Good morning, and welcome to ModivCare's Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note this conference is being recorded. I would now turn the call over to Kevin Ellich, Head of Investor Relations. Mr. Ellich, you may begin..

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 want to remind everyone that during today's call, management will make forward-looking statements under the Private Securities Litigation Reform Act. These statements involve risks, uncertainties and other factors that may cause actual results or events to differ materially from expectations.

Information regarding these factors is contained in today's press release and in the company's filings with the SEC. We will also discuss non-GAAP financial measures to provide additional information to investors.

A definition of these non-GAAP financial measures and to the extent applicable, a reconciliation to their most directly comparable GAAP financial measures is included in our press release and Form 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..

multimodal trip assignment, omnichannel member engagement and customer integration. These initiatives are the drivers of our $30 million to $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 omnichannel 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 message or even automated chatbot.

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 platform.

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 to $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 to $40 million impact. This impact will be mitigated by our $30 million to $50 million cost-saving initiatives 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 health care utilization returns to an expected and normalized level.

Although this may make challenge to understand our percent margins within this pass-through revenue, our shared risk contracts with the 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 3% to 5% 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 target of 10% to 12%, while continuing to invest in growth.

On the regulatory front within PCS, specifically, CMS' 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 role.

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 driven primarily by industry-leading referral sales penetrating new Medicaid markets with Personal Emergency Response or PRS.

Going beyond PRS, our monitoring and innovation teams are making meaningful strides in exceeding our customers' expectations by improving quality measures and increasing member satisfaction, while reducing cost.

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 insights that improves patient care, while driving down costs. For example, a recent pilot study with a leading commercial payer showed that members who are integrated with our tech-enabled care center anchored by our foundational support of 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 offering.

Unlike our customers, who struggle to proactively risk stratify the population because of the challenges they face, engaging their members, we can do it and if 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 to $100 million. We own 43.6% minority stake in Matrix, and we remain aligned with our partner on a timeline to monetization.

We look forward to unlocking its unrealized value, as it also helps to fortify our balance sheet, further 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?.

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 6% year-over-year to $687 million driven by approximately 6% growth in our Mobility segment, 6% growth in our Personal Care segment and 5% 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 4% decrease in revenue per trip.

The decrease in revenue per trip was attributed to 3% lower purchase 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 2%, 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 cost per trip decreased 5% 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 cost through our multimodal delivery strategy and our omnichannel communication strategy, respectively.

Paid trip volume in the third quarter increased 1% 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 1, redetermination has adversely impacted our Medicaid membership by about 5% and is tracking in line with our original target of a 10% to 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 to $10 million, which is reflected in our guidance. We also continue to expect a $20 million to $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 6% year-over-year to $180 million, driven by a 2% growth in hours and a 4% 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% to 12%.

In our remote patient monitoring or RPM segment, revenue increased 5% 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 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 plus or minus $20 million to $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 30, 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 to $50 million on our revolver.

Our bank-defined net leverage ratio declined sequentially to 4.6x as of September 30, 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 of 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 to $2.8 billion and adjusted EBITDA in a range of $200 million to $210 million.

However, we currently expect full year revenue to be near the low end of our guidance range due to lower revenue pass-throughs in mobility as a result of lower-than-expected purchased 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 Instructions] Our first question comes from Pito Chickering with Deutsche Bank. Please proceed..

Good morning, guys. Thanks for taking my questions. On NEMT, you talked about this in the script, but if you can just go back, looking at sort of 2Q to 3Q, revenues were a bit softer due to the revenue per trip and the utilization ticked up 8.5%, 8.7%. You have lower G&A and also lower service expense per trip.

Just trying to understand how the utilization goes up sequentially, but service trip expense goes down. How sustainable are these G&A levels and service per trip? And how much of these savings are from G&A from automation or getting better costs and drivers..

Yes. Pito, so first, on the revenue side, as you - 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, 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, contract is working, 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 for 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 way to go still, but we're on the right track, and we're performing as expected..

Okay.

So just be clear, sort of these margins are the right ones to model in the near term for NEMT?.

Yes. 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..

Okay. And then on cash flow, you talked about payables and receivables for at these normal levels, and that's $20 million, $30 million swing annually. I guess, 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 right run rate going forward? Or anything is a onetime in the collection process. Do you have any cash flow guidance we should be thinking about for fourth quarter? Thanks so much..

