ModivCare - Q2 2022

Transcript

Operator (participant)

Good morning, and welcome to ModivCare'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 one on your telephone keypad. If you may press star two 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 Ellich, Head of Investor Relations. Mr. Ellich, you may now begin.

Kevin Ellich (Head of Investor Relations)

Good morning, and thank you for joining ModivCare'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 wanna 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 8-K.

A replay of this conference call will be available approximately one hour after today's call concludes and will be posted on our website, modivcare.com. This morning, Heath 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.

Heath Sampson (Interim CEO and CFO)

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, ModivCare 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 ModivCare'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 I've 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. 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 2022 guidance for both revenue and adjusted 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 the inflationary environment.

ModivCare'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 ModivCare'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 our 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 bolsters 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 ModivCare family. We hosted our inaugural Investor Day, where we provided guidance for 2022, which we increased this morning.

Also offered a long-term financial outlook that calls for 7%-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 ModivCare has made, and it will serve as a foundation as we enhance our ESG capabilities and disclosures over time. These accomplishments position ModivCare 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 Preventive 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 ModivCare'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 ModivCare 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 ModivCare 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 ModivCare. 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 a best-in-class 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 Hylander, 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, ModivCare 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 payers 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 1, compared to just $20 in June of 2021. This increase allows us to pay our 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 ModivCare 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 4 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, and ModivCare'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. Service 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, surface 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 preferred 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 our 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 remained 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 overtime. 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 points higher than the second quarter of 2021 and 60 basis points 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 thousand 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. I have mentioned over the last few quarters, we expect to repay approximately $100 million-$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 contracts payable balance declined by $34 million during the second quarter due to several large payments.

We 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-$125 million dollar 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 dollar revolving credit facility.

Our principal debt balance was flat sequentially at $1 billion, and our consolidated pro forma net leverage ratio was 3.9x 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 3x. 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 adjusted EBITDA due to the strong second quarter results. For the year, we now expect revenue to be in a range of $2.375 billion-$2.4 billion, compared to the prior range of $2.35 billion-$2.375 billion. We now expect adjusted EBITDA to be in a range of $210 million-$220 million compared to our prior range of $203 milion-$213 million. Our updated guidance includes the benefit to revenue and 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%-12% due to higher purchased 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 our long-term range of 10%-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%-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%-16% revenue growth and 34%-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 with our first quarter of 2022 results due to the out of period benefits we 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 ModivCare for their hard work and dedication. This concludes our prepared remarks. Operator, please open the call for questions.

Operator (participant)

Thank you. Again, at this time, we'll be conducting a question-and-answer session. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Brian Tanquilut with Jefferies. Please proceed with your question.

Brian Tanquilut (Senior Equity Research Analyst)

Hey, good morning, guys, and, congrats on the quarter. Heath, I figured, you know, just to address, Dan's departure here, I figure there's not much you can say, but maybe as I think about where you and the Board see the corporate strategy right now and where the bench is, maybe can you just share with us, you know, the thoughts on that and the execution that is remaining, as it relates to the different assets that you've acquired over the, last few quarters, I guess, and what is needed to get to the strategy goals that the Board had set, you know, even prior to Dan's departure?

Heath Sampson (Interim CEO and CFO)

Yeah. Yeah. No. Hey, good morning, Brian. Thanks. You know, we had our board meeting a few days ago, and it's just confirmation on the strategy that we've laid out over the last couple quarters. You know, the last couple years making these acquisitions have really enabled us now to have a unique set of assets that allow us to be really the only supportive care company that has this stuff. So the strategy is consistent with what it's been in the past. As we've talked about every quarter, now it's about executing.

How do we bring these assets together, all the way from what we do on the back office side to what do we do, more importantly, on the revenue side, and how we're bringing all of our sales and account management together and really having that one point into our customer. Really the strategy is the same. Now it's about execution. We've made a lot of hires. There's a lot of great talent, and a lot of the talent that many of you saw at our Investor Day are out there executing every day. We have, like I said on the call, and consistent with what I've said in the past, and this has been reiterated by the Board over these last couple of days, our strategy is the same, and to continue to execute. Really it's business as usual for us, Brian.

