ModivCare Inc.

Good morning and welcome to MotivCare's second quarter 2023 financial results conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, you may press star 1 on your telephone keypad to get into the question queue. Please note that this conference is being recorded. I will now turn the call over to Kevin Elich, Head of Investor Relations. Thank you. Please go ahead.

Good morning, and thank you for joining MotiveCare's second quarter 2023 earnings conference call and webcast. Joining me today is Heath Sampson, MotiveCare's president and chief executive officer, and Ken Shepard, head of finance. Before we get started, I want to remind everyone that during today's call, management will make forward-looking statements under the Private Securities Litigation Reform Act. These statements involve risks, uncertainties, and other factors that may cause actual results or events to differ materially from expectations. Information regarding these factors is contained in today's press release and in the company's filings with the SEC. We will also discuss non-GAAP financial measures to provide additional information to investors. A definition of these non-GAAP financial measures and to the extent applicable, a reconciliation to their most directly comparable GAAP financial measures is included in our press release and form 8K filed with the SEC. 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. Ken Shepard will review our financial results. Then we'll open the call for questions. With that, I'll turn the call over to Heath.

Thank you, Kevin. I appreciate everyone joining us for our second quarter 2023 earnings call. After the market closed yesterday, we reported second quarter revenue of $699 million and adjusted the EBITDA of $52 million. The increase in revenue was largely driven by strong performance in our home division, which includes our personal care and remote patient monitoring segments, as well as an increase in transportation trips and provider costs, which partially passed through in the form of higher revenue in our NEMT segment. Our home division's revenue growth contributed positively to adjusted EBITDA. As for NEMT, the increased revenue we obtained from passing through costs in our shared risk contracts helped offset a portion of the increased service expense. However, this pass-through benefit was more than offset by a negative impact to adjusted EBITDA from our full risk contracts, which represent 20% of our NEMT revenue. Similar to other companies in the healthcare industry, we are seeing a rise in utilization of our services as we see progress in the nation's recovery from the pandemic. Even though this increase has a negative impact on a portion of our NEMT contracts, it has generally been a positive for our personal care and remote patient monitoring segments, which we are seeing strong demand for our services. I remain optimistic about MotivesCare's long-term positioning and strategy. Our unique position in the healthcare industry enables us to cater to our customers' diverse needs in a continuously evolving market to manage a rapidly aging and chronically ill population amongst rising costs and a complex regulatory environment. While the intricacies of the NEMT segment are complex, particularly with significant fluctuations that arose during the pandemic and current uncertainty surrounding Medicaid redetermination, Access to transportation is a vital component to ensuring access to clinical interventions and improving health outcomes. There are several key updates to discuss this quarter. First, we increased our 2023 revenue guidance to a range of $2.75 to $2.8 billion from $2.575 to $2.6 billion. This increase is primarily due to incremental shared risk contract revenue related to higher than expected NEMT revenue from trip volume and provider cost. Despite the increase in revenue, we have lowered our 2023 adjusted EBITDA guidance to $200 to $210 million from $225 to $235 million. This reduction is primarily related to items affecting our NEMT segment, including higher trip volume and higher trip-related cost, particularly in our full-risk contracts, and timing of new contract implementations being delayed to early 2024, which were previously expected to offset contract attrition from prior years. Next, I'd like to address our second quarter cash flow from operations, which was negative $108 million, mainly due to a 96 million decrease in our net contract payables, less receivable balance during the quarter. along with a one-time $9.6 million arbitration settlement with a former employee. Post the pandemic, coupled with a shift to more shared risk and EMT contracts, we experienced a temporary timing mismatch between payments and collections, which created a large payable balance that we've been reducing over the past year. The second quarter of 2023 marks a notable shift in our working capital. we've resolved pandemic-era balance sheet disparities, transitioning into a net receivable position where our contract receivables surpass our contract payables. This occurred earlier than anticipated, largely due to accelerated payments from a few large state clients. Furthermore, these clients now have established clear timelines for reconciliation, adding additional layer of predictability to our cash flow. We anticipate the collection of these receivables to balance out, if not surpass, payable repayments for the rest of the year, positively impacting our cash flow in the second half of 2023. Our effort to realign contracts with our customers' needs is yielding positive results. We've safeguarded our margins, trading some pandemic-era upside for long-term stability. Now, our cash flow mirrors our P&L more closely. indicating improved financial management and a balance between profitability and customer satisfaction. During the second quarter, we borrowed $111.5 million on our revolving credit facility to support repayments on contract payables. As of June 30, 2023, our net leverage ratio was 4.7 times. We knew we were going to be at this leverage point. However, as noted earlier, we anticipated paying off a couple key customers in line with prior history. Prioritizing long-term customer relationships, we agreed to accelerate related contract payables of approximately $65 million into Q2. Moving forward, we anticipate generating substantial cash flow, which we intend to utilize for revolver paydowns. This uplift will be fueled by normalized working capital the strong core cash flow from our low capital intensive businesses. Our quarterly supplemental