ModivCare Inc. (MODV), a leading provider of healthcare services, reported its financial results for the second quarter of 2024. The company announced an adjusted EBITDA of $45 million and revenue of $698 million, which remained flat year-over-year.
Despite growth in the non-emergency medical transportation (NEMT) segment, ModivCare experienced a net loss of $129 million, primarily due to a $105 million goodwill impairment in the remote patient monitoring (RPM) segment.
The company reaffirmed its full-year 2024 revenue guidance of $2.7 billion to $2.9 billion, while adjusting its EBITDA guidance to $185 million to $195 million. ModivCare remains focused on deleveraging its balance sheet and optimizing operations to achieve a leverage ratio of 3 times.
Key Takeaways
- ModivCare reported Q2 2024 revenue of $698 million and adjusted EBITDA of $45 million.
- The company reaffirmed its 2024 revenue guidance of $2.7 billion to $2.9 billion.
- Adjusted EBITDA guidance for 2024 has been adjusted to $185 million to $195 million.
- A net loss of $129 million was recorded, largely due to a $105 million goodwill impairment in the RPM segment.
- ModivCare is prioritizing deleveraging and operational optimization, targeting a leverage ratio of 3 times.
Company Outlook
- ModivCare expects to continue reducing costs and achieving savings targets.
- The company is negotiating prepayment resets on $60 million in receivables to improve free cash flow in the second half of the year.
- ModivCare is confident in its ability to manage through client churn and maintain strong relationships.
- The healthcare industry and societal demands for home-based care are seen as tailwinds for 2025 and beyond.
Bearish Highlights
- Personal care and RPM segments performed lower than expected.
- High churn rates and reimbursement pressures in the Medicare Advantage business present ongoing challenges.
Bullish Highlights
- NEMT segment showed improved go-to-market capabilities, resulting in new business wins and upward pricing.
- The company is optimistic about the momentum of personal care and RPM segments for the rest of the year.
Misses
- Revenue remained flat year-over-year due to a decrease in the NEMT segment.
- Lower-than-expected results from the personal care segment led to a downward adjustment in EBITDA guidance.
Q&A Highlights
- Heath Sampson discussed evaluating alternatives to Matrix, with timing expected later this year or early next year.
- ModivCare is confident about collecting $60 million in contract receivables by the end of Q3.
- Free cash flow in the second half of the year is anticipated to be more heavily weighted in Q3.
ModivCare's second quarter performance reflects a company at a crossroads, balancing growth opportunities against operational challenges. With a clear focus on deleveraging and cost optimization, the company is poised to navigate the evolving healthcare landscape, leveraging its scale and customer-centric approach to maintain its competitive position. Investors and stakeholders can expect further developments, particularly regarding the timing and impact of Matrix, as the year progresses.
InvestingPro Insights
ModivCare Inc. (MODV) has shown a complex financial landscape in the second quarter of 2024, with its challenges and opportunities reflected in the InvestingPro data and tips. A notable point for investors is the company's significant debt burden, which aligns with its focus on deleveraging its balance sheet. This is an important consideration, especially since ModivCare is not profitable over the last twelve months, a period where it has also been quickly burning through cash.
From a valuation perspective, ModivCare is trading at a low revenue valuation multiple, which could be seen as an opportunity for investors seeking entry points in healthcare services, particularly as analysts predict the company will become profitable this year. This optimism is supported by the recent significant return over the last week, which may indicate a turning sentiment among investors.
InvestingPro Data reveals a market capitalization of $325.86 million, a negative P/E ratio of -1.98 for the last twelve months as of Q1 2024, and a revenue growth of 6.99% over the same period. These figures suggest that while the company faces immediate financial pressures, there is underlying growth in its operations that could be leveraged for future profitability.
For those interested in a deeper analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/MODV, which provide further insights into ModivCare's financial health and prospects. These tips can help investors make more informed decisions by considering both the risks and the potential upside of ModivCare's current position in the market.
Full transcript - ModivCare Inc (MODV) Q2 2024:
Operator: Good morning and welcome to ModivCare's Second Quarter 2024 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference call is being recorded. I would now like to turn the call over to Kevin Ellich, Head of Investor Relations. Mr. Ellich, you may now begin.
Kevin Ellich: Good morning and thank you for joining ModivCare's second quarter 2024 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 will review financial results and guidance and then we'll open the call for questions. With that, I'll turn the call over to Heath.
