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Earnings call: ModivCare projects steady EBITDA, revenue growth in 2024

EditorAhmed Abdulazez Abdulkadir
Published 02/24/2024, 07:49 AM
Updated 02/24/2024, 07:49 AM
© Reuters.

ModivCare Inc. (MODV) has announced its financial results for the fourth quarter and the full year of 2023, reporting a 10% increase in annual revenue to $2.75 billion and adjusted EBITDA of $204 million.

Despite facing delayed payments and cash flow issues, the company forecasts an improvement in free cash flow in the latter half of 2024 and expects to achieve an adjusted EBITDA between $190 million and $210 million for the year.

ModivCare's fourth-quarter revenue rose by 7.5% year-over-year to $703 million, with non-emergency medical transportation (NEMT) revenue up 9% to $499 million. The company is actively pursuing cost-saving measures, digital initiatives, and refinancing strategies to bolster its financial position.

Key Takeaways

  • Full year revenue grew by 10% to $2.75 billion, with Q4 2023 revenue up 7.5% YoY.
  • Adjusted EBITDA for the full year stood at $204 million.
  • ModivCare provided 2024 guidance with adjusted EBITDA between $190 million and $210 million and revenue between $2.7 billion and $2.9 billion.
  • The company plans to focus on cost-saving initiatives and digital enhancements to improve margins and member engagement.
  • Challenges including delayed payments and cash flow constraints are being addressed, with an expected free cash flow improvement in H2 2024.
  • ModivCare is integrating remote patient monitoring (RPM) and NEMT services to reduce costs and improve care.
  • The company is working on refinancing its 2025 unsecured notes and monetizing its investment in Matrix Medical.

Company Outlook

  • Revenue guidance for 2024 set between $2.7 billion and $2.9 billion.
  • Adjusted EBITDA for 2024 projected to be $190 million to $210 million.
  • Free cash flow expected to improve in the second half of 2024.
  • Focus on execution and cost-saving initiatives to drive growth.
  • Plans to enhance service offerings through digital initiatives.

Bearish Highlights

  • Cash flow constraints and delayed payments have been a challenge.
  • Redetermination expected to impact revenue by approximately $60 million and adjusted EBITDA by about $30 million in 2024.
  • Contract losses and loss of certain membership groups will affect Q1 2024 performance.

Bullish Highlights

  • NEMT sales boosted, especially in the managed Medicaid space.
  • Margins and cash flow conversion expected to improve in H2 2024.
  • Company confident in stabilizing redetermination and utilization.
  • Cost-saving initiatives and new business wins anticipated to support growth.


  • A specific contract in Florida was not paid in Q4 but is expected to be settled within 60 days.
  • Total membership decreased by 5.5% in Q4.

Q&A Highlights

  • Healthcare utilization anticipated to rise, reaching around 10 million by the end of the year.
  • A return to post-COVID normalized environment expected by end of 2024.
  • Labor availability stabilizing due to centralization, standardization, and automation efforts.
  • New customers expected to be onboarded smoothly in Q2.
  • Opportunities for NEMT margins to improve in Q3 and Q4, with an exit rate of 8% to 8.5%.

ModivCare's focus on digital integration and cost-effective strategies, along with its anticipation of improved financial performance in the second half of 2024, reflect the company's adaptability and strategic planning in the face of current challenges. The company's efforts to enhance its service offerings and member experience, coupled with its proactive approach to managing its debt profile, demonstrate a commitment to long-term growth and stability.

InvestingPro Insights

ModivCare Inc. (MODV) has shown resilience with a 10% increase in annual revenue, but the company's financial health is under scrutiny due to several factors. According to real-time data from InvestingPro, ModivCare has a market capitalization of $377.65 million and has experienced a significant price drop over the past year, with a 1 Year Price Total Return of -73.12%. This could be reflective of the operational challenges mentioned in the article, including cash flow constraints and delayed payments.

InvestingPro Tips indicate that ModivCare is expected to see net income growth this year, which aligns with the company's forecast of improved free cash flow in the latter half of 2024. However, it's important to note that the company operates with a significant debt burden and is quickly burning through cash. This could potentially impact its ability to meet short-term obligations, as they exceed liquid assets. The company's stock has also been in oversold territory according to the RSI, which could suggest a potential rebound or further volatility ahead.

The adjusted P/E ratio for the last twelve months as of Q4 2023 stands at -7.46, indicating that the stock may be undervalued if the company can turn around its profitability as analysts predict. With the next earnings date on May 2, 2024, investors and stakeholders will be keen to see if ModivCare's strategic initiatives will lead to the expected improvements.

For readers interested in deeper analysis and additional insights, there are more InvestingPro Tips available for ModivCare. By using the coupon code PRONEWS24, you can get an extra 10% off a yearly or biyearly Pro and Pro+ subscription. In total, there are 14 InvestingPro Tips listed, providing a comprehensive view of the company's financial health and stock performance.

Full transcript - The Providence Se (MODV) Q4 2023:

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

Kevin Ellich: Good morning and thank you for joining ModivCare's fourth quarter and full year 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 1 hour after today's call concludes and will be posted on our website, This morning, Heath Sampson will begin with opening remarks. Barbara Gutierrez will review our financial results and guidance. 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 fourth quarter and full year 2023 earnings call. Today, I'll discuss our 2023 results, reflect on our transformation journey and share our outlook for 2024 before handing the call over to Barb, who will further elaborate on our financial results. Let me begin by saying we are pleased to have delivered fourth quarter revenue and adjusted EBITDA in line with our expectations. Full year 2023 revenue grew 10% with adjusted EBITDA of $204 million. Before addressing the transformation progress we've made, I'd like to address some of the challenges we've encountered primarily stemming from the recovery period following the pandemic. Firstly, our free cash flow for the fourth quarter was negative $37 million which was below expectations, primarily due to delay in payment from an MCO client within a specific contract in Florida. Looking ahead and primarily to us managing redetermination and the increased healthcare utilization environment, we anticipate our free cash flow for the first half of the year will be constrained to the ongoing build in contract receivables and the settlement of several large payables expected in the second quarter. It's important to note that our $144 million balance in contract receivables is an asset that we aim to collect in 6 months to 9 months. Consistent with what we have been doing the last several months, we are proactively working to renegotiate the prepayment terms on a number of our shared risk contracts. This realigns the payments we eventually reconcile as redetermination unfolds and utilization and cost normalize higher, post the pandemic. This will improve our working capital by securing more cash upfront. For the second half of 2024, our free cash flow will begin to normalize as redetermination ends. The $142 million of the 2023 new sales wins are onboarded and our cost saving measures continue to take hold. Next, I want to share our 2024 adjusted EBITDA guidance which we expect will be in a range of $190 million to $210 million and our first quarter 2024 adjust EBITDA guidance in a range of $28 million to $33 million. We are guiding first quarter EBITDA to help explain the ramp in the second half of the year. During the first quarter, we are addressing headwinds from a couple of contracts and membership losses prior to the 2023 contract wins starting implementation in the second quarter. These front loaded challenges are further impacted by the ongoing normalization of healthcare utilization and Medicaid redetermination. The root causes of these contract losses include a few MCO clients not securing their state contracts. A state health department's decision to transition to a full broker model favoring an incumbent competitor and a client's decision to diversify volume away from us due to legacy issues. However, it's important to note that these legacy issues have been addressed through our transformation and I'm proud of my team for doing that. In fact, we remain the largest NEMT provider and a key strategic partner for this client, actively collaborating on several new initiatives. Also noteworthy to explaining our 2024 guidance, while we've achieved success in securing MCO contracts, anticipated state RFPs we expected to bid on in late 2023 and early 2024 continue to be delayed or extended. In 2023, we won $142 million in annual contract value and $11 million in our remote patient monitoring segment that will be onboarded starting in the second quarter and will ramp throughout the year. Even though state RFPs have been delayed, we did secure a new state contract and expanded and extended 2 other state Medicaid contracts from early RFPs in 2023. In addition, we've implemented initiatives to optimize our cost structure which is expected to generate $30 million to $50 million of in your cost savings. We've made significant strides digitally integrating with our clients, a move we hadn't done in the past which will enhance our client relationships, leading to improved contract retention and reduced attrition. Additionally, our enhanced go-to-market capabilities contributed to a 90% win rate in new MCO bids throughout 2023. To capitalize on this momentum, we've recently augmented our sales team with additional talent. We're leveraging these enhanced capabilities to secure more wins from our pipeline, valued at over $800 million today. These initiatives will mitigate the negative impact from legacy losses started in the second quarter and will become more significant as the year progresses. Now, I'd like to cover our balance sheet and capital structure. We have a deliberate plan and anticipate refinancing our 2025 unsecured notes in the coming months. Additionally, we are aligned with our partners to monetize our unconsolidated minority equity investment in Matrix Medical. While we are optimistic about achieving this within the year, as the company is performing very well, our primary focus remains on supporting the management team and maximizing the return from this valuable asset. We have also successfully renegotiated our revolving credit facility covenants, enhancing our financial flexibility and addressing our liquidity requirements, thanks to the backing of our banking partners. Although our current leverage is higher than our target, reducing debt levels continues to be a priority. Since assuming the role in November 2022, we have undergone a comprehensive transformation which has been anchored by our core pillars: people, operational excellence, growth and innovation. Reflecting on the past year, we navigated challenges and achieved significant milestones. As for the people pillar, realigning our organization was crucial, notably strengthening our executive leadership team. We also realized approximately $65 million of savings through restructuring while reinvesting $30 million in key areas such as product, technology, go-to-market and clinical expertise. Operational excellence; we adjusted our business model to the post-pandemic environment and transition away from our legacy decentralized and manual processes to a more efficient functional structure. This shift improved our service quality, notably increasing on-time performance in NEMT by 6% and saving $27 million annually through our digital initiatives. These efforts have also resulted in improved satisfaction, solidifying our leading NEMT position. In the growth pillar, we improved our new business conversions in NEMT and focused on cross selling our RPM services, leading to over $150 million in annual contract wins, driven by our improved proposal process and enterprise engagement model. Innovation has been an important part of our journey. We advanced our leadership position addressing the social determinants of health with new product development and technology, aligning closely with CMS' strategic pillars and expanding our service offerings to proactively meet our clients’ needs. Turning to our 2024 outlook. We project our adjusted EBITDA will be in the range of $190 million to $210 million. And revenue between $2.7 billion and $2.9 billion. Our guidance considers the headwinds previously mentioned with confidence in our initiatives as we continue to transform our cost structure and revenue model. We expect to exit 2024 with a run rate for adjusted EBITDA between $220 million and $230 million. Additionally, we expect to generate between $40 million to $60 million in free cash flow, materially generated in the second half of 2024. Looking towards 2025, we will continue to see deleveraging benefits from our asset-light high cash flow conversion business, with normalized expectations of 40% to 50% EBITDA conversion to cash generation. We expect revenue growth rates for personal care and remote patient monitoring to be 8% to 10% and 10% to 12%, respectively, with margins consistent with previous years at 10% to 12% for personal care and mid-30% for RPM. We project modest growth for NEMT revenue with margins exiting 2024 at approximately 8% to 8.5%. In 2024, we are focused on positioning each of our business lines for long-term profitable growth, while continuing the important work to fortify our platform as we prepare for 2025 and beyond. As we look forward, we remain committed to being the trusted partner for integrated supportive care, combining digital and personal engagement to empower living at home. Here's our concise overview of our 2024 strategic priorities across our segments. In NEMT, the focus is to leverage the momentum from the achievements of 2023, aiming to capture additional revenue from our $800 million-plus pipeline. The key for growth this year is execution. Building on our comprehensive transformation and digital initiatives focused on enhancing omnichannel member engagement, expanding multimodal transportation solutions and achieving comprehensive integration with all stakeholders. These efforts are expected to drive significant cost savings, targeting $60 million in 2025, with $30 million to $40 million anticipated this year. Building upon the centralization, standardization and technology platforms in 2023, our continued transformation in personal care is now focused on leveraging automation and digital tools to improve caregiver efficiency and engagement. The key here is to free up our frontline members. This will enable us to outpace the inherent growth within the market. These market tailwinds should further be bolstered by regulatory clarity regarding CMS's role, known largely as at 80/20 this spring. Our strategy in remote patient monitoring is multifaceted and forward-looking. Continue to grow our base in personal emergency device revenue and expand our product capabilities with enhanced digitally enabled clinical capabilities. This includes fostering member engagement through our innovative care center and virtual front door services and devices. Integrating RPM and NEMT services has surpassed our expectations. We have addressed care gaps and reduced costs for our clients which distinguishes us in the market. This integrated strategy has notably boosted our NEMT sales, especially in the managed Medicaid space, as our services become crucial for customers aiming to address health determinants and reduce care costs. Our journey through 2023 was marked by a comprehensive operational, organizational and cultural restructuring. And despite some of the challenges ahead, especially in the first half of this year, our margins and cash flow conversion will progress in the back half of the year. Our unique competitive advantages, coupled with our position in the expanding home-centric healthcare market sets us apart. I'd like to thank all our team members for their hard work and dedication for providing the highest quality of services to our clients and their members. Now, I'll hand the call over to Barb, who will share additional details about our financial results and outlook for 2024. Barb?