presentation on our IR website provides a detailed cash flow overview and a view of the expectations for the second half of 2023. To conclude the balance sheet points, our annual goodwill assessment resulted in a non-cash goodwill impairment charge of $183 million within our personal care and remote patient monitoring segments. It is important to note that this is a non-cash expense and does not impact our operation cash flows or ongoing activities. Instead, it aligns the segment's carrying value with their current fair market value. Despite this non-cash charge, these segments are performing well. And what's more, we see that personal care and remote patient monitoring segments has key tenants of our strategy to unlock value-based care arrangements with supportive care, evidenced by new contracts. This makes us more enthusiastic about the long-term prospects, and we anticipate their performance will surpass our initial expectations at the time of the acquisition. We remain focused on driving strategic measures to ensure their performance and deliver long-term shareholder value. Next, I want to address the topic that's the top of mind of all of our investors, Medicaid redeterminations. There has been a lot of industry information about redetermination, and some states have taken an aggressive approach to redetermination, but others are being more thoughtful to ensure eligible Medicaid members' access to care is not disrupted, evidenced by 12 states pausing procedural terminations and 35 other states having received approval for mitigation plans to address a number of issues. That said, to date, we have seen minimal impact from Medicaid redeterminations, And our membership continues to track in line with our forecast expectations. I would also like to point out that of our 34.3 million members, 27.1 million are Medicaid and 7.2 million are Medicare Advantage, which are not affected by redetermination. Our MA membership has grown from 6 million or 20% since June 30, 2022. primarily due to new contract wins and existing contract membership growth. While redetermination may lead to some Medicaid disenrollment, we expect regular growth in Medicaid and MA programs, providing a counterbalance to redetermination impacts. For the second half of 2023, we estimate Medicaid redetermination could create an adjusted EBITDA headwind of approximately $5 to $10 million, which is embedded in our guidance. Looking towards 2024, we are currently forecasting a potential growth impact to adjusted EBITDA of $20 to $40 million from redetermination. Yet, as I will discuss later, our strategic initiatives are expected to drive growth savings of $30 to $50 million over the next 12 to 18 months. Rest assured, Our data models, industry insights, and customer feedback indicate our projects align with what we are seeing in the market, and redetermination will be manageable. We'll provide more updates as things progress. Before I review some of our operational highlights, I'm eager to provide some substantial updates to our team. We recently brought on Jessica Krall as our new Chief Information Officer. Jessica came to us from United Healthcare, and she has an extensive background in healthcare IT leadership and brings a wealth of experience and expertise to our team. Further bolstering our team, we hired a new chief people officer, and we will announce his name once he fulfills his prior company commitments. This individual has proven experience nurturing organizations with significant field employees, and he will be instrumental in further supporting our 20,000 team members and fostering our company's growth. I'm also thrilled to announce that we've also received agreement from an experienced and talented individual as our next Chief Financial Officer, who will join us in early September, and once we are able to officially announce her name, we will issue a press release in Form 8K. What I can tell you is she has multi-industry experience and a deep healthcare understanding with a multi-decade career. which will play a pivotal role in shaping our future direction. With these recent additions, our executive team will continue to reflect our unwavering commitment to attract exceptional individuals in their respective fields. As we often say, it's all about the people. And I'm confident that once all of these individuals are on board, we will have the right team in place to drive our transformation and strategy forward. Lastly, I want to extend a heartfelt gratitude to our extraordinary team for their steadfast support while I balance the dual roles of CEO and CFO. On a lighter note, I can affirm that I'm excited about finally not having to juggle two jobs. Now let's discuss the market, our strategy and segment execution. Starting with an important change in the market. As we navigate the rapidly evolving healthcare landscape, it's clear that the industry is being revolutionized by new CMS strategic mandates. which is accelerating the shift to fee-for-value from fee-for-service. This is also driving a paradigm shift towards more holistic member care. It is anticipated that by 2030, 100% of Medicare Advantage and traditional Medicare and approximately 50% of Medicaid will transition towards value-based alternative payment models. As payers and providers grapple with increased and chronically ill populations, higher costs and tighter reimbursement rates. Coupled with an evolving complex regulatory landscape, the quest for an integrated healthcare experience that combines quality, affordability, and interconnected services is paramount. At MotiveCare, we've enhanced our strategy and separated it into three parts in response to these pressing market needs. One, develop a scalable platform through operational excellence and automation. Build a customer-centric sales and growth platform. Three, enhance digital and clinical capabilities to participate in value-based arrangement models. Our strategy is powered by digital transformation, which is crucial in our fast-paced, data-driven, artificial intelligence era. The first phase of our strategy revolves around operational excellence, which we are proud of the improvements we've made over the past year, and further automation sets a solid foundation for our scaled platform of solutions. Over the past year, we've made considerable strides in upgrading our talent and culture, transitioning from a decentralized and disparate model to a shared service and central operations model. To better understand the scope of this transformation, approximately $65 million of annual salary