Bryan Wong - IR Jim Lindstrom - CEO David Shackleton - CFO.

Bob Labick - CJS Securities Mike Petusky - Barrington Research.

Good day, ladies and gentlemen, and welcome to Q2 2016 Providence Service Corporation Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference is being recorded.

I would like to introduce your host for today's conference Bryan Wong. Sir, you may begin..

Good morning and thank you for joining Providence's second quarter 2016 conference call and webcast. On the call from Providence today is Jim Lindstrom, Chief Executive Officer; and David Shackleton, Chief Financial Officer.

We have arranged for a replay for this call, which will be available approximately one-hour after today's call, on our website www.prscholdings.com. A replay will also be available until August 16th by dialing 855-859-2056, or 404-537-3406 and using the passcode 56389155.

Before we get started, I'd like to remind everyone that during the course of this call, the company may make comments which may be characterized as forward-looking statements under the Private Securities Litigation Reform Act.

Those statements involve risks, uncertainties, and other factors which may cause actual results or events to differ materially. Information regarding these factors is contained in yesterday's press release and the company's filings with the SEC.

The company will also discuss certain non-GAAP financial measures in an effort to provide additional information to investors. A definition, calculation, and reconciliation to the most comparable GAAP measures can be found in our press release and our current report on Form 8-K furnished to the SEC on August 1st, 2016.

Finally, for simplicity, we will be speaking in US dollars when referring to such things as contracts and revenue. Amounts translated from other currencies, including the British pound have been translated at the exchange rates in effect for the corresponding time period. I'd now like to turn the call over to Jim Lindstrom..

Thanks, Bryan. And thank you all for joining today's call. And thank you to my Providence colleagues around the world for their dedication to our core values, particularly around providing the highest quality customer-centered care.

So I am going to spend a few minutes on a few strategic highlights on the call and then hand it over to David Shackleton, our CFO to cover the financial highlights.

So as always, our focus during the quarter was on creating intrinsic value on a per share basis through most importantly operational excellence, and second towards deploying capital, towards repurchasing shares instead of deploying capital towards acquisition candidates this quarter, which largely continue to add valuation expectations that are inconsistent with our investment criteria.

Our US healthcare services segments had another quarter of solid performance with overall revenue growth of north of 10%, slightly exceeding our long-term growth expectations for this area. So first I'll start with Matrix. Matrix continues to be a leader in the comprehensive risk assessment field.

In order to drive growth above the 5% expected industry growth in the Medicare Advantage population over the next several years. We are pursuing a number of avenues to upsize the traditional risk assessment field for Medicare Advantage. So first, as I mentioned before, we're continuing to invest in chronic care.

We're also ramping up other new offer – new other new offerings to further improve the quality of care delivered in the home and to better identifying closed gaps impaired. For example, last year Matrix introduced pediatric assessments for the management to key market and also launched two chronic care pilots.

This year the team continues to introduce new offerings such as Matrix diabetes care intervention, where we will use predictive analytics to identify members who may be at risk of diabetes and would benefit from in-home and telephonic contact with our extensive nurse practitioner network.

Second, as we've talked about before, we have ramped up our investment in sales and marketing over the last two to three quarters, culminating with the hiring of new Chief Growth Officer in Q1.

While Matrix's revenue declined on a year-over-year basis versus the very strong first half of '15, volumes outside of our largest client in 2015 actually increased north of 30%.

So while we think that our 8% to 10% 2016 stretch revenue growth target is unlikely to be achieved in the full year, our second half is expected to show year-over-year growth in this 8% to 10% range, thanks to our sales team adding seven new clients this year, support from our existing clients and a target list that now is over 150 companies.

As you can see, operational excellence also led to stronger margins, higher than we expected and should contribute to full year margins consistent with last years approximately 24%.

We remain favorable on the operating fundamentals of Matrix and as mentioned, look forward to adding this very well run in-home healthcare platform for adding to this very well run in-home healthcare platform through both organic and the inorganic growth. Moving on to NET services, or LogistiCare.

First, the quarter’s performance was highlighted by new client wins and contract starts in California and improved financial performance in Florida and Pennsylvania due to such items such as utilization levels. While our existing Missouri contract was renewed, South Carolina remains under appealed and we have not heard yet on New Jersey.

