ModivCare Inc.

Good morning and welcome to Motive Care's third 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, to ask a question, please press star 1 on your telephone keypad. Please note this conference call is being recorded. I will now turn the call over to Kevin Elich, Head of Investor Relations. Mr. Elich, you may begin.

Good morning, and thank you for joining MotiveCare's third quarter 2022 earnings conference call and webcast. With me today is Hugh Sampson, MotiveCare's president, chief executive officer, and 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 a reconciliation between 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, Heath Sampson will begin with opening remarks, then he will discuss our third quarter financial results and updated outlook. After Heath's prepared comments, 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. I want to welcome everyone to our third quarter 2022 earnings call. This morning, I will review our third quarter results and and provide an update on our operations and growth strategy. Then will we open the call to questions. Before I review our third quarter results, I want to thank our team members, especially the field personnel that serve our members and customers every day. I am grateful and honored to lead this uniquely positioned supportive care company as we address the social determinants of health for the nation's most vulnerable populations and we are excited about the integral role we play in the U.S. healthcare system. Motive Care has built a platform to scale to provide the first-mile preventative supportive care that is necessary to improve clinical outcomes at a lower cost of care. Our vision, strategy, and suite of supportive care solutions positions us well. We are in leading market share positions for each of our segments or point solutions. including mobility, personal care, and remote patient monitoring. And we are committed to providing the highest quality and best-in-class member experience in the most cost-efficient manner. This alone provides value to our payer partners, reduces cost of care, and improves outcomes for members, as well as drives sustainable shareholder value. We also believe there is exponential value that will be unlocked by collecting, synthesizing, and operationalizing historically elusive data in the first mile of care across all our point solutions. Unifying and integrating our suite of solutions will lead to incremental savings for payers, improved outcomes, and provide valuable data and insights at the member level to support value-based care. This is underpinned by a culture of one member, one customer. All MotiveCare teammates, regardless of point solution or position in the company, impacts every single member and customer. Over the last few months, we have focused our priorities and visited many of our teammates and market leaders across the country. Our team has been listening and challenging each other to ensure we establish an operating structure in which teammates are empowered to achieve results for our members, customers, and shareholders. As we say, no mission without margin and no margin without mission. In addition to serving our members and customers every day, we are focused on the following priorities over the next 90 days. First, solidifying a high-performing executive leadership team, which includes finding my successor as CFO. Second, realigning and reallocating certain resources to drive efficiencies and operating leverage, while freeing up teammates so they can continue to improve the member and customer experience and drive organic growth. Third, implementing a disciplined operating model with clear objectives and metrics, along with a system of communication and engagement that fosters a culture of compassion for our members, customers, and teammates, along with high expectations for near-term performance that builds long-term value. Again, there is no margin without mission and no mission without margin. And lastly, establishing focused roadmaps for process and technology that align with our one member, one customer approach. Our processes and technology will be developed to enable our point solutions to provide a tailored member experience. Additionally, without distraction to our point solutions, we will align resources appropriately and build capabilities to cross-sell our point solutions and progress our bundling and value-based care strategy. Again, I'm very excited about our competitive position and market tailwinds. Our diversified business currently generates durable results. Now it's all about execution in order to build on this foundation for near-term performance that drives long-term shareholder value. With that, let's move into our third quarter results. We reported solid quarterly results driven by strong member growth in our non-emergency medical transportation or mobility business, while our home division consisting of our personal care and remote patient monitoring businesses continues to perform well. Third quarter revenue increased 31% over a year to $648 million, driven by 23% growth for our mobility business and 43% growth for our personal care business. Adjusted EBITDA of approximately $52 million was in line with our expectations. The macro environment remains capricious, primarily due to inflation and the labor market. That said, we have received favorable reimbursement rates for our personal care business, which has helped with caregiver recruitment and retention. And we have been able to pass through higher transportation costs in our mobility business. Additionally, we have a durable business model with natural hedges in place as the challenging macro environment and potential recession could improve the field personnel labor market and drive increased Medicaid membership enrollment. I'll now provide some operational highlights for our business segment, starting with mobility or NEMT segment. During the third quarter, strong NEMT revenue was driven by increased trip growth as membership grew to approximately 36 million members. Although we continue to experience higher transportation costs per trip due to driver shortages and higher fuel prices, we've