ModivCare Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 10 speakers on the call.

Operator

Good morning, and welcome to Motive Care's First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note that this conference call is being recorded. I will now turn the call over to Kevin Ellich, Head of Investor Relations.

Operator

Mr. Ellich, you may now begin.

Speaker 1

Good morning, and thank you for joining Motocare's Q1 20 24 earnings conference call and webcast. Joining me today is Heath Sampson, MOTIVare's President and Chief Executive Officer and Barbara Gutierrez, MotiveCare'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.

Speaker 1

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 ks. A replay of this conference call will be available approximately 1 hour after today's call concludes and will be posted on our website, modivecare.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.

Speaker 2

Good morning and thank you for joining our Q1 2024 earnings call. I'm pleased to report that in the Q1 revenue increased 3% and adjusted EBITDA of $32,000,000 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 Q4 of 2024 with an expected run rate adjusted EBITDA between $220,000,000 $230,000,000 and a free cash flow conversion of 40% to 50%, excluding the impact from our expected debt refinancing. Over the past 2 years, our focus on operational improvements, technology advancements and sales has underpinned our no margin, no mission culture.

Speaker 2

This has significantly enhanced our differentiated competitive positioning. As we complete this transformation in 2024, the tangible improvements in our KPIs 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 2nd quarter, providing line of sight of our earnings trajectory and cash flow. 1 of our top priorities is addressing our 2025 senior unsecured notes. While it's premature to provide specifics, the refinancing process is well underway.

Speaker 2

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 redetermination 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 state in Matrix Medical will provide other avenues to delever. In the Q1, we secured $36,000,000 in NEMT annualized contract value or ACV from a Mississippi state contract in multiple MCO contracts.

Speaker 2

After March 31, we continue our momentum by renewing and expanding our state contract in Maine. We also received notification multiyear extension with 1 of our largest state contracts. With several state RFPs expected this year for both renewals and expansions, our status as the incumbent, 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 and EMT contracts with our last loss in 2022, which again was largely due to legacy performance issues. We also secured $142,000,000 of annual revenue from new M wins in 2023 across various regional and national contracts.

Speaker 2

However, our progress was materially offset by a first quarter 2024 reduction in volume from a large payer that began diversifying its transportation providers 2 years ago, largely again due to our past performance rather than our current capabilities. Nothing or 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.

Speaker 2

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 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.

Speaker 2

That said, I expect that we will have the opportunity to monetize our minority equity stake in the latter half of twenty twenty four or the first half of twenty twenty five. Similar to Matrix, our supportive care services leveraging our national platform are increasingly crucial in the evolving U. S. Healthcare landscape. As healthcare shifts toward providing high quality services to vulnerable populations, our supportive care service offerings are essential for managing chronic conditions.

Speaker 2

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 and 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 omnichannel 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.

Speaker 2

Furthermore, this approach is creating new revenue channels by compensating us for reducing health care costs, improving outcomes and enhancing member satisfaction with a meaningful impact of our revenue projected in 2025 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 cash flow, but also facilitate deleveraging, propelling additional growth and scale. Beyond our unique platform, we possess the optionality to enhance shareholder value through our 3 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.

Speaker 2

Our cost savings initiatives are progressing as scheduled. We expect to achieve at least $34,000,000 of in year cost savings and approximately $60,000,000 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 3 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.

Speaker 2

The savings here will come from our multimodal strategy, which is shifting more trips to rideshare, mass transit, select high quality and lower cost transportation providers and other alternative options. I want to reiterate the savings and 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 $7,000,000 impact of adjusted EBITDA in 2023 and an incremental $26,000,000 to $30,000,000 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 twenty twenty four.

Speaker 2

The industry is expecting 20% to 30% of the members that were disenrolled due to procedural terminations will be re enrolled over the next several quarters, which will be an incremental tailwind to our financial performance. Shifting to Personal Care. The 1st 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 referral and caregiver matching system. With these consolidated systems and processes in place, we can improve operating efficiencies, which will help drive growth.

Speaker 2

We expect to exit the year in line with our long term revenue growth rates 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 eightytwenty 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 implementation timeline increased from 4 to 6 years before it goes into effect. Ultimately, we anticipate legal challenges and legislation could change the rule before it's even implemented.

