ModivCare Inc (MODV) 2023 Q1 法說會逐字稿

Good morning, and welcome to ModivCare's First Quarter 2023 Financial Results Conference Call. (Operator Instructions). Please note this conference is being recorded.

I will now turn the call over to Keith Ellich (sic) [Kevin Ellich], Head of Investor Relations. Mr. Ellich, you may now begin.

Good morning, and thank you for joining ModivCare's First Quarter 2023 Earnings Conference Call and Webcast. Joining me today is: Heath Sampson, ModivCare's President, Chief Executive Officer and Chief Financial Officer; and Ken Shepard, Head of Finance.

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 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 modivcare.com. This morning, Heath Sampson will begin with opening remarks. Ken Shepard will review our financial results, then we'll open the call for questions.

With that, I'll turn the call over to Heath.

Thanks, Kevin, and a warm welcome to our first quarter earnings call. Today, we reported solid first quarter 2023 results as revenue grew 15% year-over-year, to $662 million. Strong top-line results were driven by 17% growth in our mobility business and 11% growth from our home division, which includes personal care services and remote patient monitoring. Adjusted EBITDA for the first quarter was in line with our expectations at $50 million.

We remain confident in our ability to drive growth and create shareholder value. This optimism is grounded in our commitment to delivering innovative and comprehensive supportive care services, which cater to the evolving healthcare landscape, characterized by a pronounced shift towards supportive care services that provide better access to care and home-based care solutions. Achieving our expectations are visible to our entire organization and are rooted in our 2023 strategic initiatives, which are two-fold. Building a scalable platform and amplifying and diversifying growth. These 2 initiatives cut across the entire company providing focus and clarity for our teams to execute every day. Our initiatives are multifaceted and aim to enable sustained revenue growth and a stable lowest cost operating platform.

Our build a scalable platform initiative is centered around optimizing our operations and enhancing our technology infrastructure to ensure we can scale effectively and efficiently. This includes centralizing and standardizing operations and shared services, investing in technologies that are fit-for-purpose to our customers' needs, and driving efficiencies in operating leverage through realigning and reallocating resources throughout the entire company. Our amplify and diversified growth initiative aims to expand our offerings and customer base through strategic partnerships, new service offerings and geographic expansion within our current customer base; and more importantly, to new customers that have historically not been [a] focus of ours. Additionally, I'd like to provide updates on the recent CMS proposal for ensuring access to Medicaid services and Medicaid redetermination.

Recently, the centers of Medicare and Medicaid Services released to propose a rule titled "Ensuring Access to Medicaid services". The intention of this rule is to enhance access to services for Medicaid beneficiaries, which we wholeheartedly appreciate and endorse. It is commendable that CMS acknowledges the significance of personal care services, and then the necessity to attract more caregivers to the industry considering the increased demand. Several notable provisions in the proposed rule have garnered attention, particularly in the requirement that at least 80% of Medicaid payments be allocated to caregiver compensation. There are a couple of important factors to consider.

First, this is a proposal, and CMS will receive ample feedback during the 60-day [common period], this is essential to remember that this is part of the standard rulemaking process. The heightened attention on personal care services leads to necessary sophistication oversight and regulation. It's also worth noting that the proposed rule indicates this change wouldn't become effective until 4 years after the final rule is issued.

Second, if higher reimbursement rate is channeled to caregivers this should enhance our ability to hire caregivers, resulted in accelerating revenue growth and operating leverage as approximately 25% of our personal care G&A costs are variable. However, we believe CMS should consider all costs associated with providing personal care services, including care coordinators, recruiters, training, and compliance systems like electronics visit verification among others.

The growing attention and support for home and community-based services again is commendable. One of CMS's strategic pillars focuses is on expanding access, which is vital for our members. Our supportive care services play a crucial role in helping our customers reduce costs and enhance health outcomes. Also the Biden administration announced an Executive Order aimed at boosting funding for personal care. This move underscores the importance of delivering quality, affordable, supportive care services to seniors and others in their home.

Next, I'd like to discuss Medicaid redetermination. As many of you know, states were able to begin redeterminating the eligibility of Medicaid members on April 1. The healthcare system is in the early stages of the Medicaid programs re-enrolling members, which we think will last up to 5 quarters. We expect most of the impact from redetermination will be on the NEMT business, where approximately 80% of our members are Medicaid beneficiaries. As mentioned last quarter, we anticipate no significant impact on our NEMT membership from redetermination until the latter half of this year. Redetermination will unfold over the next few quarters as said, and our membership could be affected by 10% to 15% before considering new contract wins and just a standard market expansion, which is in line with our projections that we talked about last year, during our Investor Day.