Heath Sampson: Good morning and thank you for joining our second quarter 2024 earnings call. Second quarter results were in line with our expectations with adjusted EBITDA of $45 million and revenue of $698 million. These results were primarily driven by our strong operational performance in our NEMT segment due to our improved go-to-market capabilities, resulting in new business wins and upward pricing. Additionally, our cost structure continues to improve as we automate and optimize our omni-channel engagement capabilities and multimodal network. Within personal care services, the ongoing centralization and standardization has provided a solid platform to build upon, but has temporarily increased our cost structure and moderated growth. That said, our PCS performance improved sequentially and we exited the quarter trending towards our long-term margin target. Additionally, the softening labor market is favorable for our recruiting and retention efforts. Remote patient monitoring revenue growth was lower on a year-over-year basis due to client membership churn, primarily because of reduction in our membership within our largest Medicare Advantage client. Although the overall MA supplemental benefit market is under pressure we have a differentiated market position as our RPM business is primarily Medicaid long-term services and support, and we feel confident about RPM growth normalizing in the second half of the year with mid 30% margins. Based on our first half results, we reaffirmed our 2024 revenue guidance of $2.7 billion to $2.9 billion and lowered adjusted EBITDA guidance to $185 million to $195 million, primarily due to lower than anticipated personal care services results from the first half of 2024. However, we expect to exit 2024 at a seasonally adjusted run rate of $210 million to $220 million of adjusted EBITDA. Next, I'd like to recap some highlights for the second quarter, starting with business development. During the second quarter, we won $33 million of annual contract value, adding to the $36 million won in the first quarter. In addition to various other client onboarding, we onboarded a significant state contract in early June, which is already demonstrating strong performance and results. Importantly, we received extensions on 84% or $526 million of the $623 million in our state Medicaid contracts that were up for renewal this year, including a verbal commitment from our largest state contract in New Jersey to extend through July of 2025. We remain highly confident in our ability to extend the remainder of our state contracts and win additional contracts in the second half of the year. Next, an update on our cost saving initiatives. In the second quarter, we realized $7 million in net cost savings driven primarily by our strategic initiatives in our NEMT segment. Our omni-channel engagement includes digital tools that help members, transportation providers and medical facilities manage trips through apps, text messages, web portals, IVA, IVR, or when needed a low cost high touch experience with our integrated contact center. For example, digital reservations increased to 33% in the second quarter, up from 23% a year ago. Additionally, we are the most connected and connectable NEMT provider, meaning that we are the only company that's digitally integrated with our nationwide network of transportation providers through 40 trip management systems. We're fully integrated with rideshare providers like Lyft (NASDAQ:LYFT) and Uber (NYSE:UBER), and we're connected with over 4,000 medical facility portals and we have over 250,000 members and caregivers, who are connected through our member app. Additionally and uniquely, we have API connections with our largest clients. This setup allows real-time automated eligibility verification and enables clients to manage the member experience through an API connection to our platform. All these components not only improve the stakeholder experience, but also reduce costs, evidenced by our call to trip ratio improving to 38% from 52% a year ago. Our second strategic initiative involves sophisticated AI algorithms and technology to manage transportation using fit for purpose modes, which is our multi-modal network management initiative. This ensures the optimal time and place for the members transportation needs, enhancing the client and member experience. This initiative has also shifted more trips to lower cost modalities that are the most appropriate level of service for members, including rideshare, mileage reimbursement and public transit, which combined accounted for 45% of trips in the second quarter. Additionally, our digital engagement and AI algorithms are further reducing waste and improving efficiencies in routing, enabling us to lower our purchased services cost per trip by 5% year-over-year, and payroll and other expenses per trip by 17% despite inflationary pressures. Our strategic initiatives are also effectively offsetting the impact of rising healthcare utilization and Medicaid redetermination. We remain confident in achieving our targeted savings of $30 million to $50 million in 2024 as most of the initiatives have been developed, implemented, and are in varying phases of adoption and optimization. Our platform enhancements result in a member facing data rich platform, which ultimately improves the member experience and allows us to save costs through greater efficiencies in our trip management and related revenue cycle activities, which will help us achieve targeted cost savings of $60 million on a run rate basis in 2025. Additionally, our data rich capabilities further differentiate our ability to meet client needs beyond the trip itself. Our clients greatly value our access to their hard to reach members. And when this is combined with critical insights from our tech enabled data rich platform that impact the cost and quality of care, we become an indispensable partner. This differentiation not only strengthens our position to retain and expand NEMT services, but will also drive incremental revenue through value based care programs. Shifting to our debt refinancing. On July 1st, we completed the successful refinancing of our $500 million 2025 senior secured notes with a new $525 million term loan B. We thank our partners and new investors involved in this transaction. Next, I'll turn to our free cash flow. As anticipated, free cash flow in the first half of 2024 was negative due to settlements on contracts payables, growth in contracts receivables, and our semiannual cash interest payment. However, the increase in our contract receivables is primarily related to a few customers with whom we are actively negotiated prepayment resets. These adjustments correspond with Medicaid redetermination and higher utilization and will be retrospective, generating positive cash flows in the second half of 2024 and improving our cash conversion cycles. While our quarterly free cash flow fluctuates throughout the year, we expect a normalized adjusted EBITDA to free cash flow conversion rate of 30% exiting 2024. Recovering from COVID and Medicaid redetermination has been challenging and extended, but our sustained differentiated offering and optimized cost structure are now delivering strong, sustainable results that will enhance shareholder value. Diving a little deeper into our segment performance. Second quarter NEMT performance showed meaningful top line sequential growth and meaningful improvement in our gross margins driven by our cost saving initiatives. We are encouraged by performance in NEMT as overall healthcare service utilization continues to normalize and again we expect the new normal at year's end. Our strategic positioning and enterprise go-to-market approach has enabled us to secure upward pricing to offset higher utilization even in a challenging environment. Our payer clients are under significant pressure to maintain their margin amidst rate cuts and inflationary pressures impacting their growth. We have successfully navigated Medicaid redetermination and the resulting increase in healthcare and utilization, diligently managing the corresponding impact on our working capital. As evidenced by our contract wins and retention, we are well positioned to secure additional NEMT