Barbara Gutierrez: Thank you, Heath and good morning, everyone. Fourth quarter 2023 revenue increased 7.5% year-over-year to $703 million, while full year 2023 revenue increased 10% to $2.75 billion, driven by 10% NEMT growth, 7% growth in PCS and 14% growth in our RPM segment. The fourth quarter net loss was $5 million while adjusted net income was $18 million or $1.29 per diluted share. Fourth quarter adjusted EBITDA was approximately $51 million and adjusted EBITDA margin was 7.2%, a modest sequential decline due to higher G&A expenses related to investments to enhance our digital and data capabilities. Fourth quarter gross margin improved a 100 basis points sequentially to 16.8%, primarily attributable to our transformation initiatives in NEMT yielding early operational efficiencies to reduce costs. Full year 2023 adjusted EBITDA was $204 million and adjusted EBITDA margin was 7.4%, a 140 basis point year-over-year decline, primarily due to higher service expense partially offset by lower G&A related to our cost saving initiatives. Full year gross margin decreased 270 basis points to 16.4%, primarily attributable to higher NEMT purchase services expense driven by higher utilization and the normalizing healthcare utilization environment. Turning to a review of our segment financials. NEMT fourth quarter revenue increased 9% year-over-year to $499 million. Total membership decreased 5.5% year-over-year to 32.9 million members and we averaged 33.6 million members for all of 2023. On a sequential basis, average monthly members decreased 2% during the fourth quarter, primarily due to Medicaid redetermination which was in line with our expectations. Trip volume increased 13% in the fourth quarter, while revenue per trip decreased 3.5% due to mix changes and an approximate 1% decrease in purchased services expense per trip which drives the revenue in our shared risk contracts. Sequentially, NEMT gross margin increased 150 basis points as payroll and other expense per trip decreased 6% to $6.89, while purchase services per trip increased 2.5% to $42.24. The reduction in payroll and other expense per trip is being driven by our cost saving initiatives that Heath discussed which are reducing our calls per trip. Trip volume in the fourth quarter decreased 30 basis points sequentially while monthly utilization increased about 20 basis points sequentially to 8.9% due to lower average monthly members and was in line with our expectations. As a result of our strategic initiatives, NEMT adjusted EBITDA for the fourth quarter was approximately $40 million or 8% of revenue, representing a 70 basis point sequential improvement from the third quarter. Gross profit per trip improved 16% sequentially, primarily due to improvement in payroll and other costs per trip. During the fourth quarter, Medicaid redetermination reduced our Medicaid membership by approximately 450,000 members, bringing our Medicaid membership to 24.7 million members. Since redetermination started last April, we have seen an 8% reduction to our Medicaid membership which is tracking in line with our original target of 10% to 15%. Based on our most updated projections, we estimate that as of December 31, 2023, redetermination was about 70% complete and we expect that the process will conclude in the third quarter of 2024. Redetermination impacted fourth quarter revenue by $10.5 million and adjusted EBITDA by approximately $3 million which was in line with our expectations. In 2024, we expect redetermination to adversely impact revenue by approximately $60 million and adjusted EBITDA by approximately $30 million which is in line with our original range of $20 million to $40 million. The expected revenue and adjusted EBITDA impact for 2024 are embedded in our guidance. As a reminder, our margins are protected from increased utilization from redetermination on our shared risk contracts. Our shared risk Medicaid contracts accounted for approximately 60% of our NEMT revenue in 2023. Even though we'll lose some Medicaid members in these contracts, we expect higher pass through revenue under our shared risk contracts. Finally, the remainder of NEMT revenue, approximately 20% is generated from Medicaid advantage and fee-for-service arrangements. Turning to our Home division. Fourth quarter personal care revenue increased 3% year-over-year to $181 million, driven by a 3% growth in hours and a modest decrease in revenue per hour. Personal care growth was lower than the last few quarters, primarily due to the lapping of a large minimum wage related reimbursement rate increase in New York that went into effect on October 1, 2022. That said, in 2024, we received a reimbursement rate increase in New York tied to the increase in minimum wage which should accelerate our PCS revenue growth in the first quarter. Fourth quarter personal care adjusted EBITDA was $16 million or 8.7% of revenue which was lower than expected, primarily due to slower than expected hours growth and higher direct labor, particularly overtime expense which is used to temporarily staff new cases. Despite the softer margins in Q4, we still expect personal care margins to be in the 10% to 12% range in 2024, driven by operational efficiency gains and favorable reimbursement. In our RPM segment, revenue increased 7% year-over-year to $20 million, driven by referral sales and new business wins. Our RPM team has been successful in winning new business and we expect organic growth of 10% or more in 2024. Fourth quarter RPM adjusted EBITDA was $7.2 million or a 35% margin. We continue to expect long-term RPM adjusted EBITDA margins will be in the 30% range. Our monitoring business continues to perform well and 2023 was one of the most productive years for winning new business and referrals which we expect will continue in 2024. Turning to our cash flow and balance sheet. During the fourth quarter, net cash used in operating activities was approximately $26 million