Heath Sampson: Must have lost him. Hopefully he gets back in the queue. We’ll talk to you. Thanks for that question, Scott.
Operator: Our next questions come from the line of Brooks O’Neil with Lake Street Capital Markets.
Brooks O’Neil: Obviously, redetermination involves member attrition and increased utilization is the exact opposite of what you might expect in light of falling membership. So can you just talk to us a little bit about what you’re seeing out there in the marketplace and what is exactly driving that higher utilization?
Heath Sampson: Yes. Well, so you’re right to point out the utilization has to do with 2 items, the big driver, just because of a denominator of membership coming away is redetermination. The good thing about that, like we are saying and then also if you’re listening to what the payers are doing, we’re about 70% through redetermination. And most of it crescending [ph] in April, there will be some redetermination that will happen in May and June. So there’s a lot of conviction around that number and then the timing around redetermination which is the biggest driver for utilization. However, the other part of utilization that is seen across the country and is seen with us is this normalization of the usage of healthcare. So you can see that we actually have that utilization of healthcare also continuing to tick up and we expect at the end of this year, considering all those together will exit at about 10 million or 10.1 million [ph] of utilization.
So it’s 2 factors. And I do think at the end of 2024 and if you listen to the rest of the healthcare world, they probably agree that at the end of 2024, we should be back to this kind of post-COVID normalized environment. So just in summary around that, a lot of understanding now that we didn’t have early in 2023 or mid 2023 around all these factors. And again which is why we have conviction around both redetermination and normalization of healthcare utilization but both effect.
Brooks O’Neil: That’s helpful. So let’s just talk briefly about the NEMT, really, in particular the contract losses which I think are relatively unexpected. Obviously, some factors are beyond your control but if you could highlight nicely on the factors you see or have heard from customers that are driving contract losses? And then just highlight quickly, what do you think you could do to fix those problems?
Heath Sampson: Well, so since I took over in November of 2022, the focus quickly shifted to our customers. And our customers that are specific to MA that are managed Medicaid and of course our state customers. And they actually all have different needs. And then you layer on what they’re actually going through, whether that’s because of the RADV rules that CMS came out with on Medicare, or whether that’s the increased focus of [indiscernible] within Medicaid and then even within the state related bids, the requirement of innovation to do more free members. My point on that is what was in the past is different now from a customer expectation. For sure, you need to have the right quality, pick people up on time, have lower complaints but you need to do more than that.
And then you even need to start integrating with the customer to ensure that they can properly manage the member experience or integrate with a facility so they can book the trip on behalf. All those items have been part of our transformation. You look back a year ago, even 2 years ago, some of that, we weren’t — we weren’t where we needed it to be. And that gets to — and this is why I have a lot of conviction around what we’ve done, because of what the team has done. Those issues that we had around quality are gone. In fact, we’re back to best-in-class. Integrating with our customers so they can control the membership. Member experience is happening now. Having an understanding of that member, so you know that whether they made their dialysis trip 3 times, so we can communicate that, we’re doing that now.
So all the stuff that we are in the place that we’re in now, we didn’t have before. And that’s a big reason why some of our competitors were able to get in. And it’s a driver for one of the reasons why we lost part of that contract before. But I’m going to say this again. The wins that we had in 2023 of $140 million-plus. That was scattered across many different, primarily managed Medicaid. And the reason why we are chosen is because all these items that we have, coupled with we can do more for that member. So we can give the trip but we can also give insight to change, to manage a gap, or to improve customer satisfaction. Long story short, you need to have it all. And I think some of our competitors have some individual pieces. We have them now but we didn’t have them before.
So we did lose. I don’t expect to win everything but what we’re doing and what we’re doing now, we’ll win and continue to win more than when we lose.
Brooks O’Neil: Great. That’s helpful. And then just one more. One thing that I haven’t heard a lot of conversation about is labor issues and I’m considering that a good thing. But can you just give us an update on what you’re seeing in the marketplace in terms of labor availability and the cost of labor?
Heath Sampson: Yes. So, 3 quarters ago and this is pretty consistent across our entire company. As you know, we have drivers that we have through our transportation providers. And of course, close to 20,000 employees, a lot of those caregivers. And that’s always a challenge but it’s really normalized over the last 3 quarters. So we feel we have a lot of opportunity to continue to hire and retain. The differentiator now in this environment, so the external headwinds that happened again 3 quarters ago or last year, those have been flat. What we are doing now, because of the efforts of centralization, standardization and even automation, we’re able to free up resources to ensure we pay the right level and ensure that we can recruit and retain. So long story short, the environment is stable. And what we’ve done around this integration, centralization, standardization, we’re able to outpace the market and retain and grow appropriately on the labor side.
Operator: Our next questions come from the line of Pito Chickering with Deutsche Bank.
Pito Chickering: A couple for me here. For the managed care contract in Florida’s [ph] revenues, you guys didn’t collect this quarter. I believe you said you collect them in the next few months. Can I ask sort of why you didn’t collect it in the time period that you thought you would? Is there any issue on what they think they should pay versus what you guys have recognized?
Heath Sampson: Yes. We wanted to be specific that it was one contract and one area because we have a lot of relationships with that payer across the country which we are in great standing. This specific issue has not been paid at the same time, why I said the next couple of months is because we will get it paid because it’s contractually owed. So I wanted to make sure I set it because it was the main driver for the cash flow change in Q4. But I also wanted to be explicit about it and give the amount because it’s contractually owed and we’ll get it paid within the next kind of 60 days.
Pito Chickering: All right. Great. And then on the contract loss, I guess from sort of your — sort of the large customer, I guess, how do you guys feel about retaining other business that you have with that customer?