We expect the majority of these redetermined members to be lower utilizing individuals, which would lead to a smaller decline in our total trip volume, compared to the overall membership. Additionally, we've been preparing for redetermination over the last several months. When we exit the pandemic in 2020 and 2021, we made a conscious effort to effectively and efficiently transition, a large portion of our previous full-risk contracts to contracts that are shared risk or fee-for-service arrangements, protecting ourselves and our customers. These shared risk contracts significantly derisk the financial impact from redetermination by setting contractual revenue rates, primarily based on trip volumes as opposed to membership. In many situations, we can fully offset the gross profit impact from lower membership from re-determination as these contracts reset monthly.

Our remaining full-risk capitated contracts currently only account for approximately 20% of NEMT revenue, compared to 60% at the start of the pandemic. For these contracts we will continue to have anticipated contract repricing negotiations throughout the year, and annual actuarial pricing reset that allow us to normalize pricing in a post-redetermination environment. As it relates to our membership, we continue to believe that we can grow through the 10% to 15% redetermination headwinds through 2025, based on our new contract wins, existing market expansion, Medicare advantage growth, and just the underlying Medicaid market growth. In total, we believe that we have encapsulated the impact from redetermination in our 2023 outlook, as well as our 2024 outlook.

Now I would like to discuss our consolidated 2023 guidance and the longer-term outlook. We have maintained our revenue and adjusted EBITDA guidance for 2023. Although our first quarter results aligned with our internal expectations, we recognize that our guidance anticipates a continued EBITDA ramp throughout the year. To provide clarity, I'd like to highlight several key factors that reinforce our confidence in this upward trajectory.

First, we've gained significant traction in our new NEMT contract wins. This includes receipt of an intent to win award for a new NEMT state contract, a new managed Medicaid contract, and a national contract with a large MCO. Combined, these contract wins are expected to have nearly mid-single-digit annual contribution to revenue, with the contributions beginning to ramp during the third quarter of this year.

Second, our specific actions in our Mobility division will favorably impact EBITDA growth throughout the year. Our multimodal partnership model is expected to drive lower transportation cost per trip throughout the year as we narrow our network of transportation providers and we continued to shift more trips to our preferred providers matching the right type of ride with the members’ needs.

During the first quarter, our preferred providers accounted for 17% of our trips, compared to 11% last year, which led to a sequential decrease in our cost per trip during the quarter. We also expect our omnichannel communication initiative for improved member interactions to drive lower other expense per trip, as we provide more efficient and cost effective member communication that reduce calls to our contact centers. We made progress on this front during the first quarter as reduced cost -- [calls] per trip by 7% sequentially, and 14% compared to last year. While we also reduced our missed trips by approximately 10% sequentially.

In our Home division, we also expect to see a continued ramp in revenue and profitability throughout the year. Our personal care team has made good progress in centralizing and standardizing back office functions and certain operational functions as we continue to build for scale. This year we plan to centralize 12 critical business functions and 100% of our personal care team is expected to be aligned to centralize management by the end of the year with ongoing continuous improvement. We also expect continued growth in the personal care hours, driven by increased caregiver recruiting and retention as well as the opening of several de novos.

During the first quarter, we opened 2 de novos and expect to open more than 10 this year. Our remote patient monitoring segment has a healthy referral sales pipeline between new customers and expansion of existing contracts and our enterprise team continues to gain traction with cross-selling opportunities for PERS and E3. In addition to these Mobility and Home initiatives, we have taken steps to reduce our corporate G&A cost structure to align with our One ModivCare strategy, gain efficiencies as we scale and centralize.

Combined, the strong visibility in these initiatives gives us confidence in our ability to ramp growth and profitability throughout 2023. In addition to 2023, we remain confident in our ability to achieve our 3 and 3 targets for 2025, which is $3 billion of revenue and $300 million of adjusted EBITDA. I'd like to share some of the key drivers and levers that will help us achieve these long-term targets.

In Mobility, we expect to increase membership and related revenues from new contract wins and expansion by high-single digits to low-double digits over the next couple of years. We have a strong pipeline of state Medicaid and MCO contracts that are coming up for renewal and rebate. We expect to see continued growth within our existing Medicaid markets, as well as the opportunity to expand and grow in the Medicare Advantage market. Enhancing access to care is important strategic pillar for the current administration and NEMT remains highly under-penetrated as only 30% to 45% of MA plans to offer this benefit. The bottom-line is we are confident that despite some of the near-term headwinds, that there are a lot of tailwinds and opportunity for our mobility business to grow 2024 and beyond.