and free cash flow was negative $37 million as quarter-over-quarter contract receivables increased approximately $15 million and contract payables decreased $16 million. Net cash provided from financing activities was $31 million, with the amount drawn on our revolver of $113.8 million as of December 31, 2023. Our free cash flow for the fourth quarter of 2023 was less than we originally anticipated, primarily attributable to delayed payments under multiple contracts from one of our large MCO clients which we expect to collect in the coming months. The net contract receivable and payable balance at the end of the fourth quarter was $27 million which was in line with our previously stated range of $20 million to $30 million. The primary fluctuations in our quarterly working capital are driven by the shared risk contracts with our NEMT clients, with payments and reconciliations occurring over varying time periods. We have improved the granularity of our data analytics and forecasting of our cash flow by contract and have increased our focus on timely client payments, along with our account management teams. We expect to have more visibility into our free cash flow and contract receivables and payables in 2024. Since our business has undergone a significant transformation, coupled with the impact of redetermination and a normalizing healthcare utilization backdrop, we expect continued variability in our quarterly cash flow with improvement occurring in the second half of 2024. While free cash flow is expected to improve meaningfully in 2024, going from negative $125 million in 2023 to a range of $40 million to $60 million in 2024, we expect that free cash flow in the first half of 2024 will be negative with a positive exit rate into 2025. The confluence of increasing utilization, Medicaid redetermination and higher shared risk revenue is creating a temporary challenge in working capital. As we work with clients to reset the contractual prepayments to more closely align with recent utilization trends, we are continuing to build contract receivables. We also expect to repay certain contract payables in the second quarter of 2024. The tension on free cash flow will be partially offset by collections on contract receivables and improvements from resetting prepayment rates. However, we expect the full benefit of these items to be weighted in the second half of the year. I also want to take a minute to remind you about some of the normal quarterly variabilities, specifically our semi-annual cash interest payments in the second and fourth quarters of $30 million to $35 million. Our senior unsecured notes have a principal balance of $1 billion with a weighted average interest rate of 5.4%. We have been actively evaluating proposed financing options with a goal of maintaining flexibility in our capital structure and expect to formalize a refinancing plan in the coming months. Our bank-defined net leverage ratio increased sequentially to 4.7x as of December 31, 2023, compared to 4.6x in the third quarter. We filed an 8-K announcing an amendment to our revolving credit facility, extending our covenant relief period and providing additional cushion in our covenants as we manage through the balance of redetermination and normalization of utilization. We appreciate the support and flexibility of our bank group. The primary use of free cash flow continues to be paying down our revolver and delivering. Turning to guidance. We issued 2024 revenue guidance in a range of $2.7 billion to $2.9 billion and adjusted EBITDA in a range of $190 million to $210 million. The midpoint of our revenue guidance calls for about 2% growth which reflects the impact of Medicaid redetermination, healthcare utilization normalizing throughout the year, the timing of NEMT contract losses offset by the onboarding of new contracts and cost savings initiatives throughout the year. The midpoint of our adjusted EBITDA guidance range indicates relatively flat growth compared to 2023, primarily due to the respective timing of the changes in our business in 2024. We expect the second half of 2024 to be more normalized than the first half, primarily due to the timing mismatch for onboarding new contracts versus contract attrition, the continued impact from Medicaid redetermination and the impact from cost savings initiatives. We also issued guidance for the first quarter of 2024 with a revenue range of $650 million to $700 million and adjusted EBITDA in a range of $28 million to $33 million. Our first quarter will be impacted by a couple of contract losses as well as the loss of certain membership groups from another MCO. That said, our new contract wins will be implemented in the second quarter and will ramp throughout the year. In summary, our fourth quarter revenue and adjusted EBITDA results were in line with our expectations. However, free cash flow was lower than we expected due to the timing of collections under multiple contracts from one of our MCO clients. To reiterate what Heath said, we expect to exit 2024 with a run rate for adjusted EBITDA between $220 million to $230 million and free cash flow will improve materially in the second half of 2024 with a high cash flow conversion rate. We have conviction around redetermination and utilization stabilizing, the traction we are achieving with our cost saving initiatives and the forward momentum from new business wins in 2023 and 2024. We know there's still a lot of work to be done and we are taking the appropriate actions to deliver on our plans for 2024 and beyond. Before we open the call to questions, I'd like to thank all of our team members at ModivCare for their hard work and dedication. We've undergone a meaningful transformation over the last couple of years and our team continues to be highly engaged while providing exceptional supportive care services to our members. This concludes our prepared remarks. Operator, please open the call for questions.