Heath Sampson: Well, that customer and I said this, we’re still the largest NEMT broker. We have relationships from the top of the house down to procurement across all the countries. And we are doing things with them that are strategic and forward-looking. So they may be appropriately diversified, I think we gave them a window a couple of years ago to do that. But we are still the number one NEMT broker and we’ll continue to grow with them. So unfortunate but going forward, I feel good about our relationship in our ability to continue to grow with them and, of course, others.
Pito Chickering: Okay. From an interest expense perspective, how should we be modeling interest expense in the back half of the year after the refi? Just trying to tie that up with the $40 million to $60 million of free cash flow guidance just to get the models right?
Barbara Gutierrez: Yes. Thanks for the questions. It’s Barb. Yes. So I think naturally you can see the disclosure on the new revolver, the new amendment and you can see in there that the interest rate is a little bit higher than the current rate. And so it’s a complicated formula depending on how the borrowings go. But if you look in there, it’s a little bit higher than the current interest rate.
Heath Sampson: The refinancing the ’25 [ph], it’s going to be higher interest rate, that’s not in the numbers but we feel like we’re going to have a good interest rate. And then as we start delevering and paying down our line, that higher end that she said of 35% to 70% [ph] for the year, that’s — be on the higher end if you’re modeling after the refi of the ’25. And we’ll update you more as we get closer but it’s not on the lower end, it’ll be on the higher end after the refi.
Barbara Gutierrez: Just to clarify on that, you can look at the release, it’s — the interest rate on the revolver is about 50 basis points higher. So that’s in the release.
Pito Chickering: Okay. And the last quick one here, as you ramp up into 2Q EBITDA with the new contract wins coming online, can you just remind us the process of onboarding new customers and how we should think about revenues and costs flowing through in those initial months? That’s it for me.
Heath Sampson: Yes. So again, why we wanted to kind of separate out Q1 versus the rest of the year and explicitly these contracts coming on are the sales that we had and closed in 2023. So why we feel good about the timing of those and the implementation ease of those is because we have a national platform and each of these states where we won, we already have other clients in there. If we didn’t, there is. That’s a lot of work to get to stand up a network. But we don’t have that issue because we’re already concentrated in those specific states. So, we feel good about the timing and the implementation. And again, we’ve already sold those, so it really is just execution for us. So I feel good about that. Thanks, Pito.
Operator: Our next questions come from the line of Scott Fidel with Stephens.
Scott Fidel: I’m back. Sorry I was muted for my follow-up, so wanted to get those in. So my next follow-up just on the NEMT margins and just given how important this metric is for all of us. Can you just sort of tell us what is assumed for NEMT margin inside of that 1Q ’24 guide? And then, Barb, did give us that sort of exit rate of 8% to 8.5%. So I’m just curious on sort of the sequencing of that between 1Q towards getting to that 8% to 8.5%.
Heath Sampson: Yes. So 1Q being down is driven from the items that we talked about, right? So it’s redetermination, it’s the recovery utilization and it’s also the mismatch, the loss that we had that hit us in Q1 and then the onboarding of our sales. And then you couple that with the continued ramp of our cost out, that’s already happening. So, those items, we’re at the low point in Q1 of that margin perspective for those reasons. But again, the sales are coming on. They already sold them, right? Redetermination will be behind us. Normalized utilization we expect and we’re in line with that. So it really gets down to the last component which is those cost savings. And we talked about this in the script. I feel good about 60 [ph] as a total, right?
But that’s probably not — that’s not going to come till 2025. So it really is, what are we expecting to get in this year. So it really is getting $30 million and that is about just execution. So which is why we gave that exit rate of 8% to 8.5%. So controllable in process and really down to that one item.
Scott Fidel: So Heath, do you have a number in terms of what that computes for the NEMT margin in 1Q?
Heath Sampson: For Q1, no. Yes. So, it won’t come down, right? And then just to be in line with that, the margins will be lower in Q1 and Q2 and then start to ramp in Q3 and Q4 at a — so the ramp will be higher in Q3 and Q4, exiting at an 8% to 8.5%.
Scott Fidel: Okay. We’ll work through that in a model. And then just the other follow-up question I want to ask about. You did call out Matrix in the script. I was maybe hoping to get a little more detail here in terms of, I guess, one just you mentioned that performance has been good. Is there any stats that you can share with us in terms of how that business performed sort of exiting out of ’23? And then obviously, we’re all interested in sort of the timing of the monetization opportunity here. It sounds like you think this can happen still in ’24. But what would be the hold up here? Is it — I know you want to be aligned with your partner. Are they not ready yet? Or maybe just walk us through sort of — just sort of getting to that modernization catalyst opportunity?
Heath Sampson: Yes. So first off, you’re right. What the team has done has been tremendous, right? They’ve gone through a transformation themselves from Catherine, who’s relatively new as CEO for the last couple of years and you can go through the management team that’s new. And across the board in all the metrics and of course in the financials, it’s showing up. And then even strategically what they’ve done on the technology side. So the company is a very well-oiled machine that has a very unique capability. They have a network of 5,000 nurses across the country that not only can do risk adjustment but they’re in the home which is why there’s so much talk and value around that. So I couldn’t be more happy with what the team and successful.
So we’re not going to give you what happened out of 2023. We gave the broad range a number of quarters ago and we’re sticking with that of an EBITDA of $50 million to $100 million. Again, why was that so broad? Because that was a long time ago. So I’d still use that as the right proxy for how you want to evaluate this. So getting to the timing of modernization, we are completely aligned with our partners, their focus and our focus is, again, to support the management team and at the right time to actually have it monetized and allow this team to really grow and do the great things. So what I said in my script is within the next 12 months and that aligns with what we are. But it gets back to again that it is performing in a very valuable asset in the marketplace.