Speaker 2

However, we expect to be able to offset any impact with operating efficiencies and growth. Next, New York CDPAP 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 could participate in the change or convert members to more traditional home care services that we provide.

Speaker 2

In remote patient monitoring, we continue to see solid growth in 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 and PERS 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.

Speaker 2

Meeting our expectations in the Q1 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 20 25 notes with prepayable 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 of 40% to 50%, excluding the impact of of 40% to 50%, excluding the impact of the expected debt refinancing. As we approach the final stages of our transformation, we're seeing a lower cost structure and increasing revenue, and we have clarity on the completion of Medicaid redetermination. 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 3rd and 4th quarters as healthcare utilization stabilizes.

Speaker 2

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 MotiveCare 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?

Speaker 3

Thank you, Heath, and good morning, everyone. 1st quarter 2024 revenue increased 3% year over year to $685,000,000 driven by 2% NEMT growth, 5% PCS growth and 7% RPM growth. First quarter net loss was $22,000,000 and adjusted net loss was $1,200,000 or $0.09 per diluted share. First quarter adjusted EBITDA was $32,000,000 or 4.7 percent of revenue, in line with our guidance range. As we discussed last quarter, EBITDA was expected to decrease in the Q1, primarily due to the timing of NEMT contract losses occurring in the quarter, with contract wins being onboarded in subsequent quarters.

Speaker 3

Turning to a review of our segment financials. NEMT 1st quarter revenue increased 2% year over year to $479,000,000 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 $29,100,000 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.

Speaker 3

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 purchase services expense per trip and stable payroll and other expense per trip. NEMT adjusted EBITDA was in line with our expectations at $27,000,000 or 5.7 percent 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 Q1, our membership was impacted by Medicaid redetermination of approximately 600,000 members.

Speaker 3

Our top 5 states with full risk contracts are 80% through their respective redetermination periods. Redetermination impacted 1st quarter revenue by $10,000,000 and adjusted EBITDA by approximately $5,000,000 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 $60,000,000 and adjusted EBITDA by 26 $1,000,000 to $30,000,000 in 20.24 versus our original range of $20,000,000 to $40,000,000 Additionally, MCOs in states are starting to see 20% to 30% reenrollment of eligible members who were procedurally disenrolled in 2023. Our guidance includes a modest amount of reenrollment, but the timing is hard to predict. Turning to our Home division.

Speaker 3

First quarter personal care revenue increased 5% year over year to $184,000,000 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 $11,000,000 or 6 percent 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.

Speaker 3

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 Q2. Going forward, we expect wage increases to moderate and operating efficiencies will drive leverage in G and A, leading to EBITDA margins returning to an expected range of 10% for the year. RPM revenue increased 7% year over year to $20,000,000 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.

Speaker 3

The Q1 is seasonally the highest churn quarter for the year, but this quarter was higher than we anticipated. RPM adjusted EBITDA was $6,300,000 or a 31% margin. Our business trends are normalizing, and we continue to expect RPM margins in the mid-thirty percent range despite slightly higher service expense during Q1. Turning to our cash flow and balance sheet. During the Q1, free cash flow was $2,000,000 consisting of net cash provided by operating activities of approximately $10,000,000 offset by capital expenditures of $8,000,000 which was 1% of revenue.

Speaker 3

NEMT working capital dynamics were in line with our expectations. Contract receivables increased by $10,000,000 sequentially to $154,000,000 Contract payables increased by $11,000,000 quarter over quarter to $128,000,000 We ended the 1st quarter in a net receivable position of $26,000,000 essentially flat sequentially. Our revolving credit facility balance increased by $7,000,000 to $121,000,000 But importantly, our net debt remained flat with $10,000,000 in cash on the balance sheet as of March 31. We ended the Q1 with approximately $1,100,000,000 of debt and our bank defined net leverage ratio increased sequentially to 4.9x as of March 31 against our maximum net leverage covenant of 5.5x. As Heath stated, we are in the process of refinancing our 2025 unsecured senior notes.

Speaker 3

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 twenty twenty four as the second quarter includes settlement of certain contract payables and payment of our semiannual 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.