Operator: [Operator Instructions] Our first questions come from the line of Brian Tanquilut with Jefferies.

Brian Tanquilut: Maybe my first question, as I think about Q1, obviously, the guidance is probably lower than even you would have expected. So just trying to get a sense of what happened there? How do you feel confident about the bridge to the full year guidance? And maybe just any thoughts or anything you can share with us on contract losses and starts that obviously happen at the beginning of the year and losses and starts that you're expecting beginning in the second quarter?

Heath Sampson: Yes. Thanks. Well, a good reason why we guided to the first quarter is to provide the insight and really, like I said, to talk about the performance that we're having and you start seeing that in the second half, right? The first half of the year and what we've been talking about heavily impacted by redetermination and the recovery in COVID and utilization. However, the one item that we didn't talk about, because it just happened, was in the contract losses. And you can see that that's impacting us in Q1. The wonderful sales that we had in 2023, in Mobility of $143 million and in Home of $11 million, the bulk of that starts coming on in Q2. So lots of success in winning deals but with a few contracts that happen and lost in Q1. That's the main reason that's the downtick on Q1. And then you can see the rest of the ramp. And this gets back to, again, what we've been doing in this transformation and the success we're having in the cost out, in sales new wins and just the broader growth across the Home industry. So the detail is there to show, it's factual, so you guys can bridge to where we are. But you're right, it is specific within those contract losses that we talked about and that's the main driver for the decrease in Q1.

Brian Tanquilut: Got it. And then, Barb, maybe just wondering, how are you thinking about the 2025 maturities and just the ability to refinance and what are the avenues to raise capital to fund operations and the refinancing?

Barbara Gutierrez: Yes, thanks. Yes. So in terms of the ability to refinance the 2025, as I say in the remarks, we are actively pursuing some avenues. So we've got some proposals that we're evaluating. So no concerns about the options there, we have some very good options in front of us. So we're going down a couple different paths to determine what's the right option for us but definitely have some proposals in front of us. So not concerned. And then secondly, just kind of related to your question, as you all know as well, we amended our credit agreement so that we have some breathing room in our revolver going forward. So really don't have any concerns about our ability to have liquidity.

Heath Sampson: Yes, just a little bit more on that, Brian, right? We said this before too. We're asset-light business and our adjusted EBITDA that we're generating, specifically, again, why we guided to the exit rate as well. And then also said a 40% to 50% cash conversion; so we know this business generates cash flow, we know the transformation that we've done all the way from the operating metrics to customer set to sales and then now cost structure. We're in a really good spot, we have the headwinds that we talked about early. But with that current profile, we feel really good about our ability to refinance and we're refinancing at the right time.

Brian Tanquilut: Yes, that makes sense. Heath, maybe one last question for me, if I may. Just thinking about where we are now in this strategy, right, where you still have obviously 3 different business lines. How are you thinking about the fit of those different segments and the remaining opportunity there to synergize strategically? Or maybe not, right? So just curious how you're thinking now about putting these -- coupling these 3 assets together?

Heath Sampson: Yes. So you think about what the market is doing and what our customers want, right? The pressures they are having, whether that's in Medicare or Medicaid, to really treat the patient outside of the clinical area, it's required to have access to the patient more fully. All of our services, whether that's personal care, RPM or NEMT are critical to that. So we have the size and scale in each of those. And then we've modernized and centralized and standardized. So we're in a really good position in each of the individual solutions as a standalone. So that's point number one. But point number two, you think about how they come together. There's a lot of cross selling opportunities. And actually did specifically say this in the script. If you think about specifically the large payers, the integration that they are asking of us and seeing of us is specifically in the RPM and the NEMT world. It's there, it's the same patient and they need both of those services. So they can work standing alone, they can work together. So my job is to ensure that we continue to execute in accordance with our strategy and vision. At the same time, we look at the assets individually. So lots of value, whether you're looking at them standalone or some of the parts but also value as a whole. So we're sticking with the strategy but you're right to point out the individual assets do have value as standalone as well.

Operator: Our next questions come from the line of Scott Fidel with Stephens.

Scott Fidel: First question, just wanted to just try to summarize just on the shortfall on the NEMT outlook and particularly in the first quarter. And clearly, we know that there's an revenue headwind here that you have called out in detail. Just want to understand on the cost side whether there's also sort of a cost issue here that's influencing the outlook relative to where you may have been thinking about it before, in terms of costs coming in higher than expected or the savings that you're looking to target not coming in as quickly, or whether at least on the cost side, things are largely tracking as expected. It sounds like redeterminations so far is very much playing out as you expected through the end of 2023. I do see in your deck that you do have around a 70 basis point step up in utilization assumed in the first quarter sequentially. So maybe just sort of level set us around the cost side of things in terms of are -- is anything playing out worse than expected here at this point? Or is it largely tracking as expected?

Heath Sampson: Yes. Well, so the cost side, we couldn't be more proud of what we've been doing. Starting in 2023 which is what I said in my script, that we're a $27 million to $30 million cost out. However, that was offset because of higher utilization and redetermination. So really the pressures on margin have to do with redetermination and utilization. The cost efforts have been going very well which is why I have a lot of conviction around those continuing. And you can see those in the decks when you look at a per trip basis. We're really showing strong progress there. So which gets to why I have a lot -- why we gave the guidance as an exit. A lot of it has to do with our conviction around the cost and we're seeing in the data and I expect to continue. Just to summarize again that the headwinds were in the short-term are to do with redetermination and utilization and then those mismatching of the contract losses to the onboarding of the win. So with that clarity and with the cost structure that we're taking out, you put that to our scale, we're in a really good spot as we exit this year. Do we lose you Scott?

Kevin Ellich: Scott, did you have any other questions?

Heath Sampson: Must have lost him. Hopefully he gets back in the queue. We'll talk to you. Thanks for that question, Scott.

Operator: Our next questions come from the line of Brooks O'Neil with Lake Street Capital Markets.