The second lever in the mobility business is reducing transportation cost per trip and this will be driven by our multimodal partnership model as discussed earlier. Over the next couple of years, we expect to reduce our NEMT unit costs or purchased services per trip to the high-30s from $42 per trip today. Our multimodal partnership model will also improve member satisfaction as on-time performance improved over 400 basis points year-over-year during Q1. We are also confident that we could reduce other service expense to 11% to 12% range from 13% today through our omnichannel member communication initiative, which will drive efficiency and operating leverage as we use advance technologies such as Text Messaging and IVR, IVA systems and other technologies to communicate with members and overall eliminate calls.

In Personal Care, we remain confident in the long-term drivers for personal care, which include winning new business, low-single digit reimbursement rate increases, middle-single digit hours growth, which will be driven by caregiver recruiting and retention and accelerating de novo expansion. In remote patient monitoring our long-term growth drivers are new MCO contracts led by our E3 solutions and other innovation solutions like value-based care arrangements, which continued to gain traction with our payers, and other risk-bearing entities. Our E3 engagement solution really enhances our ability to be paid differently, and that's instrumental to our long-term targets that I talked about earlier. We continue to gain traction with commercial payers as member engagement and satisfaction are important factors in payer star ratings.

Although we haven't commented on it recently I'd like to provide an update on our equity investment in Matrix Medical, which is not currently being recognized in our current valuation. We have said that it has completed its operational restructuring last year. The benefits are coming through strong as the company's performance improved meaningfully during the first quarter including a 40% year-over-year increase in health assessment volumes. While this is only 1 quarter, we are confident that Matrix is on the right trajectory, which will support our eventual monetization at the appropriate time. We remain aligned with Frazier, and we will be able to monetize the minority ownership of 44% in Matrix, based on a normalized adjusted EBITDA range in the $50 million to $100 million range.

Continuing on with our recent accomplishments. My first 90 days as CEO are now complete, including upgrading people and processes while accelerating the culture of compassion meets profitability. With these enhancements in place, we can concentrate on executing on our strategy.

In March, we took a significant step in strengthening our leadership team by welcoming Anne Bailey, as President of our ModivCare Home division. Anne is a highly experienced healthcare executive with over 25 years of industry experience, having served most recently as a Senior Executive and Group Vice President at DaVita. We're thrilled to have someone of Anne's caliber onboard, and she's already making a substantial impact on our Home organization. Regarding our own ongoing CFO search, I cannot compromise on building a high-performing leadership team, it's essential to find individuals who not only excel in their roles, but also contribute to the overall cohesiveness and performance of the team. Our search for the new CFO, remains a top priority and we are committed to finding the right person.

Before, I hand the call over to Ken, one of our key leaders within the CFO organization to discuss our first quarter financial results, I want to extend my [sincerest] appreciation to the entire ModivCare team. Their relentless dedication, hard work, and unwavering commitment to excellence has been vital to providing top notch supportive care to our 34 million members. I also want to acknowledge the substantial changes we have made over the past few months and I am grateful for the team's commitment to operational excellence and their active participation in building our unique culture of compassion meets profitability. I am generally proud of the accomplishments we've achieved together.

I'd also like to extend my heartfelt thanks to our valued customers and key partners for their unwavering support and collaboration. We have made deliberate changes in how we engage with our customers and key partners and the results are evident in how we are continuously improving together.

I'll now pass the call to Ken, who will provide an overview of our financial performance for the first quarter.

Thank you, Heath, and good morning, everyone. First quarter 2023 revenue increased 15% year-over-year to $662 million driven by 17% growth in Mobility and low-double digit growth in our Home division. Net loss was approximately $4 million, while first quarter adjusted EBITDA was $50 million, which was flat year-over-year and in line with our expectations. NEMT first quarter revenue of $469 million was driven by a 5% increase in average monthly members and a 12% increase in revenue per member, per month.

Transportation costs per trip decreased 1% sequentially, due to early successes in our multimodal partnership model. We remain focused on our mobility initiatives to reduce unit costs and drive efficiencies, which will continue to improve performance, increase member satisfaction, and lead to better outcomes. We expect the benefits from these initiatives will ramp throughout the year. Trip volume for the first quarter increased 5% sequentially, while monthly utilization per member increased to 8.1%, compared to 7.5% in the fourth quarter, partially due to anticipated impact of normal contract attrition from lower utilizing customers that occurred in Q1, as we mentioned last quarter. As a reminder, there was no impact from redetermination during Q1.

NEMT adjusted EBITDA for the first quarter was $35 million, down 5% year-over-year due to increased service expense per trip, while we kept adjusted G&A expense flat sequentially. We expect to realize additional operating leverage throughout 2023, from the initiatives Heath mentioned, which will help drive sequential EBITDA improvements.

Turning to our Home division, first quarter personal care revenue increased 9% year-over-year to $174 million, driven by 4% growth in hours due to improvements in our caregiver recruiting and retention efforts, as well as a 4% growth in revenue per hour. After experiencing very strong reimbursement growth in 2022, we expect the reimbursement environment will be in a more normal 3% to 5% range this year. We expect service expense per hour could be at the higher end of this range as we focus on caregiver growth, as demand for personal care services remains very high.

