VRI Intermediate Holdings, LLC (MODVQ) Earnings Call Transcript & Summary

Greetings, and welcome to ModivCare's call to discuss the acquisition of VRI. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jonathan Bush, Senior Vice President, General Counsel of ModivCare.

Thank you, operator. Good morning, everyone, and thank you for joining ModivCare's conference call to discuss our signing of the purchase agreement to acquire VRI. With me today from the company are Dan Greenleaf, President and Chief Executive Officer; and Heath Sampson, Chief Financial Officer. We are also pleased to be joined by Jason Anderson, VRI's Chief Executive Officer. During this call, members of the management team may reference the presentation that can be found on the Events page in the Investors section of our website at www.modivcare.com and in the current Form 8-K, which was furnished to the Securities and Exchange Commission. Before we get started, I would like to remind everyone that during the course of today's call, the company's management will make certain statements characterized as forward-looking statements under the Private Securities Litigation Reform Act. Those statements involve risks, uncertainties and other factors, which may cause actual results or events to differ materially. Information regarding these factors is contained in today's press release and in the company's filings with the SEC. We will also discuss certain non-GAAP financial measures in an effort to provide additional information to investors. A definition of these non-GAAP measures and reconciliation to the most comparable GAAP measures is included in our press release, investor presentation and Form 8-K. We've arranged for a replay of this call, which will be available approximately 1 hour after today's call on our website, www.modivcare.com. With that, I will turn the call over to our CEO, Dan Greenleaf. Dan?

Thank you, Jon, and thank you, everyone, for joining us again on such short notice. We are very excited to announce the strategic acquisition of VRI, which is one of the leading remote patient monitoring and medication management companies in the United States. This acquisition accelerates our strategy to own the last mile of patient care through a comprehensive suite of supportive care solutions that address the social determinants of health, deliver better care in the home, enhance patients' lives and reduce health care costs. VRI's nationwide remote patient monitoring and medication management offering dovetails extremely well with our existing supportive care services, which include nonemergency medical transportation, personal care and an emerging nutritional meal delivery platform. By combining these 4 verticals under one roof, we are very well positioned to provide a one-of-a-kind, one-stop shop suite of supportive care solutions that our payers and states have been asking for. Having access to patients in their homes together with VRI's insightful data analytics capabilities and robust technology will enable us to deliver a greater patient experience and a pathway to a broader data platform. From a financial perspective, the acquisition is expected to deliver immediate earnings accretion and brings us a predictable reoccurring revenue stream with high margins. Further, it adds an estimated $8.5 billion of new addressable market for remote monitoring with only 13% currently penetrated and projected double-digit growth. Health care is pivoting towards solutions that address more than just a patient's condition. And the data is the key to unlocking the total health picture of a patient and realizing the benefits of holistic care solutions that address the social determinants of health. By combining VRI's in-home remote monitoring data with ModivCare's existing patient data from our other supportive care services of nonemergency medical transportation, personal care and nutritional meal delivery, we expect to provide our payer partners with a broader view of their patients' social determinants of health data. There is no company in the market today that is positioned to provide the type of social determinants of health data that ModivCare expects to offer its customers. Social determinants data will be the output of our integrated supportive care solutions, allowing ModivCare to provide additional value-based care offerings as well as other bundled arrangements in the future. We're excited to combine ModivCare with VRI's technology solution, and we look forward to the value we expect to bring to our patients, hospital systems, state and payer partners. We are also very excited about the overall market for remote monitoring, and we see favorable growth tailwinds for these solutions from Medicaid and managed Medicare reimbursement. Much of this growth is coming from increased adoption of remote monitoring benefits in the Medicare Advantage and Medicaid markets. For many payers, the pandemic highlighted the importance of offering remote monitoring benefits to their patients to keep them safe and healthy in their homes. We expect these trends to continue, which provides us confidence our mid-teens long-term growth expectations for VRI. VRI's customer profile overlaps with ModivCare's given its focus on Medicaid, Medicare Advantage and state customers, 3 channels that ModivCare has extensive experience with in the supportive care market. Roughly 60% of VRI's revenue comes from Medicaid, while the other 25% from Medicare Advantage. Revenue from these channels has been growing in the double digits at VRI due to the attractive value proposition that payers see from remote monitoring with 98% of their revenue as reoccurring. VRI's device-agnostic design allows for a more seamless experience across many devices and systems without the need for special adaptations. VRI's nationwide footprint overlays geographically in terms of our NEMT footprint and further accelerates our goal to be a nationwide provider of supportive care services. Lastly, we see the potential for meaningful cross-selling of VRI solutions across our own top customers. ModivCare and VRI's robust sales and account management teams have strong relationships with the leaders of states, hospitals and managed care organizations, both at the health plan level as well as the national level. VRI's current customer base only overlaps with 2 of ModivCare's top 20 NEMT customers. We believe there is significant opportunity given our sales and account management and infrastructure to accelerate its growth. With that, it is my pleasure to turn the call over to Jason Anderson, VRI's CEO, whom we expect to join our leadership team to run this business as a part of ModivCare. Jason has done a phenomenal job building VRI into what it has become today. I'm thrilled to have him join the ModivCare team. Jason, would you mind sharing your thoughts on this transaction as well as the future growth opportunities that you see for our combined businesses?