contracts. Incremental volume flows through at a strong contribution margin to adjusted EBITDA, which is why we are excited about consistently adding net new volume each quarter and the significant positive impact this has on our future growth and margin prospects. In the second quarter, PCS performance showed sequential improvement with steady growth in both revenue and hours. We recently secured a meaningful rate increase from New Jersey effective July 1st and continue to benefit from rate increases in New York that became effective on March 1st. Over the past year, our centralization and standardization efforts have driven efficiencies, aligned incentives, and strengthened our core capabilities. However, as often occurs during a rapid transformation, margins and growth have been temporarily affected. We have two focused strategic initiatives: first, business development and referral management; and second, optimizing our centralization and standardization efforts to enhance our hyper local community focus, thereby enabling and empowering us to accelerate caregiver recruiting and retention. As a result, we remain confident in driving profitable growth in our personal care segment and have implemented the necessary people process and technology, changes to return to a 10% margin in the coming quarters. With respect to PCS regulatory environment, while there is ongoing information from New York regarding the Consumer Directed Personal Assistance Program, or CDPAP, we are well positioned with a diversified and healthy book of agency and high acuity waiver business. Only $3 million to $5 million of PCS adjusted EBITDA is derived from CDPAP. Additionally, we may benefit from changes as we have the expertise and scale to manage consumer directed programs. Our RPM business continues to experience higher than expected churn from MCO clients, primarily within our largest MA client. However, we expect top line growth will reaccelerate in the second half of 2020. We remain confident that growth will normalize and we believe margins will remain in the mid 30% level as we invest in our offerings and focus on getting more share of clinical budgets allocated for monitoring and engagement services, which have not been impacted by the shifting reimbursement landscape. We have made significant progress over the last 18 months. Our strategy remains clear as we are well positioned to capitalize on the evolving healthcare market, which demands services to manage health outside of the clinical settings. We are focused on enabling members to stay at home and are taking a more proactive approach to their health. We have added technology and clinical resources to go beyond trips, in-home care or monitoring devices to manage high risk cohorts, truly lowering costs and improving health outcomes for our clients. Our proprietary platform and differentiated tech enabled healthcare services delivers risk appropriate care based on member acuity and SDoH needs that serve as an extension of the members' existing primary care and care team. We have modernized three service lines that can operate independently as differentiated scale platforms. When combined, our service lines leverage our unique cost structure with shared services and business development, while also having ability to drive incremental growth from cross selling opportunities. Also, it's important to note that our business is countercyclical given the ongoing uncertainty about the macro environment and potential economic downturn, the demand for our supportive care services is expected to remain stable. Regarding our capital structure, now that our debt refinancing is complete, our top priority is to proactively deleverage our balance sheet. We will evaluate all options to enhance value while optimizing our operations and continuing our mission to build a scaled SDoH platform. As for Matrix Medical, we remain aligned with our partner and Matrix management and will provide updates about a potential monetization event when there are developments to report. As we previously indicated, we anticipate this will be later this year or early next year. I appreciate the hard work and effort from all team members at ModivCare as we continue to provide great value to the healthcare system, our clients and our members. Now I'll turn the call over to Barb, who will share additional details about our future results and outlook for 2024. Barb?
Barbara Gutierrez: Thank you, Heath, and good morning everyone. Second quarter 2024 revenue was flat year-over-year at $698 million, driven by 3.5% PCS growth, offset by a 1% decrease in both NEMT and RPM. Second quarter net loss was $129 million, largely due to the $105 million goodwill impairment in our RPM segment, and adjusted net loss was $375,000, or $0.03 per diluted share. Second quarter adjusted EBITDA was $45 million, or 6.5% of revenue, driven by solid performance in our NEMT and RPM segments as well as sequential improvement in PCS. Turning to a review of our segment financials. NEMT's second quarter revenue decreased 1% year-over-year, but increased 2.4% sequentially to $491 million. NEMT revenue incrementally benefited from successful execution of contract reconciliations and negotiated pricing increases that were more favorable than expected. Average monthly membership increased 2% sequentially to $29.7 million due to the onboarding of previously announced contract wins modestly offset by Medicaid redetermination. Trip volume increased 2.5% quarter-over-quarter, while revenue per trip decreased modestly due to contract mix. Sequentially, NEMT gross margin increased 120 basis points, primarily due to trip mix and our cost savings initiatives. Notably, payroll and other expense per trip decreased 11% sequentially to $6.94, while purchased services expense per trip was relatively flat. The decrease in service cost unit metrics illustrates continued traction from our cost savings initiatives. NEMT adjusted EBITDA was $35 million and NEMT margin improved 150 basis points sequentially to 7.2%, driven by $8 million of repricing and contract reconciliations, of which $2.5 million was attributable to 2023 and greater than anticipated. $5.5 million was related to repricing and in-year contract reconciliations for the first half of 2024. The increased pricing is in our run rate as well as our guidance. During the second quarter, our membership was impacted by Medicaid redeterminations of approximately 600,000 members, which is modestly higher than we previously expected for the quarter, but still in line with our overall expectations for the cumulative impact from redetermination. We believe redetermination is essentially complete and expect a minimal impact on our Medicaid membership for the remainder of the year. Redetermination impacted second quarter revenue by $3 million and adjusted EBITDA by approximately $1 million. Overall, Medicaid redetermination is tracking in line to slightly better with our expectations and is estimated to adversely impact revenue by $60 million and adjusted EBITDA by about $25 million to $30 million in 2024, which aligns with our original adjusted EBITDA range of $20 million to $40 million. Turning to our personal care segment. Second quarter personal care revenue increased 4% year-over-year to $187 million, driven by 2% growth in hours and 2% growth in revenue per hour. We are seeing solid revenue growth driven by hours and a reimbursement rate increase in New York that became effective on March 1st subsequent to their minimum wage increase earlier this year. Additionally, during the quarter, New Jersey approved a rate increase of approximately $1.50 per hour effective on July 1st. Personal care adjusted EBITDA was $15 million, or 8% of revenue, which was a 200 basis point improvement from the first quarter, driven primarily by rate increases and operating expense controls. We are encouraged by the improvement in personal care margins. We expect the momentum to continue in the second half of the year and remain confident margins will approach the 10% level by year end. RPM revenue decreased 1% year-over-year to $19 million. As we also indicated during the first quarter, lower RPM revenue was primarily attributable to Medicare Advantage contract churn from earlier this