Personal care adjusted EBITDA for the first quarter was $17 million or 9.8% of revenue. As our initiatives build -- to build for scale and grow the business continued to gain traction, we expect personal care margins will gradually improve into the 10% to 12% range.

In our Remote Patient Monitoring or RPM segment, revenue increased 35% year-over-year to $18.7 million, driven by favorable contribution from our 2022 acquisition of Guardian Medical Monitoring. RPM adjusted EBITDA was $6.5 million [for] 35% margin, which is in line with our long-term margin target. Our monitoring business continues to perform well, as we expand into new states supporting our projected growth rates.

Turning to our cash flow and balance sheet. Consolidated cash-flow from operations in the first quarter of 2023 was the use of approximately $3 million due to a $7 million reduction in contract payables and $31 million increase in contract receivables. Excluding these items, our cash flow from operation would have been better in the first quarter by $38 million. The increase in contract receivables, which represent under payments and receivables on certain contracts with reconciliation or risk corridor provisions was higher than our expectations in the first quarter. However, we will be collecting on these receivables later this year, which will contribute to stronger cash flow in the second half of 2023.

Our contract payables, which primarily relate to overpayments and contract liabilities on certain NEMT contracts were in line with expectations in Q1 at a $7 million reduction. However, we have 1 large settlement during the second quarter that we previously expected, will be spread throughout the year. This will likely result in cash flow from operations in Q2 being in a similar range as the first quarter. For all of 2023, we continue to expect our contract payables and receivables will be much less impactful compared to last year. However, our cash flow generation will be more second half weighted due to these timing issues.

We ended the first quarter with approximately $13 million in cash and had $15 million drawn on our revolver, our $1 billion of long-term debt was flat sequentially and remains all unsecured debt at fixed rates. Our consolidated pro forma net leverage declined sequentially to 4.2x as of March 31, 2023. We continued to target net leverage of 3x, which we expect to achieve in 2024 through a combination of debt reduction and EBITDA growth. We remain committed to a disciplined and balanced capital allocation strategy with the primary focus on delevering our balance sheet.

This morning we affirmed our 2023 adjusted EBITDA guidance of $225 million to $235 million, and our revenue guidance of $2.575 billion to $2.6 billion. The comment Heath made on the call should help you bridge to our full-year guidance. We think the current consensus estimates are a fair approximation for the quarterly cadence for the year, and we remain confident in our long-term targets of $3 billion of revenue and $300 million of adjusted EBITDA in 2025.

To sum things up, our first quarter results were in line with our expectations and we continue to see the benefits from our strategic initiatives that will drive efficiencies and operating leverage, going forward. Our team is working hard to win new contracts and grow the underlying business. And before we open the call to questions. I want to thank our entire organization for their hard work and dedication. It's because of them that we were able to produce these solid results, while helping provide high-quality care and the best experience for our members.

This concludes our prepared remarks. Operator, please open the call for questions.

(Operator Instructions). And our first question comes from Brian Tanquilut from Jefferies.

I guess, Heath, I appreciate all the color you've given, especially on re-determination. So maybe I'll ask a question that we're getting a lot of, so as utilization picks up and obviously you have your PMPM contracts with your payers. I know, on the downside of utilization, you had to reset -- refund or rebate some of your payer clients, but maybe if you can walk us through how we should be thinking about the opposite of that, kind of like the bands and maybe what mechanisms are in place to protect you if there -- as utilization and broader volumes pick-up on NEMT?

Yes. So the utilization increases like we've been saying for a while, have been steady increases as we come out of COVID, and more normal trip volume takes hold and that continues to happen. The other thing -- and we talked about this today, primarily we're talking around redetermination. But in general, our contracts that we have reset, renegotiated to ensure that it's a win-win for us and the customer as well, as you see that now full-risk is down to 20% of our mix versus pre-COVID 60%. So those structural changes in our contracts allow us to grow with our customers and utilization being as planned. So, that's a good thing from a structural perspective.

The one thing that we have to do and have been doing to ensure that we can make sure that our margins get back to where we want and at the higher range in Mobility side, it's two-fold. It's the transportation costs, and those initiatives are taking hold. That's again narrowing the network and ensuring that we are with our most -- the partners that match what we need for that specific member. Those initiatives are taking hold and that cost will come down. And then the other item, well, there's 3 items.

The other item has to relate to get majority of what we do today, is still phone calls with our members, so just common technology whether that's IVA, IVR, text messaging app and bringing that down to a normal range is they're going to allow us to save funds and we're seeing that benefit right now. It really starts taking hold both of those in kind of second half of this year, but in line with our expectations on the execution plan, which is probably the most promising thing because we know it's working and we just need to execute on that.