Thank you, Dan. I am incredibly excited about bringing VRI into the ModivCare organization. VRI's strategic vision has been to become the leader of in-home patient engagement. By joining forces with ModivCare and its complementary in-home, supportive care platform, we believe that together, we can provide our patients, the parents and grandparents we serve, with an even more comprehensive, in-home solution offering that advances ModivCare's mission to better connect patients to care. VRI's platform in the remote patient monitoring market, is unique for 3 primary reasons: One, VRI is a 100% health care-focused company. Two, it is device and technology-agnostic. And three, it utilizes data and analytics to enhance patient engagement and provide actionable insights to improve health outcomes. This model has driven mid-teens reoccurring revenue growth, which we fully expect to continue and potentially accelerate at ModivCare. As a 100% health care-focused company, VRI had gained market share in the underpenetrated state Medicaid market and capitalized on the evolving Medicare Advantage market for remote monitoring. VRI is providing service in 35 states, primarily to Medicaid programs and agencies, 15 of which are recent entry points. We are currently targeting to enter 5 additional states in 2021. VRI has also had significant momentum with new wins and expanded customer relationships in the Medicare Advantage market, where there remains considerable growth potential and the increased adoption of personal emergency response systems as a supplemental benefit across many of the top managed care organizations. VRI's growth is also being driven by our unique technology and device strategy. VRI has built a device-agnostic technology platform that can rapidly adopt and seamlessly integrate new products as hardware innovation continues to occur across the industry. We are currently contracted with over 30 manufacturers and have over 250 devices integrated. Our device strategy allows VRI to efficiently and effectively adapt with technological advancements. But most importantly, all of our integrated devices utilize VRI's care center and patient engagement capabilities. Lastly, the platform that VRI has created allows us to increase patient engagement and generate actionable patient insights through a new solution we call E3, which stands for engage, educate and empower. We are partnering with health plans to provide an array of patient engagement offerings that support a wide variety of key initiatives for health plans. Our technology platform collects and analyzes the data that is generated by our connected devices to produce actionable insights for clients, promoting proactive interventions for at-risk populations. By combining our experience, insight and resources with ModivCare's own valuable experience, we expect to offer our payer customers an even more holistic view of social determinant of health trends, as Dan mentioned earlier. In summary, I am very excited about bringing VRI into the ModivCare family. Our organizations fit extremely well together, and I look forward to the exceptional opportunities that exist for ModivCare and VRI following this transaction. With that, I'd like to hand the call over to Heath Sampson, ModivCare's Chief Financial Officer, to discuss some of the financial aspects of this transaction. Heath?

Thanks, Jason. We believe that the acquisition of VRI is a compelling transaction for ModivCare, both strategically and financially. VRI currently generates $56 million of highly recurring revenue, and with $21 million of EBITDA, it boast attractive margins in the mid- to high 30% range. VRI's top line is expected to continue to grow in the mid-teens over the next several years, driven by an attractive pipeline of new business opportunities across both Medicaid and Medicare Advantage markets. The company's financial model is underpinned by per user, per month fixed price contracts, which results in predictable cash flow generation. The majority of VRI's current revenue is generated from its personal emergency response system product offering, which is expected to grow double digits going forward while vitals monitoring, medication management and patient engagement are expected to experience even more robust growth rates over the next several years off a smaller base. We expect CapEx at VRI to be in the range of 15% of revenue going forward, driven primarily by spending on equipment and installation costs related to new client growth. Turning to the financial terms of this transaction, which are referenced on Slide 10 of our investor presentation posted on our website. The total purchase price is $315 million in an all-cash transaction. This represents 15x multiple to LTM EBITDA of $21 million, while the forward multiple will be likely a couple of turns lower. We feel that this is a fair valuation given the strong growth that VRI is experiencing as well as the strong strategic benefits VRI provides in moving ModivCare closer to offering value-based care solutions for our customers. We have fully committed debt financing in place from Deutsche Bank and Jefferies. The total commitment is $400 million. We intend to term out this bridge commitment with a long-term debt issuance prior to the close of this transaction. We look forward to sharing more details around our permanent financing plans over the next several weeks. When combined with the $340 million acquisition of CareFinders Total Care, which was announced on July 26, we expect that ModivCare's pro forma net leverage will be in the low to mid-3x range. This is consistent with ModivCare's net leverage expectation at the time of the Simplura acquisition, announced in September of 2020. Since the Simplura acquisition, we have reduced our net leverage into the 1x range, driven by EBITDA growth and strong cash generation. Our target leverage ratio remains 3x, so we'll be focused on using free cash flow generation to pay down debt going forward. We'd also highlight that the company's 43.6% equity interest in Matrix could at some point also be used as a source of liquidity for debt reduction in ModivCare. However, as noted before, we cannot provide any forecast related to the timing or monetization plans for the Matrix position. With that, I'd like to hand the call back to Dan Greenleaf to provide some closing remarks before we open the call to questions. Dan?