year. With churn issues believed to be behind us, we saw solid growth exiting the quarter, which we expect will carry into Q3 and the second half of 2024. RPM adjusted EBITDA was $6.1 million, or a 32% margin. We continue to expect RPM margins in the mid 30% range in the second half of 2024. During the quarter, we performed our annual goodwill impairment assessment and we recorded a non-cash goodwill impairment of $105.3 million for the RPM segment. As a reminder, the impairment is a non-cash expense and does not impact our operating cash flows or ongoing activities. Turning to our balance sheet and cash flow. During the quarter, free cash flow was negative $62 million, consisting of a net use of cash provided by operating activities of approximately $55 million and capital expenditures of $7 million, which was 1% of revenue. Driven by NEMT working capital dynamics, we ended the quarter in a net contract receivables position of $79 million. Contract receivables increased by $12 million sequentially to $166 million, primarily due to successful repricing and contract reconciliations during the quarter. Contract payables decreased by $41 million quarter-over-quarter to $87 million, primarily due to the expected annual reconciliation and settlement on certain contracts. We have made progress on renegotiating prepayment terms on our shared risk contracts and expect the growth of our contract receivables will be reduced going forward. We have visibility into the collection of approximately $60 million of contract receivables in addition to our normal run rate collections in the third quarter through retrospective rate increases and settlements. As a result of increased utilization in the first half of 2024 and the mismatch in contract payables and receivables affecting our quarterly working capital, our revolving credit facility balance increased by $62 million in the second quarter to $183 million. We ended the second quarter with $10.5 million in cash, approximately $1.17 billion of debt, and our bank defined net leverage ratio decreased modestly to 5.22 times as of June 30th against our maximum net leverage covenant of 5.5 times. On July 1st, we successfully completed the refinancing of our $500 million 2025 senior unsecured notes with a new $525 million term loan B with a current interest rate at the secured overnight financing rate, SOFR, plus 475 basis points. Since this is a variable rate debt, we will see a benefit if there are any rate cuts. The refinancing was in line with our expectations and we appreciate the diligence and support from our lending partners and advisors on the transaction. Shifting to cash flow free, cash flow was a use in the first half of 2024 given the payment timing mismatch of contract receivables, certain larger settlements on our contract payables, and our semiannual cash interest. We've made progress on the retrospective renegotiation of the prepayment amount on a number of our shared risk contracts and in-year contract settlements, which gives us confidence that free cash flow will be positive for the year. Accounting for the first half of 2024 results with the impact of our debt refinancing, we now expect an adjusted EBITDA to free cash flow conversion rate of approximately 30% exiting 2024. Shifting to guidance, we maintained our 2024 revenue guidance in the range of $2.7 billion to $2.9 billion and lowered our adjusted EBITDA to a range of $185 million to $195 million due to the lower than anticipated results from PCS during the first half of the year while we continue to see solid performance from NEMT. Here are a few qualitative and quantitative items for you to consider for the remainder of 2024. Medicaid redetermination continues to track in line to slightly better than our original expectations. For the year we expect a $25 million to $30 million adjusted EBITDA impact, nearly all of which is in our run right now. We continue to expect business development to be a meaningful contributor to adjusted EBITDA in the second half of the year, largely driven by NEMT contract settlements and repricings, as well as net new contract wins. Cost savings are expected to be at least $30 million for the year, net of investment and digital service cost. The majority of cost savings are in our run rate, and we expect to generate an incremental $4 million to $6 million in the second half of 2024. We expect utilization within our current contract mix to normalize in a range of 10% to 11% for 2024 and to be a headwind of $4 million to $7 million in the second half of the year. We anticipate continued momentum coming out of the second quarter for PCS and RPM, which are expected to contribute $13 million to $15 million of adjusted EBITDA growth in the second half of 2024. We expect to invest $7 million to $8 million in innovation and G&A for the second half of the year. We continue to expect a steady progression in adjusted EBITDA over the next two quarters, driven by new contract implementations, greater cumulative benefit from cost savings, the diminishing impact from Medicaid redetermination, and sequential improvement in PCS, all contributing to financial results consistent with our revised guidance. In summary, our overall second quarter financial results were in line with our expectations, driven primarily by solid NEMT performance. Personal care and remote patient monitoring were moderately lower than our expectations. However, we saw notable progress throughout the quarter in both segments. We feel positive about the momentum of these segments for the rest of the year and achieving previous growth and margin targets as we exit the year. Now that our refinancing is behind us, our top priority is proactively delevering our balance sheet. In closing, I'd like to thank all of our teammates for their unwavering commitment and diligent efforts serving all of our members and clients. With that operator, please open the call for questions.
Operator: Thank you. The floor is now opened for questions. [Operator Instructions] And our first question comes from Brian Tanquilut from Jefferies. Brian, your line is open.
Brian Tanquilut: Hi, good morning, guys. I guess, Heath, as I think about the results here, pretty good NEMT progress and RPM as well, it looks like. So it's kind of like a state of the union. But as I think about the moving pieces between PCS and just the cash flow performance through the quarter, I mean, from where you sit, how are you thinking about the path moving forward here?
Heath Sampson: Yes. Hi, good morning. Thanks. We have made a lot of progress across all our three segments, and you can see that specifically within NEMT. There was a lot of transformation around all things: people, process and tech. In personal care as well, especially over the last six months again, like we said, there we exited well in the second quarter and we expect to be back to growing and approaching the margins there anyway. So each of the individual parts are doing very well and together as a whole we're getting scale and leverage. You can see that we're able to generate free cash flow. And as Barb just said, we expect to be positive free cash flow for the year, even though we're high users because of coming out of redetermination and higher utilization in the NEMT contract. So, yes, our job is to ensure that all three of these segments in the company as a whole is performing. But with that, with where we are, from a leverage perspective, everything is on the table for us. So we'll look at performing so whether that's delevering through our current cash flow or looking at other options for us. So again, we're evaluating everything and everything is on the table for us to ensure that we are able to delever and drive shareholder value.
Brian Tanquilut: Heath, maybe just to that point, I know you touched upon it in your prepared remarks as well, right. So is there a leverage target that you've set? Or how are you thinking about when you say like everything is on the table just evaluating the different options or the different business segments that you have in terms of their contribution to the enterprise? I mean is that a returns based analysis or a cash flow based analysis? I am just curious how you're viewing that evaluation process or review?