We have little insight as to when we will hear on New Jersey although the existing contract was extended through the end of August. Second, Q2 profit was negatively impacted by investments in personal and in a longer term value enhancement project.

As mentioned in our recent shareholder letter, this value enhancement project is centered on deploying call center best practices, which will improve productivity and increase the use of technology in our client communications amongst other areas.

We will also focus on better utilizing our network of five – of over 5000 transportation providers, through a variety of initiatives in these very large buckets of spend, we expect enhance our service levels, and extend our strategic competitiveness over this 6 to 24 months.

We're not yet prepared to size the opportunity for you, but view this area as one of the biggest opportunities for organic value creation over the next two years. Moving on to WD Services, a segment which is largely comprised of the May 2014 acquisition of Ingeus.

First, we're not yet consistent with our long-term profitability goals, WD's adjusted EBITDA before Mission Providence was positive this quarter, are continuing country with the exception of France and start up cost in our offender rehabilitation program were all profitable and overall generated an EBITDA margin profile at or above our long-term target of 8% to 10% for the second quarter in a row.

Second, WD's overall profitability remained under pressured due to losses in France with a start up phase of a large contract remained subject to lower than anticipated volumes in an oversized infrastructure. On France, Ingeus has deployed and operational improvement team to help turn this country profitable by year end.

Results were also pressured by start up costs in our offender rehabilitation programs, otherwise known as RP. This program is operating under a seven contract and we expect that annual revenues in the $75 million to $100 million range, an acceptable margins by the end of the year.

This support the anticipated margin expansion of our offender rehabilitation program, as well as to ensure high quality services, we recently hired a former senior leader from MAXIMUS to program COO.

Third, the Mission Providence KB which was formed in late 2014 won incentive contract in April 2015 that was smaller than expected and commenced operations in July 2015. Mission Providence's volumes under these contracts that we did win had been lower than expected, resulting a Mission Providence having a larger infrastructure than appropriate.

In response, our Ingeus operational improvement team was recently deployed to Australia for the quarter – in the second quarter and is in the process of implementing a plan to both increase volumes, outcomes and productivity. But we are active with urgency, we hope to see breakeven profitability some time in the fourth quarter of 2016.

In conclusion, on WD, we will reiterate that outside Mission Providence in France our core WD operations were profitable despite the noise around such areas, such as Brexit.

I am sure that we will see some short term effects from Brexit due to government decision and some smaller contracts that have some funding exposure from the European social fund.

However, the secular trends remain in our favor and as we have with the LogistiCare we at Providence, have started to work more closely with the Ingeus team around longer term value enhancement strategies, which we intend to report more on over the next few quarters to ensure our long-term goal at 8% to 10% margins.

These value enhancement strategies will not only support Ingeus's financial goals, but enable improved client service. I will now hand the call over to David..

Thank you, Jim. Consolidated revenue in the second quarter of 2016 was $450.6 million, a 7.7% increase over the second quarter of 2015. Adjusted EBITDA was $30.7 million, or 6.8% of revenue, compared to $31.6 million, or 7.5% of revenue in the second quarter of 2015.

The 70 basis point margin interaction was primarily driven by transportation utilization returning to more normalized levels within any key services and continued new program investment within WD Services, partially offset by productivity improvements within HA services.

Income from continuing operations, net of tax was $4 million, or $0.21 per diluted common share, versus $0.16 last year. Adjusted net income was $13.1 million or $0.70 per diluted common share versus $0.67 last year.

In addition to lower income tax provision, and lower share count, resulting from our share buyback activity, a 50 basis points reduction in G&A expenses as a percentage of revenue help contribute to increase in EPS and adjusted EPS in Q2, 2016 versus Q2 2015.

CapEx in Q2 was $13.8 million, bringing first half CapEx spend to $23.6 million, approximately 50% of the year-to-date CapEx has gone to WD Services, primarily for IT and new facility investments related to the offender rehabilitation program, as well as other new programs in the UK and France.

The other 50% of year-to-date CapEx spend went towards IT investments aimed at transportation provider and call center efficiencies within our US healthcare services segments.

Although we expect CapEx to decline in the second half of the year, we now expect full year CapEx to be above the top end of our previously estimated $30 million to $40 million range. The additional spend is coming out of WD Services where IT and facilities costs relating to new programs are higher than originally anticipated.