Brian Tanquilut (Senior Equity Research Analyst)

No, I appreciate that. I guess just shifting gears to operations. I'll start with the personal care side of the business. Maybe it sounds like things are picking up, and you're expecting things to accelerate in the back half, but any color or any quantification you can share with us in terms of, you know, recruitment and the orders or the demand that you're getting from the state plans for personal care services?

Heath Sampson (Interim CEO and CFO)

Yeah. The demand has been consistent, so anywhere from 10%-30% more demand than what actually we can fill. That is the same across all our markets. The demand is there. We have increased hours, but really we're still, it's more incremental. A lot of that has to do with just the labor market in general. The strategies that we've started to implement are taking hold, but really in the latter part of this year is when we expect them to really have benefits. A lot of that is because we have the scale and density and because of the personnel that have been in that leadership role, it's just starting to take hold. We're really optimistic about how the latter part of the year comes into play.

In addition, you know, because of the scale and density that we have, we're able to centralize a lot of the back office procedures to free up the people in the markets, in the local communities that can really focus on recruiting and servicing the members. I'm really excited about what we're doing in the personal care side. Again, I expect that acceleration and really growth in ours to happen in the upcoming quarters.

Brian Tanquilut (Senior Equity Research Analyst)

Got you. Last question from me, Heath. On the transport side, you know, obviously, you're raising guidance here, so just wanna hear how you're thinking about further recovery and utilization and what's embedded in the guidance and where you see it eventually normalizing, maybe say versus pre-COVID levels?

Heath Sampson (Interim CEO and CFO)

Yeah. The good thing that from our Investor Day, and now even in our information that we provide in the back pages, we fully disclose a lot of these metrics, and specifically utilization. You can see utilization has ticked up year-over-year. Really when you get into that, it's actually in our kind of core Medicaid that's up even a little bit higher. It doesn't seem as high because of our mix change and really the growth in our Medicare business. It has been growing. As we disclosed during our investor day, we expect that to grow to about 10%-11% range. That's that will be back to what we think is the normal levels.

That is lower than the pre-COVID levels, and we talked about this before, there's a lot of things that have changed, whether the environment itself because of telehealth to contract mix. Consistent with what we said before, we think it will incrementally get up to those levels over the next number of years, and we'll be able to manage through that with all the initiatives we have, in addition to the pricing changes that we're able to make with all of our customers. The conviction we have around that 9%-12% EBITDA margin holds even at that elevated level when we get back to that 10% utilization range that we expect over the next couple of years.

Brian Tanquilut (Senior Equity Research Analyst)

Awesome. Thanks, and good luck.

Heath Sampson (Interim CEO and CFO)

Yeah. Thanks, Brian.

Operator (participant)

Our next question comes from the line of Bob Labick with CJS Securities. Please proceed with your question.

Bob Labick (President)

Good morning, and congratulations on the strong quarter and on your new title, Heath, although we hope the interim goes away.

Heath Sampson (Interim CEO and CFO)

Yeah, I appreciate that.

Bob Labick (President)

Absolutely. Yeah. So I wanted to start, you know, obviously, as we said, very strong performance. The biggest delta versus our expectations was in NEMT, and you addressed a little bit of, you know, some retro. Even with the retro pay, there was strong sequential growth in members. By the way, I love the new metrics. I'm still trying to get through all of them.

Heath Sampson (Interim CEO and CFO)

Yeah.

Bob Labick (President)

The sequential growth in members, and revenue in general, even beyond the retro pay, was greater than we would have expected. Maybe give us a sense of what's going on with the kind of member growth there and then in general, the competitive marketplace is kind of two-part question, and new bids and opportunities to grow members further?

