ModivCare - Q3 2023

Transcript

Operator (participant)

Good morning, and welcome to Modivcare's Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the call over to Kevin Ellich, Head of Investor Relations. Mr. Ellich, you may begin.

Kevin Ellich (Head of Investor Relations)

Good morning, and thank you for joining Modivcare's Third Quarter 2023 Earnings Conference Call and Webcast. Joining me today is Heath Sampson, Modivcare's President and Chief Executive Officer, and Barbara Gutierrez, Modivcare's Chief Financial Officer. Before we get started, I wanna 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 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. Barbara Gutierrez will review our financial results, then we'll open the call for questions. With that, I'll turn the call over to Heath.

Heath Sampson (President and CEO)

Good morning, everyone, and thank you, Kevin. I'm proud of our commitment to deliver high-quality supportive care to our 34 million members. This quarter, we were able to show significant improvement in many areas, which resulted in strong third quarter results. We generated robust free cash flow of approximately $45 million. Our NEMT, or mobility-adjusted EBITDA margin, sequentially improved by 150 basis points to 7.3%. Additionally, we delivered on our commitment and paid down $43.5 million on our revolving credit facility, lowering our bank-defined net leverage ratio to 4.6x. It's been a year since I took the permanent reins, and the journey has been enlightening. Our strong performance are a direct result from the enhancements and progress we've made across numerous parts of our business.

Recognizing the near-term challenges we face, which may have been more pronounced than initially perceived, addressing them demanded targeted investments and bold, decisive actions. While these actions caused some short-term headwinds, particularly in Q1 and Q2 cash flow margins, they were undeniably the right choices, essential in positioning us for a promising future. As we navigated this transformative year, our course has been guided by four strategic pillars: people, operational excellence, growth, and innovation. Now, let's dive into a few of these achievements within these pillars. In regards to people, we've rebuilt the organization and have been laser-focused on optimizing talent, aligning our teammates with our vision and values. During the quarter, we welcomed two new members to our executive leadership team, Enrique Toledo, as our new Chief People Officer, and Barb Gutierrez as our new Chief Financial Officer.

I couldn't be more excited to partner with them and all the new leaders we have that have joined Modivcare over the last year or so. Through disciplined financial management, a structured accountability framework, and streamlined process management, we have significantly advanced towards operational excellence, which has enabled us to address challenges, including the repayment of contracts payable in our mobility business, reducing our leverage this quarter, and laying the groundwork to improve the flexibility of our capital structure. We are dedicated to developing scalable operations fortified by automation and AI technologies. Such initiatives are important to enhancing operational efficiency, elevating service quality, expanding our revenue model, and ensuring long-term margin stability. With respect to growth, we've broadened and strengthened our customer base with new and existing relationships.

In the area of innovation, we've modernized across all pillars and enhanced our data and analytics capabilities, investing in platform technology and people to bridge supportive care to clinical care, particularly as the U.S. healthcare system accelerates to more value-based payments. Our distinct advantage lies in the fact that we have more frequent access to our customer members, more than maybe they themselves do. Through the provision of supportive care services that assist members in managing their daily lives, we foster genuine connections with them and build trust. This established trust subsequently empowers us to engage and intervene on behalf of our customers. We now have earned the right to do more for their members because we now deliver exceptional service. Now, let's provide some segment highlights for the third quarter.

Starting with mobility. This segment has been transformed through three main initiatives: multimodal trip assignment, omni-channel member engagement, and customer integration. These initiatives are the drivers of our $30 million-$50 million cost savings, targeted over the next 12 months. Drilling down on each initiative, starting with multimodal trip assignment. We've deployed sophisticated automation and AI algorithms to an array of transportation modalities that best fit our members' needs.

Whether it's through our network of providers offering everything from standard sedans to wheelchair-accessible vehicles, to advanced or basic life support, or through our TNC or rideshare partnerships, or even mass transit and mileage reimbursement, we ensure that our members receive the right service, at the right time, at the optimal cost. Next is our omni-channel member engagement, which is more customer-oriented and focused on reaching our members where they are, whether it's through the phone, the internet, mobile apps, IVA, IVR, text messaging, or even automated chatbots.

By providing flexible points of engagement, we're not only enhancing member satisfaction, but also reducing operational costs. Lastly, customer integration is crucial, enhancing both our operational efficiency and customer relationships. We've introduced real-time eligibility and insights directly into our customers' digital platforms. Furthermore, we aim to merge our technology into our customers' call centers, allowing them a closer management of member experience and concurrently reducing our operational costs. The financial impact of our mobility operational excellence initiatives is primarily reflected in our payroll and other expense per trip metric, which decreased 1.5% quarter-over-quarter and drove $1 million of cost savings during the quarter.

Keep in mind, some of our mobility initiatives were implemented mid to late quarter, and on a run rate basis, our cost savings would have been more like $2 million-$3 million had they been operationalized for the full quarter. Other initiatives, specifically our multimodal strategy, will reduce purchase service expense per trip, which is an important metric for our full risk contracts and honoring our commitments to all our customers. Moving to Medicaid redetermination, which is unfolding as expected and tracking in line with our internal projections, as further corroborated by external sources such as Kaiser and CMS. Our shared risk contracts are operating effectively and as intended, safeguarding our gross margins against the backdrop of increasing utilization and costs. The challenges brought about by Medicaid redetermination notwithstanding, our margins consistently match our forecast. This instills confidence in the accuracy of our internal redetermination model.