been able to contractually share these costs with many of our customers. As noted on previous calls, we have deliberately renegotiated many contracts over the last 18 months to protect the downside. And while it limits excess margin, It helps with fluctuations in membership and cost. This balanced and transparent approach with our customers has shifted the focus to providing the proper level of service that is better tailored to the unique needs of members. A more symbiotic, customer-focused approach will continue to mature and focus on improving the member experience and outcomes, which no doubt will enable us to grow and achieve our long-term margin objectives. We are realigning our people, process, and technology to focus on three value streams, the member, the transportation provider, and the customer. We are focused on one primary initiative for each value stream. First, the member value stream is focused on omni-channel experience that is unique to the specific member. Second, the transportation provider is focused on changing the legacy transactional relationships to an empowering relationships with a smaller group of key providers that perform consistently and have the appropriate volume to scale. And third, the customer is focused on a multi-level relationship management approach with current and prospective customers, rooted in communicating member satisfaction. Member satisfaction, especially in the competitive Medicare Advantage market, is our customer's number one priority. Moving on to the home division, which is comprised of our personal care and remote patient monitoring segments. We continue to perform well in our personal care segment. We are organizing our people, process, and technology processes for the member, caregiver, as opposed to the transportation provider in a mobility segment, and customer value streams. Our member and customer value streams have been operating appropriately Therefore, most of our efforts have been focused on the caregiver value stream. We have approximately 100 personal care locations that have historically been staffed to run end-to-end operations. However, that model does not scale. As such, we are centralizing non-caregiver-centric functions and certain operational processes, which will free up our community-based personnel to focus on care delivery and caregiver recruitment and retention. This will improve our operational results and reduce costs over time. Additionally, we are reallocating resources and investing in senior leadership while also centralizing and standardizing to ensure we have a scalable tool set that our community-based teams can leverage. Most of the solutions focus on caregiver retention and recruitment, but we will also improve in other areas. ranging from data collection capabilities to best-in-class compliance. Over the last couple of months, we have made significant progress on this transformative plan, but it's not easy to convey the immense underlying workstreams involved with integrating these large acquisitions. Again, I'd like to thank our team for their extraordinary efforts with integration, in addition to their day jobs. Mia Haney, COO of our personal care segment, and her team are starting to see the fruits of their labor pay off, evidenced by weekly record high caregiver growth metrics that continued through October. We are proud of our caregiver retention rate, which is nearly twice the industry average, and we believe this can be improved even more in the future. During the third quarter, hours increased 2% sequentially compared to the second quarter and have continued to grow into the fourth quarter. We are encouraged by the success our team is having, and frankly, we are still in the early stages of this transformation. As for the regulatory environment for personal care, we have been encouraged by the reimbursement rate increases this year and expect the momentum to continue. We see a lot of tailwinds for personal care due to continued strong demand and support for rate increases, which enables us to increase wages as well as shift by payers to more value-based care arrangements, which we are participating today and will be doing more so in the future. Shifting to our remote patient monitoring segment. During the quarter, we received Medicaid credentialing in a few new states, including Nebraska and Missouri, and we expect to enter several more states by year end. We have been achieving most of our people, process, and technology providers for our member device manufacturing provider and customer value streams. For example, we are exceeding our monitoring referral expectations and our customer satisfaction as measured by a net promoter score of 87 is well above industry benchmarks. Additionally, our member commitment to answering alerts is less than 10 seconds and it's significantly faster than our competition. Our forward-looking priorities and monitoring will focus on innovating across all value streams as there are near-term opportunities to provide new solutions to our customers quickly. And the competencies within this business will be the tip of the spear to value-based care. Turning to our enterprise-wide growth strategy, we continue to focus on cross-selling and bundling our supportive care services to managed care organizations or MCOs. We have built strong long-term relationship with the largest MCOs in the country. While there is great interest in our point solutions value proposition, we know from our payer partners that there's incremental value in integrating and bundling our mobility and home services together. As our total addressable market is expected to expand from $80 billion to $150 billion over the next few years. Our growth strategy is multifaceted with steady member growth from our mobility business coupled with strong growth from our home businesses driven by Medicaid growth and accelerating growth from Medicare Advantage enrollment as supplemental benefits continue to expand for our services. Our most successful cross-selling effort to date is occurring with our E3 solution. in which we engage, educate, and empower our members. This is an add-on service to personal emergency response systems, PERS, or