Heath Sampson (Interim CEO and CFO)

The team still in the retention side and the growth side are doing a great job. We're consistently retaining business. The winning of business is primarily on our current clients adding more members. A lot of that additional members that have come in is primarily on the Medicare side. That's a large chunk of the growth there. It's a great job by our team retaining and then adding incremental revenue. There's been a few wins that we have had that have come on, but most of those wins are gonna affect us from a large perspective into 2023.

In addition, this relates to the latter period. We are very close to our clients, and as we're moving through what has changed, you know, costs are up, and you can see that in our metrics, and we are appropriately getting the pricing change to reflect that increase in cost. And also reflect the services that we provide. It's a lot of things. It's the great work that we've done to get contracts repriced. It's the account management and efforts that we have by our operations team to ensure that we are picking people up on time, which is allowing us to renew our customers.

It's just the discipline, the operating discipline that the company has, coupled with all the initiatives over the last couple of years, primarily in our contact center, that is allowing us to make sure that we keep costs down even though volume and trips go up.

Bob Labick (President)

Okay, great. Now that's super helpful. I guess just one more broad question, I'll jump back into you. There's just so many things going on. So, you know, addressing your management team, obviously, as you said, we met you know, a tremendous number of folks and very strong and talented management team at the Analyst Day. As you look forward over the next, you know, quarters and years, what are the areas of need that you're looking to add to the team, you know, as it currently is constituted?

Heath Sampson (Interim CEO and CFO)

Yeah. At the Investor Day, here around the table, when I leave this conference call and start work across the board, we have talent across the country in every section of our business, all the way from leadership down to the people that give services into the home or drive the car. We're fortunate to have a great team, and there's a lot to leverage. If you think about even over the last couple of years, there's been talent that has been added to fill where we are, whether that's sales and account management to technical skills to build the platform we have, those will continue to be needed. In addition, we've talked about this a lot, as we start bringing these assets together, we're gonna need more technology, and we're gonna need the capabilities to use this data.

That's what we're continuing to add there. Just in general, talent is everything. Executive talent all the way down to middle management and below. The Board is committed to ensuring that we attract and get the right talent in place. The home business, we have great talent there, but we know we also need some additional executive talent to ensure we continue to grow that and also help lead the great leaders that are in each of those markets. It's a bit of a generic question, but at the same time, we are aware of what we need to do strategically going forward, and that's primarily around data and technology, and those will be the talent that we continue to add.

Bob Labick (President)

Okay, super. Congratulations. Thanks.

Heath Sampson (Interim CEO and CFO)

Yeah, thanks.

Operator (participant)

All right, next question comes from the line of Scott Fidel with Stephens, Inc. Please proceed with your question.

Scott Fidel (Managing Director and Senior Analyst of Healthcare Services)

Hi, thanks, and good morning. First question, I appreciate the details you guys provided just on outlook and some of the within the segments. Just interested in thinking about the back half of the year and clearly understanding the sort of mean reversion on emergence in NEMT around the period benefit of 2Q. Just any other, you know, seasonality that you wanna call out for us, you know, across the, or, you know, how we should be thinking about, you know, EBITDA split between 3Q and 4Q? I understand you don't provide quarterly guidance, but just any call outs on anything unique in each either of the quarters.

Heath Sampson (Interim CEO and CFO)

Yeah, no. Hey, thanks. I'm glad you're able to join and thanks for starting coverage with us. We really appreciate it. Look forward to working with you. Your write-up and your understanding of our business is tremendous. Look forward to working with you. As we talked about.

Scott Fidel (Managing Director and Senior Analyst of Healthcare Services)

Already been an interesting couple of days already. Yeah.