Looking forward to 2017, we are focused on reducing WD Services CapEx as we spend associated with new large programs behind us. Working capital in Q2 was a $13.6 million cash strain, primarily result of prepaid income taxes, insurance policies and expenses for WD Services used on the program.

A reversal of the AR decline experienced by NET services in Q1 also contributed to increase in working capital. Year-to-date, excluding taxes on the sales, human services, working capital has actually provided a $32.6 million cash benefit.

On taxes, our effective rate remained elevated and came in for the quarter at 56.9% due to losses in foreign jurisdiction for which are not seeing any benefit due to the history of losses. We expect to see a similar elevated effective tax rate throughout the remainder of the year.

On our share repurchases, during Q2 we bought over 273,000 shares for $12.9 million or $47.36 per share. Since we began repurchasing shares in 2015, and through to day, we have spent approximately $74 million to repurchase approximately 1.7 million shares for just over 10% of our total shares at an average price of $43.86.

Moving to our US healthcare services segment, NET's services revenue increased approximately 14% to $309.2 million in Q2, 2016 versus Q2, 2015 driven by new contract and members of growth.

As anticipated, this growth rate is expected to decrease during the remainder of the year, bringing full year revenue growth into the high single digit and low double-digit range. Adjusted EBITDA NET services in the second quarter of 2016 was $20.7 million or 6.7% of revenue, versus $21.2 million or 7.8% of revenue in the second quarter of 2015.

While increased utilization contributed to this year-over-year margin attraction, a shift of long-term incentive plan cost from corporate NET services, as well as investments into the value enhancement project that Jim mentioned earlier also contributed to decline.

While we expect additional quarter-over-quarter margin pressure in Q3 driven by seasonally high utilization in the summer month, we are aiming to deliver a full year margin closer to 7%. At HA Services, also part of US Healthcare services, volume increased slightly in Q2 2016 versus Q2 of last year. While our ASP decreased largely due to customer mix.

In the first of 2016 revenue declined 8.8% primarily due to reduced demand from a client who drove a significant portion of our volumes in the first half of 2015. Outside of this customer, as Jim mentioned, volume increased over 30% in the first half.

Because demand for this customer fell in the second half of 2015, we expect positive year-over-year volume and revenue growth in the second half. Adjusted EBITDA for HA Services increased in Q2 to $14.6 million due to 375 basis points margin expansion.

In addition to continued efficiency gains, a number of other factors contributed this unusual expansion for the quarter, including favorable geographic and customer mixes, as well as a $1 million pick up from forfeited long-term incentive rewards which is then been reallocated to new employees and were about to be expensed over time going forward.

Although we do not expect to achieve this level of EBITDA margin we saw in the first half and particular in Q2 going forward, our full year outlook and adjusted EBITDA margin continues to improve which is offsetting the dollar impact to adjusted EBITDA of volume growth being below our stretch goal.

In Q3, we are expecting margin contracting below 20% range as we build additional capabilities of ahead of an expected up-tick in volumes in Q4 resulting in full year margin consistent with what we achieved in 2015. Within our global workforce development segment, revenue declined 3.1% in Q2.

However, on a constant currency basis revenue increased 1.6%. Prior to the impact in Mission Providence, adjusted EBITDA for the quarter was $2.3 million or 2.6% of revenue versus $4.7 million or 5.1% of revenue last year.

This decline was due to start up activities at our offender rehabilitation program that was delayed from 2015 into the first half of 2016. For the full year, we still expect adjusted EBITDA margin prior to the impact of Mission Providence to be in the mid single digit range, which implies improved margins in the second half of the year.

Mission Providences adjusted EBITDA in Q2 was negative $1.2 million. However losses narrowed on a quarter-over-quarter basis, we are implementing measures aim to increasing job advisor productivity and proven job verification processes. Our team is also started to reduce the cost side of the equation in an effort to turn the JV profitable by year end.

Adjusted EBITDA at corporate for the quarter was negative $5.8 million, include a $1.2 million benefit from cash settled equities awards. Remember that such award are effectively mark to market each quarter, so increases and decreases in our share price result in expenses and benefits respectively to our P&L.

Given the higher anticipated audit and stock cost experienced in Q1, higher legal fees in the first half and a burden of approximately $1.1 million of revenue in human services expenses so far this year, we are now expecting adjusted EBITDA at corporate for this year to be roughly inline with last year.

I will now turn it back over to Jim, to close the call..

