ModivCare Inc. (NASDAQ:MODV) Q1 2024 Earnings Call Transcript

ModivCare Inc. (NASDAQ:MODV) Q1 2024 Earnings Call Transcript May 3, 2024

ModivCare Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to ModivCare’s First Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please note that this conference call is being recorded. I will now turn the call over to Kevin Ellich, Head of Investor Relations. Mr. Ellich, you may now begin.

Kevin Ellich: Good morning and thank you for joining ModivCare’s first quarter 2024 earnings conference call and webcast. Joining me today is Heath Sampson, ModivCare’s President and Chief Executive Officer; and Barbara Gutierrez, ModivCare’s Chief Financial Officer. Before we get started, I want to remind everyone that during today’s call, management will make forward-looking statements under the Private Securities Litigation Reform Act. These statements involve risks, uncertainties and other factors that may cause actual results or events to differ materially from expectations. Information regarding these factors is contained in today’s press release and in the company’s filings with the SEC. We will also discuss non-GAAP financial measures to provide additional information to investors.

A definition of these non-GAAP financial measures and to the extent applicable, a reconciliation to their most directly comparable GAAP financial measures is included in our press release and Form 8-K. A replay of this conference call will be available approximately one hour after today’s call concludes and will be posted on our website, modivcare.com. This morning, Heath will begin with opening remarks. Barbara will review our financial results and guidance. And then we’ll open the call for questions. With that, I’ll turn the call over to Heath.

Heath Sampson: Good morning and thank you for joining our first quarter 2024 earnings call. I’m pleased to report that in the first quarter revenue increased 3% and adjusted EBITDA of $32 million was in line with our guidance range. These results are the outcome of our continued strategic transformation efforts. The progress made on our initiatives provides conviction that we can achieve our financial targets and exit the fourth quarter of 2024 with an expected run-rate adjusted EBITDA between $220 million and $230 million and a free cash flow conversion of 40% to 50% excluding the impact from our expected debt refinancing. Over the past two years, our focus on operational improvements, technology advancements and sales has underpinned our no margin no mission culture.

This has significantly enhanced our differentiated competitive positioning. As we complete this transformation in 2024, the tangible improvements in our KPI.s are now being reflected in our financial results with an improving cost structure as well as growing sales Additionally, Medicaid redetermination is in line to slightly better than expected and concluding in the second quarter, providing line of sight of our earnings trajectory and cash flow. One of our top priorities is addressing our 2025 senior unsecured notes. While it’s premature to provide specifics, the refinancing process is well underway. Our refinancing efforts are focused on balancing capital flexibility, particularly in terms of debt prepayment options and optimizing our overall cost of capital.

We also remain committed to deleveraging our balance sheet, recognizing the significant value this brings to our shareholders. With our debt expected to be refinanced soon, clear insights into the effects of Medicaid redeterminations and healthcare normalization on our profits and working capital along with new sales onboarding, a robust pipeline and continued cost structure optimization we are positioned to deleverage effectively and grow our business. Additionally, potential opportunities to monetize assets including our minority equity stake in Matrix Medical will provide other avenues to delever. In the first quarter, we secured $36 million in NEMT Annualized Contract Value or ACV from Mississippi State contracts in multiple MCO contracts.

After March 31, we continued our momentum by renewing and expanding our state contract in Maine. We also received notification to negotiate a multi-year extension with one of our largest state contracts, with several state RFPs expected this year for both renewals and expansions. Our status as the incumbents backed by a solid track record of renewals and new business wins positions us very well. Since we transformed our go-to-market strategy, we have successfully retained all state NEMT contracts with our last loss in 2022, which again was largely due to legacy performance issues. We also secured $142 million of annual revenue from new MCO wins in 2023 across various regional and national contracts. However, our progress was materially offset by a first quarter 2024 reduction in volume from a large payer that began diversifying its transportation providers two years ago, largely again due to our past performance rather than our current capabilities.

Nothing less, we remain this payer’s largest NEMT provider and a key innovation partner. Despite this, and when looking at the individual contracts and customer win-loss rates, we are proud yet not satisfied or complacent of our ability to expand our market share. Next, I’ll provide an update on Matrix Medical. Matrix recently refinanced its debt, which had an upcoming maturity. Matrix’s financial results were consistent with the improvement seen throughout 2023. The business is growing very well. We continue to have confidence in the value of Matrix’s nationwide network of 2,800 in-home nurses and its refreshed positioning addressing whole person health. The management team at Matrix has made significant strides over the last year. Along with our partners, we are balancing the timing of the sale versus the continued progress financially and with the innovative platform and technological advancements they are making.