Heath Sampson (Interim CEO and CFO)

I know, I know. It sure has been a very interesting few days. Your timing was interesting. Anyway, your questions are always on point. As I said in the prepared remarks, the second half, really if you normalize to the second quarter and really take half of that amount that's increased and push it to the first quarter, we're really kind of consistent on Q3 and Q4 from that kind of normalized Q1 run rate. There is some seasonality in our business, you know, especially on the transportation side, but really it's not that material. Think about being relatively ratable for the rest of the year for both Q3 and Q4 from an ending kind of EBITDA for each quarter.

Scott Fidel (Managing Director and Senior Analyst of Healthcare Services)

Okay, got it. Next question, just know you guys really haven't been talking about as much recently, but just interested if you can give us an update on Matrix and how that's been performing recently and you know, how you're thinking about the value of that investment at this point?

Heath Sampson (Interim CEO and CFO)

Yeah. Matrix in the core business, the risk assessment business is starting to perform like it's performed in the past. The management team has just been solidified there recently. That has been the focus. They have been growing there. Really these next couple quarters, I expect them to grow. Like many people that are in the clinical side and specifically hire nurses, that's the challenge, right? The team that's been put in place, the initiatives that they have around retention and recruiting are really strong, and they're just starting to take hold. I expect that risk adjustment business to continue to grow and do well, 'cause as you know, there's a couple of players there, them and Signify, and they're getting the market share. There's strong growth within MA.

I'm really encouraged about that. The other businesses that have performed well during COVID have not performed like we expected them to perform. We're really assessing what is the right thing to do there. These next couple of quarters, we'll know if there's growth opportunity or not. Regardless, even without the COVID-related businesses, that business is gonna continue to grow, and we are aligned with Frazier support the management team, and there will be some monetization or exit. Unlikely of anything in 2023, maybe the latter part of 2023, but probably after that. We're both patient, and we both know that there's value there, and there will be a monetization sometime over the next few years.

Scott Fidel (Managing Director and Senior Analyst of Healthcare Services)

Got it. Just one last one for me. If you could give us a sense on how much of the enhanced ARPA funds you received so far through the year and what you're expecting for the balance of the year? Then just remind us with your accounting convention, are you just flowing those through the balance sheet, and not accruing those in revenues, or are those flowing through the revenues as well? Thanks.

Heath Sampson (Interim CEO and CFO)

Yeah. You cut out. I didn't hear the main core of your question. What was the question?

Scott Fidel (Managing Director and Senior Analyst of Healthcare Services)

Sure. Can you hear me okay right now, Heath?

Heath Sampson (Interim CEO and CFO)

Yeah, now I can, yeah.

Scott Fidel (Managing Director and Senior Analyst of Healthcare Services)

Oh, okay. I'd like to ask about the enhanced ARPA funds for personal care, how much you've recorded year to date and what you're expecting over the remainder of the year, and then what the accounting convention you're using for, you know, those sort of, you know, sort of more one-time-ish funds that have been coming through?

Heath Sampson (Interim CEO and CFO)

Yeah. It's in our grant income line. For the three months of 2022, it's just over $3 million. As you know, those ARPA funds can depend on what state it is in, what the amounts are, and we use them for different things. It really depends on what we're using them for, and each state will depend on how we actually account for them. In general, they come in as soon as they come in, they go into the grant income line, and then we use them for whatever we're gonna use them for, whether that's pay caregivers or have COVID costs, whatever that may be. It's about $3 million each quarter that it's been, and we expect that. Well, we'll see what happens in the future.

That's how they come into the income. Then when we use them, they just go against the expenses in that specific category, depending on, again, what we're using them for.

Scott Fidel (Managing Director and Senior Analyst of Healthcare Services)

Okay. Got it. Thank you.

Operator (participant)

Our next question comes from the line of Brooks O'Neil with Lake Street Capital Markets. Please proceed with your question.

Brooks O'Neil (Senior Research Analyst)

Good morning, guys. Can you hear me okay?

Heath Sampson (Interim CEO and CFO)

Yeah. Good morning, Brooks. Yeah, hear you well.