Thank you, Heath, and thank you, Jason, for your comments. We are very excited about this compelling opportunity to partner with VRI. This transaction positions ModivCare as a one-of-a-kind, holistic supportive care solutions provider. It brings a more connected care experience into the home, leveraging technology to help fill the gaps in care, improve the patient experience and provide valuable data and analytics to our payer partner. And lastly, VRI's customer base overlap seamlessly with ModivCare's, opening the door to potentially significant cross-selling opportunities. ModivCare is leading the transformation to better connect people with care through nonemergency medical transportation, personal care, nutritional meal delivery, and now, in-home remote patient monitoring and medication management. We believe there are tremendous opportunities for our payers, state and hospital partners and patients as we continue to expand our solutions and tackle the future of health care. Together, we look forward to continuing to disrupt the way supportive care is delivered across the U.S., while improving health outcomes and reducing costs as we build the industry's first truly national supportive care platform. With that, we'd like to open the call to your questions. I'd like to note that we will be announcing our second quarter financial results on August 6, so we will not be taking any questions regarding the quarter at this time, but we are happy to answer your questions regarding this exciting acquisition. Operator, please open the call for questions.

[Operator Instructions] Our first question is from Brian Tanquilut with Jefferies.

Congratulations to both of you on this deal. I guess my first question is for Jason. Jason, maybe you can just give us some background on how the company got started and the growth that you've delivered over the last several years. And also, what kind of -- what kinds of devices are you installing in patient homes? I know you said you have a lot of device contracts. But just curious if you can give more details into how the business is set up, how it all -- how you're selling into managed care and managed Medicaid plans. Just any background you can share.

Absolutely. So VRI actually started a little over 31 years ago as a mom-and-pop organization or a company that was really focused primarily on just PERS and very localized in the Ohio market. There were 2 investments over time in the business that allowed the company to expand its technology solutions as well as the platform. And so initially, the company was not doing its own monitoring. About 16 years ago, started doing its own monitoring, which really allowed us control of the interactions with -- we call them clients, others call them patients or members, but allowed us to really control our interactions and build trusted relationships. And so as time progressed, we've ventured into vitals monitoring, so placing weight scales, blood pressure cuffs, glucometers, et cetera, into the clients' homes. And 15 months ago, launched the E3 solution, which allows us to pass information and gather information from our members. So the devices that we are placing in the home would be your traditional PERS device, which could be a cellular-based, landline unit or a mobile device primarily. And that is a 2-way, allows you to have dialogue over those units. We also place, as I mentioned, weight scales, blood pressure cuffs, glucometers, pulse oximeters and asthma sensors into the homes, and those devices will send us readings. So an example being if someone stepped on a scale, we would receive that reading and then our algorithms and our system determine if that's inbound or out of bounds. And if it's out of bounds, then we will reach out to them and have a conversation to determine the right course of action. And then we are also placing medication management devices in the home, which could be monitored or unmonitored, depending upon the solution that's requested.

Got you. And then I guess my next question, for Dan. How should we be thinking about the integration of this business into your existing operations, whether that's with the call centers and the sales stuff? You mentioned cross-selling. So just curious how you're planning to overlay this on top of your existing business?