That said, I expect that we will have the opportunity to monetize our minority equity stake in the latter half of 2024 or the first half of 2025. Similar to Matrix, our supportive care services leveraging our national platform are increasingly crucial in the evolving US healthcare landscape. As healthcare shifts toward providing high-quality services to vulnerable populations, our supportive care service offerings are essential for managing chronic conditions. The market now demands more than basic services. Our customers expect insights and actions that directly lower costs, improve outcomes and enhance member satisfaction. Our technology and clinical investments are helping us secure significant competitive advantage as the industry adjusts to the regulatory environment in evolving customer needs, leading legacy NEMT providers, monitoring and personal care point solution providers to lose market share.

On the other hand, our hybrid engagement model which combines digital tools like monitoring devices in homes or community stations and omni-channel connections with human interaction from our contact centers, in-home care and transportation services, not only effectively manages care for hard to reach members with multiple chronic conditions, but also significantly boosts our win rates in mobility and monitoring core services. This is a standout result of our transformation. Furthermore, this approach is creating new revenue channels by compensating us for reducing healthcare costs, improving outcomes and enhancing member satisfaction with a meaningful impact of our revenue projected in 2025 and beyond. We are actively addressing challenges from COVID’s impact on working capital and the necessary adjustments to our cost structure.

Our ongoing efforts to boost the revenue driving capabilities of our NEMT segment while transitioning us to a more competitively advantaged platform, this shift not only enhance our cashflow, but also facilitate deleveraging, propelling additional growth and scale. Beyond our unique platform, we possess the optionality to enhance shareholder value through our three business segments and our minority equity investment in matrix, each of which has scale and holds substantial value. Now I’ll address our segment highlights starting with NEMT. Our cost savings initiatives are progressing as scheduled. We expect to achieve at least $34 million of in-year cost savings and approximately $60 million in annualized savings beyond 2024. These savings are driven by our NEMT transformation, including our digital integration and technology advancements.

The savings are reflected in our unit cost or per trip metrics, as well as KPIs like call to trip ratio. The initiatives in NEMT that are driving the savings this year are in three areas. Member experience, which is focused on our contact centers, interaction with our members and transportation providers. Transportation services, which is focused on automating ride assignment, as well as standardizing and centralizing trip management and purchase services, which is the actual cost of providing the trip. The savings here will come from our multimodal strategy, which is the actual cost of providing the trip. The savings here will come from our multimodal strategy, which is shifting more trips to ride-share, mass transit, select high quality and lower cost transportation providers and other alternative options.

I want to reiterate the savings in initiatives have been identified and actioned and approximately 60% are standard run rate savings and we have clear actions for achieving our sales targets for this year and beyond. Medicaid redetermination continues to track in line or slightly better than our projection. As a reminder, we had $7 million impact of adjusted EBITDA in 2023, and an incremental $26 million to $30 million impact is expected in 2024. Redetermination is coming to an end in the second quarter and the financial impact will flat-line in the second half of 2024. The industry is expecting 20% to 30% of the members that were just enrolled due to procedural terminations will be re-rolled over the next several quarters, which will be an incremental tailwind to our financial performance.

Shifting to personal care, the first quarter results were impacted by higher than expected wage increases and higher centralized costs that will be synergized this year. A critical strategy is that that is embedded in our transformation is focused on platform implementation, shared service centralization and compliance enhancement, while implemented a sophisticated member referral and caregiver matching system. With these consolidated systems and processes in place, we can improve operating efficiencies, which will help drive growth. We expect to exit the year in line with our long-term revenue growth rate of 7% to 9% and adjusted EBITDA margin of 10% to 12%. Last week, CMS issued the long-awaited final rule ensuring access to Medicaid services, otherwise known as the 80/20 rule for personal care services.

While the 80% provision was maintained in the final rule, we are pleased that the clinical nursing cost will be included in the 80% calculation. We were also pleased that the in-place implementation time line increased from four to six years before it goes into effect. Ultimately, we anticipate legal challenges and legislation could change the rule before it’s even implemented, however, we expect to be able to offset any impact with operating inefficiencies and growth. Next, New York City path or the consumer directed program, whereby, a member can be taken care of by a family member or a person of their choice has encountered challenges from the state. This is a relatively small part of our business. However, we are staying engaged in the event that there are changes, we believe we can participate in the change or convert members to more traditional home care services that we provide.