Brooks O'Neil (Senior Research Analyst)

Congratulations, Heath. I'm excited for you. I'm sure you're not willing to say much about the changes that involve Dan, but can you just comment a little bit about the reaction of the leadership group you have to the change and how you see that impacting anyone besides yourself in the organization?

Heath Sampson (Interim CEO and CFO)

You know, when you know when these changes happen, right, there are people involved, and there's a lot of emotion and, really all professionals here. These professionals individually process. To a tee now everyone's focusing on what they can do to help the company continue to grow. I'm proud of the team that were able to do that. Now the focus is really on what do we do to help our company grow and help our frontline employees and serve our members. They've been professional, processed, and are now moving forward.

Brooks O'Neil (Senior Research Analyst)

Cool. Following on with Scott's last question, I'm just curious. Obviously, the accounting for the capitated contracts you have is complicated. Can you just talk, just refresh our memory about the revenue recognition in the capitated business, in particular how, you know, in those periods where utilization was much lower than normal, I guess I'd call it? Then, you know, the status of the repayment that you have on those contracts be helpful to run through quickly.

Heath Sampson (Interim CEO and CFO)

Yeah. Well, the complication is still the same that it's been since I've been here, but the other good side of it is it's really been consistent. You know, there's a bit of a, you know, 3%-4% or 5% kind of swing between the different types of contracts, but in general, it's been the same. Generally, again, we have about 85% of our contracts are capitated and about 15% aren't. Then within that 85%, about half of those are full risk, where we take the full risk on the transportation, and the other half have this mix. This is where the complication comes in, whether there's a collar around how much we can make or there's these reconciliations between how much we utilize or how much we spend.

That's where the complication comes in in those other half of that 85%. In general, the P&L is consistent. Where the differences have come over the years, specifically through COVID, and it's even continuing now, we accrue, we get paid on that per member per month, and even though we won't get the P&L impact, it'll get put on the balance sheet. That, again, goes into that contract payable amount. That contracts payable amount is basically flat quarter-over-quarter at $280-ish million. What that's telling you is that for those specific contracts, we are still not utilizing like maybe we expected to. As we said, many of those we pay back every quarter or every six months, and some of those a little bit longer.

That's the macro way how we are accounting. Again, P&L the same, and then we get the cash coming in the door, and then we pay back that cash, like I said. With what we've disclosed, we've said we're about $100 million-$150 million that we expect to pay, and we said this last quarter. We've paid net around $50 million this quarter. That's why we took down that guidance by $50 million for each the top end and the bottom end. Pretty consistent with what's been in the past. The growth in the contracts payable is consistent in the past based on where the utilization is.

The other item, and this is probably more important, the way these contracts have been put together, even through COVID and even today, we are consistently renewing them, and in many cases renewing them at higher prices to match the higher costs. That's the beauty of how we've been operating and how strong our relationships is to ensure that our business is performing and our margins and sticking to that 9%-10% EBITDA margin is holding for us on the NEMT side.

Brooks O'Neil (Senior Research Analyst)

Heath, that was tremendous. I really appreciate the fact that you went through it and made it understandable even for a non-accountant. Thanks a lot for that.

Heath Sampson (Interim CEO and CFO)

Yeah.

Brooks O'Neil (Senior Research Analyst)

Let me just move on. I'm particularly interested in two things I guess, as you think about the future. One is the growth of your Medicare Advantage.

Heath Sampson (Interim CEO and CFO)

Mm-hmm.

Brooks O'Neil (Senior Research Analyst)

Population that you serve.

Heath Sampson (Interim CEO and CFO)

Mm-hmm.

Brooks O'Neil (Senior Research Analyst)

In particular with the national and super-regional managed care organizations.

Heath Sampson (Interim CEO and CFO)

Mm.

Brooks O'Neil (Senior Research Analyst)

I think related to that in some ways is how you think about bundling the services you offer. I can see the overlap in the businesses and what you do for customers. I'm just trying to understand how particularly the new business alignment that you put in place with the home care and the transportation in separate units, how that bundling is likely to look going forward?