So the contracts, the way we've restructured them, coupled with these initiatives that are taking hold, coupled with where we think utilization has been, all those together are showing that it's working, and our plans are taking hold. So again, we feel really good about that business. The other item and this is more strategic. The conversation around how important trips are to healthcare continues to accelerate. They know -- the obvious ones are dialysis. But across-the-board, the people that need transportation are usually the most sick, or the most needy, and those conversations primarily with our payers are showing that transportation is really important.

I'll tie it back to that. That's why we're able to change your contracts. That's why we're able to -- and I've said this before, not be apologetic around making a 10% to 12% EBITDA margin. So a lot there that I answered. But hopefully, that answered your question, Brian.

Yes. I really appreciate that. I guess, my follow-up, Heath, a separate topic. In the past, we've talked about contract wins and what that pipeline looks like, maybe you can just share with us some of the discussions you're having and what landscape looks like for RFP and potential wins as we look into 2024.

Yes. So that's been a major focus for us and we've made new hires and changed the structure on how we go to market. Proud of the teammates that are our client service group as well as the new hires that we made, I them the hunters, there really new business. Again the announcements that we made today, a few of those we weren't even talking to a few months ago. So the value proposition, coupled with our go-to-market approach is taking hold, where we have a large MCO that we never talked to before, now we have a national contract. The pipeline is full, it's real -- it's a real pipeline that's full.

So now, I couldn't be more proud and excited about what we're doing on the new sales side across the country, so it's not just a one-person approach, it really is a multi-pronged enterprise approach with relationships at the top, with relationships all the way down to the state-based individual procurement level, and the team is doing well and the traction is beginning, and I expect that to accelerate throughout the year.

And our next question comes from Bob Labick from CJS Securities.

I just wanted to maybe dig in a little further, just follow up on kind of the last 2 answers you gave and you've given us so much information today, I'm still trying to digest it, but thank you for all the information. So you've mentioned some new wins and congratulations, that's awesome. You also said redetermination over X period of time, 6 quarters or something could have a 10% to 15% impact on membership. And then you said you'll grow members. And so, is the growth from new wins getting you back to flat, meaning is it like offsetting the 10% to 15%? Or is there like absolute growth by the end of this period? Or how should we think about member attrition and addition and timing it over the next 2 years? Just to give us a sense how this plays out.

Yes. So the -- you have to break it down kind of per the year or number of quarters that we've laid out there. So, for 2023, the way we have talked about it consistently, if redetermination happens like -- we think it's going to happen in the latter part of the year, our new wins are going to offset that. So really, it's flat, and you can see that revenue is flat. But the new wins that we're having now and expect to have throughout the year, those start coming on in 2024. So even though redetermination will continue into 2024, those new wins will outgrow that, coupled with other like Medicare Advantage as well. So, it is expected after 2024 -- through 2024, and of course, into our 2025 targets, we will grow above the redetermination impacts. There is also -- the other thing with redetermination is talked about, and we talk about that too, talking gross amounts as well. So we do expect the Medicaid growth to kind of be in line as well. So yes, just normal Medicaid growth, MA growth and then our new wins growing above. So that's why we feel good about those targets and growing above redetermination.

Okay, super and then you gave us a little more details on kind of new contract structure today as well. I think you said full-risk is now 20% versus 60% before COVID. And maybe just -- again, take a half step-back and explain the difference in the structure now and obviously, the benefit to you and to the states and to the users and everyone involved and how these new contracts are going to be better going forward?

Yes. And so COVID and really when I got here a couple of years ago, really highlighted that we had a misbalance in these contracts. We did very well at the expense of our customers in 2020 and 2021. Even before that, by the way, in 2018 and 2019, it was the opposite. Our customers did very well, and we didn't. So when I got here, this doesn't make sense, right? This win-lose relationship that was anchored on this kind of capitation that happened 5, 6 years ago. The business in transportation and NEMT changed over these last 10 years. We were not kind of caught up to this win-win relationship. And you couple that with what has happened really over the last couple of years in COVID, and continues to accelerate.

I touched on this a little bit with Brian's question, Healthcare now realizes or has realized, but now it's an important focus because we were able to track and have data. Transportation matters. It matters to people's clinical outcomes eventually. So you put all that together, we have been enabled to change the contract, where we actually have a win-win relationship. And as, whether or not utilization or cost fluctuations happen, we share in the upside and downside for that. So the change to where we are today, I expect that to continue.

So 60% pre-COVID on full-risk, which full-risk, again, is we get a PMPM. And then we're responsible for everything regardless of cost of utilization. Now the contract has worked where there is a sharing within that utilization change or cost change. Again, I expect that to continue, and that contributes again to the rigidness in our margin profile, especially when we get to the high-end, when we finish off with these initiatives like I articulated a little bit earlier.

