Alison Ziegler - Investor Relations Warren S. Rustand - Chief Executive Officer Robert Wilson - Chief Financial Officer Herman M. Schwarz - Chief Executive Officer-LogistiCare Michael C.

Fidgeon - Chief Operating Officer-Human Services Gregory Kenneth Ashmead - Chief Operating Officer-Ingeus Dean James - Chief Executive Officer of Ingeus UK Walt Cooper - Chief Executive Officer-Matrix Randy Dobbs - Chief Executive Officer-Matrix.

Bob Labick - CJS Securities Christopher Crum - Aylstone Capital Mitra Ramgopal - Sidoti & Co. LLC Brian Hoffman - Avondale Partners LLC Rick G. D’Auteuil - Columbia Management Investment Advisers LLC.

Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Providence Service Corporation Earnings Conference Call. My name is Shantale and I will be your facilitator for today's call. At this time, all participants are in listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Alison Ziegler. Please proceed. Thanks, Shantale. Good morning, everyone, and thank you for joining us this morning for Providence's conference call and webcast to discuss financial results for the third quarter ended September 30, 2014.

Before we begin, please note that we have arranged for a replay of the call. The replay is available approximately one hour after the call's conclusion and will remain available until November 13. The replay number is 888-286-8010 with the passcode 31893926. The call is also being webcast live with the replay available.

To access the webcast, go to www.provcorp.com and look under Investor Information tab as well as the Event Calendar. Before we get started, I'd like to remind everyone of the Safe Harbor statement included in the press release, and that the cautionary statements apply to today's conference call as well.

During the course of this call, the company may make projections or other forward-looking statements regarding future events or the company's beliefs about its financial results for 2014 and beyond. We wish to caution you that such statements are just predictions, and involve risks and uncertainties. Actual results may differ materially.

Factors which may affect actual results are detailed in the company's recent filings with the SEC, including the Company's 10-K for the year ended December 31, 2013. The company's forward-looking statements are dynamic and subject to change. Therefore, these statements speak only as of the date of the webcast, November 6, 2014.

The company may choose from time to time to provide updates, and if they do, will disseminate the updates to the investing public.

In addition to the financial results prepared in accordance with Generally Accepted Accounting Principles, or GAAP, stated in the press release and provided throughout our call today, the company has also provided EBITDA and adjusted EBITDA non-GAAP measurements, which present its earnings on a pro forma basis.

Providence's management utilizes these non-GAAP measurements as a means to measure overall operating performance and to better compare current operating results with other companies within its industry.

Both EBITDA and adjusted EBITDA are measurements not determined in accordance with or an alternative for Generally Accepted Accounting Principles, and may be different from pro forma measures used by other companies; and definition, calculation, and reconciliation to the financial statements of each can be found in our press release.

The items excluded in the non-GAAP measures pertain to certain items that are considered to be material, so that exclusion of the items would, in management's belief, enhance a reader's ability to compare the rest of the company's business after excluding these items.

Finally, for simplicity, we will be speaking in US dollars when referring to such things as contracts and revenues. Amounts translated today from other currencies, including the British pound, have been translated at current exchange rates. And, as such, these amounts may differ in future periods.

I'd now like to turn the call over to Warren Rustand, Chief Executive Officer. Go ahead Warren..

Thank you, Allison, and good morning. After our scripted remarks, we will be available to take your questions.

With us today on the call we have Bob Wilson, our CFO, Herman Schwarz, CEO of LogistiCare, who is in Atlanta, Mike Fidgeon, Chief Operating Officer of our Human Services Division, who is joining us from Fredericksburg, Virginia; Greg Ashmead, Chief Operating Officer for Ingeus Global, and Dean James, CEO of Ingeus UK, who are in London.

Also joining us for the Q&A portion of the call this quarter is Walt Cooper, the CEO of Matrix, and Randy Dobbs, the retiring CEO of Matrix. We are pleased to report our first complete quarter that includes the results of Ingeus, which comprises our new Workforce Development Services segment.

Our integration efforts are proceeding smoothly and we continue to pursue new opportunities for international expansion. In fact, just last week, we were advised that we were part of a consortium that is a preferred bidder from the UK's Ministry of Justice implementation of a significant reform of probation services.

We continue to be optimistic about the long-term global opportunity we have through Ingeus and its capacity of achieving higher EBITDA margins than our other core businesses. Turning to our legacy businesses of NET and Human Services, we reported solid financial results in the quarter.

Our NET service segment continues to grow through new state contracts, new and expanded managed care contracts, as well as increases in membership in certain markets, due to benefits from the Affordable Care Act, while preserving favorable margins.

In our Human Services Division, revenue growth was impacted by the Texas Foster Care redesign contract that was ended during the third quarter after we exercised our right of termination. We continue to focus intensely on performance improvements in certain Human Service markets and should begin to see some improvements in the fourth quarter.

Finally, towards the end of the quarter, we announced an agreement to acquire the parent company of Matrix Medical Network, a leading provider of health risk assessments for the Medicare Advantage market. We closed the acquisition on October 23.

We are excited about the combined scale and capabilities which we believe will allow us to deliver even greater value to our clients, payers, and shareholders. We continue to be focused on margin improvements gained over time through operational efficiencies, as well as the expansion of our business, largely through strategic acquisition.

We have made great progress in achieving these goals, as displayed by the recent acquisitions of Ingeus and Matrix, and expect additional improvements as we move into the fourth quarter of 2014, and subsequently into 2015.

Let me now turn the call over to Bob Wilson, our CFO, who will provide more detail on the third quarter results reported in our press release..