Yes. So the DSO is sometimes hard to calculate because of the capitated nature of our contracts. So you're looking at it right. But the way I would talk about DSO is from our receivables within our around six to nine months payment terms and our payables are around nine to 12 month 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 to - had a lot of payables because of COVID, now they're at a more matching level.

So we expect that the swings will be as large as the swings that we have now are right in line with our expectations, and I would expect to see those each quarter these more normalized, but still 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 to $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 hitting our target between $30 million and $50 million for the end of the year as well..

Great. Thanks so much. Nice quarter..

Thank you..

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

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

Thank you, same, looking forward to working with you..

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 changes as we play out.

Your wins come in, redetermination goes out, just to kind of give us a sense of your visibility and what we should expect over six to 12 months?.

Yes. 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 it's growing, whether that's marketing, whether that's products. 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 kind of guidance - not guidance - we're giving results every quarter around kind of TCV, or total contract value. Why we're doing that is, is be successful. And then in addition, it's more than one year.

So we're going to - you're going to 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 is going to come on in '24 or mid-'24. So we're still kind of recovering on how we're going to flow through the revenue, but we feel really good.

So the right way to think about the membership is kind of the contracts where you'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 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 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?.

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

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

Can you give us a sense of kind of order of magnitude, which are the like, not exact dollars, but the most money is coming from multimodal or which is the highest and which is lowest in terms of those savings and how hard they are to get them..

Yes. So omnichannel member engagement, so that's the - how we engage with our members, whether that's on the phone or via technology, that's probably 50-plus percent 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 2, the omnichannel 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 the automation of our - in the omnichannel side. We have our app up and running.

It's one of the top apps within Apple Store and within the other - Google, yes. So we're really doing well, text is improving. 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 omnichannel approach as well as multimodal.

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, it's just worked to us. And we feel really good about getting that $30 million to $50 million within next year. And 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 million to $80 million 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 outcome. 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..

Super. Thanks so much..

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

Good morning. You've got Taji on for Brian. Thanks for taking my question. And Barb, we look forward to working with you. So to start off, maybe, Health, 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, I guess, how the value-based strategy fits within that?.

Yes. Yes. No, I appreciate that. That's probably the teammates that are listening or listening to the recording are going to be yes, there has been a lot of change. So - and all thanks to them. So you go across the board, if you think about what's happened from a people perspective. Barb is 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 there's a couple that I really want to point out. We really got product capabilities, 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 they're processed across the board. Heavy discipline, daily, weekly, monthly from a process perspective and metric perspective is a new culture for us.

And I couldn't be more excited there. And then on the tech side, there's been a lot, whether that's infrastructure that's going to help us 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 getting analytics, using AI to help us really change outcomes. So it's been across the board. Now that we have those components in place. There'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 kind of the broader strategy. And 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, 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.

So - but now because of our competencies around process and specifically around tech enablement, 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 our strategy is meaning where health care is going. Growth in people that are getting older, people that are sicker and of course, the challenge is on cost. So just marries well with where our company is, where the market is going, and so that's where we're excited about continuing to do that each year and year..

Great. Really appreciate that. And then just one follow-up. I know that we've kind of talked about the margins pretty extensively. So shifting to cash generation, obviously this quarter posted solid results.

So as we look post-2023, can you just talk about what gives you confidence in your ability to sustainably deliver free cash - positive free cash flow?.

Yes. So if you look at our individual businesses, and I mean know these last couple of quarters, specifically in the mobility business, we needed to get past some of the COVID balance 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 an 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 kind of downside risk on margins going what they were prior 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 we 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 9% 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 that, which we should that allow us to really have rigid and strong markets in NEMT. And if you put that all together, we're going to continue to get scale as we grow from a revenue line perspective. And so again, I feel 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, $100-plus million run rate cash flow just on our core businesses. So - and 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..

Thank you..

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

Hi, thanks. Good morning, everyone. I 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 4% 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.

And then as we think about sort of ultimately landing back into that 9% to 12% long-term target margin for NEMT where you think you need to take that $48.50 to sort of, let's say, sort of get back within that range?.

Yes. Well, the per trip metric is the right metric because it normalizes - it will show the execution of our initiatives. So the per trip, whether that's purchased 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 Q, you can see that in our notes where we break out purchased 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 going to come out with our omnichannel, multimodal and digital engagement. That's where we're manual and doing normal automation is going to 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 $2 million to $3 million in this quarter kind of per trip improvement.

So really good progress and still early on. And the purchased 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 purchased 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 has 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've been really good about those are the metrics to track. All of them - 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 going to be coming out..

