuff is great and great ideas right off the bat. But also just from her background, PACE background, and why this is important to bring up? PACE has a unique understanding of the health care world and specifically what our customers want. So -- and that ties in heavily to our shared risk contracts to even the value of getting paid differently. So there's a ton of health care value that she brings as well.

Yes. Just a natural extension of my experience at PACE, the support of care services. Yes, just really thrilled to be here.

Cash flow, very good in the quarter, I think $40-plus million of reduction on the revolver. Thoughts, and you made out some prior guidance to that. I mean how do we think about it both in the fourth quarter, but both -- even going into 2024? I think contracts, receivables, payables netting to zero more or less now. So would we see a more normalized cash flow structure if -- the way we think about it into '24 and beyond? Kind of that COVID, I don't call it COVID, but the bubble, if you will.

Yes. And so the bubble is behind us. It really was Q2 for us, right? From a COVID -- paying off COVID payables, that was a big driver as well as our contracts were structured the right way and receivables up. So it was a -- Q2 was the bubble. The -- I might be a little bit repetitive to your question around margin, too, so we're in a good spot now and generating cash. Like you said, $40-plus million. Our guide that we gave was the second half, it was $30 million to $50 million, and why we gave that second half, and just to remind everybody, we pay our interest on our bonds twice a year, Q2 and Q4. That's 30-ish million, right? So we wanted to make sure that we disclose that. So that -- you can do that math. You know we have $30 million going out in Q4 against our generation. So we're back to generating cash flow in line with what we have. For that cash flow generation to be up to where we want it to be, we got to get through redetermination of these cost savings. So we're around 6%, 7% margin range. The cash flow is proportional to that. And as we exit the year, that 9%, that cash flow will be proportionate to that. So it is really aligned with that margin discussion that I already had.

And to that end -- does the impact of Medicaid redetermination piece, where is that kind of -- from a timing perspective, when do we see that kind of...

Well, it's happening right now, right? It's happening right now, and it's in the numbers and it's as expected. So each quarter we're giving you -- it's -- I know it's happening right now. It's in line with my -- with our expectations, and it's great. It's great and it's in line with us. The good thing for us, where we're exposed is, I don't want to say exposed, because this is an understanding and why we came up with our numbers, is in our risk contracts that are primarily democratic, so the process around redetermination is very deliberate. So that gives us a lot of confidence around what the amount is as well as the timing.

Right. So when do we -- the impact, when do we kind of wrap up that, mid-'24?

Mid-'24 I think is the peak. But I think it's all of 2024.

It is? Okay.

But we'll update you on the timing each quarter.

Okay. Any questions in the audience? We've hit our time. Any last questions in the audience? [ Jango ] has got one more.

So just a quick one. Can you refresh us in terms of personal care on labor? Are any of the geographies unionized? Is that the SEIU? Are there current SEIU efforts underway with any segment of your labor force?

Yes. So we are unionized, primarily in New York area and partners of us. I like the union. We have a great relationship. It's performing well. So the labor side is the ultimate challenge for the entire industry. The good thing is, is that, like us and all other industry, it's going to hit a normal period, so we're seeing our ability to grow. But it's still the -- probably not growing in line with what our long-term expectations are, but I expect that will change, and we will, when we can start investing back when we finish consolidating and centralizing stuff. So it's a solid labor market. And then the relationships with the unions, it may be implicit in your question, I know we run out of time, is the regulation that came out that was really, really driven primarily from the unions, is this 80-20 rule, that you would -- 20% kind of -- cap the gross margin at 20%. I feel good about the broader provisions that they have. It's across the country. It's across the country. So the general consensus by the public guys as well as the entire industry is that won't hold, that it may be some percentage, but it's probably not the 80-20 rule. So I really feel really good about that business even if it did happen because people that have scale and size and the ability to deliver in these new regulations are going to benefit. So...

Great. I think that about wraps us up. Thank you.

Great. Thank you. Appreciate it. Take care.

Thank you, Heath. Thank you, Barbara. Thanks to the team. Thanks for joining us.