Thank you, Warren. Looking at third quarter results for 2014 compared to the third quarter of 2013, consolidated revenue was $394.2 million, an increase of 42.5% from $276.7 million. Net service revenue increased 17.7% to $226.1 million from $192 million. Human Services revenue grew 8.6% to $92 million compared to $84.7 million.

Third quarter revenue includes $76.2 million in revenue related to our Workforce Development Business segment that was added during the second quarter of 2014 as a result of the Ingeus transaction.

Mike Fidgeon, Herman Schwarz, and Greg Ashmead of our Human Services NET Services and Workforce Development Business segments will provide more details around this in a moment.

For the quarter, we reported net income of $0.3 million or $0.02 per diluted share compared to net income of $3.5 million or $0.25 per share – per diluted share in the prior year. EBITDA was $9.9 million compared to $11.2 million. Adjusted EBITDA was $13.6 million compared to $11.7 million in the prior year.

For the nine months period ended September 30, 2014, EBITDA was $44.3 million compared to $43.2 million in 2013 and adjusted EBITDA for the nine month period ended September of 2014 was $52.8 million compared to $44.2 million in 2013.

Impacting both the three and nine months periods ended September 30, 2014 were – excuse me, acquisition related charges of approximately $3.7 million and $8 million, respectively. These expenses are included as an add-back item for adjusted EBITDA. EBITDA margin decreased to 2.5% in the third quarter of 2014 from 4% in the third quarter of 2013.

And adjusted EBITDA margin decreased from 3.4% in the third quarter of this year from 4.2% in the third quarter of 2013.

The decrease in our adjusted EBITDA margin for the third quarter of 2014, as compared to the comparable quarter in 2013, is primarily related to the impact of the losses incurred on our Texas Foster Care contract, as well as other continuing challenges in certain of our Human Services markets. Mike Fidgeon will comment further on that in a moment.

For the nine-month period ended September 30, 2014, our effective tax rate was approximately 42.9% compared to 39.8% in the same period in 2013.

The increase in the effective tax rate is due to certain non-deductible transaction costs and stock compensation, primarily related to the Ingeus transaction, which will continue for the next 4 years investing of related stock. We do expect our effective tax rate will be between 42% and 44% for fiscal year of 2014. Let me comment also on G&A.

General and Administrative costs for the quarter were 6.4% as a percentage of revenue. Obviously, that includes a number of one-time costs, which we will discuss on this call, as well as in the Q&A. We believe that kind of a normalized basis historically our G&A has run at 4% of revenues pretty consistently quarter-over-quarter.

We expect there to be some up-tick in our run rate G&A somewhere between 4% and 4.5%, primarily related to the Ingeus shareholder stock vesting, which will – where we accrue expenses over the next, over the four-year vesting period.

At September 30, 2014, we had unrestricted cash and cash equivalents of $136.9 million compared to $99 million at December 31, 2013. Our strong cash flow from operations and our amended credit facility enhances our financial flexibility, as we continue to focus on growing our operations.

I will now turn it over to Herman to discuss the performance of the LogistiCare business for the quarter..

Thank you, Bob. Good morning, everyone. Revenues in the NET segment grew to $226.1 million in the third quarter, a 17.7% increase compared to the same period last year.

This strong growth trend continued to be generated from increased membership in several states due to Medicaid expansion and or the addition of the workforce population, plus the addition of new state contracts in Maine, Rhode Island, Texas and Utah, as well as growth in managed care contracts in California, Florida, Illinois, Louisiana, Michigan and Ohio.

Our margins continued to benefit from the new business, as well as membership increases without a proportionate increase in utilization. Transportation expense ran at 75.0% of revenue in the quarter versus 76.7% last year.

However, we are beginning to experience an up-tick in utilization in those states that expanded early, and expect this figure to increase as we move into 2015.

Non-transportation expense as a percent of revenue grew by 7/10 of a point compared to last year, due to our increasing staff levels to meet more stringent call center performance thresholds associated with managed-care contracts.

We manage transportation in 39 states plus Washington, DC, and have a census of 20.7 million exclusive eligible members up from 16.0 million a year ago.

We went live in Maine in August, and our expanded operation in the state has performed very well in managing the transition from the former broker in the four regions of the state we added to our contract. Our two new Texas regions started on September 1, and that implementation has also progressed smoothly.

We are in the process of expanding operations in Arizona, Florida, New Jersey, and Nevada, to handle the growth we have experienced, as well as prepare for expected new business between now and the end of the first quarter of 2015. We are still waiting for New York State to award the Long Island region contract.

We expected an award by now in order to hit the early January go live date indicated in the RFP, but it is more likely that this go live will, at a minimum, be pushed into the second quarter of 2015. As indicated last quarter, this is not a huge contract in terms of revenue, but it would be a nice complement to our existing New York City business.

The RFP in South Carolina, where we are the incumbent, was released and then delayed indefinitely due to turnover in the Medicaid agency. We are hopeful that this delay will lead the agency to reconsider the terms of the RFP, which we consider to be quite costly and risky for a broker.

We are also working on our RFP response for Iowa, which is due mid-November. This program is currently managed by a competitor and similar to South Carolina, the RFP terms are highly risky. We will pursue it aggressively from a technical standpoint, but will not price it irrationally.

We also continue to work on closing some very large managed care opportunities that would likely go live in the first quarter of 2015. With that, I will turn the call over to Mike to discuss the Human Services operations for the quarter..

Thank you, Herman. Good morning, everyone. For the third quarter of 2014, our client census in Human Services was approximately 57,400 clients. This is up 3% or approximately 1,700 clients from the prior year quarter. All clients are being served from 359 local offices in 23 states, the District of Columbia, and three Canadian provinces.

There are approximately 6,500 employees serving 447 contracts.