In remote patient monitoring, we continue to see solid growth and performance and we’re seeing good progress with payers as we shift to an access to care model driven by our hybrid digital and human touch engagement model. As noted earlier, our monitoring solutions are contributing nicely to NEMT incurred sales growth and more specifically to the innovative revenue streams that generate payments to us for cost savings, improved outcomes and member engagement. Currently we have over 40 programs delivering this model. The results are very promising with high customer engagement to expand. We continue to scale and expect meaningful revenue in 2025 and beyond, meeting our expectations in the first quarter was an important step towards achieving our 2024 financial targets and our conviction to generate free cash flow in the second half of the year, as well as refinancing our 2025 notes with pre-payable debt.

We have confidence in our strategy, competitive positioning and execution throughout the year and we will continue to consider available strategic avenues to optimize our capital structure and drive long-term shareholder value. Our outlook for the year remains unchanged and we are confident in achieving our fourth quarter run rate adjusted EBITDA of $220 million to $230 million with a free cash flow conversion rate of 40% to 50%, excluding the impact of the expected debt refinancing. As we approach the final stages of our transformation, foreseeing a lower cost structure and increasing revenue. And we have clarity on the completion of Medicaid redeterminations. With the volatility and unpredictability in cash flow behind us, our capital needs for funding working capital are expected to peak in the second quarter and expected to decrease in the third and fourth quarters as health care utilization stabilizes.

I’d like to thank all our team members, as we’ve navigated change and challenges over the last several months. It’s their dedication and hard work that make ModivCare, a special place to be. Now, I’ll turn the call over to Barb, who will share additional details about our financial results and outlook for 2024. Barb?.

Barbara Gutierrez : Thank you Heath and good morning, everyone. First Quarter 2024 revenue increased 3% year-over-year to $685 million driven by 2% NEMT growth, 5% PCS growth and 7% RPM growth. First quarter net loss was $22 million, and adjusted net loss was $1.2 million or $0.09 per diluted share. First quarter adjusted EBITDA was $32 million or 4.7% of revenue, in line with our guidance range. As we discussed last quarter, EBITDA was expected to decrease in the first quarter primarily due to the timing of NEMT contract losses occurring in the quarter, with contract wins being onboarded in subsequent quarters. Turning to a review of our segment financials. NEMT first quarter revenue increased 2% year over year to $479 million.

NEMT revenue incrementally benefited from successful execution of contract settlements and negotiated pricing increases that were more favorable than expected. Average monthly membership decreased 12% sequentially to $29.1 million, due to previously announced contract losses and Medicaid redetermination. Trip volume increased slightly quarter-over-quarter while revenue per trip decreased 4% due to mix changes. Sequentially, NEMT gross margin decreased 180 basis points primarily due to lower revenue per trip, higher utilization related to mix and lower membership. Notably, purchased services expense per trip, decreased 2.4% and payroll and other expense per trip was flat sequentially at $6.90 even as trip volume modestly increased. THIS quarter’s decrease in service cost unit metrics, following last quarter’s strong decline, is evidence that our cost savings initiatives are progressing, which includes lower purchased services expense per trip, and stable payroll and other expense per trip.

NEMT adjusted EBITDA was in line with our expectations at $27 million or 5.7% of revenue. We expect to see margins improve throughout the year due to the onboarding of new contracts in the second and third quarters as well as the execution of our cost initiatives. During the first quarter, our membership was impacted by Medicaid redetermination of approximately 600,000 members. Our top five states with full risk contracts are 80% through their respective redetermination period. Redetermination impacted first quarter revenue by $10 million and adjusted EBITDA by approximately $5 million. Overall, Medicaid redetermination is tracking in line to slightly better than we previously expected. Based on updated information, we now expect redetermination to adversely impact revenue by $60 million and adjusted EBITDA by $26 million to $30 million in 2024 versus our original range of $20 million to $40 million.

Additionally, MCOs and states are starting to see 20% to 30% reenrollment of eligible members who are procedurally this enrolled in 2023. Our guidance includes a modest amount of re-enrollment, but the timing is hard to predict. Turning to our Home division. First quarter personal care revenue increased 5% year-over-year to $184 million driven by 2% growth in hours and 3% growth in revenue per hour. We continue to make steady progress driving hours growth and converting applicants to caregivers. The reimbursement rate increase this quarter was largely driven by favorable increases in minimum wages in New York. However, we expect a more subdued reimbursement rate environment for the remainder of the year. Personal care adjusted EBITDA was $11 million or 6% of revenue, which was lower than expected primarily due to wage growth outpacing rate increases in certain states as well as grant income tapering off.