Heath Sampson: Yes. Yes. So for consistent, what we've been saying for a while, 3 times is the target and from where we are today, that's a ways away, right. So considering the 3 times, that's why we're evaluating all the options. And the way we look at it is having each of those businesses to be strong and where they're kind of at from a value today and what can that be that incremental value that we could get from each of those segments or from the business as a whole. So it's a pretty simple analysis. The best thing for us is to do what we're doing is to ensure each of our businesses are performing. They're all at scale. They're all meeting where the market is going. We see that with our customers and we know what's happening in healthcare. So that is our priority. But again, if there is an option for us, we will evaluate those options. And again, it's just where we are today to what we could get is how we're looking at it.
Brian Tanquilut: Appreciate it. Thank you so much.
Operator: Thank you. And our next question comes from Bob Labick from CJS Securities. Go ahead, Bob.
Bob Labick: Good morning. Thanks for taking our questions. And thanks for all the information.
Heath Sampson: Good morning, Bob.
Bob Labick: I want – good morning. I wanted to start and just ask you to elaborate more on the free cash flow discussion for the back half of the year. I think you said something along the lines of actively negotiating prepayment resets on $60 million receivables, I don’t know, I was typing fast. But maybe just help us understand kind of the process, the visibility, and when we get to a normal run rate of working capital and stuff like that. But more specifically, what’s the visibility to that, the strong free cash that you’re talking about in the second half?
Heath Sampson: Yes, thanks, Bob. I’ll start here, and Barb can add some color. And we did in the investor deck, I think, Slide 18, we gave a lot of disclosure and even some disclosure, what we expect for contracts payable and contracts receivable for Q3 and Q3. So it really gives a good kind of picture of what we expect. So, the main driver for us, because the businesses are performing on our working capital, is the contracts, right. And again, the contracts, especially over the last kind of two years, 18 months, have been redesigned to ensure that we’re in this win-win relationship from a margin and P&L perspective. But where we’re hit, just as a reminder, you know very well that many other people with redetermination and then utilization, with the settlement times within our shared risk contracts, that goes on the balance sheet, mainly in AR, and then we have from the past being below that, we’re at the same time paying contracts payable. So the contracts are working as designed and protecting the downside and protecting the P&L. But there is no question there is a working capital challenge that we’ve been working through. So within those contracts, we know the timing, and when those happen, they are written down. Unlike it was in the past, they were a little more ambiguous because COVID was new and wasn’t contemplated, but now they are all contemplated in the contract. So that’s the general statement. And, Barb, do you want to add something?
Barbara Gutierrez: Yes, so I will just add a little bit of color. Thanks for the question, Bob. So just to expand a little bit on what he said, in terms of the $60 million that we reference in the script, as he said, that’s a contractual amount, it’s not a fuzzy amount at all. So it’s a contractual amount. It’s a few payors where we’ve been successful in our repricing efforts and even successful in an in year contract settlement which is earlier than normal. So we have very good visibility to that $60 million in the third quarter. And again, it’s primarily related to our successful efforts in repricing. So good visibility, it’s contractual. And that really will continue to the improvement in the free cash flow in the back half of the year, in the third quarter and the back half of the year. We also, in the prepared remarks, commented that from an exit perspective, free cash flow will be improving. The conversion rate will be approximately 30% as we exit the year. So maybe those are a few highlights and data points to give you a little bit more color on the improvement in the free cash flow.
Bob Labick: Okay, great. I appreciate that. And then on NEMT, obviously a nice quarter and I think utilization, and payroll and other were kind of the drivers there. So two questions. I am bouncing between your slide decks and trying to figure this out quickly, but it looks like the ending number of membership is lower than last quarter, 30.5 versus maybe 32. The net client growth in the back half may have changed a little bit. What – am I – again I apologize if I got it wrong there, but what changed there and obviously what are the expectations for client growth? Is the onboarding taking longer or were there addition? What’s – thanks.
Heath Sampson: Yes, very good question. Well, the current deck is the deck to look at with our membership because we have a really good understanding of the timing of clients onboarding. A couple things on that. If you triangulate and redetermination on the membership, it’s about 500,000 higher than we thought around that. We also did have one of our – we won state businesses that got pushed into 2025. And then the other items are just a general estimate that we had before and when stuffs coming online or when contracts get ultimately finalized with the right mix. And that’s probably the biggest driver that we had that membership too high. The important item is that’s just the membership item that you’re seeing. The economics, and the ultimate bottom line, and ultimate cash flow and timing are right in line with what we expected last quarter. It just is really a membership estimate change for those reasons that I just talked about.
Bob Labick: Okay, great. And last one, I’ll get in queue on this. The payroll and other was a nice substantial decline sequentially. And I mean, this is a trend we’ve been looking for and it was good to see and part of the strength in NEMT in the quarter. Just kind of a little bit behind that are we at a new run rate? Is there still more improvement there? Was there any onetime benefit there, et cetera? How should we think about that? Again, it was a great, comforting number. I just want to get a sense of how that plays out going forward.
Heath Sampson: No it’s – again, the efforts of the team and what we’re doing within our platform is tremendous. We gave a lot of detail in my opening comments. Hopefully that was helpful because really all those items together are what are driving our ability to meet the member where they are with technology, tools and processes in place. So that’s a real number. And we still have more in the tank. You will see in the cost savings that we’re actually achieving what we thought we would in that for the year, right. We’re going to be right where we expected. And then also in my comments, I do expect that we’re going to continue to accelerate beyond that to get closer to the 60. So we expect more and more kind of on a linear basis as we finish the year and go into 2025. So it’s been really, really well done by the team. So you see that in payroll and other. In purchase services, as well, there is some kind of one time timing between Q1 and Q2, but that trend is going to continue down as well, again, from all the hard work we’re doing in each of those initiatives, it’s really paying off, so we feel good about it continuing.
Bob Labick: All right. Thank you very much.
Operator: Thank you. And our next question comes from Pito Chickering from Deutsche Bank. Go ahead.