As it stands, we are going to be in line with our 2023 expectations for redetermination, as well as our expectations for 2024, which we expect to be a $20 million-$40 million impact. This impact will be mitigated by our $30 million-$50 million cost saving initiative over the next 12 months, plus our sales growth. Over the past year, as we frequently pointed out, our mobility revenue has been grossed up by pass-through trip volume and costs. This trend has become increasingly evident as healthcare utilization returns to an expected and normalized level. Although this may make a challenge to understand our percent margins within this pass-through revenue, our shared risk contracts with our customers are protecting the downside to our cash flow, creating a win-win situation for us and our customers.

Again, from a revenue perspective, our primary focus is growing our sales pipeline. We're optimistic about realizing the benefits from new wins this year and next year. For example, we continue to add wins. This quarter, we won new mobility MCO business with a total contract value of $138 million, most of which will start in 2024. We also renewed and were awarded additional regions in our state mobility business, and we received an extension on another sizable state contract. Our pipeline is strong and continues to grow. Now to personal care. Our revenue is healthy and growing in mid-single digits. Personal care hours continue to trend in the right direction, and we expect three to five percent hours growth for the year.

The personal care reimbursement environment remains good as we received rate increases in several states that correspond with the higher wages for caregivers. Our margins are stable and as expected. As noted earlier, we expect operating expenses to decrease as we complete centralizing, standardizing, and automating in 2024, which will enable us to maintain our adjusted EBITDA margin targets of 10%-12%, while continuing to invest in growth. On the regulatory front within PCS, specifically CMS's proposed HCBS rule, we remain aligned with other industry stakeholders and expect the final rule could be issued during the first half of 2024, and then would be implemented over the next four years. Other than the 80/20 provision, we are generally supportive of the proposed rule. It is focused on quality and safety measures, increased transparency, and the rate-setting process.

We also believe the proposed rule could benefit companies like ours that have professionalized operations at scale with enterprise-level compliance programs. In the remote patient monitoring segment, revenue growth is solid and primarily driven by industry-leading referral sales, penetrating new Medicaid markets with personal emergency response, or PERS. Going beyond PERS, our monitoring and innovation teams are making meaningful strides in exceeding our customers' expectations by improving quality measures and increasing member satisfaction while reducing costs. Additionally, our sales team has taken advantage of these new capabilities, having closed 17 new programs this year, including six this quarter. Our customers find our services make a real difference beyond the services that we provide. We're not just sending emergency alerts to case managers. We're providing insight that improves patient care while driving down costs.

For example, a recent pilot study with a leading commercial payer showed that members who were integrated with our tech-enabled care center, anchored by our foundational supportive care services, experienced a remarkable 71% reduction in costs. This pertained to individuals with disabilities, the elderly, and those in need of long-term care services. Understandably, this customer is eager to expand with us to the next phase of the program. Digital risk assessments are another example of our innovative offerings. Unlike our customers, who struggle to proactively risk stratify their populations because of the challenges they face engaging their members, we can do it, and this is unique. These new value-added services on the shoulders of our trusted relationships and differentiate us from our competition. We'll share more about the financial aspects of these new services when we discuss our plans for 2024 early next year.

Next, a quick update on our equity investment in Matrix Medical, which holds significant value. Matrix has consistently performed well over the last few quarters, aligning with our monetization expectations for Adjusted EBITDA between $50 million-$100 million. We own 43.6% minority stake in Matrix, and we remain aligned with our partner on a timeline to a monetization. We look forward to unlocking its unrealized value as it also helps to fortify our balance sheet, further position, positioning us to capitalize on growth opportunities. Before handing the call over to Barb, I want to extend my deepest appreciation to the entire Modivcare team for their relentless dedication and effort. The past year presented a number of changes, each with a set of challenges, yet the team has undeniably fortified our foundation.

Our robust third quarter results not only underscores the financial resilience of our platform, but also highlights the substantial cash flow generation of our business. This, in turn, aids in our deleveraging, so we can focus on growth and driving long-term shareholder value. Now, I'd like to pass the call to our CFO, Barb Gutierrez, who will provide an overview of our financial performance for the third quarter. Barb?

Barbara Gutierrez (CFO)

Thank you, Heath, and good morning, everyone. Before I provide the third quarter financial review, I'd like to say that I'm thrilled to be here and very excited for the future of Modivcare. As Heath mentioned in his remarks, our quarter was highlighted by strong free cash flow of $45 million. NEMT Adjusted EBITDA margins improved by about 150 basis points sequentially to 7.3%, as repayment of $43.5 million on our revolver, which reduced our bank-defined net leverage ratio to 4.6x. Third quarter 2023 revenue increased six percent year-over-year to $687 million, driven by approximately six percent growth in our mobility segment, six percent growth in our personal care segment, and five percent growth in remote patient monitoring. Net loss was approximately $4 million.

However, adjusted net income was $20 million, or $1.44 per diluted share. Adjusted EBITDA in the third quarter was $51 million. G&A expense was lower on a year-over-year and sequential basis due to leverage created from our restructuring efforts, net of strategic reinvestments made in innovation and growth activities. We will continue to balance our opportunities to drive efficiencies and leverage in our cost structure while promoting and generating growth. NEMT third quarter revenue of $486 million was driven by a 10% increase in paid trips, partially offset by a four percent decrease in revenue per trip. The decrease in revenue per trip was attributed to three percent lower purchased services expense per trip, which flows through to revenue in our shared risk contracts.

Total membership decreased 6.6% year-over-year to 33.7 million members. On a sequential basis, average monthly members during the quarter decreased two percent, driven primarily by the impact from Medicaid redetermination, which was in line with our expectations. Sequentially, NEMT gross margin increased 80 basis points as transportation costs per trip decreased five percent sequentially to $41.21, while payroll and other costs per trip decreased 1.5% to $7.30, driven by our strategic initiatives to improve unit costs through our multimodal delivery strategy and our omni-channel communication strategy, respectively. Paid trip volume in the third quarter increased one percent sequentially, and monthly utilization per member increased to 8.7%, compared to 8.5% in the second quarter, which was in line with our expectations.