Yes. So I think our longer-term vision on this, Brian, is we're going to have 4 business units: one in transportation, one in personal care, one in food and then one in remote monitoring. And Jason will be the CEO of that business. There'll be back-office integration, as you might expect. But we really think the most significant opportunity here is our channel ownership. I mean nobody has -- I mean that's the -- I think one of the things that people didn't appreciate with our NEMT business is just how powerful a channel we have. We have 30 million members, and 9% of the U.S. population. And our goal is to use the account management teams and sales teams at VRI and account management sales teams at ModivCare and to begin the process of cross-selling into the payers. And we think the opportunity is enormous. If you look at our top 20 payers, only 2 of those are customers of VRI. So we really think this is going to be an enormous growth platform. There's significant opportunities. $8.5 billion market, that there's only 13% market penetration in. And so where everything is going to come together here, Brian, is really in the account management, sales functions.

Dan, so just to clarify on that. So on the call center, I know you've built a very strong call center infrastructure at ModivCare. This is not something that you think would be integrated, right? They're going to be run separately.

I think they're doing -- yes, candidly, I think they're doing different things right now, Brian. So there are no plans to integrate. I think these are kind of, if you will, clinical calls that the VRI team is doing, and that's not really what we do at our call centers. Now that all being said, you could imagine just how additive that's going to be for us. Imagine one of the things we first talked to Jason was, Jason says, you wouldn't believe how many calls we get about transportation, how many calls we get about food, how many calls we get about personal care. And then you look into what they're doing from a clinical standpoint, and it just all makes sense. And so we're going to use their call centers as part of our clinical arm in terms of addressing a lot of the patient needs that we obviously see in the marketplace.

Our next question is from Bob Labick with CJS Securities.

Congratulations on an exciting -- another exciting announcement.

Thank you, Bob.

So you just said something. I think was the top -- of your top 20 payers, only 2 are customers of VRI. Can you talk about what are those existing payers using now for patient monitoring? Or are they not doing that? And so how does the sales cycle work to get them interested in this opportunity?

Yes. What I would say is I think some of it has to be -- is geography-based. Obviously, a lot of it's relation-based. There may be instances where they are using it. But keep in mind, Bob, that only 13% of the market is penetrated at this point in time. So I think the likelihood is that they don't use something currently and or are using something as, I think, as robust as VRI has. That's what I would be thinking about at this point in time. Again, I think what I would be focusing on is it's a company that's got double-digit growth. It's a company that's in an $8.5 billion marketplace, where the market's only 13% penetrated. There isn't a company out there who has a stronger channel into these payers and states and, in fact, what we're doing in the hospital systems as well, which we really haven't talked about yet, but there's a real strong initiative going on there. And we're going to take Jason and his team into these opportunities. And we think there's -- just based on the feedback we get from our payers, we think there's -- in states, we think there's significant cross-selling opportunities. I don't know, Jason, if you have anything else you want to comment on that.

Yes. The only additional add or how I'd build on that is to echo what Dan said, is the adoption within managed Medicare plans has been increasing over time. And through the research that we've done, about 40% of them offer our services today through some sort of company that exists. And so as we said, adoption increased, particularly with some of the dynamics that have been taken place more globally related to COVID, we expect greater penetration and adoption.

Bob, at the end of the day, it's a massive opportunity for us. I think that's what we're trying to -- and I know you're trying to size it up and score it a little bit, but it's significant. And so I'll let you ask your next question. Sorry about that.

Okay. No, no. Absolutely. And so is this a platform that you can scale nationally as it exists now? Or are there more potential acquisitions? Because on the Personal Care side, you had Simplura then CareFinders, and it's more geographic. These guys, due to their technology, seem more nationally oriented. But I'm just trying to get a sense of what your growth expectations are here. Is there -- are there more tuck-ins to follow? Or how should we think about that?

Well, the way I'd be thinking about it is that we think we've got a scalable platform. And Jason talked about some of this. We're agnostic when it comes to devices. No one has the E3 program that Jason has developed. I think we're in a really unique position. And we -- one of the reasons we look to this is that we thought we could scale it rapidly. And again, I think just underscoring where we are with our current patient base should give you some sense of what the opportunity is. But I do not, at this point in time, see the need to buy additional remote monitoring organizations. And we thought, frankly, VRI was the best out there. We felt they had the best capabilities. We felt they have the best technology. We think they align very well with somewhat of an asset-light model when it comes to their view on being agnostic when it comes to device. And our view is this is a very, very scalable platform. And this is one of the reasons -- one of the things that's most impressive about Jason and his team is what they've done over the last several years in terms of positioning this to be uniquely scalable.

