Q3 2024 ModivCare Inc Earnings Call
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Good morning and welcome to MotiveCare's third quarter 2024 financial results conference call. At this time all participants are in a listen-only mode.
As a result of lower rates and higher costs, our MA NCO clients have exited several unprofitable geographies and reduced supplemental benefit spend on transportation and other supportive care services.
As a reminder, Medicare advantage accounts for about 15% of our any empty revenue and 25% of our RPM revenue.
We anticipate a shift of our MA mix two winners from losers as a result of potential changes we.
We are focusing on our sales and product strategy around these shifts listening to our clients and developing MA products in response to the expected shifts in the market.
In 2025, we do anticipate a contraction of our Medicare advantage business.
That's our clients' MA membership firm up this will be reflected in our 2025 budget with more details to follow on our next earnings call.
Consisting of net cash provided by operating activities of approximately $9 3 million and capital expenditures of $7 7 million.
We ended the quarter in a net contract receivables position of approximately $63 million.
Down from a net contract receivables position of $79 million at the end of Q2.
On a net basis contract receivables decreased by $55 million sequentially to $110 million, primarily due to successful collection of pricing resets and reconciliations during the quarter.
Net contract payables decreased by $40 million quarter over quarter to $47 million. This decrease was due to reconciliation and settlement on certain contracts that are expected in the third quarter.
Over the last several quarters, we have successfully renegotiated a number of our shared risk contracts to increase the upfront prepayment amounts and in some cases accelerate contract receivable settlements otherwise do in subsequent quarters.
As a result of the prepayment resets, we have been able to reduce our recent quarterly gross contract receivables build rate by 40% on a go forward basis and improve our upfront cash flow conversion.
In the third quarter, we collected $105 million of gross contract receivables, including $42 million from retrospective prepayment resets and $39 million from early settlements.
While we had a net inflow of $16 million from our contract receivables and payables other working capital fluctuations, including $25 million of debt refinancing costs led to a $45 million increase in our revolving credit facility, which had a balance of 228 million.
As of September 30th.
At the end of the third quarter, we proactively amended our credit agreement to increase the total net leverage ratio Covenant for September 30th 2024 to six five times from five to five times.
Reduced the minimum interest coverage ratio covenant to 2.0 times from two five times.
As of September 32024, we had approximately $1 $2 billion of debt and our bank defined net leverage ratio was five six times.
We are still in discussions with our bank group for a long term relief amendment to ensure continued compliance and will provide an update once complete.
We ended the third quarter was $48 million in cash as a reminder, we make our semi annual interest payment on our 2029 senior unsecured notes in the second and fourth quarters.
And the first interest payment on our new term loan facility was due on October one.
Which will be due at each quarter and going forward.
Turning to 2020 for guidance.
We anticipate continued contribution and growth from PCF and RPM as.
As well as our business development activities, which is expected to have a positive impact on membership and trip volume mix.
We will provide more details regarding our 2025 outlook when we report fourth quarter and full year 2024 results, which is our normal cadence for providing full year guidance.
In summary, our third quarter financial results were in line with our expectations. We were pleased with the significant collections of our contract receivables and continue efforts to work with our payers to tightened reconciliation periods on a go forward basis.
We continue to focus on maximizing value in each of our operating segments through gross and operating cost efficiencies.
In the near term we are concentrating on completing the long term amendment on our credit facility to provide us flexibility and runway as we work on our top priority to Delever our balance sheet.
I would like to thank all of our teammates across the organization for their hard work and dedication. Your efforts are greatly appreciated as we continue serving our members and clients.
Operator, please open the call for questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time again that star one if you have a question or comment please hold as we poll for questions.
And we will take our first question from Brian <unk> from Jefferies. Please go ahead Brian.
Hey, good morning, guys.
Hey, good morning question.
Good morning, the first question as I listened to your comments in prepared remarks on the fee for service shift seems to be part of the new strategy.
You can just talk to us about number one the why.
Reflective of the expectation that utilization will remain data and then two maybe just the margin implications and then three.
This is something that you expect.
<unk> plans to.
Agreed to as well.
To managed Medicaid.
Yes, I'll start from your last question so the state Medicaid.
Contracts.
We'll likely remain.
Full risk we're seeing that.
And so I don't I don't expect those two to move from where they are and again, we've seen our renewals in that space and those continue to be at the full risk.
<unk>, which is again 40 ish percent of our <unk>.
<unk>.
And then the the shared risk is definitely where you'll see the change and this is a change that we are supportive of pushing towards two.
To ensure that we can get paid on a monthly basis or quarterly basis, and if you. Just you just do the math on that cost of capital.
It makes a ton of sense to do that.
And then because there is there is price compression that happens on that.
So again that far outweighs the price compression that we're seeing.
In addition to the price compression.
<unk>.