As a result of our strategic initiatives, NEMT Adjusted EBITDA for the third quarter was $35 million, or 7.3% of revenue, which was a 150 basis point sequential improvement from 5.8% in the second quarter. The improvement was driven by a $4 million reduction in adjusted G&A, as well as improved gross profit per trip. During the quarter, Medicaid redetermination reduced our Medicaid membership by approximately 1 million members, bringing our Medicaid membership to approximately 27 million members. Since April 1st, redetermination has adversely impacted our Medicaid membership by about five percent and is tracking in line with our original target of a 10%-15% growth impact on membership. Redetermination impacted Adjusted EBITDA by approximately $3 million in the third quarter, and the effect was all within our full risk contracts.

The impact was in line with our expectations for the quarter and our full year expectations. We continue to expect the impact of redetermination for the second half of 2023 to be $5 million-$10 million, which is reflected in our guidance. We also continue to expect a $20 million-$40 million Adjusted EBITDA impact from redetermination in 2024. It's important to remember that we are materially protected from redetermination on our Shared Risk contracts, which account for 65% of our NEMT revenue. Even though we'll lose some Medicaid members in Shared Risk contracts, we will receive a corresponding increase in revenue PMPM on the remaining Medicaid members, resulting from higher utilization because of the construct of these contracts, thereby protecting our gross margin dollars on the majority of the NEMT business.

Our risk or exposure to redetermination is primarily on the members we lose in full risk contracts, which account for approximately 20% of our NEMT revenue. Turning to our home division, third quarter personal care services, or PCS, revenue increased six percent year-over-year to $180 million, driven by a two percent growth in hours and a four percent increase in revenue per hour. Third quarter PCS Adjusted EBITDA was approximately $18 million, or 9.8% of revenue, which is in line with our commentary from last quarter, and at the lower end of our long-term expected range of 10%-12%. In our remote patient monitoring, or RPM segment, revenue increased five percent year-over-year to approximately $20 million, driven by new referral sales and business wins.

While year-over-year growth this quarter was lower than prior quarters, we expect growth to rebound going forward and still expect full year revenue growth in our long-term range in the mid-teens. Third quarter RPM Adjusted EBITDA was $7.2 million, or a 36% margin. We continue to expect long-term RPM Adjusted EBITDA margins will be in the mid-30% range. Our monitoring business is performing well, and 2023 is proving to be one of its most productive years for winning new deals, referrals, growth, and adding strategic programs with customers. Turning to our cash flow and balance sheet, during the third quarter, we generated strong free cash flow of $45 million, driven by cash flow from operations of $53 million, less capital expenditures of $9 million, which was 1.3% of revenue.

Positive operating cash flow was driven by lower working capital needs, as contract payables was a source of $24 million, and contract receivables was a use of $9 million, for a net benefit of $15 million. Now that contract payables and receivables are at more normalized levels, going forward, we believe the net balance of payables and receivables could be ±$20 million-$30 million annually in either direction, based on our contracts and timing of payments and settlements. During the third quarter, we repaid $43.5 million on our revolving credit facility, ending the quarter with a balance of $83 million as of September 30th, 2023. Our $1 billion of long-term senior unsecured debt was flat sequentially and at fixed rates, with a weighted average cost of long-term debt at 5.4%.

In the fourth quarter, we have semiannual interest payments of approximately $30 million, which means our free cash flow is expected to be nearly flat after these payments. This still puts us on track to achieve our second half of 2023 target of repaying $30 million-$50 million on our revolver. Our bank-defined net leverage ratio declined sequentially to 4.6x as of September 30th, 2023, compared to 4.7x in the second quarter. Our primary use of free cash flow going forward will be to pay down on our revolver and delever as we remain committed to a disciplined capital allocation strategy. There's an updated cash flow bridge in our quarterly investor presentation on our IR website, which illustrates cash flow for each quarter. Frequently, we are asked about the refinancing plan for our 2025 unsecured senior notes.

As a reminder, the interest rate on these notes is 5% and 7%, 8%, and the bonds mature in November 2025. We are diligently assessing options based on deep market insights and actively monitoring market trends to determine the optimal time to refinance, with the goal of maintaining the maximum flexibility in our capital structure. Turning to our 2023 guidance, we are maintaining our guidance for revenue in a range of $2.75 billion-$2.8 billion and Adjusted EBITDA in a range of $200 million-$210 million. However, we currently expect full year revenue to be near the low end of our guidance range due to lower revenue passthroughs in mobility as a result of lower than expected purchase services expense per trip.

In summary, we are extremely encouraged by the financial results and significant cash generated in the third quarter. We continue to make progress on our strategic initiatives, and the results are showing up in our operating metrics, which all trended in the right direction this quarter. We still have more work to do, but it's great to see the progress and the momentum. I'd like to thank Heath and the team for welcoming me, and once again, I'm thrilled to be here. I know it's all our team members, from our caregivers and drivers in the field, to all of our support functions, that make our company succeed and provide high quality service and care to our 34 million members. I want to express a heartfelt thank you to all of our team members for their passion and commitment.

I also look forward to speaking with and meeting many of you on this call over the next several months. This concludes our prepared remarks. Operator, please open the call for questions.

Operator (participant)

Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in a 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. One moment while we pull for our first question. Our first question comes from Pito Chickering with Deutsche Bank. Please proceed.