Yes, Heath, if I can add to that, we see that going into these new contracts and procurement of all our pending wins, coming up. So all the big clients are moving towards, "Hey, let's look at this from a shared risk perspective". So we do see that bucket of our contract profile continue to grow.

Our next question comes from Scott Fidel from Stephens.

Great. Just wanted to start out just -- I appreciate the commentary on the CMS Medicaid and CBS proposal, and definitely understand there is still a lot of wood to chop here in terms of getting to the final proposal, but would be interested just -- I know, that you reaffirmed the 2025 3 and 3 targets. But we're thinking sort of longer term if the proposal went into effect over 4 years. Would that have any impact on your 10% to 12% margin target for the Personal Care segment?

And it looks like in the first quarter, you did around a 22.5% gross margin, would you have the ability, I guess, to offset that if in terms of G&A, if there was a 20% margin cap for gross margins. I mean clearly, there is probably going to be definitional sort of flexibility from CMS, I would imagine around that. But I just want to get your thinking on that long-term 10% to 12% margin target if that is secured, if this proposal would go into effect?

Yes. Well, you set it up very well. So the opportunity for us as this gets put in place to ensure that we have things centralized, the back office and a lot of shared operations. A wonderful thing about personal care, the simplicity of hiring caregivers and servicing the member is actually pretty -- it's relatively low cost. The majority of that goes to paying the caregiver. What's happened -- and we're still through this transition and same as across the entire industry, and for sure, with mom-and-pops, there's a lot of administration cost within each of these offices. And the opportunity to take those costs a way to free up those people, to hire and retain and service is right in front of us.

And we're partway through that journey, so yes, companies like us that really focus on that, invest in that 1 platform, 1 system, centralized back office, centralized core operations are going to be able to reduce their G&A costs, and therefore, make these margins that we have talked about long-term. So I feel really good about it. You can see in the script that I am mostly -- I'm really bullish on what personal care does for our country, and CMS sees that. This proposal coming out, I view is a good thing, though there is a little disconnect that you talked about right now is a kind of 2% difference. That's going to be worked out companies with sophistication and scale are going to do very well here. So yes, I feel good about our long-term margins. I'm excited about what this industry is doing, and we'll see how these next number of quarters and years pay out on those regulations. But again, I think it's all positive.

Okay. And then just a follow-up question. I guess, 2 numbers questions would be helpful. One, just on the NEMT side, to the extent you can give us some insight into how you're sort of modeling the NEMT margin ramp over the course of the year from that 7.5% jumping off point, [wanted to] hopefully try to get our modeling as accurate as possible as we can on the NEMT margin.

And then on operating cash flow. I know you guys sort of gave us some of the updates on the impacts for the second quarter. It might be helpful if you have a full year view on operating cash flow in terms of your 2023 expectation there now?

Yes. So I'll start, the operating cash flow is -- I think, consistent with what I talked about in the past around now, and the clarity that we talked about a little bit, but I'll be more specific around that. The Q3 and Q4 is really where we get the working capital kind of big fluctuations happen in Q1 and Q2, and they'll be more normalized in Q3 and Q4. So that adjusted EBITDA less CapEx, less interest we'll follow more to bottom line. So that kind of $100 million-ish run rate free cash flow is the right way to think about that. But really, that kind of starts happening more clearly in Q3 and Q4.

From a margin perspective on mobility side, it's two-fold. It's the cost per trip that we pay. That has improved, and I expect that to accelerate throughout the year. And that, again, that's on getting the right members and the right modality to our members at the right cost, and that's working. And I expect that to be kind of ramping throughout the year at the current pace that it is.

The other component of our service expense is calls, which Heath mentioned earlier. So as we ramp those down through the initiatives in the second half of the year, we'll see margin benefit from that as well.

Yes. And you can see, we have like 20 million-plus calls. Majority of our interactions are calls, so you can see that, that lever is a big lever that we are pulling and we're seeing that traction, and it will accelerate through the year. So tangible actions taking hold, I expect that to be kind of a consistent ramp, but more importantly and probably in Q3 and Q4 accelerating as these initiatives take hold.

So Heath, where would you see that sort of margin? Obviously, your longer-term range is 9% to 12% as you see those initiatives playing out? Where is sort of the [exit] rate on the NEMT margin that you would be thinking about in 4Q, let's say, versus 7.5 in 1Q.

So for where we are, the [exit] rate is still going to be on the lower end of our range, but really accelerating. So I think the right approach for where we are is to think about it being on the lower end of our range as we're exiting this year.

And our next question comes from Pito Chickering from Deutsche Bank.