Operator

That we will exit

Speaker 3

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 $2,700,000,000 to $2,900,000,000 and adjusted EBITDA in a range of 190 $1,000,000 to $210,000,000 For the remainder of 2024, here are a few qualitative items for you to consider. Medicaid redetermination is tracking in line slightly better than our original expectations. We expect to lose additional members in the 2nd quarter as redetermination is anticipated to conclude by mid year.

Speaker 3

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 a range of 34,000,000 to $38,000,000 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 1,000,000 of dollars for the year. We expect to invest $2,000,000 to $4,000,000 for the year in innovation strategies and G and A.

Speaker 3

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 redetermination and improvement in our Home segment, all contributing to financial results consistent with our full year guidance. In summary, our Q1 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.

Speaker 3

With that, operator, please open the call for questions.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question is from Bob Labick with CJS Securities. Please proceed with your question.

Speaker 4

Good morning. There's a lot to unpack. Good morning. Congratulations on a solid start to normalizing things for us here.

Operator

Thanks, Bob.

Speaker 5

Yes. So, I wanted to

Speaker 4

start with NEMT. Obviously, a lot of moving parts there. But overall, I think results at least from our perspective were a macro is the impact on redetermination and then the shift, the mix shift from the contracts that you lost to the new contracts you're winning. So maybe help us understand how that plays out in the P and L this year, maybe particularly utilization and purchase service costs kind of are offsetting directionally from where we thought. So how might this be different to prior expectations?

Speaker 4

How should we think about those 2 key drivers with the mix shift, the redetermination and the contract change shift?

Speaker 2

Yes. Well, the first item that you hit on Medicaid redetermination is the big item, right? 12 months ago, there was fears in the marketplace on what it was going to be. And yes, it's hitting us right now as expected and is a main driver for where we are in Q1. And most importantly, we'll be done with it in Q2.

Speaker 2

And then secondarily, it's right where we expect it to be, but still material. 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 off coupled with Medicaid redetermination has changed our mix.

Speaker 2

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 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.

Speaker 2

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 or 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 the 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.

Speaker 2

But to you all, it's 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 mix change, again, as expected, it will be at about 11%. So big model change when you're looking at things.

Speaker 2

But in line with that mix change, there's other things that happen within our P and 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 our P and L is going to be at the end of 2024.

Speaker 4

Okay, super. That's really helpful and makes sense there. And then you touched on this, so maybe we can talk about it a little more too. Congratulations on the success, another salesman, obviously, won a bunch last year, you won another contract or a couple more in the Q1. Just talk about the pipeline here.

Speaker 4

Any potential surprise losses or how is 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.

Speaker 2

Yes. 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.

Speaker 2

And then again, building the necessary capabilities to ensure that that meets our customers' needs. So with that resulting in the results. The sales that were that started last year and the sales that continue this quarter, I'm really excited about even how the rest of the year comes out. 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.

Speaker 2

So, 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 payer, I'll just repeat what I said last quarter, we're still the largest in EMT 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 doing right now, our wins will out pace our losses. So I feel really good about the team.

Speaker 2

It's showing up in the results and I expect that pace to continue.

Speaker 4

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 proposal from CMS, 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.

Speaker 2

Yes. Well, first off, our focus really over these last 12 months and especially over these last 6 months since we have great new leadership in there with Anne and Damon and the rest of the team there on the PCS side. We're building a platform. This organization historically was made up of a lot of individual businesses and individual locations that were doing great work, but very challenging to scale and grow when you have this. So that has been the focus and really that's proud of this platform we're building there.

Speaker 2

And then we do expect to get back to the right level of growth at the right margin after we finish with these investments. But to your question around the eightytwenty that we knew it came out, so that 20% gross margin cap that is being proposed. Again, most importantly, it doesn't need to be implemented till 6 years from now and we do think there'll be challenges around that. But there was something in there that is very beneficial is what is the definition of the 20% and including these clinical costs or these nurse costs are really helpful for us because really the impact if this was implemented, it would be very manageable for us. So it was a good outcome by including those clinical costs, because that margin, historically from a gross margin, we're at 21% to 22%.

Speaker 2

And if you include the nurse costs, that really covers a lot of that as well. So long story short, we do believe that this rule will develop and change. We're in a really good position as a large scale company. And even if it was to get in place 6 years from now, just because of how it was defined, we feel like we're in a good spot to grow and maintain strong margins.