Brooks O'Neil: Obviously, redetermination involves member attrition and increased utilization is the exact opposite of what you might expect in light of falling membership. So can you just talk to us a little bit about what you're seeing out there in the marketplace and what is exactly driving that higher utilization?

Heath Sampson: Yes. Well, so you're right to point out the utilization has to do with 2 items, the big driver, just because of a denominator of membership coming away is redetermination. The good thing about that, like we are saying and then also if you're listening to what the payers are doing, we're about 70% through redetermination. And most of it crescending [ph] in April, there will be some redetermination that will happen in May and June. So there's a lot of conviction around that number and then the timing around redetermination which is the biggest driver for utilization. However, the other part of utilization that is seen across the country and is seen with us is this normalization of the usage of healthcare. So you can see that we actually have that utilization of healthcare also continuing to tick up and we expect at the end of this year, considering all those together will exit at about 10 million or 10.1 million [ph] of utilization. So it's 2 factors. And I do think at the end of 2024 and if you listen to the rest of the healthcare world, they probably agree that at the end of 2024, we should be back to this kind of post-COVID normalized environment. So just in summary around that, a lot of understanding now that we didn't have early in 2023 or mid 2023 around all these factors. And again which is why we have conviction around both redetermination and normalization of healthcare utilization but both effect.

Brooks O'Neil: That's helpful. So let's just talk briefly about the NEMT, really, in particular the contract losses which I think are relatively unexpected. Obviously, some factors are beyond your control but if you could highlight nicely on the factors you see or have heard from customers that are driving contract losses? And then just highlight quickly, what do you think you could do to fix those problems?

Heath Sampson: Well, so since I took over in November of 2022, the focus quickly shifted to our customers. And our customers that are specific to MA that are managed Medicaid and of course our state customers. And they actually all have different needs. And then you layer on what they're actually going through, whether that's because of the RADV rules that CMS came out with on Medicare, or whether that's the increased focus of [indiscernible] within Medicaid and then even within the state related bids, the requirement of innovation to do more free members. My point on that is what was in the past is different now from a customer expectation. For sure, you need to have the right quality, pick people up on time, have lower complaints but you need to do more than that. And then you even need to start integrating with the customer to ensure that they can properly manage the member experience or integrate with a facility so they can book the trip on behalf. All those items have been part of our transformation. You look back a year ago, even 2 years ago, some of that, we weren't -- we weren't where we needed it to be. And that gets to -- and this is why I have a lot of conviction around what we've done, because of what the team has done. Those issues that we had around quality are gone. In fact, we're back to best-in-class. Integrating with our customers so they can control the membership. Member experience is happening now. Having an understanding of that member, so you know that whether they made their dialysis trip 3 times, so we can communicate that, we're doing that now. So all the stuff that we are in the place that we're in now, we didn't have before. And that's a big reason why some of our competitors were able to get in. And it's a driver for one of the reasons why we lost part of that contract before. But I'm going to say this again. The wins that we had in 2023 of $140 million-plus. That was scattered across many different, primarily managed Medicaid. And the reason why we are chosen is because all these items that we have, coupled with we can do more for that member. So we can give the trip but we can also give insight to change, to manage a gap, or to improve customer satisfaction. Long story short, you need to have it all. And I think some of our competitors have some individual pieces. We have them now but we didn't have them before. So we did lose. I don't expect to win everything but what we're doing and what we're doing now, we'll win and continue to win more than when we lose.

Brooks O'Neil: Great. That's helpful. And then just one more. One thing that I haven't heard a lot of conversation about is labor issues and I'm considering that a good thing. But can you just give us an update on what you're seeing in the marketplace in terms of labor availability and the cost of labor?

Heath Sampson: Yes. So, 3 quarters ago and this is pretty consistent across our entire company. As you know, we have drivers that we have through our transportation providers. And of course, close to 20,000 employees, a lot of those caregivers. And that's always a challenge but it's really normalized over the last 3 quarters. So we feel we have a lot of opportunity to continue to hire and retain. The differentiator now in this environment, so the external headwinds that happened again 3 quarters ago or last year, those have been flat. What we are doing now, because of the efforts of centralization, standardization and even automation, we're able to free up resources to ensure we pay the right level and ensure that we can recruit and retain. So long story short, the environment is stable. And what we've done around this integration, centralization, standardization, we're able to outpace the market and retain and grow appropriately on the labor side.

Operator: Our next questions come from the line of Pito Chickering with Deutsche Bank.

Pito Chickering: A couple for me here. For the managed care contract in Florida's [ph] revenues, you guys didn't collect this quarter. I believe you said you collect them in the next few months. Can I ask sort of why you didn't collect it in the time period that you thought you would? Is there any issue on what they think they should pay versus what you guys have recognized?

Heath Sampson: Yes. We wanted to be specific that it was one contract and one area because we have a lot of relationships with that payer across the country which we are in great standing. This specific issue has not been paid at the same time, why I said the next couple of months is because we will get it paid because it's contractually owed. So I wanted to make sure I set it because it was the main driver for the cash flow change in Q4. But I also wanted to be explicit about it and give the amount because it's contractually owed and we'll get it paid within the next kind of 60 days.

Pito Chickering: All right. Great. And then on the contract loss, I guess from sort of your -- sort of the large customer, I guess, how do you guys feel about retaining other business that you have with that customer?

Heath Sampson: Well, that customer and I said this, we're still the largest NEMT broker. We have relationships from the top of the house down to procurement across all the countries. And we are doing things with them that are strategic and forward-looking. So they may be appropriately diversified, I think we gave them a window a couple of years ago to do that. But we are still the number one NEMT broker and we'll continue to grow with them. So unfortunate but going forward, I feel good about our relationship in our ability to continue to grow with them and, of course, others.