A little more detail on Scott's question, but sort of more specifically, looking at the 2 lines of NEMT margins, the purchased services is down because of these -- the preferred providers, but then the payroll taxes are up sequentially. So it specifically related to those 2 components, kind of where it does purchase services and sort of in the fourth quarter and then more specifically does payroll and other cost per trip and in the fourth quarter.

So just to be clear, the purchased services are going to be related more to the transportation cost. And the payroll and other is primarily where you're going to see benefits coming from the reduced call volumes. And so yes, I can let Heath share a little more commentary on thoughts on [the year on that.]

Well, again, I think it's the same that I just talked about with Scott. I expect those to continue to increase, to improve those margins, combined with that getting us to the lower end of our range on the EBITDA side of kind of that 9%, 10% range exit rate.

All right. Fair enough. And then sort of a follow-up on Brian's question. Just to be clear here, as the NEMT, the utilization increases with the new contract structure you guys have, is that an EBITDA dollar increase? And how should we think about increased utilization relative to EBITDA margin on NEMT.

Well, so the -- and that's always the challenge on our contract, and you know this, Pito, right? So when we talk about the margin percentages that we talked about, there's a lot of things that happen within that based on our current contract mix. So in some areas, when cost goes up, that affects our revenue line, but it doesn't actually hurt our percentage line. So, but -- so that's why based on the mix we have, we think that we're going to improve the margin percentages in a consistent way based on the cost cutting that we have, based on the utilization and the contract mix that we have to happen. So -- what was the other one?

Well, Pito ask your question again to make sure I answer it.

Yes. No, it's -- I mean, because these contracts have changed, I guess the question is just sort of very, very simplistically, if liquidation increases, that is now a more revenue driver, therefore, should we see increased liquidation as an EBITDA dollar increase? Yet maybe more of a margin pressure but the EBITDA dollars go up?

Yes. Okay. So that's what you see here right now. Yes, that's the nature of -- with our current contract mix, when -- if expense goes up, we share in that. And a lot of that goes to the revenue line, but the cost line is also going up, so the percentage will be down, but the dollars are good. So you're right. You're talking -- you're thinking about it just right. Dollar-wise, we are strong and you see that. But percentage-wise, because of our contract mix now, could be more compressed as we move through this year. But that being said, we see what's going to happen in utilization. We see what's going to happen with contract wins, which is why we get back to those margins that I already articulated. And I expect those to improve based on all the initiatives that we have as well to offset that contract mix phenomenon that you just articulated.

Yes. The contract mix shift as beneficial to us, providing us that protection so that as we do get that payroll and other line addressed through reduction of call volume, that's where you see the margin percent benefit.

And our next question comes from Miles Highsmith from Deutsche Bank.

Just had a couple. I was wondering for 2023, we've talked about operating cash flow, and you talked about the contract line items around the payables and the receivables together, having an impact of roughly $38 million for the quarter. I know you've given some directional comments, but is there anything you can give us in terms of a full year expectation, related to that $38 million? What would that look like on a full year basis?

And then my follow-up is, you talked about on the redetermination side. If I'm hearing your comments earlier, right, Heath, it was -- some of these guys that are going to fall off might be lower acuity. And I think you made the comment that could have an impact in terms of the type of trip or the number of trips. I was just hoping you could revisit that a little bit. Is it right to think that like these are patients with fewer trips and that's why the average hit might be less to you than if it were an average member?

And then if there's anything you'd be willing to quantify in terms of trips per patient or anything -- any way we could look at it as we kind of model that in, that would be great.

Miles, this is Ken. I'll take the first part of that question on the contract receivable, payables. So we do see the increase in the receivable side of the house in Q1, combination of cost and utilization and the protected nature of our contracts. We expect that to level off as the collection side of that normalized in the second half of the year, and we do have payables coming down throughout the second half of the year to normalize as well. So you should see that level off in the second half of the year as we expect.

And then on the redetermination, and the -- our disclosure around the redetermination is primarily people that aren't utilizers. The reason why we disclosed that is similar to the question that Pito had. It explains why from a utilization perspective, you could see that being higher because that's the phenomenon with people -- people going away, they don't take trips. But the reason why we also talked about our contract mix, you see that being shared. So even though utilization is up, you're seeing that being shared in the way our contracts are structured.

So it's helping you model the coming out of COVID with redetermination and showing that our contracts actually work. So, even on what Ken just talked about, the increase in receivables is right in line with how we've organized these contracts. And they -- out of the -- we had a lot of noise with paying back COVID expenses in 2022. Those now are done. Now you see the normal fluctuations between receivables and payables that are happening here in 2023. We still have a little bit of noise that's happening in Q1 and Q3 on COVID stuff, but the majority of our working capital fluctuations, as evidenced by what Ken just talked about have to do with the way our contracts are set up.

