Alison Ziegler - IR, Cameron Associates Jim Lindstrom - Chief Executive Officer David Shackelton - Chief Financial Officer.

Bob Labick - CJS Securities Mitra Ramgopal - Sidoti Mike Petusky - Barrington Research.

Welcome to the Providence Services Corp third Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host for today Ms. Alison Ziegler. Ma'am, you may begin..

Thank you. Good morning, everyone, and thank you for joining us this morning for Providence's Conference Call and webcast to discuss our financial results for the three months ended September 30, 2015. On the call from Providence today is Jim Lindstrom, Chief Executive Officer and David Shackelton, Chief Financial Officer.

Before we begin, please note that we have arranged for a replay of this call which will remain available until November 17. The replay number is 855-859-2056 or 404-537-3406 with the passcode 60084396. This call is also being webcast live with a replay available.

To access the webcast, go to Providence's new web address www.prscholdings.com and look under the Event Calendar on the Investor Information tab. 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 2015 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 Annual Report on Form 10-K for the year ended December 31, 2014 as well as subsequent filings.

The company's forward-looking statements are subject to change and are based on current expectations that involve a number of known and unknown risks, uncertainties and other factors which may cause actual events to be materially different from those expressed or implied by such forward-looking statements.

These statements speak only as of the date of this webcast, November 10, 2015. The company is under no obligation to and expressly disclaims any such obligation to update any of the information presented if any forward looking statement later turns out to be inaccurate, whether as a result of new information, future events or otherwise.

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, adjusted EBITDA, non-GAAP measurements which present its earnings on a pro forma basis.

During this call, the company will also discuss certain pro forma financial measures giving effect to the results of certain recent acquisitions as if they had occurred at the beginning of fiscal 2014 which is also a non-GAAP presentation.

EBITDA, adjusted EBITDA, and the pro forma financial measures discussed are measurements not determined in accordance with or an alternative for Generally Accepted Accounting Principles, and may be different from non-GAAP measures used by some companies.

A definition, calculation, and reconciliation to the most comparable GAAP measures for EBITDA, and adjusted EBITDA can be found in our press release.

A definition, calculation, and reconciliation to the most comparable GAAP measures for the pro forma financial measures provided can be found on our website, www.prscholdings.com and in our current report on Form 8-K filed with the SEC on November 9th.

The items excluded or included in the non-GAAP measures pertain to certain items that are considered to be material, so that exclusion or inclusion of the items would in management's belief enhance a reader's ability to measure overall operating performance and compare the results of the company's business after excluding or including these items with other companies within its industry.

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

I'd now like to turn the call over to the CEO of Providence, Jim Lindstrom. Go ahead, Jim..

Thank you, Alison, and thank you everybody joining today's call. I apologize in advance for any background noise I'm actually in one of our Ingeus call centers in Birmingham, England so apologize in advance. We have had a busy few months.

As I think everybody knows and we look forward to communicating our operational and financial highlights of the recent quarter on this call. First though we announced the strategic sale of our Human Services or PHS as we call it internally that segment to Molina Healthcare. Foremost I would like to thank the PHS team on behalf of Providence.

As many of you know Human Services contain the original service offerings of Providence.

These behavioral and mental health services are highly complementary to Molina's health plan offerings and the transaction provides Molina with an opportunity to demonstrate the value that can be created when physical and mental health are brought together to deliver a holistic healthcare offering.

So we wish Human Services which has been rebranded as Molina Pathways the best in their new corporate home. For Providence the sale of Human Services provides increased financial flexibility and increases the company's ability to pursue strategic opportunities aimed at increasing intrinsic value per share.

For example as we announced in yesterday's press release, our Board of Directors has approved a $70 million share repurchase program which may be funded with a portion of the transaction proceeds and future cash flows. The program will cover the next 12 months and allow us to opportunistically deploy capital in our favorite investment, Providence.

Please note that the $70 million share repurchase program is in addition to the $29 million share repurchase that we executed in October. The remaining proceeds from the sale of Human Services will be used to pay down debt as well as for investments in the long term development of our current operations and potential future acquisitions.