Revenue for the quarter in Human Services increased 8.6% to $92 million from $84.7 million in the second quarter of 2013, primarily related to the contribution from tuck-in acquisitions in Idaho and North Carolina that were completed in the first part of the second quarter 2014 and the first part of the fourth quarter 2013, respectively, as well as the growth of Texas Foster Care contract.

As we have stated previously, we have given notice to the state of Texas that we are exiting the Texas Foster Care contract. We have agreed on a transition plan with the state and have largely completed that transition. We have minimal administrative functions that remain and expect that the transition will be fully completed by the end of 2014.

We continue to have challenges in certain markets due to a variety of factors, chiefly managed care payer consolidation.

We continue to believe that markets going through the stresses of managed care consolidation will benefit larger organizations like Providence, that can offer a broader range of services, and make the necessary capital investments to weather state mental health system changes.

In addition to completing the wind down of the Texas contract, lower margin operations are the subject of intense management focus right now, and we expect to realize significant improvements in 2015. As we move through the fourth quarter of 2014 and into 2015 the focus will be on overall margin improvement.

Margin improvement will be driven by consolidation of back office support services, standardization of operating policies and processes and strategic focus on services and programs providing sustainable higher-yielding margins.

We may experience some fluctuations and even declines in revenue, client census, employee retention, contracts, and offices, ahead of these margin improvements. I would now like to introduce Greg Ashmead, who will discuss the Workforce Development operations at NGS.

Greg?.

Thank you, Mike. And good morning, everybody. It's been a very eventful few months at Ingeus. Ingeus is now serving over 230,000 clients in 10 countries across 177 sites with more than 2,700 colleagues assisting those people. While our partnership with Providence is only five months old, it's already begun to yield significant benefits.

Late last month, we received word that we were a preferred bidder with the UK Ministry of Justice as part of their implementation of a radical reform of probation services. This is a significant strategic development for Providence and for Ingeus, establishing Ingeus UK as a major probation correctional services provider.

Providence's expertise in this space was advantageous in the bidding process. The reducing re-offending partnership, of which Ingeus will be the majority equity partner, comprises Ingeus and two leading UK charities, St. Charles Trust and Crime Reduction Initiative.

We were the preferred bidder on two of the Ministry's 21 Community Rehabilitation Companies, or CRCs, in Staffordshire and West Midlands, as well as Devonshire, Leicestershire, Nottinghamshire, and Rutland. The negotiations through the contract award are now ongoing, and full commencement of the services is expected in early 2015.

When signed, these contracts will be long-term agreements to reduce re-offending. The contracts are for an initial period of seven years, with an option for the Ministry to extend. These two CRCs are among the largest CRCs by volume of preferred offenders and could represent 14% of the overall caseload.

Based on contract values published by the Ministry of Justice via the official Journal of the European Union, it could represent in the range of US$100 million [ph] per year to Providence, and require the on-boarding of upwards of 1,500 probation staff.

On the workforce side, where Ingeus remains a market leader, last week, we started up our first contract in Northern Ireland, which we had announced last quarter. We also recently won a National Citizenship Service contract, a life preparation service to assist young people.

At this point of time, the contract values have not been posted in the public domain. There continues to be a large pipeline of opportunities for Ingeus globally that we are currently evaluating, a portion of which we could beat over the next couple of months.

Some examples include France, which is looking to procure a national contract for short-term unemployed, as well as several tenders in Poland, as part of their first national rollout of outsourced employment services.

These are just two examples of how we look to expand organically in markets, and leverage where we have established a base of operations.

In addition to Providence adding its expertise to bear and the opportunity with the UK Ministry of Justice, we are similarly looking to bring our international expertise in workforce development to bear on Providence's opportunities in Canada and the US.

-The recent Workforce Innovation and Opportunity Act passed in July could offer some opportunities in the US. We are really excited about the prospects in front of us, and believe that our partnership with Providence will continue to prove fruitful. With that, I'll turn the call back to Warren. Thank you..

Thanks, Greg. Before I open the call to questions, I'd like to reflect on how we are progressing toward some of the goals we had set for ourselves. In December of 2012, we discussed 5 areas of concentration that needed focus to be able to transform Providence.

These were to operate the business more efficiently and effectively, pursue tuck-in acquisitions, pursue larger-scale acquisitions, invest in technology and implement a performance wide management system. We've made progress on all of these fronts.

Importantly, as we look ahead, we should continue to see steadily improving EBITDA margins over the long-term, particularly with the exit of the Texas Foster Care contract and the addition of Matrix.

We are working hard to position Providence for the future, and will pursue financially compelling service expansion opportunities in order to extend our mission, which is to create healthier communities. I'd now like to open the call to questions. And we'll try to answer them as best we can. Thank you..

(Operator Instructions) Your first question comes from the line of Bob Labick of CJS Securities. Please proceed..

Good morning..

Good morning..

A bunch of questions, but let's start just with a quick one. Bob, at the end, you expanded a little bit on the SG&A in the quarter and obviously, it was high. You called out $7.5 million.

Were there any other one-times in that? And then I guess just as a follow-up, when you add Matrix into the mix now that it's closed, is 4% to 4.5% the right run rate for next year as a percent of sales? Or where will that trend, including Matrix?.

Well, we –so I think we'll include Matrix, but I have to caution you that we're still in the midst of our budget process, both with regard to the company overall. We now have four months of track record with Ingeus and zero months with Matrix. So I think the budget process will help us to clarify what that percentage ought to be.

That's why I gave a relatively wide range of 4% to 4.5%. I think it might trend towards the higher end of that..

Okay.

Trend with Matrix or trend before Matrix?.

With, but that is all – it's all subject to going through a detailed conclusion on our budget process..