Heath Sampson (Interim CEO and CFO)

Just macro, we know how MA is growing every year, and we know that our services that we have, those are large growth all the way from 20% to even 40%-50% growth on the supplemental benefits that we have in the areas we have. MA for us is a major focus, and it's been a large part of our growth, like I said before, primarily in the transportation side. We expect that growth to continue across all our business lines. The personal care side has primarily been in the Medicaid side and still a lot of growth there, like I talked about before, 'cause we're not even meeting the demand there. On the MA side with remote monitoring and transportation, there's a lot of opportunity.

Most of the growth that's happened on the MA side has been with our core customers. Our core customers, our large Big Six, are also the large MA providers. We are just really at the beginning stages of selling beyond those Big Six. We have a great Brett Hickman that's come in with a great team. Really now, I view, they view, and we view that as an opportunity to expand even beyond our current customers on the MA side. Point solution growth in MA, lots of opportunity. Your second part of your question is, and this is really where we actually get more sticky, as well as when we bring them together and we bundle them together. We're seeing a lot of the bundling and cross-selling right now on the remote monitoring side.

Primarily, we talked about this, the E3 solution, a lot of interest from our current customers on expanding that. We've talked about this at the Investor Day and also in the scripts, the direct benefit to outcomes in E3 is really gaining traction, and we're starting to cross-sell there. With the team that Brett's put in place, I expect that cross-selling and bundling to accelerate each quarter. Lastly, as we move through this, we are doing pilots right now, is the eventual value-based care. I say that's a really critical part of our strategy as we move in, but not necessary for our near-term growth. Our near-term growth is point solutions, cross-selling and bundling.

That gives us the time to ensure that we are partnering with our payers, building the right platform, and eventually we'll get the stickiness and growth of value-based care in the years to come.

Brooks O'Neil (Senior Research Analyst)

That's great. My last one, and since you mentioned it actually is the topic of my question. Can you just give us a little color on what your value-based care offering looks like and how that?

Heath Sampson (Interim CEO and CFO)

Mm-hmm.

Brooks O'Neil (Senior Research Analyst)

How that might work for the providers and payers that you're trialing it with?

Heath Sampson (Interim CEO and CFO)

If you look across all of our business lines, and there are many studies that we don't even do, and I alluded to one in my script, but there's even more around that. Each of these supportive care services are keeping people healthier and out of the hospital. Really now it's collecting data on all of that and comparing that to control groups that don't have that. We start measuring that actually. We're changing outcomes and lowering costs. Those are the pilots that are starting. It's primarily in the home business right now that those pilots are starting. We'll collect that data with partnerships on our payers in specific states.

Eventually from there, we'll start contracting in that way where we start sharing some of the savings that are coming through these control groups. We'll add on transportation. Eventually, when we have the right data and everyone's comfortable with that, we'll be able to start sharing risk in that across all of our services.

Brooks O'Neil (Senior Research Analyst)

Great. Thanks a lot. I'm looking forward to the future.

Heath Sampson (Interim CEO and CFO)

Yeah. I really appreciate it, Brooks. Thanks a bunch.

Operator (participant)

Our next question comes from the line of Pito Chickering with Deutsche Bank. Please proceed with your question.

Kieran Ryan (Equity Research Associate)

Hi there. This is Kieran Ryan on for Pito. Thanks for taking the question. Just wanted to start off on NEMT gross margins, looking into the second half.

Heath Sampson (Interim CEO and CFO)

Mm-hmm.

Kieran Ryan (Equity Research Associate)

Do you think that these transportation initiatives that you're about to start rolling out and the improved attrition trends can offset, you know, like, wage pressure and then higher utilization in the back half to keep?

Heath Sampson (Interim CEO and CFO)

Mm-hmm.

Kieran Ryan (Equity Research Associate)

Gross margins about flat with the first half?