Speaker 4

Okay, super. Thank you so much. I'll jump back in queue.

Speaker 6

Thanks.

Operator

Thank you. Our next question is from Raj Kumar with Stephens. Please proceed with your question.

Speaker 5

Hi and good morning. Just kind of wanted to dive deeper into the Home segment. Just kind of want to see like if there's kind of differentiation in terms of NEMT does have like a more of a back half ramp story to it just given redeterminations and implementation of new contract wins. But PC and RPM seem like based on your commentary that it may have like a smoother path to getting towards those 2024 targets. So just wanted to get confirmation on that.

Speaker 5

And then just as a follow-up, just kind of walk us through like the acceleration in membership for RPM kind of versus 1Q?

Speaker 2

Yes. So the Home segment made up of PCS and RPM. Actually, there will be specifically in PCS because of what we had in Q1, which we explained. A lot of that has to do with some of the costs that we've added to do with this transformation. We expect that those costs will come out.

Speaker 2

In addition, with the team gelling on the new platform that we're building, we actually expect growth to accelerate as well. So, but it is smoother, right, than mobility. There still is a lot that in mobility because of the timing of getting our sales on and our cost out. But there is still a growth that we expect within PCS as well as RPM. RPM too in the Q1, the timing difference between some of the business that came off related to the MA.

Speaker 2

We have a large client that is MA and they didn't win as much business. So, we didn't get as much volume and we had some costs that stayed on. So, we expect that that will accelerate coming out of Q1 as well. But you're not at the slope that an EMT is and it's a reasonable plan to ensure that we hit our targets as we come out.

Speaker 5

Great. Thank you. And then just as my second question, just kind of wanted to double click on the eightytwenty provisions and just trying to get your updated thoughts on just like I know like company in the past has talked to a 23% to 24% gross margin target kind of longer term. And given the definitional changes and what adjustments you can make, do you think that's still achievable longer term or if there's like a kind of updated baseline based on the adjustments that you think you guys can make?

Speaker 2

Yes. So it depends what states you're in is depending what your gross margin is going to be. That's hence why a lot of people are arguing around this, not a one size fits all makes sense across the country. For us, where we are in our states, again, our gross margin was historically around 22%, 21.5% to 22%. So much more manageable as we go down.

Speaker 2

And I'll repeat again, having the clinical cost or the nursing cost in that really we only the gap is in 2%. It's less than definitely less than 2% to get down to 20%. So it's very manageable under the current construct that we have. But there's other provisions in the proposal that really require and demand centralization, better compliance, better reporting, that costs money and that's a lot of stuff that we've been doing for the last 18 months and we'll have that in place. So and then we'll be able to get scale and leverage off of that as we grow ours as well.

Speaker 2

So the 10% to 12% EBITDA margin that we've laid out is We don We don't think it will be that, but we will believe that we're in a good spot to grow and manage through and hit those EBITDA targets that we've always said.

Speaker 5

Awesome. Thank you. That's all for me.

Speaker 2

Thanks.

Operator

Thank you. Our next question is from Ryan Tanquilut with Jefferies. Please proceed with your question.

Speaker 7

Good morning. You have Taji Phillips on for Brian. Thanks for taking my question. So maybe first to kind of dive a little bit deeper on the cost savings initiatives. Clearly in the bridge you outlined in the slide deck, you show $1,000,000 being realized in the quarter, but then another $33,000,000 to $37,000,000 left in

Speaker 3

the tank. Maybe can you tell

Speaker 7

us what gives you confidence in your ability to execute on this and kind of lay out what else needs to happen for you to realize these savings throughout the year?

Speaker 2

Yes, it's a critical part of the remainder of this year. There's another slide that you'll see there that shows about 60% is run rated. So we've done a lot of good work. And then the remainder of that is actions that we've identified and are executing on. The bridge, which is a good bridge to show, even though it was a 1,000,000 dollars quarter sequential quarter, we had a lot before, right?