Pito Chickering: Okay. From an interest expense perspective, how should we be modeling interest expense in the back half of the year after the refi? Just trying to tie that up with the $40 million to $60 million of free cash flow guidance just to get the models right?

Barbara Gutierrez: Yes. Thanks for the questions. It's Barb. Yes. So I think naturally you can see the disclosure on the new revolver, the new amendment and you can see in there that the interest rate is a little bit higher than the current rate. And so it's a complicated formula depending on how the borrowings go. But if you look in there, it's a little bit higher than the current interest rate.

Heath Sampson: The refinancing the '25 [ph], it's going to be higher interest rate, that's not in the numbers but we feel like we're going to have a good interest rate. And then as we start delevering and paying down our line, that higher end that she said of 35% to 70% [ph] for the year, that's -- be on the higher end if you're modeling after the refi of the '25. And we'll update you more as we get closer but it's not on the lower end, it'll be on the higher end after the refi.

Barbara Gutierrez: Just to clarify on that, you can look at the release, it's -- the interest rate on the revolver is about 50 basis points higher. So that's in the release.

Pito Chickering: Okay. And the last quick one here, as you ramp up into 2Q EBITDA with the new contract wins coming online, can you just remind us the process of onboarding new customers and how we should think about revenues and costs flowing through in those initial months? That's it for me.

Heath Sampson: Yes. So again, why we wanted to kind of separate out Q1 versus the rest of the year and explicitly these contracts coming on are the sales that we had and closed in 2023. So why we feel good about the timing of those and the implementation ease of those is because we have a national platform and each of these states where we won, we already have other clients in there. If we didn't, there is. That's a lot of work to get to stand up a network. But we don't have that issue because we're already concentrated in those specific states. So, we feel good about the timing and the implementation. And again, we've already sold those, so it really is just execution for us. So I feel good about that. Thanks, Pito.

Operator: Our next questions come from the line of Scott Fidel with Stephens.

Scott Fidel: I'm back. Sorry I was muted for my follow-up, so wanted to get those in. So my next follow-up just on the NEMT margins and just given how important this metric is for all of us. Can you just sort of tell us what is assumed for NEMT margin inside of that 1Q '24 guide? And then, Barb, did give us that sort of exit rate of 8% to 8.5%. So I'm just curious on sort of the sequencing of that between 1Q towards getting to that 8% to 8.5%.

Heath Sampson: Yes. So 1Q being down is driven from the items that we talked about, right? So it's redetermination, it's the recovery utilization and it's also the mismatch, the loss that we had that hit us in Q1 and then the onboarding of our sales. And then you couple that with the continued ramp of our cost out, that's already happening. So, those items, we're at the low point in Q1 of that margin perspective for those reasons. But again, the sales are coming on. They already sold them, right? Redetermination will be behind us. Normalized utilization we expect and we're in line with that. So it really gets down to the last component which is those cost savings. And we talked about this in the script. I feel good about 60 [ph] as a total, right? But that's probably not -- that's not going to come till 2025. So it really is, what are we expecting to get in this year. So it really is getting $30 million and that is about just execution. So which is why we gave that exit rate of 8% to 8.5%. So controllable in process and really down to that one item.

Scott Fidel: So Heath, do you have a number in terms of what that computes for the NEMT margin in 1Q?

Heath Sampson: For Q1, no. Yes. So, it won't come down, right? And then just to be in line with that, the margins will be lower in Q1 and Q2 and then start to ramp in Q3 and Q4 at a -- so the ramp will be higher in Q3 and Q4, exiting at an 8% to 8.5%.

Scott Fidel: Okay. We'll work through that in a model. And then just the other follow-up question I want to ask about. You did call out Matrix in the script. I was maybe hoping to get a little more detail here in terms of, I guess, one just you mentioned that performance has been good. Is there any stats that you can share with us in terms of how that business performed sort of exiting out of '23? And then obviously, we're all interested in sort of the timing of the monetization opportunity here. It sounds like you think this can happen still in '24. But what would be the hold up here? Is it -- I know you want to be aligned with your partner. Are they not ready yet? Or maybe just walk us through sort of -- just sort of getting to that modernization catalyst opportunity?

Heath Sampson: Yes. So first off, you're right. What the team has done has been tremendous, right? They've gone through a transformation themselves from Catherine, who's relatively new as CEO for the last couple of years and you can go through the management team that's new. And across the board in all the metrics and of course in the financials, it's showing up. And then even strategically what they've done on the technology side. So the company is a very well-oiled machine that has a very unique capability. They have a network of 5,000 nurses across the country that not only can do risk adjustment but they're in the home which is why there's so much talk and value around that. So I couldn't be more happy with what the team and successful. So we're not going to give you what happened out of 2023. We gave the broad range a number of quarters ago and we're sticking with that of an EBITDA of $50 million to $100 million. Again, why was that so broad? Because that was a long time ago. So I'd still use that as the right proxy for how you want to evaluate this. So getting to the timing of modernization, we are completely aligned with our partners, their focus and our focus is, again, to support the management team and at the right time to actually have it monetized and allow this team to really grow and do the great things. So what I said in my script is within the next 12 months and that aligns with what we are. But it gets back to again that it is performing in a very valuable asset in the marketplace. So, hopefully that's helpful.

Scott Fidel: Yes. Okay.

Operator: Our next questions come from the line of Bob Labick with CJS Securities.

Peter Lukas: It's Pete Lukas for Bob. I just wanted to clarify your free cash flow targets for '24. Does that assume payment of those delayed payments that you called out and said you expect to get?

Heath Sampson: Yes.

Barbara Gutierrez: Yes, Peter.

Peter Lukas: Great. And then I guess a lot has been covered. Just one more for me. How is the market for Matrix, how has it changed -- for Matrix, how has it changed or evolved over time? And what are your current thoughts on the likelihood of Frazier monetizing the asset in '24?