Heath Sampson (Interim CEO and CFO)

Yeah. You could see in the stats that, I'll start with the wage side. Really, for the last three quarters, consistent with everything that's happening across the globe and specifically even in the US, there has been inflation and wage pressures. You see that in our stats. Likely we're hitting the peak on the wage pressures. Then the initiatives that we have primarily that are in our multimodal strategies, those will take hold and hopefully bring those down. We expect in the numbers that we've given and the guidance we've given, we don't expect material decrease in that for the rest of the year. Very comfortable with the guidance we've given on that side.

Utilization, we expect that nominal uptick to continue for the rest of this year. Long story short, basically the margins are relatively consistent for Q3 and Q4. The changes that will come in utilization, which will continue to happen, will be offset by these strategies that were articulated on the mobility side, again, primarily the multimodal, but also the partnership model that really ensures that our transportation providers are making the right level of money, getting the consistent volume, and then we ourselves will ensure that we get the right quality at a lower price. All those together, we feel really confident in our ability to offset any increases in utilization that we expect over the couple of years. It's real. We see it happening. It's a great.

The team is just in California, meeting with a lot of our top TPs and going through these initiatives and ensuring that we are putting pen to paper and executing on these. I'm really confident that we'll be able to do that over the next number of quarters and years.

Kieran Ryan (Equity Research Associate)

That's helpful. Thank you. Just a quick follow-up, staying with NEMT, but looking into 2023. I was wondering if you could just talk a little bit about what needs to happen to, you know, hit like the midpoint of the G&A guidance for, which I believe is 6%-7% of revenue in 2023. How much is that driven by top line performance versus the direction of cost inflation from here? Thank you.

Heath Sampson (Interim CEO and CFO)

We are really now gonna get leverage out of our current cost structure. Majority of that G&A will be flat, and we'll start getting growth on the revenue side, so we'll start getting leverage. That's the right way to think about it. We've made the necessary investments. There'll be some resource allocation that happens that's a bit different, but we have the talent, we have the people. We've made the necessary investments on the technology side in the NEMT business. Now we're gonna get leverage and scale out of that as the quarters and years go by.

Kieran Ryan (Equity Research Associate)

Thanks a lot.

Operator (participant)

Again, as a quick reminder, if anyone has any questions, you may press star one to join the Q&A queue. Our next question comes from the line of Mike Petusky with Barrington Research. Please proceed with your question.

Mike Petusky (Managing Director and Senior Investment Analyst)

Hey, good morning. A couple of questions. Brooks sort of got into some of this, but I wanted to try to drill down a little bit. In terms of the bundling coordination of services, et cetera, and pilots that may be going on, I mean, could you get a little specific in terms of, you know, how many pilots may be going on and with whom? I mean, are these the larger?

MA organizations, I mean, you know, length of time of these pilots? I'm just curious where this really is. I mean, is it in the first inning? Is it in the third inning? Is it, you know, pre-game? Thanks.

Heath Sampson (Interim CEO and CFO)

Yeah. To use your baseball analogy, it's really the first inning still, and there are really two different kinds, though. The one that we are really getting a lot of traction on, and it wouldn't be as holistic as I articulated to Brooks a few minutes ago, is really in the E3 side. There's a lot of those that are currently happening. Call it kind of pseudo point solution, but also bundling and data collection that's happening on there. There's a number of those happening and a number of those in the pipeline. I'm even more encouraged and above my expectations on how those are currently going on and the demand for those.

The other more holistic ones, those are the ones we're more in the first inning on and we're in the planning stages. We're beyond planning stages, but we're in the early execution of that. I'll say this again, right? That side of moving to value-based care, even beyond bundling. Bundling will be. We could do bundling just by doing contracts together, and that's really important as well, so I don't wanna minimize that because the payers do want things bundled just from the efficiency, and I'll get into a little bit more of that in a second. The value-based care, we gotta be rightfully so deliberate and plan with our payers there.