Speaker 2

So the run rate coming off of 2023 into this year is really driving a lot of those savings. So the $1,000,000 had a lot to do with the growth in trip volume and utilization as well. But we feel good about getting that $34,000,000 to $36,000,000 in year. And then even beyond that, because of the run rate and because of the initiatives that we are putting in now, I expect that it will be about a $60,000,000 full year benefit as we enter 2025. So yes, there is a lot of work that needs to still happen, but we have identified it.

Speaker 2

And again, it's about 60% of that 30 plus 1,000,000 run rated from previous execution that we've had.

Speaker 7

Great. Appreciate the color. And then just back on Personal Care, just want to go back to this comment about how you're expecting these like delayed reimbursement increases. Maybe can you talk about the magnitude of those? And I guess how you're working to stabilize purchase services, because obviously that expense line had pretty much triggered the shortfall this quarter?

Speaker 7

Yes.

Speaker 2

So it puts that kind of maybe $5,000,000 ish delta from in the bridge that you see there when you net it all out. About a $1,000,000 is about a reimbursement. So the reimbursement rates that we expect to get. So another couple million, which is in the G and A and also in the service expense is based on us getting the synergies after these centralization efforts and automation efforts that we have. And the other $2,000,000 is around is just higher service expense And we expect we will grow and get leverage out of that, specifically in a couple of states where we know that we have growth targets that allow us to get leverage.

Speaker 2

So that's how it breaks down. And we have plans and we expect to be able to get back to the margins and growth rates that we had prior.

Operator

Our next question is from Pito Chickering with Deutsche Bank. Please proceed with your question.

Speaker 8

Good morning, guys. So two questions for me here. Matrix, I think it's the first time you've given color like this sort of on the monetization of Matrix. I guess, so two questions on that one. I guess, what gives you guys confidence that, that asset can be monetized over the next sort of 12 months?

Speaker 8

And then, we're not asking for prices here, but any ranges and multiples of sort of where you think some sort of transaction can be realized?

Speaker 2

Yes. Well, similar to what I talked about, how proud I am my team here, and then specifically around go to market, the same is for Matrix. Catherine and her team, Catherine is the CEO there, what they've done over the last 18 months and really over the last 6 months, it's every we had a Board meeting a couple of weeks ago and we're going through everything and it's just tremendous work that has joined. So the results in the financials are there and growing and stable. And then the other conviction that the team has and I have as well is the platform they're also building to really leverage more care in the home or more outcome change in the home.

Speaker 2

And it really gets down to their technology implementation that they've had. So you couple those two things together and the sustained success that this team has. And then again, as importantly, 2,800 nurses that are in people's homes. And there's a lot of value that they can have on the healthcare system. So and there's a lot of inbound.

Speaker 2

So we have a lot of confidence that we'll be able to get them to another owner and grow beyond that. So which is why I gave that guidance and confidence around our ability to do that. So the multiples are going to be good because of the great effort that they had. So, I'm not going to comment on what they're actually going to be. Obviously, if you and we get this question and Pito, you may have asked this before.

Speaker 2

Hey, we're going to get the SignifAI multiple, which is a 30 times EBITDA. No, that's not possible. But it's going to be well above the kind of standard healthcare services multiples. So I feel really good about it. And again, thanks to that team and the execution.

Speaker 2

We'll get it done.

Speaker 8

Okay, great. And then sort of second question, just looking at the Q1 EBITDA results versus your sort of Q4 guidance, so that came $56,000,000 Can you just walk us through just how we should be bridging 1Q to 4Q in terms of margins sort of throughout the year kind of where do we see the biggest margin improvements and then sort of you touched on some of the questions, but what are the biggest drivers as for those margins getting better? Yes.

Speaker 2

Well, so similar to what we said last quarter and well as I think Barb even said in hers, the ramp is in the back part of the year. And so I'm focusing on mobility here first. And it really gets to the stuff implementing the sales that we had. So again, those are some sales that we've already sold and those are coming on now and I expect them to come on more in Q3. So that's an important item.

Speaker 2

But that would show why the ramp is in the back half of the year, redetermination being done. And then really the kind of the normalized growth within Medicaid post Q2 when redetermination is done. And then the last component that is still needed to execute on and it also is back end weighted in Q3 and Q4 as the cost out. And again, we're 60% done from a run rate perspective, but we still have work to do So consistent with what we said before, the EBITDA target is around 8% range exit rate in NEMT. And then in Personal Care, we do expect to ramp and be exiting at that 10% EBITDA rate.

