ModivCare Inc.

Good morning, and welcome to MotiveCare's second quarter 2022 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. At that time, if you would like to ask a question, you may press star 1 on your telephone keypad. And also, you may press star 2 if you'd like to remove your question from the queue. Please note, this conference call is being recorded. I'll now turn the call over to Kevin Ellick, Head of Investor Relations. Mr. Eldrick, you may now begin.

Good morning, and thank you for joining MotiveCare's second quarter 2022 earnings conference call and webcast. With me today is Heath Sampson, Interim Chief Executive Officer and Chief Financial Officer. Before we get started, I want to remind everyone that 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 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 reconciliation to their most directly comparable GAAP financial measures is included in our press release and form 8K. A replay of this conference call will be available approximately one hour after today's call concludes and will be posted on our website, motivecare.com. This morning, Hugh Sampson will begin with opening remarks and then he will discuss the details of our second quarter financial results and outlook. Then we will open the call for questions. With that, I'll turn the call over to Heath. Please go ahead.

Thank you, Kevin, and good morning, everyone. Today I will provide some high-level comments on our second quarter results and highlights for our two businesses, Motive Care Mobility and Home. Then I will review our financial results and outlook before we open the call to questions. Before I review our financial results, I would like to address the announcement we made earlier this week. we issued a press release indicating that Dan Greenleaf is no longer MotiveCare's CEO or a member of the board. Our board of directors has appointed me as interim CEO. I appreciate the opportunity the board has provided me, and I look forward to serving and leading our nearly 20,000 team members that provide essential supportive care services to approximately 34 million members. I've been here for a year and a half, and have had the opportunity to lead operations for both segments and help grow the company to where it is today. I have more conviction about our future now more than ever before, and it's because of the tremendous work the entire organization has accomplished over the last few years. My conviction is also because we have unique businesses and capabilities that nobody else has combined. And with disciplined yet innovative execution, we will continue to capture the supportive care market tailwinds. Our business fundamentals, financial performance, strategic position, and our long-term growth strategy remain strong. Turning to our quarterly results, we executed and performed well during the second quarter of 2022, which has led us to raise our full year 22 guidance for both revenue and adjust EBITDA. Our strong financial results were highlighted with consolidated revenue growth of 32% and adjusted EBITDA of $60 million. Revenue growth was driven by 23% growth from our mobility or non-emergency medical transportation business and 48% growth in our personal care business, which is our largest segment in our home business. Adjusted EBITDA grew 13% in the second quarter compared to last year, which was ahead of our expectations due to favorable NEMT contract repricing and a strong reimbursement environment for our personal care services. While the macro environment presented challenges with inflation and labor headwinds, we are encouraged by our strong results and our operational performance in this quarter. Our recruiting and retention initiatives continue to gain traction, and our team, Particularly our frontline workers who serve members every day are doing a great job managing their inflationary environment. Motive Care's holistic platform of services meets members where they are, bringing them to medical appointments and providing in-home services that reduce costs and improve outcomes. We have developed unique strategies and initiatives that are yielding positive results for our workforce while managing labor cost pressures. While we have been increasing wages for our caregivers, these wage increases have been supported by significant reimbursement rate increases in the states where we operate. The demand for our personal care services far outweighs the supply, and we continue to make progress in recruiting efforts. Our entire team, from recruiters to caregivers, and our member care center teammates, embodies our unwavering commitment to Motive Care's purpose with their hard work and dedication. I am humbled and proud to be able to lead this organization. During the second quarter, we completed several important accomplishments, including the acquisition of Guardian Medical Monitoring, which is a leading provider of remote patient monitoring solutions for approximately 50,000 aging and chronically ill patients. With $18 million of annual revenue, Guardian is a perfect fit for a remote patient monitoring business as the company is 100% focused on monitoring for managed care and Medicaid clients, similar to our existing business. This tuck-in deal boasters our position in several important markets and adds several new payers. Following the acquisition of Guardian, there are very few healthcare payer-focused RPM businesses of scale remaining, so we are excited that we could add Guardian to the Moved Care family. We hosted our inaugural investor day where we provided guidance for 2022, which we increased this morning. We are also offered a long-term financial outlook that calls for seven to 10% compounded annual revenue growth and adjusted EBITDA margins of 10%. By 2025, we expect to achieve $3 billion of revenue and $300 million of adjusted EBITDA. Lastly, we published our inaugural Environmental, Social