The numbers that we've guided for even through 2025, the three and three, really doesn't have value-based care in there. Execution, coordination at the point of sale, assuming leveraging the relationships, cross-selling and bundling is the priority. Then again, value-based care, the question you had, we'll continue to iterate on those, and I expect that to come in over the next couple of years. The other thing on cross-selling and bundling, and we have, we're really just starting this as well, is leveraging that case manager to ensure that we can properly have that case manager understand that we have all the services. That is really, we're at the beginning stages of that, and I expect that to happen and really get some traction on that probably the latter part of this year.

That will be a big part of our growth and efficiency and alignment with our customers into 2023.

Mike Petusky (Managing Director and Senior Investment Analyst)

Moving on to transportation. Any update on, in terms of, you know, contracts that are sort of out there but expected to be decided maybe over the next several months between now and the beginning of 2023 or any update on, you know, how much business there is out there that you think will be won or lost that you're in the hunt for over the next several months?

Heath Sampson (Interim CEO and CFO)

Yeah. I feel like a broken record on this over the last couple of quarters and 'cause we've been expecting large awards to happen these last couple of quarters, but unfortunately, they have not been awarded. We're in the process of working through some of those big ones. And there's a lot of information below that, how that's happening and what our expectations are. When those contracts are done and the final award is given, we will update. I do expect over the next couple months that some of these larger contracts, we'll be able to give you some more definitive information on whether or not we have won those new contracts or not.

The contracts that we have and are up for bid as well, those have also not been through the process either. Again, I feel really good about keeping those, but I also can't right now say that we're through that as well. Same story that I had last time. We're optimistic. We will win more than our fair share, retain more than our fair share. As those final decisions get made over the next number of months, we'll update you.

Mike Petusky (Managing Director and Senior Investment Analyst)

Last one, sort of sticking with transportation. You guys alluded to New Jersey, and I think possibly some other places where states have worked with you guys on sort of the inflation, labor wage challenges. I guess my question is, you know, across, you know, your book of business, I mean, are those conversations happening with every single customer? If they are, I mean, where do we stand on that? Like, are you getting the adjustments you need, or are we gonna be looking, you know, a year or two from now or maybe less than a year from now at sort of, you know, a bunch of contracts that really haven't been adjusted to reflect the cost that you're having to sort of absorb? Thanks.

Heath Sampson (Interim CEO and CFO)

Every single customer we're having those discussions on. To date, everyone that's changed, we've been getting the necessary increases. Contracts that over the last couple years that were not as profitable as they needed to be, they are now profitable. Some of the ones that were maybe more rich are now kinda less rich. Really, it's been consistent, and thanks to the, again, the great teams that we have here working with our customers and showing the data. We're well along that journey. Where are we? All the big ones and all the ones that have been finished. I expect that to continue. Every year we have something coming up, but the big ones and the majority of ones have been repriced over the last, call it eight to nine months.

Long story short, because of our performance, because of our relationships, because it's the right thing to do to make a 10% margin to ensure that we properly invest and pick people up on time, I'm confident that we'll be able to continue with those contract negotiations to ensure that those margins are maintained.

Mike Petusky (Managing Director and Senior Investment Analyst)

Very good. Thanks so much. Really nice quarter. Thanks.

Operator (participant)

We have reached the end of the question and answer session, and I'll now turn the call back over to Heath Sampson for closing remarks.

Heath Sampson (Interim CEO and CFO)

Well, thank you. I want to thank you all for participating in our call this morning and for your interest in our company. If you have any more questions or want to schedule any follow-up calls, please contact Kevin Ellich, our Head of Investor Relations. We look forward to speaking with many of you over the coming days, weeks, and months before we report our third quarter results here in November. Thanks to all of the team members, our customers, our clients, and thanks to all of you. Operator, this concludes our call.

Operator (participant)

Yes, this indeed concludes our conference, and you may disconnect your lines. Thank you for your participation.