Pito Chickering (Healthcare Facilities and Medical Devices Analyst)

Hey, good morning, guys, and thanks for taking my questions. On NEMT, you talked about this in the script, but if you can circle back, looking at our Q2-Q3, revenues were a bit softer, due to, you know, the revenue per trip, and the utilization ticked up from 8.5%-8.7%. You had lower G&A and also lower service expense per trip. Just trying to understand how, you know, the utilization goes up sequentially, but service expense per trip goes down. How sustainable are these G&A levels and service per trip, and how much of these savings are from G&A, you know, from automation or, you know, getting better costs from drivers?

Heath Sampson (President and CEO)

Yes. Hey, good morning, Peter. Yeah, so first, on the revenue side, as you know, from an NEMT perspective, the big discussions that we've been having for the last quarter, and this continues as well, it all kind of relates to our pass-through revenue, you know, our shared risk contracts and those. So that's the main driver for the revenue being lighter, is the nature of our shared risk contracts and not as much pass-through as prior quarters. So again, contracts working as can be, which is why we automatically go to what does that mean to the bottom line for us, really, which is the EBITDA and the margin improvement you're seeing. So you see strong EBITDA dollars and also margin recovery.

A lot of that is the phenomenon that I talked about with revenue being a little bit lower, but it's also the initiatives that are starting to take hold, whether that's in service expense or G&A. So we're getting leverage, we're seeing automation, and it's starting. So it's strong margins improvement. We've got a ways to go still, but we're on the right track, and we're performing as expected.

Pito Chickering (Healthcare Facilities and Medical Devices Analyst)

Okay, just to be clear, so these margins are the right ones and models for in the near term for NEMT?

Heath Sampson (President and CEO)

Yeah, it's the right way to think about it, then continue to improve. This one was a little bit higher because of the revenue being a little bit lower, but we're making progress, and we expect the margins to continue to tick up each quarter as we get into 2024 and exit 2024.

Pito Chickering (Healthcare Facilities and Medical Devices Analyst)

Okay, and then on cash flow, like you talked about, payables and receivables are at these normal levels, investor $20 million-$30 million swing annually. Because looking specifically at DSOs, they're down significantly to about 26.8 days, which is the lowest I actually have in my model. Is this the run rate going forward or anything, so one times in the collection process? And then do you have any cash flow guidance we should be thinking about for fourth quarter? Thanks so much.

Heath Sampson (President and CEO)

Yeah. So the DSO is sometimes hard to calculate because of the capitated nature of our contract, so you're looking at it right. But the way I would talk about DSO is from our receivables within or around six to nine months payment terms, and our payables are around nine to 12 months payment terms, and those are big contracts.

So sometimes you see it being a little bit lumpy each quarter because of those payment terms. But unlike in the past, where we had a lot of payables because of COVID, now they're at a more matching level. So we expect that the swings won't be as large, and the swings that we have now are right in line with our expectations. And I would expect to see those each quarter be more normalized, but still, you know, have some swings each quarter, whether that's positive or negative, from a net perspective on receivables and payables. And then to do with the cash flow, consistent with what we said last quarter, we gave a second half year guidance of $30 million-$50 million. And why we gave a second half year is because, one, we're generating cash, as you see.

We expect to continue that fourth quarter and beyond. But in the fourth quarter, we also have our, twice-a-year interest payment of about $30 million as well. So obviously, with being 45 million of cash generation now, we feel really good about us hitting our target between $30 million and $50 million, for the, for the end of the year as well.

Pito Chickering (Healthcare Facilities and Medical Devices Analyst)

Great. Thanks so much. Nice quarter.

Heath Sampson (President and CEO)

Thank you.

Operator (participant)

Our next question comes from Bob Labick with CJS Securities. Please proceed.

Bob Labick (President)

Good morning. Congratulations on a strong quarter, and welcome to Barb, and looking forward to working with you.

Barbara Gutierrez (CFO)

Thank you. Same. Looking forward to working with you.

Bob Labick (President)

Great. So I wanted to start, you gave us a ton of good information. You talked about redetermination, and you talked about some additional contract wins. Can you give us a sense of kind of member numbers over the next six to 12 months and how it plays out? And maybe more so just listening to your script, too, discuss it a little bit in the context of full risk member number, you know, changes as we play out. You know, your wins come in, redetermination goes out. Just to kinda give us a sense of your visibility and what we should expect over six to 12 months.

Heath Sampson (President and CEO)

Yeah. So, from a win perspective, again, we couldn't be more proud of the team that we have in place, whether that's in people that have been hired to do hunting, whether that's account management that is growing, whether that's marketing, whether that's products. So our entire new go-to-market strategy is taking hold and resonating, and we are winning, and we're getting lots of attention in the market. So we're giving these kinda guidance, not guidance, we're giving results every quarter around kinda contract TCV or total contract value. Why we're doing that is it's been successful, and then in addition, it's more than one year. So we're gonna—you're gonna start seeing the stacking of our revenue coming in.

As we know, it's still a long sales cycle, and a lot of these wins that we've recently had, a lot of it's gonna come on in 2024 or mid-2024. So we're still kind of recovering on how we're gonna flow through the revenue line, but we feel really good. So, the right way to think about the membership is kind of the contracts we're winning are not any different from a pricing perspective or volume perspective of what we had in the past. So you just take the revenue, and you divide it by the numbers of members. So we haven't guided to the membership increase, but we're winning more than we're than what's coming out the door, and we feel really good about the revenue side of things.

And then that's a really important driver for us to continue to get scale on our expenses and on in our G&A, and you're seeing that now, and that will continue into 2024. But the other item within redetermination that needs to happen and is happening is to modernize and automate our platform within NEMT. And that's happening, and we started to give some metrics and guidance around that. And that will—that coupled with revenue, we feel really good about managing our redetermination. We reconfirmed what redetermination is. We feel really good about it. We were right on in predicting what is happening in 2023. This gives us more conviction on what's happening in 2024 as well. So, anything else, Barb, would you add?