Speaker 2

And then monitoring is going to have that steady growth there too. So though it is a ramp, it's Q3, Q4 driven. Specifically, mobility, it's a lot of those things that we've done in the past that will ensure that we hit those Q3, Q4 targets.

Speaker 4

Great. Thanks so much.

Speaker 5

Thanks.

Operator

Thank you. Our next question is from Rishi Parekh with JPMorgan. Please proceed with your question.

Speaker 9

Hi. Thanks for taking my questions. My first question, I was hoping that you could walk us through your MA exposure through the various divisions and specifically within NEMT, what services are currently being utilized between by those NEMT members?

Speaker 2

Yes. We have

Operator

a

Speaker 2

I think it's about 18%, 16% is in the deck. It's a small font. 16% of our revenue is MA. For us, that's and then on the other segments, specific monitoring, it's higher personal care. There's no exposure on MA.

Speaker 2

And in the monitoring side, again, it's pretty concentrated to one client and we feel good about where those projections are. So within NEMT, that 16%, a lot of it was higher before and that was part of what we lost in Q1. But MA is a critical benefit that continues to grow across all transportation and we expect that we will win and grow in MA as well. Probably the biggest thing from a market perspective and it gets back to what I talked about a little bit earlier, It's different than Medicaid. So you really have to understand the member and understand when that trip is taken and how that trip is taken.

Speaker 2

So if you have the right insight and technology, you can service that member at the right cost And a lot of those efforts we put in place. So but as you know, MAs just across the board for payers is a top issue. And many supplemental benefits are going to be cut. Transportation's one of them that is going to continue. So though it's 16%, we do expect it to grow and it's manageable and a big part of our business as we move forward.

Speaker 9

And sorry, what are the within the NEMT business, what trips? Is it mostly for dialysis, physician offices, majority of the trips are?

Speaker 2

Well, so MA is not. Dialysis for us, the bigger volume for that is in the Medicaid side. There's duals within the MA that will have the dialysis. So it is your adult daycare, but there is the normal kind of breakdown of the different trip types, but it's less dialysis and more in line with what you'd expect with people that are over 65.

Speaker 9

Okay, great. And then, I believe your New Jersey contract set for renewal later this August. I'm not sure if that's the contract that's currently under RFP. I believe this is also a fairly sizable contract. Can you just provide us with some idea as to how that process is going?

Speaker 9

Is it still expected to be an exclusive contract? What's your visibility around it? And can you quantify your exposure?

Speaker 2

Yes. So we have a good slide in the deck that talks about what's in the renewals. And the state business is a critical part. And New Jersey that you said is one of our important customers, which we've had for many, many years. We have a really strong relationship with them.

Speaker 2

Why? Because we're performing and we do more for their members than just the trip. And we're an important part of their community within New Jersey on ensuring that people are working and the transportation providers are fulfilling their commitment. So my point is we're really deep within New Jersey, performing well. We have a very low cost platform.

Speaker 2

So we meet and check all the boxes. So I feel good about our ability to renew all of our state business and even gain some state business. And the other thing we said there in the script, because of what we have done over the last 6 to 12 months, our win rate in renewals as well as gaining new business is very strong. So I expect that to continue and that $600,000,000 of renewals that we have this year, I expect we will win more of that than lose. So but again on that, those are RFPs this year.

Speaker 2

I don't expect any impact from any changes both positively or if there is something negatively that comes off until 2025.

Speaker 9

Okay. And just the last question on PCS, you've obviously noted that it might be an area or a segment that you may look to sell. Addus has made some comments in terms of their dislike of New York. Would love to better understand where you are in this process? And do you view it as a multiyear process or do you view it to be aligned with your Matrix asset sale process?

Speaker 2

Well, so Matrix definitely is going to be something we sell. For us and our job my job is to ensure that we drive shareholder value. And the best way to drive shareholder value when I look at each of the individual parts is to build the best platform, the lowest cost platform that grows. And that's exactly what we're doing for Personal Care. And that's really our focus.