Heath Sampson: Yes. So similar to what I said before, I think we're aligned with our partners. The best thing is to support the management team and get the highest value. So my estimate of 12 months is what I expect but it'll be when it's the right time and Frazier wants to also monetize when the time is right. So consistent with what I said before, that's it. The value of Matrix is the nursing network, right? So it matches with what's happening in healthcare. Though there is some pressures around risk adjustment. Really though, risk adjustment couldn't be, is more of a need than it has ever been because of what is necessary to do with that specific patient. So the value is we have a national platform across all the payers, risk adjustment demand remains. And then, since you have those nurses and you're in the home, you can do a little bit more or a lot more, whether that's giving a vaccine to closing another gap. So that's what we're enabling this management team to work on and build and we will monetize at the right time.

Operator: Bob, did you have any further questions? It sounded like you were about to say something else.

Heath Sampson: No. Next question.

Peter Lukas: No, I'm good.

Operator: Our next questions come from the line of Mike Petusky with Barrington Research.

Mike Petusky: So appreciate the commentary around your confidence in the collectability of the delayed payment and the possible timing. I didn't catch, though, if you commented on it. Is there a material disagreement between the parties in terms of what's actually owed?

Heath Sampson: Well, so, it's -- all of our contracts that are with shared risk, this is why they reconcile over many months. So it's complicated. But we've been under this contract with this customer. Well, one, they've been a long-time customer of ours many, many years. And this contract structure started in late 2022. So we feel really good about the math and the collection of the entire amount. It's in line with the requirements of the contract. So we'll collect it within the next 60 days or so.

Mike Petusky: And then -- and forgive me, I was off the call for about 3 minutes and I may have missed this if you guys talked about this. Did you give or could you give sort of a sense of the cadence of free cash between first half and second half? I see that the target is essentially sort of $50 million at the midpoint for '24 but just in terms of the cadence of first half versus second half?

Barbara Gutierrez: Yes. Thanks for the question. It's Barb. Yes. In the prepared remarks, we comment about the first half, we will have some tensions on our cash flow. And we'll be generating the cash in the back half of the year.

Mike Petusky: Okay. So that part actually caught but I was wondering if there might be at least some kind of range or quantification range of exactly how much you are expecting within your guidance to have to generate in the second half to get to that sort of $40 million to $60 million [ph]?

Heath Sampson: It's really all of it in the second half, Mike. So again, the amounts in the first half and then, though, Barb says tensions but it really is redetermination and utilization and the contracts are working. So it's working capital and the bulk of it is this increase in receivables, because redetermination is bringing down our membership. And that's just -- the delta between that, we throw in our balance sheet within receivables. So it's arithmetic, both in AR and then paying off the account, the contracts payable. But because of predetermination not ending till April, May. That's the main reason why we utilize so much in the first half of the year. But that's also done in the first half of the year which is why we'll quickly ramp that rest to that kind of midpoint of $50 million.

Mike Petusky: Right. I mean, it should be -- and sorry for pressing on this but I do think it's important. I mean, it is -- so are we looking at, like, sort of a negative $20 million, $25 million [ph] a quarter in the first half and then sort of making that up plus in the second half?

Heath Sampson: Yes. So, well, we have a refinance line and there'll be fluctuations that happen within the first couple of quarters. So we're not going to guide to what's actually going to happen in Q1 and Q2 around cash flow but we have a lot of confidence in our exit rate around cash flow.

Mike Petusky: Okay. And then I just wanted to staying on this topic in terms of free cash, the $40 million to $60 million target does not include any refi which you'll likely do in the first half. A refi of the '25. And it also -- does it include the amendment to the revolver or is that not included in the $40 million to $60 million either?

Heath Sampson: Yes, the amendment to the revolver is in there. And that's relatively small, right? But it doesn't include the additional interest on the 2025. And going to -- I think it was Pito's question before. We did give a range there. So I think it's going to be higher interest but we'll also be bringing down, as we start generating cash flow, we'll be able to bring down that line. So the right way to think about it right now and we'll get more specific when we do refinance is in that higher end range which was closer to 70 [ph] as a total annual number.

Mike Petusky: Okay. And then just last question. You sort of alluded to some contract decisions being pushed out. Are you hopeful and obviously you've had great success in contract wins in '23. Are you hopeful that in the second half of '24, some of these decisions, these awards will be made and sort of setting up for '25? Or do you get a sense that a bunch of this may push into '25 and who knows beyond?

Heath Sampson: So what I was referring to was the state business with Mobility. So and those -- a lot of those contracts, especially in the second half of '23 and even in '24, have been pushed out. But I do expect RFPs to happen in 2024. But when those awards happen, that volume won't come on until 2025. And then the success rate that we've had in our recent state bids that did come up and that we talked about, right? We won one and then extended one and then renewed. So I expect that we will win more than we lose. Therefore, that happens in '24 and we'll let you know when that happens in '24 but that -- and then we'll appropriately tell you what's going to happen in '25 when that new volume comes on.

Mike Petusky: Any rough quantification of how much business is out there to sort of be bid on for...

Heath Sampson: Yes. So consistent with this, I think, a couple of quarters ago we said this, the TAM for state is about $1.2 billion to $1.3 billion and we have about half of that ourselves right now. So we have the ability to go after that other half. That entire $1.2 billion is not going to churn in '24 or even '25 but there'll be meaningful opportunities for us to grow, to retain that half as well as to grow above that.

Operator: Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Heath Sampson for any closing remarks.

Heath Sampson: Thank you for participating in our call this morning and for your interest in ModivCare. Our updated investor presentation is posted on our Investor Relations website. If you want to schedule a follow-up call, please contact Kevin Ellich, our Head of Investor Relations. Thanks and have a great day.

Operator: Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect at this time. Enjoy the rest of your day.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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