and Governance or ESG report in early July. This report highlights the progress MotiveCare has made and it will serve as a foundation as we enhance our ESG capabilities and disclosures over time. These accomplishments position MotiveCare well for continued growth over the next several years. Drawing from our multi-decade customer relationships, we continue to collaborate with health plans to cross-sell and bundle our services to our payer partners. While clients already understand the value of our services individually, they are now grasping the value proposition of bundling and coordinating these services, opening the door for significant partnerships. A recent study published in the American Journal of Preventative Medicine showed that focusing on one social need alone, such as transportation, may not solve the patient's underlying set of social needs, as patients often present with multiple intertwined social needs that require various interventions. We're having several meaningful discussions with payers today around bundling our services and initiating value-based care pilots, and we expect this momentum to continue to build. The Medicare Advantage opportunity is also significant for our social determinants of health, or SDOH, suite of services. SDOH benefits for MA have been accelerating since the Chronic Care Act of 2018, allowed for non-clinical adoption of supplemental benefits. As we outlined our Investor Day in June, the growth of Motive Care's non-clinical services as supplemental benefits in MA health plans is significantly outpacing the overall growth of our core MA benefits. Our suite of SDOH capabilities has the potential to significantly improve chronic disease burden, functional limitations, loneliness, and social isolation. This allows MotiveCare to meaningfully contribute to health plan performance and help close gaps in care for our payer partner members. As a reminder, our addressable market opportunity across MotiveCare is over $90 billion today which we expect will grow to 150 billion over the next few years. As we transform our business, we expect much of our growth opportunity will come from care moving into the home. Our home division is growing organically through new client growth, accelerated caregiver recruiting initiatives in existing markets, de novo openings, and increasing scale and density. We expect sales growth from home to accelerate through care coordination, and our cross-selling efforts, as case managers are a common referral across home service offerings. We also expect strong growth from our mobility business. This market benefits from continued growth in Medicaid and accelerating growth in Medicare Advantage enrollment, coupled with more plans offering transportation as a supplemental benefit. Now, I'd like to provide an update to our mobility or NEMT segment. During the quarter, our nearly 34 million members took 7.8 million rides. We have several ongoing initiatives for our mobility business that will help improve performance while enhancing the member experience. Some of these initiatives include, first, establishing business partner relationships with transportation providers. We will continue to transform relationships with our transportation providers by aligning more closely with them and creating a collaborative model. We believe this will provide more transparency and consistency for their businesses, resulting in better service and lower costs for motive care. Second, establishing a member care coordination model. We will continue investing in and leveraging technology to use data to improve and customize our members' experience. Since we have developed the Best in Clash nationwide program, we have improved our member care center service levels from 71% to greater than 84% and are meeting more than 97% of our customer contracts. Additionally, we have improved attrition rates by 14% year over year. Focusing on the member experience enables us to provide a better experience and collect data that we can leverage across our business segments and move toward providing a holistic experience for all our members. Lastly, as part of our broader mobility strategy, we will continue to develop on-demand multimodal solutions. We continue to engage members to understand the best transportation modality for them, including mass transit in major metropolitan areas and mileage reimbursement in rural areas. Now I'll provide an update on our home segment, which includes personal care services, remote patient monitoring, and meals. As many of you saw during the investor day, we have a deep bench of talent across our leadership team and a strong operations in our home division, with Mia Haney, the COO of personal care services, and Jessica Highlander, COO of monitoring and meals. Our home business continues to perform well, and we will see a long runway for growth as care shifts to lower cost settings and we meet patients where they are. These are great businesses, and combined with mobility business, Motive Care is the only company of scale with this unique supportive care platform focused on the social determinants of health. As payers continue to narrow their networks, we are uniquely positioned to be the one-stop shop for these supportive care services. We continue to make progress in our home business. Here are the highlights. Personal care recruiting and retention. Our team continues to do a great job driving initiatives for caregiver growth. Demand for our services continues to outpace the supply of caregivers, but we are seeing signs that the labor market is improving. Year-to-date, paycheck counts are increasing and overtime continues to decrease due to the talent acquisition team's enhanced recruiting efforts. They are doing an outstanding job in a challenging environment. We also believe the strong reimbursement environment we see from our states and pairs will help us drive meaningful