Next I would like to welcome Leslie Norwalk and Matt Umscheid to the company. Leslie joined Providence's Board last week and brings extensive healthcare and regulatory expertise to Providence, having formally served as the head of CMS during the Bush administration.

Matt joined the management team last week as the Senior Vice President of Strategic Services. Matt brings substantial healthcare and operating experience to the company. Prior to joining Providence Matt worked with numerous healthcare services companies and a well-regarded private equity firm.

These new additions to the Providence team are just two examples of value creation strategy we’re implementing here at Providence.

As shared and previewed at our Investor Day in September we have been working extensively with each of our verticals on this value creation strategy which is focused on honing budgets, sales and operating targets and capital allocation priorities for 2016.

This work is also aiding us as we look to improve client solutions and operational effectiveness in not only 2016 but in 2017 and 2018 as well. So moving on to the segments I will start with WD services and congratulate Jack Sawyer who's recently been named CEO of all of Ingeus.

Jack has been with Ingeus since 2004 and has demonstrated great leadership in his position as CEO of Ingeus UK. Jack embodies the values of Ingeus organization.

These are values born of the vision of Ingeus’ Founder Therese Rein and the Former CEO of Ingeus International Greg Ashmead are vital to the future success of Ingeus and we believe as we talked about in our investor day, our competitive advantage for us.

While remaining shareholders of Providence and continued financial partners in the future of Ingeus, Therese and Greg have chosen to step down from their executive roles and on behalf of Providence I'd like to thank Therese and Greg for their leadership and helping countless people across the globe achieve greater success in life by connecting them with career opportunities.

Operationally in the third order the WD Services management team continued to focus on the execution and implementation of new contracts. Our two new largest programs, the RP Program and Mission Providence have exceeded our operational and financial targets for the year to-date.

Our [indiscernible] rehabilitation programs or RPs as we have talked about in Q3 performed better financially than expected due to lower cost than originally anticipated. Additional supplemental revenue streams and the delay of certain transformation cost into late Q4 and early 2016.

In Australia Mission Providence a significant investment for us in 2015 is exceeding our job placement targets in its first few months of operation and it's received almost 40,000 referrals in its job active program. On the work program, and as expected volumes continue to decline and are close to our internal targets overall.

But however the impact to EBITDA declining work program referrals continues to be offset by operational improvements, job start and sustainment payments largely driven by our strong advisor workforce. Like I said I'm actually at our all center in Birmingham, England at the moment.

A location with strong performance and a values based culture that's consistent with the rest of Ingeus. I was also with our international teams this week and I'm pleased to report solid performance in areas like South Korea, and recent wins in France and Germany and improved outlook at our Assure Program in Australia.

Moving to NET Services, the team delivered another strong quarter of revenue growth driven by new contracts and increased membership. EBITDA margin slightly contracted due to increased utilization and increased payroll cost required -- the increased service requirements of managed care contracts.

In terms of new RPs management has submitted its proposal for the South Carolina ASO contract and on New Jersey we now don’t have -- we don't expect a new RFP to be released until Q1 of 2016. As we look into 2016 we continue to see opportunities within our pipeline and operational strategies to improve our effectiveness and delivery.

Lastly at HA Services or matrix business as widely known our team continued to drive impressive operational efficiencies which helped offset the lowering the impact of lower volumes and pricing on a quarter over quarter basis and as discussed on prior calls Matrix delivered very strong volumes in the first half of the year partially as a result of volumes being pulled forward from the second half a year into the first half of the year.

While we expect full year 2015 volumes to be higher than 2014 volumes, we expect the second half of 2015 to be slightly less than the first half in terms of volumes and second half revenue and earnings to be slightly less than in the first half.

Overall Matrix continues to be focused on growth within its core Medicare advantage health assessment market and expanding into adjacent market through additional sales resource investment.

In summary while we will rarely be pleased to report GAAP net income losses to you for any quarter we’re reminding that our businesses particularly WD services should be viewed over years, not quarters due to the lifecycle characteristics of its contracts.