The efficiency that we're gaining in the system and the model, especially when we have scale as a really competitive advantage to ensure that we can.
Compete on that price did not feel that the compression that happens so the math makes sense the model and the initiatives that we did.
Have acted on and continue to act on really gives us a competitive advantage. So.
But you will see the price compression happen again as expected and we want that because of the timing of cash flow.
Got it Okay, and then maybe since you mentioned cash flow.
Thank you for calling the Conference Center.
Please stay on the line. An attendant will be with you momentarily. Thank you.
I appreciate all the detail.
The moving pieces between AP NAR, but as I think about.
Back half.
Thank you for calling which conference will you be joining today?
Mid 2025, how should we mean thinking about cash.
And it's Aaron.
Cash position or net AR AP position, what would that look like and then what are you seeing in terms of new receivables coming in.
Okay, and you said Aram?
And then these contracts.
We're hearing some delayed.
So just curious what youre seeing there and what your expectations are.
And that's the company that's hosting the call.
Yes so.
Would it be more proud of the team and actually the partnership with all our clients out there to get through this.
Modib care. Modib care.
The health care industry, and specifically our clients that were we're managing on the shared risk side with redetermination, coupled with higher utilization the costs were higher than a lot of unexpected.
and your name with spelling please.
and Rachel Hiel.
And that was painful which is why these last couple of quarters we've been.
Last name?
Disclosing these items, but it's and that was 23 cycle as well as 24, because again most of these contracts fishing and weighted perspective are 12 months and then you have a quarter after that a reconciliation. So we're through that tough period, which is why we gave so much disclosure on how much we have.
Smith, S-M-I-T-H.
and your company please.
at its company, Aira.
AERA
Yes, A-I-E-R-E.
Collected and where we are but we still have the 24 contracts.
All right, one moment please, I'll place you into your call.
To roll off and that's why we've given that that's why.
Thank you.
Why we've given the information around mid 2025, why we have a lot of clarity around the timing and the amount is because we're through that but we do have to roll off these shared risk contracts through 2024 and that will take time through the middle of.
Thank you.
2025.
And a lot of those contracts as well in the middle part or early part of next year will be switched to that fee for service as well, but again, we got to roll off.
The remaining 2024 contracts that our shirts share growth.
To ensure that they are performing operating at scale.
Consistent cash flows because they they do all capex right.
And the transformation that we've gone is taking hold and you can go across the board to ensure that we have a long term.
Calm Music
Margin profile and consistent cash flows that come from each of these segments. So that's been a top priority for us and we.
Our deliberately talking about the three of them separately at.
At the same time, we are.
Are evaluating those individually to see if they makes sense to stay with us or they can be.
Monetized and sold so that dual path strategy preparing and doing is what we've been doing and we continue to do that.
And we will give more information when the time is right because.
We know and it is important that we delever the balance sheet, we know the cost that we have and the optionality to do that at the right time.
No where we are we know we are performing and we understand if there was a sale what's the best time and whats the best dollar amounts and we're prepared for all those scenarios and we understand it's accrual critical part of our strategy going forward.
To do has to do with matrix, saying.
Matrix has done a wonderful job over the last.
18 months to ensure they have a competitive advantage in their main advantages having these 2000 plus nurse practitioners that can do more in the home and catch the tailwind of where healthcare is going into the home. So we've made significant effort. The team has made significant progress to have competitive advantages to ensure that we.
And matched the nurse to the timing and the member taking the friction out of that system and they have done a lot of that.
So that timing on when we monetize that mainly to do with.
The MAA tailwind sorry headwinds that have been in the marketplace TBD, we're aligned with Frazier. The most important thing is to continue to execute in and we'll monetize when it makes the most sense.
Great and then following up on Brian's question around.
Moving mcgivney MTBC for service, you sort of talked about price compression as managed care payers.
Quicker payments in return for lower prices historically the PM TM model was your moat like how do you defend against these sort of managed care payers using other ride sharing apps. If you just move into fee for service and are you seeing other competitors willing to keep for the full risk model and is there.
Our risk for market share losses.
Yes, so the full risk model.
Primarily in the state business and those are large contracts. There really is only a couple of people now that can do that work.
Which is why you've seen the benefit of us continue to extend that so we feel really good about those and those are at full risk.
Contracts and there remain there which are at the appropriate risk adjusted margin, which is which is obviously higher.
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Speaker Change: That's why I have a lot of conviction around that in 2025, but it's not hitting our our financial statements. It will hit in 2025.
And then to your question around compression and Thats too I do expect that to be compression across the board, but again, it's the right thing to do.
And again, we're able to manage that because of the.
The quickness in getting the cash as well as the costs that were really competitively advantaged to win there and then the specific items that we talked about last quarter had to do with the surprise that a lot of our.
Payers had really in some of in 2023 and their 2024 contracts those are aware the price the lumpy price compressions has been given.