caregiver growth going forward. For example, in New Jersey, one of our largest personal care markets, the state recently increased hourly reimbursement rates by over 22% to $24.50 on July 1st, compared to just $20 in June of 2021. This increase allows us to pair caregivers more competitively relative to other industries, which will help drive long-term growth for the entire personal care market. Our personal care business has several strategic advantages compared to the smaller mom and pop providers, including scale, density, and a community-based approach. In addition, we are centralizing back office functions, such as revenue cycle management and payroll, which allows our frontline team to spend more time recruiting, and providing care and services to members. Shifting to the remote patient monitoring or RPM business, we continue to gain traction with our E3 offerings, which is now active with eight new programs. As a reminder, E3 is our member engagement platform that stands for engage, educate, and empower. E3 dynamically identifies member needs and provides tailored education to drive meaningful outcomes such as gap closure and cost avoidances. E3 also enhances the member experience, improves outcomes for select populations, and broadens our ability to serve members more holistically. This service directly helps our payers improve their star ratings. Our RPM business is unique and differentiated from other monitoring companies since we can leverage our contact centers that have live interactions with our members. Not only do we provide service to our members when they call for assistance, but we collect data that can be leveraged throughout our supportive care platform. As we integrate our home business from an infrastructure and operational perspective, this will allow Motive Care to better coordinate care for our service offerings, which we have started to do with cross-selling and bundling and value-based care efforts. Lastly, The growth opportunity for home remains encouraging for both an organic and M&A standpoint. We expect our growth to be driven more and more by organic efforts going forward. To this end, during the second quarter, we opened four de novo personal care locations, and we will continue to open additional locations to organically strengthen our footprint and leverage our infrastructure. To conclude my home update, It's clear that care continues to shift to the home. Emotive Care's supportive care platform is focused on meeting members where they are. There's no question that our home business has a lot of tailwinds. The demand for our comprehensive offering will outpace growth in our other businesses over the next few years, which is why we expect home will eventually account for the majority of our business. Now I'll review our second quarter financial results. We reported net service revenue of $628 million, which reflected growth of 32% compared to the prior year period, while net income was $3.3 million, or $0.24 per share. Adjusted net income for the second quarter was $28 million, or $1.99 per diluted share. And adjusted EBITDA was $60 million, or 9.6% of revenue. Next, I'll review our business segment financial performance, starting with our non-emergency medical transportation segment or mobility segment. Second quarter NEMT revenue increased approximately 23% year over year to approximately $449 million, driven by a 14% increase in average monthly members, a 5% increase in revenue per trip, and an 18% increase in trips. Revenue was favorably impacted by approximately $10 million related to an out-of-period benefit from favorable contract repricing with several customers during the quarter. These contracts were finalized during the second quarter. However, we negotiated to have the contracts made retroactive to January 1, which created this out-of-period benefit. Surface expense for the NEMT segment, which includes all direct costs, increased 28% year-over-year in the second quarter of 2022 to $374 million. This increase was driven by a nominal increase in utilization and higher service costs associated with an 18% increase in trip volume and a 10% increase in purchase service expense per trip. On a sequential basis, service expense per trip increased approximately 4% from the first quarter, driven by transportation provider rate increases and contract mix. Surface expense per trip has gradually increased over the last several quarters, primarily due to inflation and driver shortages. That said, we think this is a near-term peak for cost per trip as we accelerate the rollout of our multimodal and pervert provider initiatives in the back half of this year. This should improve unit economics while also providing a great experience for our members. NEMT segment net income was $24 million in the second quarter of 2022, while NEMT adjusted EBITDA was $46 million compared to $48 million in the second quarter of 2021. The year-over-year decrease was driven by a $5 million increase in G&A expense relating to investments in our contact centers and headcount, partially offset by a $3 million increase in gross profit dollars. The gross profit increase was primarily due to an out-of-period adjusted EBITDA contribution of approximately $7 million during the second quarter of 2022 related to the favorable contract repricing mentioned earlier. Adjusted EBITDA margin for NEMT segment was 10.3% in the second quarter of 2022 compared to the first quarter of 2022. Adjusted EBITDA margins increased 100 basis points sequentially primarily driven by operating cost leverage. Turning to our personal care segment, revenue in the second quarter of 2022 was $163 million compared to $110 million in the second quarter of 2021. The increase was primarily driven by $42.4 million of incremental revenue from the CareFinders acquisition, which closed in September of last year, and rate increases. On a sequential basis, revenue increased