Okay. Perfect. And then just a follow-up question. So you've now sort of detailed a pretty expensive 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.

I know you've talked about a number of these initiatives underway as sort of One ModivCare and the centralization, the automation going on in the home. Interested if that is sort of going to be, I guess, quantified for us in any type of cost savings? Or is it more that you're pretty close to your margins.

At this point, you're going to have savings, you're going to have investments, but there's not like this sort of explicit on cataloging of the cost savings to get to target margins in the same way that you need for an NEMT..

Yes. Yes, not cataloging in the same manner, mainly because it's not implicated from a standpoint of all the 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 and 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 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% to 12%, but I wouldn't expect that to get any more.

Why? Because what we want to do with these additional savings and leverage that we're going to 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 sales - kind of same-store sales perspective.

I expect when we finish that and a lot of the investments that we're going to make in the caregiver that is driven by and 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, and I really look forward to talking about this in 2024 and beyond.

There's a 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..

Okay. All right. Thank you..

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

Good morning, all. And welcome Barb, nice to you on the team there. I have a couple of quick questions. I guess, one of my recollection is that labor had historically been a bit of a constraint on your business, particularly in 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..

Yes. So consistent with the last couple of quarters, and across the board, just in any industry and even in kind of health care and specifically, we're in that kind of hourly rate perspective, it's normalized.

So it's - but it's still a struggle, right? That, 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 our number one thing.

So - and 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 going to see us, be able to recruit faster and retain better. So it's solid. Growth is solid. Margin is rigid. When we finish this off, we'll start growing above that in 2024 and beyond.

One more thing on that, 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 entities, providers are really interested in personal care because we have access to that member.

So people that are doing what we are doing, professionalizing, centralizing, automating to ensure that we can get more out of that caregiver, therefore, pay 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..

Yes. And as you said, with the trip towards value-based care, the opportunity for you there is immense. So it's a great hit. Let me answer one more. It strikes me that 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 focus 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.

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.

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

Yes. Well, first, Brooks, 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 of 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 that gives us the flexibility for working capital fluctuations. We have - our bonds are 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. And I think part of the reason why some of the shareholders or maybe some of the analysts are maybe not paying attention to Matrix.

Prior to this new management team and its 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 is not distracted by when I say publicly, we said $50 million to $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 - and 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 paid on 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 broad range, but that's the right way to think about it..

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

Yes. Thanks Brooks..

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

Good morning. Let me just follow up real quick on Brooks' last question around Matrix. I know you said, hey, look, when you're thinking about ultimate monetization valuation of this one, think about $50 million to $100 million of EBITDA.

Can you just talk about where they're likely to come in this year in '23? Do you have a ballpark even if it's a range of where they're likely to come in, in terms of EBITDA?.

Yes. 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.

So I would - like we do want to just about everything, usually, people take the middle point of that range..

Okay. Fair enough. So Heath, you guys have a great slide in the deck sort of illustrating the progress on contract mix.

And 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 - I won't hold you to this, but I mean, what's your best guess as to - is there additional progress that can be made on that?.

Yes. So in that slide, what we did, and I think it was a great slide as well. That's for our entire membership and just a little bit more just to square back to what we've said historically. It was - if we took out the MA business, the Medicaid-only business would be in the kind of 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. 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 at full risk primarily. And we still have the opportunity to win more. So if we win more there, the percentage it stays 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 it 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 0, 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 these full-risk contracts with our states as well.

So I would expect in the right way to model is it, it stays relatively the same going forward..

Okay. And that's actually a good transition to my last question. So lots of concerns this earnings season around softening economy and just macro concerns all over the place. And I'm just curious you guys have looked at the last time, like there was any kind of meaningful recession, maybe '08, '09 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 if you have any thoughts on remote monitoring.

I mean, have you guys thought about, hey, if we have sort of rolling over the economy for two, three, four quarters in '24, what that would mean for each of your businesses? Thanks..

Yes. For us, for the population that we serve and the people that we hire a recession from a P&L perspective is helpful, right? Because typically, when there's a recession, more people need help and service those Medicaid roles 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 tailwind as opposed to a headwind as we move into recessions..

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 some like this?.

Well, so the trip volume, so the usage of our services are in line with the types of illnesses or needs that people have. So those don't accelerate because you're in a recession. What would accelerate if you get more people off. So it's not a - 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..

Got it. Okay. All right. Fair enough. Hey, congrats on a really nice quarter. Thanks..

Thank you..

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

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..

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..