has been transitioned. and we expect to upgrade and reallocate back approximately $30 million. Phase two, running parallel to phase one, involves fostering an organization that prioritizes growth through a coordinated model of relationship management, referral execution, and hunting new opportunities, all backed by marketing and centralized sales operations. Finally, phase three will participate in value-based arrangements in addition to fee-for-service, We will harness our newly developed digital and clinical connected capabilities to augment our supportive care services by providing longitudinal data collection for our customers, members, and design engagement models, enabling virtual connections to care. Far from being conflicting strategies, these three phases are designed to complement each other, strengthening each other together. Let's now delve into our progress for each of our segments. Our focus on centralization and operational excellence facilitated by technology has considerably improved our NEMT services. We're meeting or exceeding all our customers' quality and service level requirements, as seen in our key performance indicators, such as on-time performance and reduced missed trips. Our multimodal transportation partnership strategy has led to increased customer satisfaction and reduced costs. We are transitioning from traditional call centers to omnichannel options, improving member engagement at lower cost. Further automation of the transportation processes through unified tech-enabled dispatch is a key priority as well. We anticipate savings between $30 to $15 million over the next 12 to 18 months through these continued centralization, operational excellence, and automation efforts. We expect these initiatives will mitigate the headwinds of Medicaid redetermination and higher utilization. Our sales strategy within the NEMT segment has shown promising results, albeit slower than we wanted. Year to date through June 30, we've secured new MCO businesses with a total contract value of $110 million, nearly all of which will commence in 2024. Including the contract renewals and expansions, the total contract value won this year amounts to over $500 million, over three to five-year contract terms. Over the next five years, we foresee around $1.3 billion worth of state NEMT contracts up for RFP, of which we currently serve approximately 700 million. Our team has been successful in retaining business, and we are delivering higher service levels than historically. We are confident in retaining the majority of the contracts we have, and we aim to win and convert additional market share. Additionally, we will continue to pursue approximately $700 million of new opportunities in our MCO pipeline, which is more receptive and, frankly, demanding that we offer more holistic solutions beyond just transportation. In personal care, our focus on centralization and operational excellence has streamlined our services, enabling better regulatory compliance. We've embarked on a full transformation of this segment shifting from disparate local model to a more unified regional model. This has also allowed us to reallocate resources to growth. Ours increased 3.4% in the second quarter as we continue to gain momentum towards additional growth projected in the second half of the year. Quickly commenting on CMS's HCBS proposed rule, we've aligned our feedback with industry stakeholders, supportive of the rule, however, expressing concerns about the 80-20 wage provision, noting that it will further exasperate the supply and demand imbalance for personal care services. It is important to note that we are optimistic that the rule will drive further professionalization, and once the final rule is issued, it will not be implemented until four years from now. In the RPM segment, Our operational excellence strategies have improved efficiency, allowing us to provide elevated care levels while also integrating the Guardian Medical monitoring acquisition from last May. We've leveraged technology to boost efficiency, enable vital data collection, and fostering growth. Within PERS, we are seeing market share gains and maintaining strong pipelines. For example, activations were up 10% year-over-year and enrollments increased 81% compared to the first quarter. We are also adding capabilities to enhance our vitals and medication management offerings and expect meaningful expansion starting this year. Under the careful management of our newly dedicated strategy, product, and innovation team, led by Jeff Bennett, previously the CEO of Higgee Healthcare Solutions, our strategy integrates cutting-edge technology and data management with our newly developed operational excellence and clinical capabilities. This strategy empowers us to capture longitudinal data from our customers' members, enabling the development of virtual engagement models and facilitating value-based arrangements. In 2023, we expect to generate meaningful dollars from innovation and value-based payments. We have over 20 active programs focused on member insights and opportunities to move into value-based arrangements that give us the confidence that our innovation approach is aligned to our customers' needs. I'd like to provide a brief update on our equity investment in Matrix Medical, which we believe holds significant value for MotiveCare. Matrix saw continued momentum in the second quarter and delivered another strong quarter driven by assessment growth of 30%. For context, adjusted EBITDA range of 50% million to $100 million is still the correct results to anchor value from. We are confident that Matrix is on the right trajectory to create significant value and remain aligned with Fraser in monetizing our 44% minority interest at the right time. In closing, I'd like to thank our entire team for their hard work and dedication. The last year has been a period of significant change for us. We've remained committed to providing the highest quality of service as we have done amazing things to help transform this business. We continue to build on our culture where compassion meets profitability and will continue to guide us as we move forward. I'm incredibly proud of what we have achieved and the transformation we've undergone. We are clearly on the right trajectory and I see this continuing as we remain committed to growing our supportive care services focused on the social determinants of health. Now, I'd like to pass the call to Ken Shepard, our Head of Finance, who will provide an overview of our second quarter financial performance.