Barbara Gutierrez (CFO)

Yeah. The only thing we did mention that we do think overall, the impact on our membership will be in that 10%-15% range, in terms of membership from redetermination.

Heath Sampson (President and CEO)

Yeah.

Bob Labick (President)

Got it. Okay, great. And then just, you kind of alluded to this a little bit, but maybe discussing the, you know, the actions that you're taking in order to drive the $30 million-$50 million in savings. I think you, you know, bucketed maybe multimodal, omni-channel membership and the digital customer integration, if I'm on the right slide.

Heath Sampson (President and CEO)

Yeah.

Bob Labick (President)

Can you give us a sense of, kind of order of magnitude, which are the like, not, not exact dollars, but the most money-

Heath Sampson (President and CEO)

Yeah

Bob Labick (President)

- is coming from multimodal or, you know, which is highest and which is lowest in terms of those savings, and-

Heath Sampson (President and CEO)

Yeah

Bob Labick (President)

-how hard they are to get them?

Heath Sampson (President and CEO)

Yeah. So, so omni-channel member engagement, so that's how we engage with our members, whether that's on the phone or via technology. That's probably 50%+ of the cost savings. The multimodal is probably another 20%-25%, and then the delta is in that kind of digital customer integration side. So all those, specifically the first two, the omni-channel and the multimodal, are initiatives that are starting, some further along than others, but we have a really strong plan. We're making a lot of progress, specifically in the automation of our in the omni-channel side. We have our apps up and running. It's one of the top apps within Apple App Store and within... What's the other one?

Bob Labick (President)

Google.

Heath Sampson (President and CEO)

Google. Yeah, so we're really doing well. Text is improving, IVR, IVA. We had a message that went out a couple of weeks ago about us moving to Genesys. That coupled with bots. So we're really happy about our omni-channel approach as well as multimodal. And multimodal, for us, has been a long strategy for us, and it's a strategic shift, ensuring that we are moving to partners within the transportation providers, so we're really narrowing the network and giving volume. Uber and Lyft are partners of ours, and we're integrated more with them. So you just go across the board. There's numerous initiatives under each of these. So yes, lots of execution. Hard is just work to us, and we feel really good about getting that $30 million-$50 million within next year.

Even more so, if you look at the cost base, which is made up of manual people right now, we feel really good about the 60-80 in total. And the last one on digital, and this is—this does get cost out, but it also is really high on customer satisfaction. And that's where we are integrating and providing data to our customers so they can properly manage the member experience and even start changing outcomes. So all three of these are getting cost out. All three of these are having higher member satisfaction and higher customer satisfaction, and couldn't be more excited about the team we got in place. And we will keep updating you every quarter on these metrics, these per-trip metrics that really show that we're making progress.

Bob Labick (President)

Super. Thanks so much.

Operator (participant)

Thank you. Our next question comes from Brian Tanquilut with Jefferies. Please proceed.

Taji Phillips (Equity Research Senior Associate)

Good morning. You've got Taji on for Brian. Thank you for taking my question, and Barb, we look forward to working with you.

Barbara Gutierrez (CFO)

Thank you.

Taji Phillips (Equity Research Senior Associate)

So to start off, maybe, Heath, I'll send the first question to you. We know the company has gone through a lot of change since you took over. So maybe can you talk about your strategy for the next few years, and what are the risks and other opportunities you see over the next one to two years? And also, you know, I guess, how the value-based strategy fits within that.

Heath Sampson (President and CEO)

Yeah, yeah. No, I appreciate that. Probably the teammates that are listening to this, they're listening to the recording, they're going to be, "Yeah, there has been a lot of change." So, all thanks to them. So you go across the board, if you think about what's happened from a people perspective, right? Barb sitting here and everybody else that's joined the team. And even below that, there's been a shift to new competencies within the people side. And this, there's a couple that I really want to point out. We've really got a product capability, people that understand the life cycle and true future of where these services are going. We've added a lot of people there, development, technology people, and then, of course, innovation and then salespeople.

So there's been a reallocation and rehiring of people that complement what we do every day in the field. So a lot of change and a lot of opportunity there. Process across the board, heavy discipline, daily, weekly, monthly from a process perspective and metric scale, all the way from company-wide ERP to platform, standard platforms across personal care, that's happened. And then even below that, how are we adding value with forecasting analytics, using AI to help us really change outcomes? So it's been across the board. Now that we have those components in place, it's really just bringing that together and scaling that even more. And that's a big part of next year, is to finalize this new approach, and ensure that we have the best service for each of our point solutions at the lowest cost.

If we just finish that, which is our plan, and a lot of the questions that came before are around that, and then when we start bringing these services together, and then also with the services that we have right now, and this gets to the, this gets to the kind of the broader strategy. You hear a lot of people talk about value-based care, and this is where I want to spend a little bit of time. Value-based care to us, our customers, whether that's a payer or whether that's somebody that the payer has offloaded risk to, so some other risk-bearing entity, those are the people that take risk. They are our customers, but here's what they value with us.

Because we do these services, whether that's a device in the home, whether we have a person in the home doing personal care, whether that is somebody that's driving, or whether that's somebody that's connecting via our contact centers, we have access that they don't have. But now, because of our competencies around process and specifically around tech enablement, we can, we can start tracking a member longitudinally, and you put some clinical support behind that, we can actually start giving data and helping our customers change outcomes, have higher satisfaction. As you know, CMS or states high expectations on ensuring that happens. So what does that do for us? It is just a trampoline or a further acceleration on selling our point solutions and being sticky. And then on top of that, creating additional revenue sources.