Okay. And then jumping to segments, on the Human Service side, obviously, you know, mentioned you were exiting Texas. It sounds like you will be out by year end.

How much of the loss in the quarter related to the Texas contract or winding that down? And when should we expect breakeven and then positive margin for Human Services?.

I'll comment on the first of those and then ask Mike Fidgeon to add some commentary. So, during the third quarter, we lost approximately $1.5 million for the quarter. Year-to-date, we've lost close to $4 million. I believe that we have now sort of crossed over where we are no longer incurring any costs or any substantial costs in terms of wind down.

So I think that's done, gone behind us. And maybe I'll let Mike comment on just sort of margin improvement efforts that are going on..

Yes. So, Bob, specific to the Texas contract, to add to what Bob has shared, we have a few remaining expenses that will continue to tail off as we round out the year, primarily payroll expenses.

We have about three to four staff that are still largely facing the wind-down of the SSCC contract related to audit requirements for year end, as well as maintaining and continuing to transfer data back to the state, as the state has taken on the responsibility for those 1,200 clients in care.

We also have some ongoing lease costs and software costs related to managing the data of those clients and some minimal communication and public affairs costs as well. I would estimate somewhere ballpark, they're ranging about $60,000 to $70,000 per month. But we are seeing that incrementally come down month-to-month.

The largest hit that we took was in August, which was in this quarter, in terms of federal loss. The $1.5 million that Bob referenced was about $985 million in August as a result of only 17 days of revenue realized, and then the state took over the contract on the 18th.

So we didn't realize any revenue for clients in the remaining days of that month, and then no client revenue in September. We did have a little bit of expense reimbursements in the month of September. I hope that's responsive to your question..

Very helpful. And then just sticking with you, Mike for a sec. What do you think is, I know, over time, the goal was to get back to the 6%, 6.5% EBITDA margins.

What's reasonable for the 2015 timeframe?.

That's our goal for 2015, it remains such. As Bob had indicated are in the midst of budgets right now. And as to earlier comments I made indicated, we're really taking a look at continuing to bolster the areas where we are strong, like Virginia and Maine, as two examples of contracts and environments that perform very well.

And we continue to look at areas, now that the Texas dust is settling on the SFTP contract like Florida where we have brought that business that was losing money back to a breakeven point and we'll continue to focus on how we can improve our opportunities in Florida. Also, Arizona is another one I've referenced in past calls.

And we continue to address issues with our contract performance in that state while the contract is up for bid. So we anticipate some of those changes naturally will occur as a result of some external influences. And we have a – we're really putting our best people on addressing those issues at this point in time in those environments.

But we believe we can get back to the 6% and 6.5% in 2015. As we budget we're determining how we best address not just the operating performance, but some of the consolidation of support costs related to be back offices, which we've been consolidating now for most of 2014 into a single location in the east, with a couple of exceptions..

Okay, great. That's terrific. And good luck with that goal, that sounds great. Jumping over to Herman's LogistiCare. You mentioned South Carolina would be a riskier contract. I know previously they had discussed potentially going to ASO, which is obviously lower risk.

Can you talk about the RFP in South Carolina and Iowa and what you find kind of risky about them and how you can avoid it being too risky for Providence?.

Sure. Well, in terms of South Carolina, if it was a straightforward ASO model. It does take away some of the – obviously, the transportation risk in terms of utilization.

The way they structured the RFP when it first came out was under an ASO model, but it had severe liquidated damage performance standards associated with the broker that are difficult to control and we don't control the transportation dollars.

So if we don't have that ability to kind of work our magic and negotiate and play the mix across the state, then it gets difficult to meet some of the performance thresholds they had established in that RFP.

So when I talk about risk, it's really operational risk that would lead to financial risk and if we're only getting paid at an ASO level, obviously, we don't have the ability to cover some of those performance standard damages like we might if we had the transportation dollars as well. And then, Iowa is similar.

Iowa has a very severe all or nothing liquidated damage clause in their contract. And it's from our perspective a bit unreasonable in terms of how they are looking at it. So it was just a matter of trying to figure out how confident we are that we can hit that every month and not lose that entire liquidated damage.

So that's what I'm talking about in terms of how they are structured with terms that I think are a little too onerous for the broker.

Okay, great. That's helpful. And then obviously you've had just fantastic results throughout the year. We keep looking for some normalization in margins that are above, I guess, what you have targeted before.

How would you think about kind of the next year margin goals, just so we are all on the same page because we continue to keep looking for this normalization that you keep beating?.

I'm going to answer the same way I have all year, which is, you know, I'm not ready to give you any kind of guidance on 2015. We're still budgeting the weather, possibilities are likely to be as attractive as they were this past winter.

As we all know, there were several, you know, as many as four or five days of almost complete cancellations up in the Northeast. Obviously, our largest contract is sitting in New Jersey. So that has a very positive impact when there is high cancellations. Certainly can't count on that again for 2015.

And then I think we have to be realistic in recognizing that we have benefited from the expansion population, particularly as we've talked about in New Jersey and a few other states. And we fully anticipate that there will be some kind of rate adjustment around that.

So, I'm not ready, Bob, to land on a number for you yet, but it certainly won't – we don't expect to be running at the same margin levels we have in 2014..

Understood. And then over for Ingeus, congratulations on the Ministry of Justice and it sounds like a very big opportunity for you.

Could you tell us a little bit about, I know that with certain contracts the DPW and what not there's generally an upfront investment that you have to make before you start gaining most of the revenue and the profitability.

Can you tell us a little bit about this contract and if you expect similar occurrence in 2015?.

Yes, this is Bob Wilson. I'll comment on that and then turn it to Greg and Dean as well, Dean James.