However despite this performance at the net income level, we’re pleased with our operational strategic achievements in Q3 and after our initial budget and ongoing strategic sessions over the last month or two we feel that we’re very well positioned across all of over verticals for a solid 2016 and beyond.

Let me now turn the call over David to discuss the financials..

Thank you, Jim. I would like to start by reviewing the economics of Human Services transaction as well as the changes made to layout of the financials in our 10-Q and press release to reflect the significant and strategic disposition. On November 1, we completed our previously announced sale of Human Services to Molina healthcare for $200 million.

After a positive adjustment of 7.6 million for estimated working capital at close a negative adjustment of 600,000 for debt assumed by Molina and a negative adjustment of 8.6 million for estimated transaction expenses, our estimated net proceeds from the sale were 198.4 million.

This net proceeds number of 198.4 million includes $10 million of cash placed in escrow to cover potential indemnity claims but does not include the estimated cash on Human Services balance sheet at close of $24.5 million that Molina paid us for. In the 10-Q Human Services financial results are reported as discontinued operations.

On the consolidated balance sheet Human Services cash is recorded in current assets of disc-ops; again at close Molina compensated us for this cash. On the income statement Human Services financial results are captured in the discontinued operations net of tax line.

Immediately after closing we used the net proceeds as well as a portion of The Human Services balance sheet cash to pay down our revolver by $206 million.

Note that our revolver balance as of September 30, as reflected in 10-Q was only $191.7 million but as Jim mentioned earlier we used $27 million from our revolver in October to partially fund a $29 million privately negotiated repurchase of our shares.

We intend to utilize the increased revolver capacity for a variety of activities over the next 12 months, including the $70 million opportunistic share repurchase program that Jim mentioned earlier as well as CapEx and OpEx investments to grow our businesses and potential acquisitions among other uses.

Lastly before moving on to financial results for the quarter I would like to point out a change to our definition of adjusted EBITDA for WD Services. As in prior quarters we are including the loss on equity investment related to our Mission Providence JV investment in Australia.

Due to this quarter however we are backing out the taxes and G&A contained within this loss on equity investment making this adjustment negatively impact WD Services adjusted EBITDA by approximately $900,000 in Q3 and negatively impacts it by $2.2 million year-to-date.

The adjustment has a negative impact to EBITDA because the Mission Providence JV has been generating a large tax benefit year-to-date due to its negative net income prior to income taxes.

Moving on to financial results for the quarter, consolidated revenue and adjusted EBITDA from continuing operations was $432.5 million and $16.04 million respectively. Including Human Services Q3 revenue and adjusted EBITDA was 517 million and 18.2 million respectively.

Year-to-date revenue adjusted EBITDA from continuing operations was 1.3 billion and 77.5 million respectively, including Human Services year-to-date revenue adjusted EBITDA was 1.5 billion and 89.6 million.

On a pro forma LTM basis assuming Matrix was acquired on September 30, 2014 revenue and adjusted EBITDA from continuing operations was 1.7 billion and 106 million respectively. This pro-forma LTM EBITDA is down from the figure I gave last quarter as we are now excluding Human Services which generated LTM and adjusted EBITDA of 15.4 million.

Q3, 2015 adjusted EBITDA was also behind Q3 2014 pro-forma LTM adjusted EBITDA due to significant upfront costs related to new programs within the WD Services segment.

Diluted EPS available common shareholders from continuing operations in Q3 2015 was negative $0.30 excluding the portion of the net loss attributable to WD Services of negative 9.2 million or negative $0.56 per share EPS would have been positive $0.26.

On the adjusted basis, diluted EPS available to common shareholders from continuing operations was positive $0.07. As you can see in our press release, the largest ad back we are taking to get to adjusted EPS is a non-cash and tangible amortization related to the Matrix and Ingeus. acquisitions.

Again WD Services negative net income for the quarter significantly depressed adjusted EPS. Moving on to our segment results, NET revenue was up 22.6% for the quarter and 25.3% year-to-date driven by new contracts and increased membership.