We're getting paid and sharing in those risk-bearing entities. So that our strategy is meeting where healthcare is going. Growth in people that are getting older, people that are sicker, and of course, the challenges on cost. So it just marries well with where our company is, where the market's going, and that's we're really excited about continuing to do that each year and year.

Taji Phillips (Equity Research Senior Associate)

Great, really appreciate that. And then just one follow-up. I know that we've kind of talked about the margins pretty extensively. So, you know, shifting to cash generation, obviously, this quarter posted a solid result. So as we look post 2023, you know, can you just talk about what gives you confidence in your ability to sustainably deliver, free cash flow, positive free cash flow?

Heath Sampson (President and CEO)

Mm-hmm. Yeah. So, if you look at our individual businesses, and I know these last couple of quarters, specifically in the mobility business, we needed to get past some of the COVID imbalance between payables and receivables, and we're through that, and you see it. It's showing up in Q3, and we expect that to continue. In the personal care and monitoring side, very strong margins right now. Those margins, though, on the personal care side, we're on the low end. I expect those to continue to get stronger as we finish our centralization, standardization, automation. So, that business, very strong, rigid margin. It's all about growth there. And then that's where I'm going with the strategy that I talked about earlier, married with our new go-to-market strategy. Those margins strong, how do we grow there?

So really, the item that all of you are looking at and that we should continue to pay attention going forward, it's the mobility or NEMT margins. So the good thing for us, because of all the work we've done over the last 18 months, two years, we have these contracts where we have a win-win with our customers. So this kinda downside risk on margins going, what they were prior to COVID are really low. We've kind of protected that side. Okay, now, how do we get back? How do we get back to stronger margins? And that's with these efforts that we're doing now, and they're starting to take hold. And you will start seeing now and through 2024, that we will be moving up and gaining margin improvement as we exit 2024.

We'll probably be on the low end of our margin guidance, which was the nine to 12% that we've given. But again, if you look at, and this is also the questions we had before, and you go to that slide that has optimizing our cost structure, that's kind of assuming middle-of-the-road cost savings for 2024. We continue to execute on this, which we should, that'll allow us to really have rigid and strong margins in NEMT. And then you put that all together, we're gonna continue to get scale as we grow from a revenue line perspective. And so again, I feel really, really good about what we've done. It's working, and margins will be strong.

So then we get to as we exit kind of 2024, we'll get back to that strong kind of $100+ million run rate cash flow just on our core businesses. So again, we have work to do, but generating cash now, we'll generate cash in 2024, and it will continue to grow as we exit 2024.

Taji Phillips (Equity Research Senior Associate)

Thank you.

Operator (participant)

Our next question comes from Scott Fidel with Stephens. Please proceed.

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

Hi, thanks. Good morning, everyone. Wanted to start just around the service expense per trip metric and some of the sort of savings that you're now providing to us in the deck. In the third quarter, that metric was at just around $48.50, which was down around four percent sequentially. Interested if you can share with us, if you do have a sort of point projection on how we should be thinking about that metric in the fourth quarter.

You know, then as we think about sort of ultimately landing back into that nine to 12% long-term target margin for NEMT, you know, where do you think you need to take that $48.50 to sort of let's, let's say, you know, sort of get back within that range?

Heath Sampson (President and CEO)

Yeah. Well, the per trip metric is the right metric because it normalizes. It will show the execution of our initiative. So the per trip, whether that's purchase services, which is what you were talking about there, or whether that is kind of the payroll and other line per trip. And we in the queue, you can see that in our notes where we break out purchase services and payroll and other, and then also in our supplemental information, you see that. So it's the right metrics to track. Starting with the payroll and other metric, and why I'm starting with that, that's where the majority of the cost is gonna come out with our omni-channel, multimodal, and digital engagement. That's where we're manual and doing normal automation is gonna get that up.

So tracking that metric and seeing the progress is probably the best way to look at that and ensure that we start getting our margins up. And as I said, and we said in our script, if you look at where we are on a run rate normalized perspective, that's about a $2 million-$3 million in this quarter, kind of per trip improvement. So really good progress and still early on. And the purchase services trip, that's also a good metric to track, but important to note, and this is why we always talk about our contracts being restructured. A lot of our shared savings is ensuring that we pass that through. So the cost increase and that purchase services per trip has been increasing over the last kind of 24 months and over the last 12 months.

It's stabilized and normalized, so I don't expect that to increase. One, because of where the labor market is and our model that we put in place on multimodal is really kind of stabilized that, and I expect that to continue to tick down. Not to the extent of the payroll and other, but it will continue to tick down. So expect a modest decrease kind of quarter-over-quarter. So I'd be really good about those are the metrics to track. I mean, sorry, both of them will continue to decline. The payroll and other will be more steep because that's where most of the cost is gonna be coming out.

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

Okay, perfect. And then just a follow-up question. So you've now, you know, sort of detailed a pretty extensive cataloging of the cost savings that you're sort of driving towards to optimize the cost structure in NEMT. Interested if you have sort of a similar type of framing that you're planning to give us for the home segment. You know, I know you've talked about, you know, a number of these initiatives underway as sort of one mode of care and the centralization, the automation going on in the home. Interested if that is sort of gonna be, you know, I guess, quantified for us in any type of cost savings, or is it more that, you know, you're pretty close to your margins at this point.

You're gonna have savings, you're gonna have investments, but there's not like this, you know, sort of explicit, cataloging of the cost savings to get to target margins in the same way that, you know, you need for NEMT?

Heath Sampson (President and CEO)

Yeah, yeah, not cataloging in the same manner, mainly, mainly because it's not as complicated from a standpoint of all the addition, automation that needs to happen. However, the centralization and standardization, primarily within personal care, but across all of home, is a big change from having these numerous offices across the Northeast that kind of did everything. So it's a big change, but relatively simple from a tracking perspective. And a big part of this year was really putting that start of the framework in place, the standard platforms, the pointing of the organization, some of the centralization. So we're really kind of halfway through that centralization, standardization, which is why we're still on the low end of our margin guidance there.