So yes, similar to the DWP contract, there will be in upfront investment in IT infrastructure, as well as a startup costs, working capital fundamentally, because there is a revenue piece that does front the contract, but a lot of it is also on the backend based on performance. So, not going to give you guidance on what that magnitude is.

But it's very much in line with what we expected when we acquired Ingeus and knew something of this bid that was going out. So, yes, to answer your question in general terms, there will be an upfront cash cost and a fairly significant amount of that will be operating or period costs that will hit our income statement in 2015..

Okay. Thank you..

Greg, do you want to make any additional comments or Dean, on that?.

Yes. Good morning. It's – we are currently closing the negotiation with the Ministry of Justice on this contract. So, I know you will all appreciate it's difficult for us to share any more detail right now in terms of this contract. But I mean from the Ingeus perspective, this is both a very good long-term piece of business in its own right.

But it's also strategic in the event that there are other opportunities in the justice space that we are actively pursuing at the moment.

So, from an Ingeus perspective from the UK where I am now, this is the beginning of a push to expand more services into the justice area, alongside the rest of the different kind of the workforce development and training services we provide. So, from that point of view, it's a very exciting development.

The actual process itself is that the, effectively, government is spitting off part of the existing probation services operation, putting them into a number of special purpose vehicles and those vehicles will come over to us. So it will be quite a significant increase in our workforce. And Greg gave an indication there of what that means.

You know, and as this contract progresses and Bob may well be in a position to be able to share some more data with you. But right now, we've still got a few weeks to go to get to closure on this. So I hope that's helpful background..

Yes, very helpful. And my last question, I promise. On the DPW, part of the contract calls for backend incentive payments, which are, I guess the first one is due in March of 2015.

Could you just give us an update on how you're tracking towards that and when you expect to recognize those incentive payments?.

Yes, I'm happy to do that. So, under our – under the existing arrangements we have with DWP, we are tracking to achieve our incentive payments next year. However, in the background, we have a commercial negotiation running with DWP on a number of areas.

Clearly, alongside the rest of the industry, some changes that they want to implement to the scheme and so, that is ongoing. So I can't really comment any more in respect of that, of that package of changes. So, where we are at the moment the business is on track in terms of performance.

In the background, we have a commercial discussion and negotiation ongoing with the department around a number of refinements they want to make to the management of the overall scheme..

Okay. I will get back in queue and let others ask questions. Thank you..

Thank you, Bob..

Your next question comes from the line of Christopher Crum of Aylstone Capital. Please proceed..

Yes, good morning. Just a couple of quick questions.

I was wondering if you could tell us what the Ingeus revenues were for the same quarter last year?.

I don't have that number at my fingertips. Can we – either we can get that number while we proceed on this call or we can get back to you after the fact. I don't have it handy..

Okay. And then second, on the Matrix acquisition, for the last six months, it looked like the EBITDA margin was near 25%, sorry, that's the six months ended June of 2014.

Is that sort of a run rate that we should expect going forward?.

Well, this is Warren. The numbers that were published obviously were very significant strong numbers. We continue to believe that Matrix will be a very strong performer as they go through their third quarter and into the fourth quarter. And we have expectations that in the fourth quarter, they will positively affect our EBITDA.

Those are awfully high numbers. And we have sachet them at a lower number to be conservative, but they will certainly be higher than our average business rate we have historically seen. So while we budget them in the low teens as a good number they've consistently been better than that over the first six months of the year.

[Later corrected by the company] (The Company expects Matrix's average revenue growth to be greater than 12% over the next three years, with adjusted EBITDA margins greater than 20%. Full-year 2014 revenue and adjusted EBITDA for Matrix to be $210 million and $49 million, respectively).

Okay.

And then any disclosure on the Matrix revenues for the quarter ended September?.

No. We're not making any announcement at the quarter ending. We'll see that at the end of the fourth quarter and we will roll that out publicly at that time..

Okay, great. Thank you very much..

Thanks, Christopher. Appreciate it..

Your next question comes from the line of Mitra Ramgopal of Sidoti. Please proceed..

Yes. Hi, good morning. Just couple of questions. Greg, you identified a very nice opportunity on the justice side of the business.

And I was just wondering if you could maybe help us in terms of give us the margin profile on those contracts done with the Workforce Development?.

Let me take a stab at that and then turn it to Dean or Greg to add additional commentary. Again, Mitra, as I think was mentioned by Dean, that is in the process of negotiating those contracts. So we have surfaced as the preferred bidder, the exclusive bidder in those three regions, but the negotiations around the contract continue.

So we really can't comment any specific. All I can say is that Ingeus has financial thresholds that they adhere to that are consistent with how we would think about it at corporate, particularly in relation to our legacy businesses.

And at least based upon the bid, subject to negotiation, that bid, therefore because that's how they approach these bids, did meet their financial thresholds..

Okay. Thanks.

And I was just wondering as a follow-up to that, is this option only available in the UK? Or are there other countries with similar opportunities?.

That's a really good question for Dean or Greg to comment on..

It's Greg speaking. Look, this probation services contract in the United Kingdom is ground breaking in the industry globally and it's being looked at by all countries as to the success of this approach, which largely is outsourcing the lower risk probation ex-offenders to private companies.

I know of a number of countries that are looking at this very closely and we will certainly be leveraging the experience that we have in the United Kingdom into other markets that we currently work in..

Thanks, very helpful. And Mike, I was just wondering again, I know you are doing a lot of things in terms of trying to get the margins ticking back up on the Human Services side. But when we look at it the last few years, it has been declining.

What sort of gives you the confidence that maybe 2014 is the bottom and you really will be able to turn it around?.