As previously mentioned we anticipate this top line growth rate to slow in the fourth quarter as we lapse the start [indiscernible] of contracts began in Q4 2014 and a strong Medicaid expansion growth experienced in Q4 2014. Adjusted EBITDA margins at NET Services came in at 6% for the quarter which is 170 basis points lower than last year.

As mentioned on previous calls, margins were negatively impacted by increased utilization as the expansion in [indiscernible] populations became more familiar with the Medicaid transportation benefit as well as increased resource demands from MCO contracts which continue expanded as a percentage of our overall revenues.

We believe the costs we are incurring provide these higher service levels with NET Services will allow us to continue to win contracts and achieve greater scale in the long term. At WD Services adjusted EBITDA for the quarter was negative 5.5 million, the loss was driven by significant startup cost at Mission Providence.

The expected decline in Work Program volumes as well as a new program costs in France. We expect these trends to continue into Q4 resulting in a negative adjusted EBITDA for WD Services for the quarter as well as for the full year.

However if we were to exclude the impact of Mission Providence significant investment for us in 2015 WD Services adjusted EBITDA is expected be positive for the year. Consistent with previous expectations Mission Providence is burning our adjusted EBITDA in 2015 by approximately $12 million.

Note that in our calculation of WD Services adjusted EBITDA we’re not adding back certain severance related costs of approximately 2.3 million year-to-date or expense accruals related to the release of cash from transaction escrow accounts of approximately $1.4 million year to date.

Given the onetime nature of these items an argument could be made to making to add back to EBITDA however this time we have chosen not to do so in the calculation of our adjusted EBITDA.

Finishing up on segment performance with HA Services revenue adjusted EBITDA for the segment in the quarter was 52.9 million and were 11.9 million respectively, a 22.6% margin. Compared to both Q1 and Q2 this year HA Services revenue margin was down primarily as a result of lower volumes.

As anticipated volumes declined slightly quarter-over-quarter because the management team was able to fill the majority of the 2015 volume demands or make significant customer in the first half of the year. Before wrapping up I'll touch on a few consolidated level items.

G&A from continuing operations was 4.9% of revenue for the quarter versus 6.6% in Q3, 2014. This 160 basis point reduction in G&A cost was a result of decreased acquisition, integration restructuring and stock comp expense in Q3 of this year as compared to last year.

Our effective tax rate for Q3 2015 was above 100% in Q3 due to non-deductible acquisition related stock comp expenses and net operating losses informed jurisdictions for which future tax deductions cannot yet be recognized. Excluding these two items, the effective rate in Q3 would have been 43.8%.

Net interest expense for the quarter was approximately 4.6 million which includes 750,000 captured in disc ops, given the substantial pay down on our revolver last week interest expense should decline in Q4. CapEx from continuing operations was approximately 9.8 million for the quarter and 21.2 million year-to-date.

CapEx is expected to increase significantly in the fourth quarter as a result of major IT investments across all of our segments particularly WD Services. These CapEx investments which are expected to yield increase efficiencies in Q4 will bring full year CapEx from continuing operations into the $40 million range.

Again I would like to reiterate that despite our net income loss for the quarter driven by WD Services we’re pleased with our operational and strategic achievements and after our initial budget and continued strategic sessions over the last month we feel that we are well positioned across all of our verticals for a solid 2016.

With that Jim and I would like to open up the line for questions..

[Operator Instructions]. Our first question comes from the line of Bob Labick of CJS Securities. Your line is open. Please go ahead..

I wanted to start with WD services and first if Jack is listening, congratulations to him on his new role there. David just mentioned the startup for Mission Providence in line of 12 million. Could you tell us regarding the RRP and then I think you had startups in France as well I think you had said 20 million to 25 million was the expected startup.

Are you still on track for that? And are you still on track -- do you believe that should end shortly and have a sharp positive swing in 2016?.

I did mention that the startup costs associated with Mission Providence is about $12 million for 2015 and then when looking at RRP in France that kind of 20 million to 25 million of startup costs for the year still holds. We expect as Jim mentioned we did have some of the startup costs related to RRP pushed into the beginning of 2016.