Okay. Super. And then last one for me. Just probably for Heath on the financing. Given this and CareFinders, can you kind of just walk us through and summarize what the potential debt structure looks like at the end of the year? And how much flexibility you would have to repay any, I guess, revolvers or things like that were there to be a monetization of Matrix over the next X period of time?

Yes. So what we expect to do, again, we have this committed from -- committed right now. And we'll go out to the market and raise $400 million of senior unsecured notes, so a new tranche of those, so adding that to our existing $500 million. That's all the debt we expect to raise on that. And then as you know, we do have the revolver that has $225 million, but we do not expect to draw on that at this time. So that would get us again just to kind of low to mid-single 3s from a leverage perspective. And then as you said, with Matrix, right, Matrix, when that happens -- again, we're not forecasting when that is going to happen. But that gives us a lot of flexibility to delever around that. And with our current notes, as you know, we do have the ability to start paying back this year as well. So lots of flexibility to delever as we move through the months and quarters and years.

Our next question is from Brooks O'Neil with Lake Street Capital Markets.

A lot of moving parts at ModivCare right now. I know you guys are used to moving parts. It's sort of the core of the business, I guess. But how do you feel about your ability to manage all this and keep things going in the right direction?

Dan, you may be on mute.

Yes. Yes, I'll comment on that. Listen, one of the reasons we got VRI was Jason and his team. And we felt they were the strongest team in the industry, and we feel very, very good about Dave Middleton as the CEO for the Personal Care business. We have a lot of experience in the transportation business, as you know, and we have an excellent team there. And then Phil Wilkins is running on our food business. So I -- candidly, I think we've got really good teams in place to make this happen. And I think that's what I would say. The other thing I would also say, and this is something that Kenny has just done an extraordinary job with, is that he's built a best-in-class account management sales function. And I think that's ultimately, from my perspective, with all of this, where the rubber hits the road and brought some -- and I don't think there's a better sales and account management team in this industry. I don't think it's even close. And I would even argue that when I look back at my SharingCloud days, where I thought we had a world-class account management team, I think this one is better. And so I think that's what I would say, Brooks, is that I think these are very distinct business lines with really strong operators in place. And then it's all going to come together kind of in the account management sales function, and we feel really good about that. So I mean, I think without Jason, without Dave Middleton, even Jim Robinson at CareFinders, it'd be unlikely we would do some of these deals because we understand how important it is to have the right person at top of those organizations.

Hey, Dan, I may add on to that. As you -- as we always say, this really does fit also into our technology road map. As you know, over the last 12 to 18 months, we've heavily invested in technology, with people. So a big part of this as well is that we're able to leverage that team and it fits well into this broader vision that we have around technology in all our business lines as well. So that was done deliberately months ago, and that also will be seamless and fits well into our technology road map.

Great. Could we just ask Jason to talk a little bit about reimbursement? I'm curious what exactly do the payers pay for? And what have been the trends over the last several years in terms of more reimbursement for more things? Or higher or lower reimbursement, that kind of stuff would be very helpful.

Yes. Absolutely, Brooks. So with regards to reimbursement, we're reimbursed for providing this service. And so it's -- they are renting the device and paying for the service that comes along with that. And so it is per client, per month is how we're being reimbursed. Trends in state and managed Medicaid have been kind of slightly increasing kind of along with inflation over time so kind of low, low single-digit growth. And relative to managed Medicare market, they're really paying for the service, and you have the ability to provide additional services, so expanding your relationships, which they're willing to pay for. And that's really based upon value and how you're able to execute on them provide better care or closing gaps of care or lowering their claims costs.

Okay. That's great. I'll just ask one more. I'm intrigued by the medication management offering, but I don't really understand what it is you do. So could you talk to us a little bit about what you do today? And whether you see opportunities to build on that? Medication is key for many of these clients you have and the overlap with the other clients, so the company seems significant as well.

Yes. There's some significant opportunities to grow that segment. Obviously, there are challenges with really kind of from a patient client perspective, the refill of those devices. But today, we will place the device in the home. That device will signal into our care center if they've actually opened the device at the appropriate time and taken their medication. And if we aren't receiving a signal, we will reach out to them with a live phone call and remind them of that. We also can operate, where we don't actually have a device in the home, but we're actually calling them on -- at regular intervals to remind them to take the medication. And so there is very high compliance in our model related to anything around the reminders.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Dan Greenley for closing remarks.

Yes. So again, thank you again for joining us for this exciting announcement. We look forward to reporting back to you on August 6 when we release our second quarter financial results. And I hope everybody has a great day. Take care.

This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation, and have a great day.