Yes. Thank you for the question, Mitra. I think, as I had indicated in my scripted remarks, the – there's really three things that we are focusing on.

This continued back office consolidation, which is moving our – from our south region, which is – was Florida based, and west region back offices, which was operationally Tucson based to our Virginia based east office. So the business has historically been highly decentralized and fragmented.

So having both a consolidation of control and eliminating some of the redundancy and duplication is going to benefit us in 2015. We have transitioned approximately 25 of our total 31 distinct operating entities from those other back offices into Virginia.

And then there are some we won't transition, like the Canadian business that, that operates with a bit of a firewall for reasons of just intentional structure.

And then we're studying our cost reimbursement environments like California and Pennsylvania, because we do see some infrastructure benefits, as well as challenges to how we might move forward with consolidation there. So consolidation is one. And the second that I referenced was operating policies and procedures.

Again, across some 31 entities, unique entities in the business, we have a lot of variation still in the way that we operate, both in Human Resources capacity, as well as the way information rolls up and data is managed and we're making improvements on those month-to-month. So some policies as an example, PTO are being looked at to be standardized.

We could see some of those savings, as well as our reallocation in that standardization that would add value for our employees, while adding some savings to our bottom line.

So, that and also doing a deep dive on each state and operations in terms of the strategic value of various services and what the future of those services are as a function of funding, as well as politics, are all things that give me some confidence that the efforts of 2014 will start to bear some positive results in 2015..

Thanks very much. And Bob, just one final question in terms of the fourth quarter. Obviously you've got some charges and non-recurring items in 3Q.

Should we expect at all, as related to the acquisitions to be finished in fourth quarter, and then 2015 pretty much being a clean year?.

I'm sorry. Let me just clarify your question. Are you talking about acquisition costs or….

Yes. Charges, integration costs, et cetera, yes..

Yes. Well, there will be some lingering costs related to the Matrix transaction since we consummated that in October. But you know, so we will see some residual from that. In terms of integration costs, that will be minimal.

I think, as Warren and we've all talked about, just our operating philosophy, we're kind of a light touch on integration, allow the business segments to operate successfully on their own.

So other than perhaps, as we've talked about with Ingeus connecting pipes and wires in the finance function, between the business segment and the corporate reporting, we don't envision either additional costs or even minimal synergies around that as well..

So I think, Mitra, to further your question is that we expect those costs all to be wrapped up by the end of the fourth quarter. So as we go into 2015, those costs will be largely behind us..

Thanks very much. Thanks for taking the questions..

Thanks, Mitra. I wonder if – this is Bob. I wondered if I could get back to the question that Chris asked earlier, just to, I do have that information in front of me now. So, as we talked about in our comments, Ingeus's revenues for the quarter were about $76 million for the – again, for the three months ended, of course.

For the revenues for the comparable period last year were about $92 million. And again, as we talked about on this call in the past, and given indications, we expect Ingeus's revenue to not run at the same pace as it did in 2013 for a variety of reasons. The attachment fees coming off as of July 1, as well as some discounting on job outcome fees..

Okay. Go ahead, please..

Your next question comes from the line of Brian Hoffman of Avondale Partners. Please proceed..

Hey, good morning. Thank you for taking the question. I wanted to get a bit more color on the $3.3 million of compensation expense.

Can you just give a bit more color around that, how do we should expect that to trend going forward and the duration of that?.

I'm sorry, Brian, could you repeat the question?.

Yes. I wanted to get some more color around the $3.3 million compensation expense related to the immediate vesting. If you could just give a bit more color on that.

How that should trend going forward and for what length of time?.

Sure. Well, there were some unique somewhat one-time grants that were made in the third quarter that we don't think represents a reasonable run rate. We should think of a run rate though somewhere in the range of $2 million in the aggregate, which really represents kind of a recurring run rate on grants and , I am sorry, the cost recognition.

As well as I mentioned in my comments, we do have the recognition of stock comp expense tied to the restricted shares issued to the Ingeus, previous Ingeus shareholders that does best over a four-year period. So we recognize that expense ratably.

So I think barring other sort of transactions or grants approved by the board, I think a run rate, a reasonable run rate is in the $2 million range..

Okay. Thank you. And then can you give us a sense on what the EBITDA margin would've been for Ingeus in the third quarter as a whole, because we can only see the gross margin. And I believe when the Q comes out, we might get a bit more color.

But if you could just help us out here and maybe frame it with respect to the 8% to 10% long-term range that was previously provided?.

I think its best probably just to wait for the Q to come out and you can glean that information tomorrow..

Okay, great. That's it for me. Thank you..

Thanks, Brian..

Your next question comes from the line of Rich D’Auteuil of Columbia Management. Please proceed..

Good morning..

Good morning, Rick..

So my first question, there was a question asked earlier on Ingeus and you are tracking the full incentive comp that comes from that. However, it was unclear with the answer that I heard as to the timing of when that incentive would hit your P&L.

At one point I think you guys contemplated gradually bringing it into P&L as the time, as the calendar marched forward. Maybe you can answer that to start. And then there was the element of renegotiating or the contract.

So, potentially are the incentive clauses coming out, it seems a little vague?.

You're talking about Ingeus, Rick?.

Yes. Ingeus..

So let me just recite the, kind of the cap – first of all the contract and then the accounting, and see if that answers your question. And if not, maybe others of us can jump in as well. But – so there are two pieces of incentive compensation, three pieces.

One relates to the restricted stock, which vests over a four year period starting from the date of the acquisition. And we are accruing that compensation expense monthly, quarterly, as we go over the next four years. That's the first piece.