Lastly, we received several reimbursement rate increases that didn’t take effect until March 1. The benefit of these increases will be fully realized in the second quarter. Going forward, we expect wage increases to moderate and operating efficiencies will drive leverage in G&A leading to EBITDA margins returning to an expected range of 10% for the year. RPM revenue increased 7% year-over-year to $20 million. We expect new contract wins and referral sales to further accelerate growth for the remainder of the year toward our revenue growth target of 10%. Gross margin declined year-over-year and sequentially, primarily due to higher churn in our Medicare Advantage business related to members who lost eligibility and higher deactivation costs.

The first quarter is seasonally the highest churn quarter for the year, but this quarter was higher than we anticipated. RPM adjusted EBITDA was $6.3 million or a 31% margin. Our business trends are normalizing and we continue to expect RPM margins in the mid-30% range, despite slightly higher service expense during Q1. Turning to our cash flow and balance sheet. During the first quarter, free cash flow was $2 million, consisting of net cash provided by operating activities of approximately $10 million, offset by capital expenditures of $8 million, which was 1% of revenue. NEMT working capital dynamics were in line with our expectations. Contract receivables increased by $10 million sequentially to $154 million. Contract payables increased by $11 million quarter-over-quarter to $128 million.

We ended the first quarter in a net receivable position of $26 million essentially flat sequentially. Our revolving credit facility balance increased by $7 million to $121 million. But importantly, our net debt remained flat with $10 million in cash on the balance sheet as of March 31st. We ended the first quarter with approximately $1.1 billion of debt and our bank-defined net leverage ratio increased sequentially to 4.9 times as of March 31st against our maximum net leverage covenant of 5.5 times. As Heath stated, we are in the process of refinancing our 2025 unsecured senior notes. We are currently pursuing financing solutions that provide flexibility for prepayment to support our priority to delever, while managing our overall cost of capital.

We will provide updates as the refinancing progresses, but we are focused to complete it expeditiously, while optimizing the best outcome. As a reminder, we continue to expect free cash flow to be negative in the first half of 2024 as the second quarter includes settlement of certain contract payables and payment of our semi-annual cash interest. We expect free cash flow to be positive in the second half of the year based on the improvement in adjusted EBITDA and net working capital being a source of cash. We expect that we will exit the year with adjusted EBITDA to free cash flow conversion of 40% to 50% excluding the impact from the expected debt refinancing. Free cash flow conversion may decrease by approximately 10% as a result of our refinancing.

We maintained our 2024 revenue guidance in a range of $2.7 billion to $2.9 billion and adjusted EBITDA in a range of $190 million to $210 million. For the remainder of 2024, here are a few qualitative items for you to consider. Medicaid redetermination is tracking in line to slightly better than our original expectations. We expect to lose additional members in the second quarter as redetermination is anticipated to conclude by midyear. We continue to expect a slightly net positive impact on adjusted EBITDA from business development for 2024, driven by the onboarding of our NEMT contract wins and contract repricing, offsetting the attrition from earlier in the year. Cost savings are expected to be in the range of $34 million to $38 million net of investment and digital service costs.

We expect utilization within our contract mix to be a headwind as healthcare utilization normalizes. Adjusted EBITDA from home is expected to grow in the high single-digit millions of dollars for the year. We expect to invest $2 million to $4 million for the year in innovation strategies and G&A. Over the remaining quarters for 2024, we expect a steady progression and ramp in adjusted EBITDA driven by new contract implementations, greater benefit from cost savings, the diminishing impact from Medicaid redeterminations and improvement in our home segments, all contributing to financial results consistent with our full year guidance. In summary, our first quarter results were in line to modestly better than we expected. These results set a solid foundation for the year and we expect to see sequential improvement as we progress throughout the year.

We expect to have our refinancing done in the near term and we will continue focusing on execution and driving operational improvements and results. I’d like to thank all of our team members for their continued dedication and passion for serving our clients and members. With that operator, please open the call for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Bob Labick with CJS Securities. Please proceed with your question.

Bob Labick: Good morning.

Heath Sampson: Good morning.

Bob Labick: There’s a lot to unpack morning but congratulations on a solid start to normalizing things for us here.