So.
And then for those specific comp.
Lumpy price compressions that we gave because those are isolated to the 2024 contracts that go forward is as I articulated.
Okay.
Speaker Change: Great. Thank you and any comments on the contract receivables payables.
Speaker Change: Yes so.
Speaker Change: Fully we give a lot of disclosure around this.
Speaker Change: We gave a lot of information around our collections and the timing of those collections, both on the receivable and payable side.
Speaker Change: So the right way it will be through majority of that kind of lumpiness in the mid part of 2025. So.
Speaker Change: Payables down.
Speaker Change: Var is down and the related collections and settlements on that as we move to fee for service as well.
Yeah.
Speaker Change: Okay. Thank you very much.
Thanks.
Thank you.
Speaker Change: We will go to Michael Pitofsky from Barrington Research. Please go ahead Michael.
Okay.
Michael Pitofsky: Alright, I just wanted to clarify.
What's going on here in terms of what.
Speaker Change: What you said the 30% cash flow conversion is that essentially what you are saying that.
Speaker Change: Likely in terms of EBITDA between now and mid two five is that what was being communicated or can you just clarify that.
Speaker Change: No it's post that post <unk>.
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Speaker Change: So getting back to the REIT conversion rate.
After midpoint of 2025 and okay understood.
Speaker Change: Yes, the fundamentals of our cost structure the fundamentals of each of our businesses, we feel great about it really is the timing.
Speaker Change: Of when we finish off the roll off of all of these contracts.
Speaker Change: That's the driver for the the continued need for capital.
Speaker Change: The underperforming businesses are doing everything we wanted to unexpected so we got to get through this contract roll off and we have clarity now in alignment with our customers. So we.
Speaker Change: We feel good about that.
Speaker Change: Okay, Great and then just sort of following up on that and then it seem to say you seem to say that.
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Speaker Change: Very good.
Improve over time I guess.
Speaker Change: Sort of what's the upside if we're looking at 26 27 and beyond I mean can you get to a 50% five zero cash flow conversion or can you just speak to where you think you can get to over alright.
Speaker Change: Yeah. So delever right then we can get to that point and that's why it's such a priority.
The.
Speaker Change: The businesses need to be competitively advantaged at scale and grow and we feel great about that.
Speaker Change: So that will continue to happen. So that's going to happen. So then really to get to that 50% amount we need to have less debt and thats. Why we are committed to that and thats why our dual strategy on ensuring that we can monetize one of these great assets to ensure that that happens is the top priority.
Speaker Change: Okay and then on.
Speaker Change: In terms of what you guys talked about Pennsylvania rate study I mean.
Speaker Change: To me, it's a state engaging at a rate study can be sounds like something that will take forever, but can you just comment on when you.
Speaker Change: Guests action potentially could be taken I mean could that be in place by 'twenty six.
Speaker Change: Yeah. So.
Speaker Change: We were explicit about that because we're seeing lots of.
Speaker Change: Growth in <unk>.
Speaker Change: In the Pennsylvania market and I do believe that the lower cost solution for Pennsylvania.
Speaker Change: Personal care services.
Speaker Change: So it makes a lot of sense for them to continue to grow that and that's us as well as the entire industry.
Speaker Change: We're educating Pennsylvania, you can see all around Pennsylvania that these other states are having rate increases because of that so im optimistic that Pennsylvania will do that.
Speaker Change: The industry as a whole is around that.
Speaker Change: Predicting the timing TBD.
Speaker Change: We're seeing engagement, we're seeing action.
Speaker Change: So we'll keep you up to date I do think it will happen.
Speaker Change: Not going to guess on when that actual quarter's going to be.
Speaker Change: Okay, and then just last quick question.
Speaker Change: The matrix update you gave obviously it sounds like you feel good about what you guys are seeing in terms of the fundamentals, but it does seem like in terms of timing for monetization because of you.
Speaker Change: While it's going on in Medicare advantage.
Speaker Change: That feels like it's been pushed out is I mean is that a fair characterization of versus your prior thoughts. Thanks.
Speaker Change: Yes, Sir.
Correct.
Alright. Thank you thanks guys.
Speaker Change: Thank you and we will take our next question from Rishi Parekh from Jpmorgan. Please go ahead.
Speaker Change: Thanks for taking my question there is a law.
Speaker Change: And thank you for the free cash flow conversion post second half, but I just want to go back to the EBITDA number that youre.
Speaker Change: Do you expect to be up 10% and I know you're going to give us more information of fiscal 'twenty five.
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Speaker Change: It's a tough time trying to.
Speaker Change: Paresh myself to that 10% growth I was hoping that you could help.
Speaker Change: You talked about fee for service, which we know are.
Speaker Change: And lower margins.
Speaker Change: There might be some offsets with new wins.