Second piece, by far and away the largest piece, is the earn-out provisions which can be – actually let me comment on the second piece and then make that the third piece. You know, there is a component that relates to certain events occurring as defined.

And when those events hit, there – a specific event, actually there is a potential incentive payment that is made. We will record that when that event occurs. And then the third piece, by far and away the largest, is the earn-out. And again, how that works, I think we've described this on prior calls.

But, once the base consideration, we earn that back through EBITDA minus CapEx for Ingeus.

Then there is an earn-out that kicks in which runs in total five years from the date of the transaction and there is a 50/50 sharing, if you will, between Providence and the former shareholders of Ingeus in each of those periods of EBITDA minus CapEx, as defined in the agreement.

So we're not recognizing any of that expense until we reach a point where they are in an earning mode, if you will and don't anticipate – that won't be in 2015..

Okay. I wasn't clear with my question. The incentive I was talking – on the UK Workforce contract, I mean, that was all helpful information, so I appreciate that.

But when does that come into the P&L? Is it – does it start trickling in, in Q4, was there anything in Q3?.

Sorry. Too many incentives, I guess. I think you should've cut me off earlier. I….

No, okay, that was useful information. So I'm happy I got that..

Okay, well, maybe for some. But you are pretty sharp, you knew that already. So on the incentives related to DWP, again all subject to the discussions that are – commercial discussions that Dean James referred to. We're not recognizing any of that currently.

We will likely – we will evaluate it at the end of this calendar year and see where they are related to their performance.

But it's most likely that we will recognize that in its entirety once we reach the end of the measurement period, which is March 31 of 2015 or when we get confirmation from the government that they agree with the calculation of the incentive..

Okay.

So it's going to be likely a 2015 event..

And the magnitude of that in maybe a rough range? What's the, I guess, upside potential if every – if you hit 100%?.

I'm going to actually defer that question to Dean. The only reason I do is, certainly, the company has a view of what that might look like. But I think you have to be careful and respectful of proprietary information that the DWP wants to – if it's not in their public domain, we really probably can't comment on it.

So I'll leave it to Dean either to confirm that or if he has other color he would like to add..

Yes. So thank you very much. So this incentive fee payment is for prior performance up to March 2015, that's the cut-off point for the measurements. So that is when the – then on prior performance, if I miscalculated from that, it is, as Bob says proprietary to DWP. And then that mechanism rolls on for further years of the contract.

As I said, I mentioned earlier, our prior performance against the contract we have is generating a bonus payment, which will be payable within that timeframe. The – I did – you did ask for clarity around the DWP package of changes.

Again, that is a commercial negotiation which has to be agreed by the parties from both sides, which the Department for Work and Pensions is having with all providers in the sector. There are a number of refinements and changes they want to make to the overall program.

And the – again, that is proprietary to the department and we are in negotiation mode. And, you know I think once we – and that is, we're looking to conclude on that within a certain timeframe. And – but I hope that kind of just gives you a bit more color to the question that you asked..

Okay. So I….

I would just say maybe to add, Rick, I think that Dean would agree with this. There will be much more clarity around this when we – if not definitiveness, when we have this call at the end of the fourth quarter..

Yes. I mean so the issue as a public company, I get when they were private that the timing of the lumpiness doesn't matter, but as a public company, the lumpiness matters.

And if all of a sudden in one quarter we're going to essentially book a $20 million profit that comes annually, I think it's important that that kind of magnitude gets disclosed in this kind of forum. You know, I understand that there is some things that are proprietary.

But if we think the run rate on your margins is X, and then one quarter a year X turns into several times that, that's something that, as a public company is important to disclose. So I guess – I'd give that advice. I know there is the offset of maintaining the confidentiality with the customer.

But maybe some rough parameters on upside versus downside and so the analysts can model something into their models, not just have it as one quarter a year, this huge spike..

We understand the concern and question, Rick, and I mean we actually do. We are very sensitive to it. But actually, Ingeus would be in violation of their contract with DWP to express anything publicly that's not already in the public domain….

Okay. Sorry, fair enough. SG&A, actually, Bob, maybe you can help walk me through what happened from one quarter to the other, in addition to the callout that you provided. It looks like a substantial increase, maybe stair step.

Are there potentially more one-time items that you didn't call out? Because it looked several million dollars higher, even adjusting for the $7.5 million that you referenced.

Would some of the taxes hit in there? I would've thought that would of been above, that would of been in the gross profit line but maybe you carried it down below or?.

Yes, no. So how we think of the one time items in Q3, they are the acquisition costs that we call out. There will be some residual of that in the fourth quarter. There were integration costs related to Ingeus, and that may be a little bit of a misnomer.

What that really represents is additional, primarily external costs that we had to incur for things like the 8-K/A filing, the due diligence. I mean, did the work related to that using KPMG, as well as other accounting kinds of fees, kept some restructuring, legal restructuring of the Ingeus entities that had to take place, all of that.

And then really lastly this one component of about $3.3 million or so of immediate vesting of specific stock grants that were made in the third quarter. Those are really the sort of the one time callouts, and you know they probably represent about $8 million or so.

So then on a go forward basis, the thing that's different that wasn't – hasn't been in prior quarters again is this Ingeus stock compensation, the restricted stock and accruing that over quarter-over-quarter for the next four years. That gets us down to what we believe to be a more normalized percentage.

Again, I think our budget, so that's still higher than 4%. I mean, it is higher than 4% because of the Ingeus matter, just on its own. And I think going through the budget process with Matrix, as well as with Ingeus, as well as the legacy businesses will better inform us as to whether how close to 4% or something north of 4% that runs.

Our core businesses, the corporate structure, cost structure has really not changed. So, all the variables, if you will, that would move us north of 4% are relate to the items I mentioned. Matrix potentially, maybe not. If they are G&A costs running to a comparable percentage.