Pito Chickering: Hey, good morning, guys. Just going back to the timing of cash flows from NEMT risk contracting, Medicaid, liquid redetermination and legalization has been hot last sort of two years. So why this happening this quarter versus other quarters? Is there any debate around how much is owed on these contracts? Have you had any issues collecting revenue from these risk sharing contracts in the last 12 months?
Heath Sampson: Yes. So you are on it and you’ve covered the payors. And I think many people on this phone know what’s happening. It’s pretty clear that utilization has been hot and it continues really to be hot. But why? It’s kind of isolated to really, it’s been happening, but really it’s kind of hitting this crescendo right now. It’s just kind of the timing of where we kind of benchmark and estimated when this was going to happen, coupled with our contracts get settled rather than six to twelve months. So even though utilization was increasing in 2023, you settle up with a lot of those kinds of kind of 12 months later. And then coupled with where we’ve snapped the chalk line earlier on, that’s why it’s all coming to ahead right now, again which is why we said first part of the year we’re going to be using a lot and the second part of the year we’ll be able to delever. So it’s not a surprise. It’s really the design of our contracts and the timing of that. And yes, correct, the utilization has been high, but again, as expected.
Pito Chickering: Okay. So just be clear…
Barbara Gutierrez: I want to add…
Pito Chickering: Please go ahead.
Barbara Gutierrez: Yes, sorry, Peter. I would add. And in fact, it’s actually in part, it’s been our success in the contracting process where we’ve accelerated some of the reconciliation, some of the settlements in a couple of contracts. And so we’ve talked about that in the past, that that is our goal to try to accelerate that so that there is not so much time and distance between when we’re actually incurring those costs and that actual cash settlement. So we’ve actually been successful in accelerating a couple of those.
Heath Sampson: Yes. And just a little bit on that, because what does that mean? So let’s just say it’s 12 months and we’re halfway through and we’re knowing, and we and the client are knowing that utilization is going up. So we know, I don’t know, six months from now we’re going to have a large true up or settlement there. So we go to the client, say, hey, it’s going to be so large, you can see this, you see the data, which is why we’ve been, oh, okay, let’s kind of reset that line so we don’t have a big, growing receivable in payment at the end. And our clients again, are in a win-win relationship with us to ensure that we’re doing that. And that’s why, as Barbara articulated, we’ve been successful in a few of those large contracts to do that ahead of time.
Pito Chickering: Great. So two more quick ones here. So just be clear, there is no risk for charges on RevRec around these risk-sharing contracts. And then last quarter you said that we exited the year at a free cash flow conversion of 40%, 50%, excluding the debt refinancing, now it’s 30%. Just wanted to understand the change of the 40%, to 50%, to 30%. Is it just the debt financing or something else?
Heath Sampson: Yes. So we do have – a couple quarters ago we talked about one contract in Florida that we didn’t collect on, but we’ve collected 75%. That one is still open that remainder. So, there is one client that we’re having some, but it’s really small. So just to be transparent there was one client that we’re still in discussions to get the last 25%. Outside of that, we expect to collect all our receivables. And then to do with the cash conversion, it really is – we just – with the higher cost in our new term loan that we got, it’s just math to take us down to that 30% from the 40%.
Pito Chickering: Great. And the last one for me here on RPM, churn rate, I guess, why is the churn rate so high from your largest customer? Is it pricing or service levels? Thanks so much.
Heath Sampson: Yes. The main reason – excuse me, is one of our large clients on the – excuse me, MA side. Again, if you’re talking to payors, and specifically supplemental benefit pressure with an MA is high across the board. And this is what happened with this payor. That’s where the churn was. First off, the churn related to them not winning states, so they lost states. Therefore we don’t get as much volume. That’s the biggest driver, but it also is just some pressure on supplemental benefits and offering, that is what is the issue. But as we pointed out, and we get some data in the deck here, we, unlike maybe a lot of other RPM businesses, we’re not as exposed to MA. It’s about 25% of our business. So yes, that was the reason. Going forward, we believe we’ll be able to manage through that challenge in the MA market.
Pito Chickering: Great. Thanks so much.
Operator: Thank you. And our next question comes from Scott Fidel from Stephens. Go ahead, Scott, your line is open.
Scott Fidel: Hi, thanks. Good morning. First question, just thought it might be helpful if you wanted to bridge us just on the margins for NEMT and then with PCS, did catch the comment about getting to close to the 10% by fourth quarter and the exit rate maybe if you want to sort of, I guess, embedded in getting to that 220 or 210 to 220 exit rate. How you see the NEMT margins progressing in 3Q, and then 4Q and similarly with PCS in 3Q and 4Q as well.
Heath Sampson: Yes, thanks, Scott. Well, starting with NEMT, you can see the margins in that seven percentage range. And then to Bob’s kind of question around improving cost savings, that continuing, coupled with our continued onboarding of clients where we have again contribution margin that flow through strong. So I do expect an uptick, call it a kind of to the end of the year, around 100 basis points plus is probably the right way to think about it on the NEMT side. PCS, you saw the jump in Q2, again, lots has transformed there and still lots of work to do. He also said that we exited that quarter in a strong way. And then you couple that [indiscernible] with PCS, not only have the cost, centralization costs normalized for us because we got it out, but we also have rate increases and that’s a big driver for us. And those started here in early Q3. So you’ll see that jump. So that’ll be more than – and as Barb alluded to, we’ll get closer to that 10% range. And then RPM will be kind of in that mid-thirties range as well. So really – so that’s the bridge and all in front of us. Most of it is the actions we have in place or things that we have done and it will trend that way. Is that helpful, Scott?
Scott Fidel: Yes, it is. And then just one follow-up around that. Just on the PCS side, I was thinking – I mean, should we see more of a step function up in the 3Q just because you guys have now gotten those rate increases or are there still some costs from the centralization and transformation that offsets that in the 3Q so that we see more of the margin in the 4Q show to get to that sort of close to 10%.
Heath Sampson: You will see a step up because of the stuff. It won’t get all the way to the 10% range, but you will see a meaningful step up.