We'll start to see that tick up as we exit next year, and then we'll likely get to the high end of that 10%-12%, but I wouldn't expect that to get any more. Why? Because what we wanna do with these additional savings and leverage that we're gonna get is to reinvest back into that caregiver. That is where the value comes so we can outgrow the market. Right now, we're kind of growing in line with the market from a same store sales perspective.

I expect when we finish that and a lot of the investments that we're gonna make in the caregiver that is driven by Anne, who's been here for six months, Enrique, our new Chief People Officer, who has a lot of background in this, we'll start seeing that growth. So margins on the low end, centralization, standardization, will get us to the high end exiting next year, and then growth on that. Monitoring for us, strong margins, right? It's all about a growth perspective there. And for us, I really look forward to talking about this in 2024 and beyond. They're the tip of the spear for us getting paid differently, specifically sharing in that value-based care.

That's where we'll have strong growth, strong margins in that business, but really, more exciting is we'll start seeing different payments on different revenue models in 2024 and beyond.

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

Okay. All right, thank you.

Operator (participant)

Our next question comes from Brooks O'Neil with Lake Street Capital. Please proceed.

Brooks O'Neil (Senior Research Analyst)

Good morning, all, and welcome. Barb, nice to have you on the team there. I have a couple quick questions. I guess one of my recollections is that labor has historically been a bit of a constraint on your business, particularly on personal care. I see the unemployment rate ticked up a little bit this morning, but can you just give us an update on what you're seeing across your businesses from a labor availability, labor rate, et cetera, perspective?

Heath Sampson (President and CEO)

Yeah. So, inconsistent with the last couple quarters, and you cross the board just about in any industry and even in kind of healthcare and specifically, we're in that kind of hourly rate perspective, it's normalized. So it's, but it's still, it's still a struggle, right? That's, for us, is the number one challenge and opportunity for us is to hire caregivers, right? So I would say not a headwind from the market anymore, that it's accelerating, but it's, it's our number one thing. And this, this gets back to how do we overcome that? Because we're doing fine, and we're growing in line with the market.

It really is finishing, and I know I'm repeating myself, but when we take away all the activity that's unnecessary, whether that's centralizing revenue cycle management, whether that's centralizing intake, you can just go across the board, then you free up the local offices to just hire and retain and service that member or customer. And that's where we're really gonna see us being able to recruit faster and retain better. So it's solid growth, solid margins rigid. When we finish this off, we'll start growing above that in 2024 and beyond. Great. And, you know, one more thing on that. The thing for us, and this gets back to the value of personal care and how important it is because of that access.

Customers, you go across the board, payers, risk-bearing entity, providers, are really interested in personal care because we have access to that member. So people that are doing what we're doing, professionalizing, centralizing, automating to ensure that we can get more out of that caregiver, therefore, paying more to that caregiver, it's just going to be on a flywheel. And I think the industry as a whole and us as a whole, are at the beginning stages of doing that. So I'm really bullish on that business and specifically combining it with our monitoring business.

Brooks O'Neil (Senior Research Analyst)

Yeah. As you said, with the trend towards value-based care, the opportunity for you there, it is immense. So it's great.

Heath Sampson (President and CEO)

Yeah. Yeah.

Brooks O'Neil (Senior Research Analyst)

Let me ask you one more. It strikes me that, you know, very strong cash flow this quarter, that's great. Maybe a little bit less in the fourth quarter, but I think probably a lot of investors focused on the balance sheet and the debt repayment. Strikes me, as it always has, that Matrix is an important hidden asset, or it's actually right out there in plain sight, but most people don't pay attention to it.

Heath Sampson (President and CEO)

Right.

Brooks O'Neil (Senior Research Analyst)

Could you give us any feel for, A, what you think that business might be worth to you in terms of cash to you on a sale or a restructuring, whatever?

Heath Sampson (President and CEO)

Yeah.

Brooks O'Neil (Senior Research Analyst)

And then secondly, what you think the timing might be?

Heath Sampson (President and CEO)

Yeah. Well, first, Brooks, you hit on, you hit on something really kind of around all the levers we have in our capital structure. One, we're generating cash. We're through the COVID payments off. You go to each business line, generating cash, low CapEx, which is why a big part of why we're doing that. We have a strong line. It gives us the flexibility for working capital fluctuations. We have our bonds, our fixed rate right now. So we have lots of good attributes within our capital structure platform. And then you go to the other item, which is what you're saying, is around our investment in Matrix. So first off, what the Matrix team has done over these last 12 months is tremendous.

I think part of the reason why some of the shareholders or maybe some of the analysts are maybe not paying attention to Matrix. I think prior to this new management team and this restructuring, we had a COVID bump, but the kind of core risk assessment or adjustment business wasn't performing. That's not the case anymore. It's performing very well. We're the second largest, and what the team has done and what is going to happen each month and each quarter on that is tremendous. So I feel really good about that business and thanks to the management team for what they're doing and the partnership with our partner there. So, the most important thing is they continue to perform, and we don't distract them with anything other than that.

So then what's it get to around, kind of monetization and value on that? So we gave a really broad range on EBITDA, and why we gave that, we want to make sure that the business can focus. It's not distracted by what I say publicly. We said $50 million-$100 million. And why we gave this a broad range? Because if we keep performing, it's going to continue to kick up, move up closer to that higher end. But it helps you then box in how would you value that. So we've done some. There's been a lot of work on that.