Same thing with Ingeus and then the stock compensation related to the Ingeus shareholders..

Okay. Again, some of those boxes that we talked about with Ingeus, I almost think of those as part of the purchase price, and yet they are hitting the P&L and I guess that – I think it's worth calling that stuff out just so that we can understand the accounting behind it.

But – so maybe the $4 million overage outside the $7.5 million of called-out adjustments, what a couple of million might be the restricted stock kind of number?.

Yes..

Okay..

A little less than that..

Is there anything that can be done? I think the talk is you were trying to downsize corporate and essentially each one of your divisions will have a mini corporate.

Is there anything being done on the expense side to try to better control the G&A?.

This is Warren. Absolutely, but as we make this transition from lower margin businesses to higher-margin businesses, it can get a bit uneven. And we knew this going into this transition Rick, that we would probably have a quarter where it might be a little uneven and where costs got to us in a different way.

And I think you're seeing that in the third quarter. But as we transition with two large acquisitions now to higher-margin businesses with both Ingeus and Matrix, and we begin to see the effect of that in the fourth quarter and the early time in 2015, I think you'll have a sense of what that is. And the other piece of that obviously is Human Services.

So, we now look at four verticals across our business, three of which will be performing at higher margins, one of which is at substantially lower margin.

And we have a team internal focusing exclusively on that to make the changes necessary, which includes exiting contracts like Texas, moving back offices and consolidation of back offices as was stated.

In regard to our expenses at the corporate level, as you suggested, Bob just mentioned here at corporate in Tucson, our expenses are running on budget or slightly below. And we would expect all of our verticals to be very careful and very thoughtful about their corporate expenses. We'd rather run leaner.

We always, that's our philosophy and we will continue to focus on that very hard. And we're going to obviously eliminate redundancies and duplicative efforts wherever we can..

And then I just have a follow on for Herman. You talked about maybe some outside margins this year and expecting certain customers to maybe come back and renegotiate. But you also said in your prepared remarks that you were seeing increased utilization.

Hopefully that's taking into consideration as the utilization picks up, those outside margins will likely dissipate. And to renegotiate on top of that might compress margins to unacceptable levels in.

So what is the current thinking on that?.

Well, Rick, I was hoping you were going to let me slide by this quarter. I mean, obviously, we are watching that closely and as I mentioned, we've seen the utilization, particularly on the expansion population, start to grow a little bit.

And we, in the context of the conversations we are having, we certainly bring that up and argue that the data needs to be clear before we give back too much money. That being said, we also are looking at it and can tell that the utilization rates of that population are not going to approximate the standard Medicaid utilization.

So, it is a negotiation. It is a timing issue. And the clients that we have had some preliminary conversations with are aware of that concern, and we are looking for ways to structure it so that it's not an all or nothing type of give back.

So I think we're very aware and cognizant of the fact that that trend is happening and are being very careful about what we are doing.

But like every other situation, we also have to take into context the timing of where we are in that agreement; that contract, when it might be coming out for bid again, and want to be sure we are positioned properly for being in the right position to re-win the contract. So, point taken and we are well aware of it..

Okay. And just a follow up to you, Herman, I mean, we hear about the good margin business and it all rolls up to very strong margins. But there are a handful of states that you are below your targeted levels and those are likely, my understanding is, you are addressing those or will address those as we get into the new year.

So it's not a perfect scenario.

It's a portfolio of business, right?.

Absolutely. I mean, we always are looking at, I mean, look, we look at gross margin on every contract which is the revenue less the actual transportation costs. So we know exactly where we stand on each and every contract.

And we go back quite frequently when we see the trends going in the wrong direction for too long, to go back for looking for ways to either reduce the cost in such a way in terms of changing policies in the state, around the closest medical provider trying to enforce some of those restrictions if the state will let us, to also doing rate negotiations.

We did and were very successful in a rate negotiation in one of our largest states that went into effect October 1. So that one had been running in a negative sense and it now will be positive going forward and we've got a significant rate increase. And it took a long time to negotiate it.

I think we started the conversation in January and didn't sign the deal until the very end of September. But we provided the data, we went back and forth. We demonstrated that it was accurate and that what we were saying was real, and that we had taken pain for enough – long enough.

And if that wasn't going to be the case, that they could find a way to give us some relief, they would have to go back out to bid. So, I think you're right. It is a portfolio. We have some, I mean every year, we have some that trend in the right direction and we have some that trend in the wrong.

And we are constantly trying to manage that portfolio of different contracts..

Okay. And then I lied. One last question.

What's the revenue opportunity for the managed care business that you closed for on an annual basis?.

Well, it's not quite closed yet, so don't put it in the safe yet. But we are looking at probably in the range of $60 million to $75 million on an annual run rate once it's all in here..

Okay. Thank you, guys..

Thanks, Rick. I appreciate your questions..

(Operator Instructions) There are no additional audio questions in the queue..

Thank you very much.

We'll close our comments by just saying that this third quarter call was always interesting because it catches us in the middle of the budget cycle and we're giving great scrutiny to our businesses, and making certain that for budgeting perspective for 2015, that we understand where those businesses are and are going to be from a revenue and EBITDA margin perspective.

And so we're right in the middle of that now. As Bob stated, there will be much greater clarity as we move to the next call and we'll have much more information in regard to each one of our businesses.

But again, as we transition the company from what has been a highly decentralized business in the Human Services side to a much more focused business, there will be changes in that business as we go forward to bring it into a more compliant area as regard to our EBITDA margins.

So we thank you for your interest in our companies and we look forward to talking with you in the near future. Thanks for your questions today. Operator Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day..