And our next question comes from Mike Petusky from Barrington Research.

A couple of people sort of asked about this, and I feel like they've gotten to the 2-yard line, 1-yard line. I'm going to try to get this over to the goal. Talking about free cash generation, look, heavy CapEx quarter, you're about $16 million negative free cash at one time. At one time, and I understand what we've talked about are the receivables and payables. But at one time, we're talking about $80 million, $100 million of free cash generation this year. That does not look like it's going to happen.

To me, it feels like free cash probably be somewhere close to flattish, maybe in the second quarter and then more normalized after that, which would sort of lead to maybe $30 million, $40 million of free cash generation this year. I mean, can you just sort of comment on sort of the math I'm trying to sketch out there?

Yes. No, I think you're walking through a decent way of thinking about the first half of the year. But then, as we think about the second half of the year, we'll also benefit from the reversal of some of these build and receivables, we're going to be collecting on these receivables in the second half of this year. And so that's going to be from a working capital perspective, a benefit. And then, you also have the typical -- I think, what Heath is referring to in terms of normalization is that you'll also have this benefit of just, EBITDA less CapEx and interest in the second half of the year.

And so I think to that range that you've given of like the $80 million to $100 million, it's probably going to be in that range, depending on how working capital really shakes out through the rest of the year. But yes, like we're feeling very confident that, as Heath has alluded to, the contracts are working as they should be. And really, the cash flow generation is going to be accelerating. So that's all good stuff.

Yes. But Mike, you could see that -- well, one, your CapEx question was right. CapEx was a little bit higher. The biggest driver is the fluctuations in our working capital related to our payables and receivables. That was again $30-plus million swing just in this quarter, and that can wipe out or add to a specific quarter. So when you normalize all that, we will be back in that $80 million to $100 million run rate when you look at it as a whole.

Okay. Yes. And I just really want to drill down on that. I understand $80 million to $100 million run rate, but not $80 million to $100 million for the year.

Yes. I think you're -- because of where Q1 is and Q2 is, I think that's the right way to think about it.

Okay, yes.

Q3 in Q4 run rating at that amount. It could be higher than that, but that -- your model and your rationale makes sense.

Right. Okay. Yes. So you're not going to be generating -- because what I was hearing was you're going to be generating something like $45 million or $50 million of free cash each quarter in the second half. That's not happening. Essentially, it's going to be more like 25-ish or 30 or some -- such number as that.

And it will be dependent on working capital estimation (inaudible).

Yes. Understood, but that's closer to reality as you guys see it right now, correct?

Yes. That's correct.

Okay. Excellent. And then just sort of looking at the company overall. As we look at sort of the leverage you guys expect to gain, I'm assuming that relative to the first quarter, I'm assuming that most of that leverage comes on the service expense line, not like the G&A, you've been sort of working at, but the real ability to sort of move the needles on the service expense. Is that fair?

I think, it's both. I do think, it's both.

Okay.

We have made that -- those changes on the G&A side. I expect those to continue. But there is a lot of leverage on that service expense side as well. So I don't know, call it 1/3 and 2/3, 1/3 being more leverage on G&A more 2/3 to that service expense side. It's both.

And then just in terms of -- just last question, I promise -- just in terms of the Matrix Asset and sort of the talk out there around risk-adjusted payments and so forth. I mean, isn't it fair to say that even though the -- I guess, the health assessment volumes have really grown nicely in Q1, I mean, isn't it fair to say that, that uncertainty sort of -- is going to weigh on any kind of valuation when you guys do decide to monetize that asset?

Yes. So risk adjustment, even with the changes that have happened, the risk adjustment rules and services are being refreshed. Items that were more important 2, 3 years ago are less important now and other items are becoming more important. Risk adjustment, risk assessment will continue to be an important part of what the healthcare world needs and payers need.

We are the second -- Matrix is the second largest risk adjustment company. The opportunity in growth, similar to almost personal care, the limiting factor is really kind of hiring nurses. So the noise that is in the changes that have happened within the rates, the changes that have happened in the surfaces, yes, are an item that companies need to overcome, and Matrix will overcome those. The bigger benefit is the volume that's going to be out there and continue to be out there.

Companies that can hire and retain and have scale and can actually penetrate and perform at a higher rate because of process and technology, which Matrix is doing, that will outweigh the noise that's in the system around the changes that have come through and expect to come through. So yes, there is challenges, but the opportunity far outweighs those challenges.

That is our last question. At this time, I would like to turn it back to Heath and Kevin for any closing remarks.

Yes. Thank you for participating in our call this morning and for your interest in our company. Our updated investor presentation and quarterly supplemental decks are 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 second quarter results in early August.

Thank you again, and have a great day. Operator, this concludes our call.

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.