Heath Sampson: Thanks, Bob. Yes.

Bob Labick: Yes. So I wanted to start with NEMT, obviously a lot of moving parts there. But overall I think results at least from our perspective were better than expected better than feared. So good starting there. The biggest changes to the model really on a macro is that impact on redetermination? And then the shift — the mix shift from the contract that you lost to the new contracts you’re winning. So maybe help us understand how that plays out in the P&L this year? Maybe particularly utilization and purchase service costs kind of are offsetting some directionally from where we thought. So how might this be different to prior expectations? How should we think about those two key drivers with the mix shift the redetermination and the contract change?

Heath Sampson: Yes. Well the first item that you hit on Medicaid redeterminations is the big item, right? In 12 months ago we — there was fears in the marketplace on what it was going to be. And yes, it’s hitting us right now as expected the main driver for where we are in Q1. And most importantly, we’ll be done with that in Q2. And then secondarily it’s right where we expect it to be, but still material the other. The other – and that really affects our full-risk contracts because the membership goes down and that’s a big driver. The other item that we talked about is the mix change. So as we disclosed last quarter that we lost a number of members through this one large payer and those coming of off coupled with Medicaid redetermination has changed our mix.

And especially as we are onboarding these new sales wins that we’ve had over the last 12 months or so and continued into Q1. So that mix change — and I don’t know if people realize that all our contracts that we have though everything averages to what we give. There’s a lot of diversity around utilization. The main — the big differences that are obvious are between like Medicare has a look typically a lower utilization. And then within Medicaid it depends on where you are in that specific state because there could be high utilizers for example, if it’s heavy dialysis, point being mix really matters and you hit on a big point because of redetermination in the large volume that came out. A lot of the large volume that came out was within the Medicare space were dual space and lower utilizers.

So that is the big change. And you’ll see that utilization from a mathematical perspective actually is up. But really from a standpoint from a macro where healthcare utilization is, yes, higher but in line with our expectation that’s probably the most important point — in line with our expectations, but to you all is definitely up. So if you remember we expected at the end of 2024 the complete normalization of healthcare usage and utilization, and we had that at about 10%. Now with this mixed change, again, as expected, it would be at about 11%. So big, big model change when you’re looking at things. But in line with that mixed change, there’s other things that happen within our P&L, and you hit on it, purchase services. So the purchase services within this mix change will come down significantly based on the type of contracts that we have in place.

So those two factors, when adjusted, will make you in line and be able to better predict what our P&L is going to be at the end of 2024.

Bob Labick: Okay. Super. That’s really helpful and makes sense there. And then you touched on this, but maybe we can talk about it a little more, too. Congratulations on the success. Another, salesman, obviously you won a bunch last year. You won another contract or a couple more in the first quarter. Just talk about the pipeline here. Any, potential surprise losses or how’s your visibility going forward? I mean, wins are great. We just want to avoid losses because you already have the wins lined up. So maybe visibility there, please?

Heath Sampson: Yeah, well, first off, there’s a lot that we’re proud of. We could spend all day going through the entire organization on the great things that have happened, but really in our go-to-market strategy, the team that we’ve added there, all the way from people that can drive new sales through marketing, through our product organization that’s building the right solutions that meet our customers’ needs. And then even beyond just the transaction of a trip to really think about this as an access to care platform. And then again, building the necessary capabilities to ensure that that meets our customers’ needs. So with that, transformation of our go-to-market strategy, it’s resulting in the results. The sales that started last year and the sales that continue this quarter, I’m really excited about even how the rest of the year comes up.

So I couldn’t be more proud of what this organization has done. We’ve really changed the culture and capabilities in our go-to-market strategy. And then the losses, again, the loss last quarter, a lot of that had to do with legacy items and the need for them to diversify away from us. Again, that specific pair, I’ll just repeat what I said last quarter, we’re still the largest NEMT broker and innovation partner with them. So we did not lose anything this quarter. It would be — I’m sure we will, but based on what we’re — what we’re doing right now our wins will out pace our losses. So I feel really good about the team is showing up in the results and I expect that pace to continue.

Bob Labick: Okay. Super. And last one for me, and I’ll get back in line. But just on the PCS, I think explained pretty well what happened in the quarter in terms of margins and the expectation for year end. But as a generalist, maybe you could help simplify the message on the 20% gross margin proposal from CMS, particularly as it relates to clinical nursing input. I don’t know how that relates to you, but just kind of simplify that one for me. It would be awesome.