VITALS, that enables health plans to close gap in care and reduce total cost of care by tailoring programs to specific membership cohorts. Our pipeline for additional E3 opportunities are coming from relationships associated with our broader motive care business. While we are in the early stages for the full rollout of value-based care strategy, our individual point solutions are already participating in value-based and risk-based arrangements today. In Pennsylvania, our personal care segment has been participating in value-based contracts receiving quality payments based on gap closure. We have seen improved quality through this comprehensive care program while improving the member experience. Importantly, These arrangements are enabled by our ability to engage and collect real-time data. We are excited to participate in similar programs as other states continue to roll out these frameworks. Also in personal care, we have an early warning program that monitors members' change in condition that empowers caregivers to escalate a case for clinical intervention. We have seen encouraging results from this program with over 50% of our clients generating alerts leading to escalation avoidance rates in the mid-teens. For our remote patient monitoring segment, we have partnered with leading health plans to improve gap closures for higher acuity members through dynamic and personalized engagement. These programs has proven to drive results, including a 40% increase in gap closure. Without distracting the operations of our point solutions, we are dedicating the appropriate level of resources and investment to drive value-based care innovation. As previously mentioned, we are conducting integrated pilots with a few pairs focused on higher outcomes and total cost of care reduction with opportunities to generate incremental performance revenue. Our approach is to prove that our supportive care services change outcomes for high-risk, high-cost members. Currently, our approach is to share in the cost savings as we help improve outcomes, taking broad population risk is not a priority. I'm confident that our value-based care strategy will become a meaningful long-term growth driver for Motive Care. As noted in our point solution business updates, we've aligned our people, process, and technology to focus on three value streams. Having this congruent approach across Motive Care will allow us to scale, move quickly, cross-pollinate best practices, and progress towards our one member, one customer vision. Most importantly, the common value stream we are focused on is the member, which is most critical to our long-term strategy. We are building unified member profiles across our services. We will have a unique integrated offering and importantly collect valuable data that most healthcare service providers continually strive to collect. Unlike many healthcare companies, We collect data during everyday life activities, which can be used to predict and intervene before a clinical need. Additionally, many of our high-risk and high-cost members likely receive one or more of our services. We see these members every day in their homes or in our vehicles. Our payer customers struggle to engage with these most vulnerable members in a proactive manner, and we do it every day. We have created strategic clarity in our empowering our high-performing teammates to ensure we execute every day within our one member, one customer approach. Our daily and results-focused execution will again lead to near-term growth and long-term shareholder value. I'll now review our third quarter financial results, which reported net service revenue of $648 million, which reflected growth of 31% compared to prior year period, Adjusted net income for the third quarter was $23 million for $1.61 per diluted share. And adjusted EBITDA was $52 million for an 8% adjusted EBITDA margin. Next, I'll review our business segment financial performance, starting with our mobility or NEMT segment. Third quarter NEMT revenue increased 23% year-over-year to $460 million, driven by a 23% increase in average monthly members. While revenue per member per month was up slightly, approximately 1 million of our average members that we reported in the third quarter were temporary in nature, based on how we account for our members, and we exited the quarter with closer to 35 million members, which is an appropriate run rate to use for the fourth quarter. Service expense for the NMT segment, which includes all direct costs, increased approximately 30% year-over-year in the third quarter of 2022 to $300 and $95 million. The increase was driven by higher service costs associated with a 16% increase in trip volume due to higher membership and a 14% increase in transportation costs per trip due to the general inflationary environment. On a sequential basis, service expense per trip increased approximately 3% from the second quarter, driven by transportation provider cost increases and service level mix as inflation and higher fuel prices continue to create a headwind. Utilization, which is defined as paid trips per member, tick lower sequentially to 7.4% due in part to the temporary benefit of approximately 1 million members that I mentioned before. NEMT segment income was $19 million in the third quarter of 2022, while NEMT adjusted EBITDA was $39 million compared to $42 million in the third quarter of 2021. The year-over-year decrease was driven primarily by higher transportation service costs, partially offset by G&A cost leverage. Adjusted EBITDA margin for the NEMT segment was 8.6% in the third quarter of 2022. Compared to the second quarter of 2022, adjusted EBITDA declined $6 million primarily related to lower out of period benefit from a favorable contract repricing, which benefited second quarter adjusted EBITDA by approximately $8 million. While we continue to experience transportation cost pressures, we are pleased with our recovery of the costs through contractual pass-through and contract repricing. Turning to our personal care segment, revenue in the third quarter of 2022 was $169 million, compared to approximately $119 million in the third quarter of 2021. The increase was