Scott Fidel: Okay, got it. And then second question, just wanted to just get your update on, I know you guys talked a little bit about it with Pito just on the sub benefits in MA and some of the churn there in RMP, just looking out to 2025, just given the reimbursement pressure that MA plans are facing and the utilization they’ve seen on supplemental benefits this year. What’s your visibility at this point into your MA books in NEMT and then in RPM in terms of sort of retention of volume and then your sort of pricing with your MA customers? Is that remaining consistent just or are you seeing some pushback just given the rate pressures and cost pressures that MA plans are experiencing?
Heath Sampson: Yes. So, first – you know this, but no exposure to MA on PCS. Within NEMT those really supplemental benefits have really been under pressure for the last couple years and it’s been pretty steady. And so we know the markets that our clients are not going to offer NEMT. So we know that and expect that. There are no question pricing pressures, but we anticipated that, and it’s been baked into our current numbers and even what we expect in 2024, which is why again a company like us that has the size and scale and what we’re doing around automating, we can get to the right win-win price where we save money for people, as well as ensure that we maintain our margins. The RPM business is probably the biggest business that is going to be impacted on supplemental benefits. I could spend a lot of time here. In the end, the technology in someone’s home is going to be really important, especially for people on certain population types. So though, yes, the current model is under pressure, but I do think there is going to be a more outcomes based, populations based device in a home transformation. And those are the discussions we’re in. So I don’t expect large, large growth in the short term around MA and RPM, but I do expect more of a sustained kind of competitive advantage even on the MA side for us. And again, the other thing, this is what’s happening, it’s not about the alert anymore, it’s really about what are you going to do with that alert and the clinical outcomes that are there. And because of what we’ve invested in with our clinical people as well as our technological capabilities, we’re able now to get into the clinical budget, because we’re really going to change outcomes. And that’s what I mean about the changing dynamic within the RPM world.
Scott Fidel: I got it. And one more if I can. Just as we sort of put all of this together, thought it might be helpful just at this vantage point if you wanted to sort of summarize what you see as the key headwinds and tailwinds for ‘25 and sort of your confidence and sort of getting back to EBITDA growth in a nice way. I mean, obviously there has been a number of these headwinds that seem to be more impacting the first half relative to the second half. But we all need to be respectful around the environment and a lot of fluidity that we see in the Medicaid market and in some of the businesses. So sort of taking all that heat, sort of, how would you lay out what you see as the key tailwinds and headwinds for next year?
Heath Sampson: Yes. Well, so for next year and beyond, a lot of tailwinds from the pressures that are helping in the healthcare system and the societal demands of moving into the home. Again, those pressures, whether that’s cost or the evolution of understanding that care really matters outside of just the clinical episode, that’s going to continue to accelerate because it reduces cost as well as improves access, quality and costs. So those kind of macro are only going to continue and will happen in ‘24 – I’m sorry, ‘25 and beyond. So, with that and what we’ve invested, we’re in a really good spot to ensure that we are meeting that. But specifically around 2025, a lot of what we’ve done within this transformation has been in place. So a lot of the hard work around culture ensuring the strategy is there, ensuring the right operating model is there, has been in place. So now it’s about this continued execution and really being customer centric. I know that sounds kind of cliché, but that is our focus because our customers, whether they are doing explicitly at the contract level, because they’re doing explicitly at the executive level. Yes, I love the trip piece, I love that you’ve done the work in the home and I love the device alert, but really I want an outcome and I want you to understand my population. So, that’s what we’re doing now. And then just a little bit around, I think, implicit in your question, PCS is a good example. We had a soft Q1 and Q2 because of what we’ve been doing from a centralization, standardization of one platform. But you’re seeing that grow. So those kind of internal dynamics are done. You never done transforming, but from reality of how much transformation we had, we’re able to build on top of that. So, long story short, I feel good about what we’ve done internally. The headwinds, of course, are going to be these continued reimbursement pressures. But again, for each of our units, we have scale and size, and then the market tailwinds as long as we are meeting where the customer wants to go beyond just the transaction, which we are, we’re going to ensure that we’re in a good spot for growth. So I expect 2025 to be a really solid growth off our run rate that we disclosed earlier today.
Scott Fidel: Okay, thank you.
Operator: And our next question comes from Rishi Parekh from JPMorgan. Go ahead, Rishi.
Rishi Parekh: Hi. Thank you for taking my questions. First on the contract renegotiations that you were referring to earlier, I get that as a win-win, or at least you noted it as a win-win with the payors, but can you just help me better understand how is it a win for the actual payor? I mean, I get that you’re getting paid earlier, but are you giving up price or are you reducing price, or what are the economics that you’re changing to make sure that the payors are paying you early? And what does this also mean for payables? Are you going to also have to pay those out faster?
Heath Sampson: Yes. No on the payable side. But the win-win, yes, the payor wants the best price. So we’re able to offer the best price because of what we’ve done with our platform. But we’ve estimated that, so it’s not different than what we thought. They are getting a better price as we re-underwrite these deals. For us just in general because, and the other item that we need to perform. So, you need to ensure that on NEMT that of course you’re picking people up on time, there’s no complaints and then you’re starting to do more at the individual population. A dialysis member is very different than a mental health member. So, we are doing all that. So, that is really the main reason why our customer satisfy, later on that we can be the lowest cost, even better. So, that’s what I mean by win-win. But specifically on your question around kind of the renegotiation, the renegotiation is two-fold. It’s when something comes up for renewal or when we’re at a juncture where we need to reset because of a mix change or because of what’s happening redetermination. Those we know that we’re going to get a lower price. Again, those are what have been baked into our 2024 numbers and what I expect in 2025. The other item around our free cash flow timing, that is the contractual design. We set this specific estimate of $5 and we know now that it’s $6, and we’re not going to settle up for that $6. That incremental 12 months, we’ve negotiated to get, call it half of that or some of that earlier. So it’s not an economic issue, it is a timing issue. And because of all the benefits that I talked about earlier, our large customers are receptive to do that for us.