We really view our -- a lot of these startup costs as expiring in the first quarter of 2016 and both of these contracts turning to positive EBITDA positions at the end of the first quarter of '16 beginning in the second quarter of '16..

And then looking over at Matrix, you mentioned that you highlighted on the last call you had pulled forward some assessments into the first half.

And you just mentioned Q4 should be I guess reasonably similar to Q3, does the outlook for growth which you gave at the Analyst Day for 8% to 10% for the next few years that still holds for 2016 as you sit here today?.

Yes, we believe that still holds that 8% to 10% three year CAGR. Although our revenue, our volumes in the second half of 2015 are slightly below those in the first half, full year 2015 volumes are well ahead of full year 2014 volumes..

And then looking at LogistiCare you highlighted in the Q that build-up of receivables is related to LogistiCare and a little bit for WD Service startups. Typically we've thought of LogistiCare as paying up front at the beginning of the month model.

I believe some of these changes in working capital relates to the reconciliation contracts you discussed at the Analyst Day but could you confirm and elaborate on that and when would you expect the cash flow to come into you?.

That is correct on the working capital the increase is largely related to LogistiCare but also has components related to WD Services in the new contracts there.

As you see our revenue has been growing quite significantly over the first nine months of this year so we are getting a natural buildup of AR related to that, and you’re correct that a number of our contracts we are paid upfront monthly. But we do have contracts where that is not necessarily the case.

I mean as you pointed out on the reconciliation contracts that LogistiCare has, there is a look back to see where utilization was for the month and additional payments might be made by the MCO, majority of these reconciliation contracts are with MCOs..

Last one, I'll jump back in queue, David, you gave us some good details on the sale and the proceeds from Human Services sale, could you if you have in front of you or else we can figure it out offline, but give us a sense of the pro forma balance sheet after you've got the proceeds and you bought back the $29 million of stock and the other moves there what you know cash and debt looks like right now?.

I think the easiest way and as I mentioned the cash from Human Services, we were required to put that in the disc-ops line on the balance sheet.

So if you assume that we have 25 million of cash from Human Services being reimbursed to us by Molina and then approximately 200 million from the sale so you know look at total net proceeds around 225 mark, subtract out kind of the 10 million of escrow 8 million of transaction costs and that’s really the total net proceeds that we used to repay the revolver.

Also keep in mind that we drew down 27 million on the revolver and used 2 million in cash in October for the privately negotiated share repurchase..

[Operator Instructions]. Our next question comes from the line of Mitra Ramgopal of Sidoti. Your line is open. Please go ahead..

First on the NET business, you’re certainly seeing a number of new contracts and increased membership in several states.

How much of that would you say is really attributable to healthcare reform versus maybe the underlying business?.

So, Mitra, I think a large part of the benefits of the health care reform, ACA, that really kind of impacted us at the second half of 2014.

Some of those impacts are still flowing through but when you look at our largest contract New Jersey those increased -- that increase membership from ACA was really a 2014 event but again there still are positive impacts that continue to flow through just not as significantly as in 2014..

And as you mentioned New Jersey do you have any update regarding the contract there?.

No, Mitra, we don’t, the latest we've heard is -- we think it will progress maybe in January, but we thought we will hear by now also, so that's where we're kind of expecting in Q1 at this point..

And switching to WD, I know you mentioned but when we look at the revenue, the benefits you got from the new rehab and justice program was partially offset by declining referrals and reduced unit pricing, I was wondering if you would give us a little more color in terms of the environment as it relates to pricing?.

So on WD Services that comment related to pricing is really focused on the work program as was the -- and which has been expected and part of that contract, the unit pricing does come down over time.

So they were totally expected and again those declining volume and pricing was in reference to the work program which as we all know is in its later years..

And on the health assessment business, I know -- if we look back at the first quarter we have had a couple of quarters of small sequential declines. I was wondering if you can give us a sense when you think that might bottom out..

So in terms of -- on Human Services the volume declined from Q2 to Q3, again that's just related to how volumes are falling out for the pattern of volumes for the year. We're not seeing on a year-over-year basis a decline in volumes. So it's purely just kind of inter-year volatility within volumes at Matrix..