primarily driven by incremental revenue from the CareFinders acquisition, which closed in September of last year, as well as rate increases. On a sequential basis, revenue increased 4%. Hours during the third quarter increased approximately 2% sequentially to $6.8 million driven by increased service levels and our team's focus on workforce development, including recruiting and retention initiatives. Personal care service expense per hour, primarily representing caregiver wage expense, increased 5% sequentially due to increased wage expenses. Although caregiver wages have increased this year, we have received reimbursement rate increases from state payers to offset these labor-related costs, while also allowing us to provide more competitive wages for our caregivers. Personal care segment net income increase was $1.6 million, while segment adjusted EBITDA was approximately $19 million in the third quarter of 2022, compared to $10 million from the prior year period. Adjusted EBITDA margins were 11%, which was 260 basis points higher than the third quarter of 2021, and flat sequentially. While service expense was higher during the quarter, we've been able to drive operating cost leverage to keep margins flat quarter over quarter. Moving on to our remote patient monitoring, or RPM segment. Revenue was 19 million dollars, which included approximately $4.7 million of contribution from the Guardian medical monitoring acquisition. RPM revenue increased approximately 12% sequentially from the second quarter, primarily driven by a full quarter contribution from the Guardian acquisition, which closed in May of 2022. We've been pleased with the monthly growth in PERS referrals from our Guardian business since we completed the acquisition, and this, in addition to the members coming on a high contribution margin, are the key reasons for acquiring this business. RPM segment net income was $462,000 in the third quarter, while adjusted EBITDA was approximately $6.6 million, and adjusted EBITDA margins were 35.3%, in line with our long-term target for the mid-30% margin range. Consolidated cash flow from operations in the third quarter of 2022 was a use of $6 million due to payments on contracts payable, partially offset by strong cash flow from our core operations. During the third quarter, we reduced our contract payable balance net of our contract receivables by $51 million to a net balance of $184 million. We expect to reduce this net balance by an additional $40 to $60 million during the fourth quarter, which is in line with our prior expectations. As a reminder, these payables primarily relate to overpayments and liability reserves on certain of our contracts in the NEMT segment. Excluding the combined negative impact of $51 million from these items, our cash flow from our core business continues to be very strong. As we head into 2023, we expect a more normalized level of activity for these contracts payables, and therefore, our free cash flow is expected to be more normalized as well. We ended the third quarter of 2022 with approximately $73 million in 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 was four times as of September 30, 2022. We remain committed to do leveraging over time, and we expect to reduce our net leverage ratio to three times. As a reminder, we are not exposed to rising interest rates since our current debt structure is 100% fixed rates. Our capital allocation strategy is unchanged as we are committed to a disciplined and balanced approach towards capital deployment as we continue to deliver our balance sheet towards a three times target. Moving on to guidance. This morning, we increased our revenue guidance range by $75 million for the year due to strong membership growth in our mobility business and reimbursement rate increases in our personal care business. Revenue is expected to be in a range of $2.45 to $2.475 billion. The midpoint of a revised guidance range is a 3% increase and implies 23% year over year growth for the full year versus 2021. We maintained our adjusted EBITDA guidance for 2022 in a range of $210 to $220 million. While there is only one quarter remaining this year, There is normal variability in our business segments, and it is prudent to maintain this range. While revenue growth has been strong and exceeded expectations, some of the revenue upside has been passed through to offset higher costs, thus having a neutral impact on adjusted EBITDA. Given the strength in membership growth we've seen throughout the year, NEMT revenue growth in the third quarter was very strong. However, we think this will start to normalize in the fourth quarter back to the long-term range we provided on Investor Day in June. Additionally, NEMT-adjusted EBITDA could decline somewhat sequentially due to the lower average members compared to Q3, while margins for the year could be at the lower end of our long-term range of 9% to 12%. Due to higher transportation costs per trip, and still being in the early stages of our mobility process and technology transformation. For our personal care segment, we expect revenue growth in the mid-single digits for 2022 on a pro forma basis. An adjusted EBITDA margin is expected to be near the midpoint of our long-term range of 10% to 12%. Our long-term outlook for personal care remains unchanged with revenue growth in the high single digits through 2025 and adjusted EBITDA margins in a 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 VRI acquisition, which annualized in September. We expect RPM adjusted EBITDA margins in the mid 30% range for the year. Overall, we reported another solid quarter and remain encouraged about our long-term outlook as we focus on several initiatives to improve and transform our supportive care platform. We remain confident in our growth strategy and long-term opportunities, and we will continue to engage and empower our members, providing high-quality care and the best experience. Lastly, I want to thank the entire team at MotiveCare for their hard work and dedication. Every one of our 20,000 teammates impacts our one member, one customer vision. This concludes our prepared remarks. Operator, please open the call for questions.