approximately 2%. Hours during the second quarter increased approximately 3% sequentially. PCS hours remain stable and have gradually improved due to our team's recruiting efforts and increased service levels. Personal care service expense per hour, primarily representing caregiver wage expense, decreased 1% sequentially as we have increased wages earlier this year and our recruiting and retention efforts have helped reduce over time. Our personal care business continues to move in the right direction. Personal care segment net income increased to $4 million. Personal care segment adjusted EBITDA was approximately $18 million in the second quarter of 2022, compared to $10 million from the prior year period. Adjusted EBITDA margins were 11%, which was about 200 basis point higher than the second quarter of 2021, and 60 basis point improvement sequentially attributable to slightly lower service expense and G&A expenses. Moving on to the remote patient monitoring or RPM segment. Revenue was $17 million, which included $2.6 million of contribution from the Guardian Medical Monitoring Acquisition in mid-May. RPM revenue increased approximately 21% sequentially from the first quarter, driven by increased active clients and the guardian acquisition, partially offset by lower revenue per member due to nationally exclusive large commercial payer contract. RPM segment net income, driven by acquisition and tangible asset amortization, was $475,000 in the second quarter. Adjusted EBITDA was approximately $6 million in the second quarter, and adjusted EBITDA margins were in line with expectations at 33.6%. Consolidated cash flow from operations in the second quarter of 2022 was a use of $18 million due to payments on our contracts payable and changes in working capital. As I have mentioned over the last few quarters, we expect to repay approximately $100 million to $150 million of contract payables this year. These payables primarily relate to overpayments and liability reserves on certain of our contracts in the NEMT segment. The contract payable balance declined by $34 million during the second quarter due to several large payments. We also experienced an $18 million increase in reconciliation contracts receivable during the quarter related to underpayments and contracts receivables from our NEMT customers. Excluding the combined negative impact of $52 million for the quarter, our cash flow from our core business continues to be very strong. For the remainder of 2022, we expect contracts payable to be $75 million to $125 million use of cash. We ended the second quarter of 2022 with $88 million of cash and cash equivalents, and had no amounts drawn on our $325 million revolving credit facility. Our principal debt balance was flat sequentially at $1 billion, and our consolidated pro forma net leverage ratio was 3.9 times as of June 30, 2022, due to the acquisition of our guardian with our cash on hand and the repayment of our contracts payable mentioned earlier. While our leverage will fluctuate quarter to quarter, we are committed to deleveraging and affirm our target net leverage ratio of three times. It's important to remember that our current debt structure has 100% fixed rates, so we are less impacted by the rising interest rate environment. We are committed to a disciplined and balanced capital allocation strategy. Before we open the call to questions, I want to update you regarding our 2022 full-year guidance. how business is trending, and our long-term expectations. We are increasing our 2022 guidance for revenue and adjust EBITDA due to the strong second quarter results. For the year, we now expect revenue to be in a range of $2.375 to $2.4 billion, compared to the prior range of $2.35 to $2.375 billion. We now expect adjusted EBITDA to be in a range of $210 to $220 million, compared to our prior range of $203 to $213 million. Our updated guidance includes the benefit to revenue in adjusted EBITDA from the favorable repricing on several NEMT contracts that I mentioned earlier. Given the strength in membership growth we've seen during the first half of the year, we expect NEMT revenue growth in the low double digits for the year, while NEMT adjusted EBITDA margins are expected to be towards the lower end of our long-term range of 9% to 12% due to higher purchase services per trip. For our personal care segment, we expect revenue growth in the mid-single digits for 2022 on a pro forma basis, and we expect adjusted EBITDA margin will be near the midpoint of a long-term range of 10 to 12%. As we mentioned at our investor day, we expect personal care revenue growth will accelerate to the high single digits through 2025, and adjusted EBITDA margin will be in the range of 10 to 12%. Lastly, we expect remote patient monitoring growth in the low teens this year on a pro forma basis for the acquisition of VRI. with adjusted EBITDA margins in the low to mid 30% range. Our 2025 targets for RPM remain unchanged at 14 to 16% revenue growth and 34 to 36% adjusted EBITDA margins. Looking to the second half of 2022, we expect personal care and remote patient monitoring revenue and adjusted EBITDA will continue to grow sequentially. However, we expect NEMT revenue and adjusted EBITDA will be more in line our first quarter of 2022 results due to the out-of-peer benefits we've recognized in the second quarter related to favorable contract pricing. Overall, we remain very excited about our long-term outlook and the tailwinds for our business as we execute our strategy to be the nation's leading integrated supportive care provider. We are setting the foundation for our platform to generate strong growth over the long term as we provide the full breadth of services to our members and our payer partners. I want to thank the entire team at MotiveCare for their hard work and dedication. This concludes our prepared remarks. Operator, please open the call for questions.