Speaker Change: Revenue growth potential in 2025 could be in the low single digits in the <unk>.
Speaker Change: Rest of it is going to come through cost savings does that how we're supposed to think of it or can you just at least help us bridge from where we are today or at least from your guidance to that 10% growth on the puts and takes between revenue and expenses.
Okay.
Yeah.
Speaker Change: The first item Youre right is the M&A market and the headwinds that we have around that in membership reduction that's going to happen in any empty and then.
Speaker Change: Membership reduction Thats also going to happen in the monitoring area. So that is the headwind, but when I get back to the fundamentals of each business.
Speaker Change: Because they are large at scale.
Speaker Change: The transformation that has happened ensures that we have the right peggings for the right cost structure across each of these and youre seeing that.
Speaker Change: And then and then the competitive advantages and leading indicators that show that we're going to have growth and operational efficiency.
Speaker Change: All of that I couldnt be more proud of the team and seeing that happen in the numbers.
Speaker Change: And that's going to be the underpinning.
Speaker Change: Ensuring that we have the right cost structure. So cost is going to be a continued component of that but it's the it's the right type of which is automation efficiency working on the right stuff at the right time, that's what's going to be the big driver for us and a lot of those.
Speaker Change: Those underpinnings of a put in place. So that's a big part of what we will see contribute to our our 10%. The other irons are continued growth right.
Speaker Change: The personal care and monitoring business stable recurring I feel really good about the personal care I really feel good about that with our new team there, but also our approach on business development, which hasnt been approach. So feel good about that any M. T. As well. This is why we were explicit in.
Speaker Change: The script and I have been talking about a lot for us to show this differentiation and to have high strong customer relationships.
Speaker Change: And in the Medicaid side Youre seeing continued wins continued growth I expect expense that happened there I am personally involved with our sales group on many of these customers and clients and we can show.
Speaker Change: The differentiation, where the challenges and that's where we're going to need to overcome so that 10% growth is based on.
Speaker Change: Continued growth in <unk>.
Speaker Change: Offsetting the challenges on MA continued growth both in the other segments and then the cost out, but again, the underpinnings of cost out or in place we need to continue to execute but we will and that's why we gave and reaffirm that 10% gross margin.
Okay.
Speaker Change: On the floor.
Yes.
Before you had a bullish.
Speaker Change: Renewals, which I think you said earlier that you renewed all of them.
Speaker Change: Assuming at least a year.
Speaker Change: Just to where we.
And what should we expect from an RFP standpoint, whether it's a percentage of.
Speaker Change: Brenda just states for any empty in 2025, I believe new Jersey's up for RFP.
Speaker Change: Timing is this all within the summer.
Speaker Change: And just yes.
And Perry.
Perry: On a forward basis and is that included in your 10%.
Speaker Change: Yes. It is included in our 10% we do expect on the state side within mobility.
Speaker Change: Rfps to come out with the normal cycle.
Speaker Change: And when those come out.
Speaker Change: We feel really good about our ability to continue to win announced as you know the state side, especially in the state side.
Speaker Change: Innovation is important high quality services important consistency is important so we feel good about our ability to windows and so even though they come out any type of move.
Speaker Change: If other than we expect this also next year that we will have.
Speaker Change: Net new opportunities in state wins, but even if we were to win one of those they're not going to come on in 'twenty five so in general think about any kind of action on the rfps within <unk>.
Speaker Change: 2025 any change.
Speaker Change: Would not be impacted into 2026, that's in general so that's.
Speaker Change: That's what happened on the state side and again on the Medicaid MTO side, I expect us to continue to win it.
Grow there and if I could.
Speaker Change: Squeeze one more in on the covenants I know you talked about it earlier.
Speaker Change: The timing more once we have audited financials.
Speaker Change: Going to wait until we actually have.
Speaker Change: Migrated over to fee for service before you spend and trying to figure out what the.
Speaker Change: No it's not.
Speaker Change: Actually the financials at all it really is us just ensuring that we have all the <unk>.
Speaker Change: Details and.
Speaker Change: Information around what our forecasts are and expectations are to get to that so that's we're in the middle of showing the proof around everything I just talked about today and ensuring we get a long term solution. This is not we just don't want to quarter solution. Our two quarter solution, we want a long term solution and we're just.
Speaker Change: In the middle of that planning process and sharing process.
Speaker Change: But it is not a requirement to get the audit done.
Speaker Change: Thank you.
Speaker Change: Thank you and that was our last question I'd like to turn the floor back to Mr. Heath Sampson for closing remarks.
Heath Sampson: Yes. Thank you for participating in our call. This morning and for your interest in mode of care. Our updated investor presentation is posted on our website. If you want a follow up call. Please contact 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 and full year 2000.
Speaker Change: 24 results in February of next year. Thank you again have a great day and operator this concludes our call.
Speaker Change: [music].