So you just take a multiple off of that and less the debt, and you can see that it's very significant cash flow to us, that would help us even further solidify our balance sheet. So whether that's pay down the loan, whether that's grow, whatever it may be. So the timing is going to be when the timing is going to be. Because they're performing so well and because it's an extremely valuable asset, the right way to think about it is 2024. So that's a-

Brooks O'Neil (Senior Research Analyst)

Very-

Heath Sampson (President and CEO)

I know, broad range, but that's, that's the right way to think about it.

Brooks O'Neil (Senior Research Analyst)

All right. That's very helpful. I appreciate it, and I'm excited about all you're doing.

Heath Sampson (President and CEO)

Yeah. Hey, thanks, Brooks.

Operator (participant)

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

Mike Petusky (Managing Director and Senior Research Analyst)

Hey, good morning. Let me just follow up real quick on Brooks' last question around Matrix. You know, I know you said, "Hey, look, when you're thinking about ultimate monetization, valuation of this one, think about $50 million-$100 million of EBITDA." Can you just talk about where they're likely to come in this year, in 2023? Do you have a ballpark, even if it's a range, of where they're likely to come in, in terms of EBITDA?

Heath Sampson (President and CEO)

Yeah. So right now we're in that range, right? So that's why we gave the broad range. And I don't mean to be, if we want to make sure that we do the right thing for the business, and if there is a sale process, I don't want to kind of front run anything. So it's right in that range.

Mike Petusky (Managing Director and Senior Research Analyst)

Okay. Okay.

Heath Sampson (President and CEO)

I would—like we do on just about everything, usually, people take the middle point of that range.

Mike Petusky (Managing Director and Senior Research Analyst)

Okay, fair, fair, fair enough. So, Heath, you know, you guys have a great slide in the deck, you know, sort of illustrating the progress on contract mix and, you know, in 2020, it was 60% full risk, and now it's 30% full risk. What might that look like if you sort of run it out another three years? I mean, could 30% turn into 15% or 20%? What would you, you know, I won't hold you to this, but, I mean, what's your best guess as to, you know, is there additional progress that can be made on that?

Heath Sampson (President and CEO)

Yeah. So in that slide, what we did, and I think it's a great slide as well. That's for our entire membership, and just a little bit more just to square it back to what we've said historically, it was if we took out the MA business, the Medicaid-only business would be in the kinda low-20s range from a perspective. And really, so I think what has happened over these last, you can see the trend, right? I don't see the mix changing that much going forward.

Mike Petusky (Managing Director and Senior Research Analyst)

Okay.

Heath Sampson (President and CEO)

Well, here, let me back up. I see the growth happening primarily on the MCO side, just in general. That's in line with the marketplace, in general. That being said, we still have the ability to win other, it's primarily state business that is that full risk, primarily, and we still have the opportunity to win more. So if we win more there, the percentage would stay the same. I think to your question, and then I'll continue on that, that mix is probably the same, and that's actually a good thing. So where we were in the past, some of we got out of whack because we didn't have the right win-win relationships or even the right contracts on the state side. I'm not concerned with this mix. These full risk contracts have strong margins.

They won't go to zero, right? As utilization increases, the margin ticks down a little bit, but that's in line with the guidance I've given. So they're working as we like them. I like the mix of them, and I like the full risk contracts with our states as well. So I would expect, and the right way to model it, it stays relatively the same going forward.

Mike Petusky (Managing Director and Senior Research Analyst)

Okay. And that's actually a good transition to my last question. So, you know, lots of concerns this earnings season around softening economy and just macro concerns all over the place. And I'm just curious if you guys have looked at, you know, the last time, like, there was any kind of meaningful recession, maybe 2008, 2009, sort of stands out to me. I mean, what does that do in terms of utilization, say, in transportation business? What does that do for the labor picture in personal care? And you know, if you have any thoughts on remote monitoring.

I mean, have you guys thought about, hey, if we have, you know, sort of, a rolling over the economy for two, three, four quarters in 2024, what that would mean for each of your businesses? Thanks.

Heath Sampson (President and CEO)

Yeah, you know, for, for us, for the population that we serve and the people that we hire, a recession is from a, from a P&L perspective, is helpful, right? Because typically when there's a recession, more people need help and service, so Medicaid will increase. When there's a recession, it's tighter on labor and the ability for us to hire caregivers and drivers improve. So we usually perform better, because we're helping the country out. So it's a, it's a tailwind as opposed to a headwind as we move into recession.

Mike Petusky (Managing Director and Senior Research Analyst)

What about just, and I could totally see that, but what about in terms of utilization of the transportation business? I would think that would go up in that sort of backdrop. Or, do you guys have sort of numbers on what it looked like the last time we went through something like that?

Heath Sampson (President and CEO)

Well, so the trip volume, so the usage of our services, are in line with the types of illnesses or issues or needs that people have. So those don't accelerate because you're in a recession. What would accelerate is you get more people on. So it's not a, it won't, there won't be a disconnect on utilization as you go into recession. The numbers of trips will go up because the members will go up.

Mike Petusky (Managing Director and Senior Research Analyst)

Gotcha. Okay. All right, fair enough. Hey, congrats on a, on a really nice quarter. Thanks.

Heath Sampson (President and CEO)

Yeah, thank you.

Operator (participant)

Thank you. At this time, I would like to turn the call back to Mr. Heath Sampson for closing remarks.

Heath Sampson (President and CEO)

Great. Thank you for participating in our call this morning and for your interest in Modivcare. Our updated investor presentation is posted on our IR website. If you want to schedule a follow-up call, please call Kevin, our Head of Investor Relations. We look forward to speaking to many of you over the coming days, weeks, months, before we report our fourth quarter results in February. Thanks again, and have a great day. Operator, this concludes our call.

Operator (participant)

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation, and have a great day.