I think as we mentioned before we have some exposure to some larger clients which drove some of that.

I think the team has been focused on diversification and adding new clients and so we have actually seen quite a volume increase through the year and a nice addition of additional clients for the year, so what gives us confidence -- I think we're working quite well with our larger clients and as soon as that their volume picks up I think in the first quarter of next year we'll be in good shape to deliver the 8% to 10% that David talked about earlier.

.

And a slight decline you saw on the margin, [indiscernible] attributable to the volume as opposed any underlying price issues?.

We still see price pressure but it's not substantial. Also we are investing versus last year earlier and earlier in the year we are investing at our product care division which puts a little bit of pressure on it versus the second quarter it's not very much difference. So volume deferred a little bit..

And finally I know Jim, on the last call you had mentioned obviously when we had the four segments that potentially you might explore vertical with the Human Services business now sold, are you more inclined to maybe explore fourth vertical or pretty much you’ve enough on your plate right now to sort of occupy you for the next year at least..

We're spending a lot of time together as a team and we see a lot of sort of I'd say within vertical opportunities whether it be growth opportunities or we might call extra capital or add some resource, we see -- we’re quite excited about that.

We also see some opportunities for acquisitions within the verticals which we we're increasing our activity there. So that's really our first priority because we think we are very good to the operating teams within the verticals and their knowledge within the spaces that they're operating.

It's quite strong and so we saw a pickup in actually inbound activity after we announced the sale directly from other people within the industries that we operate. I think they saw the strategic shift in Providence at that point and so the volume of that activity has picked up..

[Operator Instructions]. Our next question comes from the line of Mike Petusky of Barrington Research. Your line is open. Please go ahead..

Couple of questions on the G&A expense, you guys have done a nice job in taking that down in terms of absolute dollars last few quarters, I guess I'm just wondering is there any more that you think you can get done there over the next year to two years or is this pretty much, as much as you can squeeze out and this is kind of the run rate going forward..

We are pretty focused on and we're just going through the budget process so we feel there's more room in there. We will give some guidance I think at year-end when we announce the fourth quarter around that. But I'd say here and few other areas within the company we do see some opportunity.

You know that being said we are offsetting that with adding some resources around sales and operational improvements teams in some of verticals but we see some pretty quick payback on those. So corporate wise yes we do see it coming down a little bit more..

I would say that I see it coming down over the next couple of years. As Jim said we are quite focused on that number and believe there is room for improvement..

And then just flipping over to the NET business, I just want make sure I understand the New Jersey RFP is going to be released in Q1, how long would you guys if that’s the case and how long would you guys expect you know before a decision was actually made.

Hopefully you guys are able to hold the contract but I mean -- what's the quickest that could change over regardless?.

I could be a month, it could be a few months, but certainly by-product [ph] for the second quarter..

And then just wondering if I missed this earlier please forgive but are there other meaningful pieces of business that you guys are in terms of a transportation business that you guys are bidding on that could change hands in '16?.

Yes so there are always are a handful of contracts that we're bidding on.

We did just submit an RFP for South Carolina which we hope to hear back from -- hear back on the next couple of months and in Virginia we're currently on month to month extensions with that contract and entering conversations about extending that for a year and then we also recently there are existing contracts but resigned Missouri, in terms of any of our current business outside of New Jersey that could change hands in 2016 which we hope it doesn't.

The other contracts would be much smaller than New Jersey..

David there is one that I probably shouldn't say which state, but it is contiguous with the current offering that could be sizable. I'm going to talk in -- I wouldn’t want to disclose that right now but there is simple one larger one out there for us..

And that would be a new piece of business?.

That would be..

Operator:.

. :.

Well thank you everybody, thank you for those of you who attended our Investor Day few weeks ago and thank you for calling in this morning and being supporters of Providence. We appreciate it. Thank you. Bye, bye..

Ladies and gentlemen thank you all for your attendance. This does conclude the program and you may all disconnect. Have a great rest of your day..