Speaker 2

But we always will be looking to see what is the right thing to do from shareholder value. So there's a lot of demand for Personal Care. Personal care, and there's lots of companies, whether that's Addus, whether that's other some large privates and that are doing wonderful things around personal care and the value that that adds to the person's healthcare outcomes. So it's a critical part of healthcare. So we'll be a value that's our focus and there will be demand for personal care.

Speaker 2

And then I do expect there'll be trades that happen around personal care from an M and A perspective. So everything is on the table for us, but our focus and priority right now is to do what I said before, build a platform that's growing and can generate cash flow. And that's the focus of ours right now.

Speaker 5

Great. Thank you.

Operator

Our next question is from Mike Petusky with Barrington Research. Please proceed with your question.

Speaker 6

Hey, good morning, guys. And right off the bat, I'm going to apologize, I missed part of this call. So if you commented on this, if you could just comment on it quickly, I'd appreciate it.

Speaker 2

Okay.

Speaker 6

Mine benefit. Did you guys speak to that receivable that was sort of out there after last quarter? And it was like $35,000,000 $36,000,000 Have you guys spoken to that or commented on that?

Speaker 3

Yes, we did. We did in I think in the prepared remarks, we commented that we received a significant amount of that payment in the quarter. And we are still yes, so it was helpful to

Speaker 7

our cash flow for sure.

Speaker 6

Okay. And then Heath, I was just wondering, you said a lot of positive things about Matrix what they've done last 18 months, last 6 months, said that they're growing well, believe that they'll get a really good multiple, maybe not signified, but really good multiple. But I'd love to know, can you give any help on either trailing adjusted EBITDA or run rate EBITDA or something that sort of you may not get questions around multiple because we can sort of guess at that if we have a good sense of what the EBITDA range is?

Speaker 2

Yes. So, the most important thing that we set this company up to have the right successful exit, so I'm not going to give you exact specifics. But I'll go back to something that I said before and this may not be satisfying to you, but it's consistent with what I've said for modeling purposes. I said there's a range between $50,000,000 $100,000,000 of EBITDA and that was a year and a half ago. So you can do your own extrapolations within that.

Speaker 2

The point being it's very strong and growing, but that's the right way to think about it.

Speaker 6

Can I just ask a sort of clarifying question on that? I think when you made that comment in the past, you said the right way to think about a takeout is that multiple. But I don't think and maybe you did clarify this and I just didn't pick up on it. I don't think at that time you've or when I've heard you say it, I don't think you've ever said, hey, they're actually in that range. Like is that what you're saying that they're in a range of $50,000,000 to $100,000,000 now?

Speaker 2

Yes. No, I said that. I said that. Yes. Okay.

Speaker 6

Fair

Speaker 2

enough. And just going back to

Speaker 6

the receivable real quick. When you said you collected it like I mean is it fair to say like 75% of that or more or

Speaker 2

Yes, I think we it's definitely 75% is about right actually. But the point there is why we said what we said last quarter was because just to clarify around what our cash flow expectations that was the main driver for the miss. But the other reason why we're giving this type of information is it's a critical important client of ours of a large payer And we expect that they will be critical going forward. And though there is some negotiation around that client itself, we did collect about 75% of that $36,000,000

Speaker 6

And again, I may have missed this as well in the prepared, but did you guys comment on sort of your hoped for timing on the refis? I mean, is that hopefully a Q2 event or could that slip into Q3?

Speaker 2

Yes. So it's Q2 for us. That's the right way to think about it because we're executing on it now. So we expect to be done before the end of Q2.

Speaker 6

All right. Thank you so much.

Speaker 8

Great. Thanks.

Operator

Thank you. There are no further questions at this time. I would like to hand the floor back over to Heath Sampson for any closing comments.

Speaker 2

Great. Thank you for participating in our call this morning and for the interest in MotiveCare. Our updated investor presentation has been posted on our website. If you want to follow-up call or questions, please contact Kevin, our Head of Investor Relations. We look forward to speaking with many of you over the next coming days, weeks months before we report on our Q2 2024 results in August.

Speaker 2

Again, thank you to you all. Thank you to the team and have a great day. This concludes our call.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Powered by Quartr
Earnings Conference Call
ModivCare Q1 2024
00:00 / 00:00