Rishi Parekh: And just to follow-up on, is that something that’s going to happen every year or is this just a temporary move just to collect on those receivables now for this year?
Heath Sampson: It’s this year. We do expect as we exit this year, redetermination will be done really the kind of normalized healthcare utilization. So it’s just a bolus because of those two reasons that we expect to be finished this year.
Rishi Parekh: Okay. And then I know you went through some of the numbers on this and I apologize, those did not type fast enough. But your first half, second half EBITDA split is usually fifty-fifty. And based upon your guidance, it’s more like forty-sixty. So there’s about a $35 million, $40 million delta just to get to your guidance, or at least the midpoint of the guidance. Can you just maybe walk me through what’s the big drivers to get to that number?
Heath Sampson: Yes, so the uncontrollables again and this is redetermination. Redetermination, major, large headwind for us. And that kind of peaked in Q2. So, that’s one. The other is timing of our kind of net sales wins. We did have legacy attrition. We’re offsetting that. And that onboarding of all those contract wins we had in 2023 and 2024 kind of really starts in Q2 and continues to accelerate. So, it’s working through the losses and the timing of putting the new ones on. So that’s – those two big items. And then the last one, it’s across the board, but primarily within AMT is the continued traction and acceleration of the cost savings. So it really is. And there is not, hey, a big gap. We need to do x or y. It really is those items that are in place and run writing or coming on board as scheduled. So, we have a lot of conviction in our ability to hit that. That appears ramped second half of the year for those reasons.
Rishi Parekh: If I could just squeeze one more in on your leverage target. I know you said three times. One, can you give us a target timeframe as to when you plan on getting there? But more importantly, is that three times based upon your covenant EBITDA number, which is about a two turn difference, or is it based upon actual EBITDA, which is about a four turn difference?
Heath Sampson: Well, so first off, the timing, and this is important for us, too, the timing will be hard to predict because we need to – there is options for us to get there. So if it’s just generating cash from our businesses, that’s going to take longer. If it’s some other alternative, that would be faster. We’re going to do the right thing for us. We have the time, we have a good capital structure in place. So for us, it really is evaluating what’s the best economic answer for us. So timing is tough to predict. At the same time, we are looking at everything so we can do it as well. We really do understand and how important it is to ensure that we bring down leverage as fast as possible. So, sorry for the fuzzy answer, but really it’s about ensuring that we do the right at the right time. But again, we have many options in front of us.
Rishi Parekh: Sorry, if I could – sorry go ahead.
Heath Sampson: And then what’s your second question?
Rishi Parekh: Is it based on the covenant EBITDA or actual EBITDA?
Heath Sampson: Well, so for us, it’s true economics. We don’t have a – obviously we have covenants. We have to abide by those. But the decisions we make around timing are going to be economic, not driven by a covenant, because we feel good about our ability to make those covenants.
Rishi Parekh: And sorry, when you say the alternatives, how far down that path are you with those alternatives other than Matrix? I mean, are you in the third inning, fourth inning, or are you just scratching the service to evaluate those alternatives?
Heath Sampson: Yes, that is not something we’re really – because we’re not announcing anything like that. We are fully aware of all our businesses and the opportunities in the market, so we’re not in any inning or anything that we want to disclose around that again, other than Matrix, which we know the timing we talked about there already.
Rishi Parekh: Great, thank you.
Operator: And our last question comes from Mike Petusky from Barrington Research. Mike, your line is live.
Mike Petusky: Good morning, Heath. And I apologize, but you can do this super quick if you’re willing. I missed multiple calls this morning. I missed the first eight minutes of your prepared remarks. What did you say about Matrix?
Heath Sampson: Yes, consistent with what we said last quarter, the timing is either later this year or early next year.
Mike Petusky: Okay. All right, great. Yes, great. I will read the transcript for anything else there. I appreciate it. So just going back to the $60 million contract receivable that you think is sort of teed up, how many contracts does that cover? Is that like three or four contracts primarily, or how many different accounts does that cover?
Heath Sampson: Yes, it’s definitely more than one contract. As you all know, the concentration of payors, there’s really kind of big eight people. So, though it’s multiple contracts, it’s isolated to a couple large payors.
Mike Petusky: Okay, so like two?
Heath Sampson: Yes.
Mike Petusky: Okay. All right. And then just curious, has – we’re about into the quarter, has any of that been collected to this point or no?
Heath Sampson: So there is lots of cash flow moves in and out. So yes, we’re not going to front run Q3 for us, we just feel good about our ability at the end of Q3 to get those collections happening in total.
Mike Petusky: Okay, so can I just ask one more question just on sort of connected to the subject? So given the call out of the $60 million that you think is likely to be collected sooner rather than later. I mean, is sort of the cadence of the free cash flow in the second half going to be a little bit more heavily weighted in Q3 versus Q4? Is that a reasonable sort of guesstimate?
Heath Sampson: Yes. No, you’re right. And if you look at Slide 18, you actually can see that.
Mike Petusky: Yes.
Heath Sampson: Which is why we gave all that disclosure. Yes.
Mike Petusky: All right. Okay. Very good. Thank you so much.
Heath Sampson: Yes.
Operator: Thank you. This does conclude our question-and-answer session. I’d now like to turn it back to Heath for any closing remarks.
Heath Sampson: Yes, thank you for participating in our call this morning and for your interest in our company. Our updated investor presentation is posted on our Investor Relations website. If you want to schedule a follow-up call, please call Kevin Ellich, our Head of Investor Relations. We look forward to speaking to many of you over the coming days, weeks, and months before we report our third quarter results in November. Thank you again. Thanks to the team. Everybody have a great day. Operator, this concludes our call.
Operator: Thank you. This does conclude today’s conference. We thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.
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