Thanks, David. So hopefully as you heard in todays call we are very focused on supporting our segments leadership positions with not only capital, but also by supporting our CEOs and our team who are leaders in their industry domains.

As we entered the second half of 2016, improve our – and improved our cash generation through reduced CapEx in 2017 in 2018, reduced start up cost at Ingeus, and we start to see the benefits of our value enhancement projects, we feel pretty good about our financial profile over the next few years.

We also believe that Providence will increasingly become a preferred partner, an attractive option for companies and leaders who are seeking alternative to traditional private equity or strategic owners. So noted and prepared for these potential partnerships, we added to our Board of Directors and holding company team during the quarter.

We added three new directors with current or prior CEO experience and demonstrated success in both investing and operations and institutions such as Warburg Pincus, GCA Savvian and Robertson Stephens and Alexion Pharma.

We have also rounded on our holding company investment capabilities with team members who previously worked at world class institution, such Crevasse, Lean, and Loer [ph] Blackstone Private Equity and GE. Finally, as I said in our shareholder letter, I like to thank each of our Providence colleagues for their dedication and focus on client care.

I also said capital allocation is a major focus to Providence, but what truly sets Providence apart as our team of leading experts and healthcare and workforce development services. Our people are passionate about working with clients and patients to help them better manage their health and improve their quality of life.

We would like to thank you for your support of our long-term – continued long-term focused value creation. We have a strong sense of urgency around short term achievements and we've got a culture of operational excellence to drive exceptional client outcomes in 2016 and beyond. I'll now open it up to questions..

[Operator Instructions] And our first question comes from Bob Labick with CJS Securities. Your line is now open..

Good morning. Congratulations on a nice quarter..

Thank you, Bob. Good morning..

Hi.

So, thanks for all the details, just wanted to follow up a little bit on a couple of things, starting with logistic here, obviously, very strong sequential growth, can you talk a little bit about the pipeline going forward, you obviously raised the expectations in terms of sales this year, but is the growth coming you know, from mostly from MCOs, is it data outsourcing or how do you look at that over the next few years?.

So going forward, and also a lot of our growth that we experienced in Q2, what's coming as we mentioned from new contracts, particularly in the managed care, the MCO arena, and as we look forward, although we do have renewals in RFPs related to some of our current state programs, we look at growth more coming from the MCO contracts, which tend to be smaller dollar value than the state contract, but we do see quite a few of those contracts coming out..

Okay. Great.

And then, in relation to the value enhancement project, can you talk a little bit about the timing of the benefits and also will the savings be reinvested in more competitive bidding, in other words like, revenue drivers or should we expect higher margins over time or both?.

Sure. I'll take this one. So we've had a team of approximately 14 or approximately 7 to 10 people working on this program for the last two months, just as sort of identifies the sort of big buckets and then drill down into some smaller segments within those buckets to identify the opportunities.

What we're moving towards now is actually coming up with the, the plan to actually role those out, some of those – some of the improvements have actually started and actually started coinciding or even before sort of the larger program came into play.

So we're not prepared to talk about sort of the timing of the benefits yet, but I will say that we are I' say, we've seen any minimal benefits from this year and really its going to be more focused on '17 and '18.

We'd like to do some more work on it internally, it is going to take some investment as it has this past quarter around areas such as hiring process improvement talent which we don’t have a huge deep inch right now, like we do at Matrix.

So it is going to take some time to recruit those people, give some training within our ranks around some of these changes and then also come up with the work force management plan which hopefully we'll be able to communicate more about this fall and relate some of the examples or some of the sizes of the opportunities that we're looking at.

So I can't be more specific at this….

A question, in terms of, so just moving on then, in terms you just mentioned this little bit, in terms of the capital expenditures and above the prior guidance for this year will be coming down in '17.

Can you give us just a sense of what the kind of normalize CapEx should be in beyond 2017 and beyond?.

Sure. So, you know, within the US healthcare segment areas, outside of this value enhancement project we should be you know, sub $20 million. We're going to have some elevated CapEx from this project at LogistiCare, but it’s not huge, by any means.

So next year we're probably talking in the 20 to 25 range, and this is all very preliminary, we haven’t gone through a budgeting process yet. And then over at WD it should be fairly minimal in the core operations, the one thing that would drive it up is the next phase of the work program which we will be hopefully bidding later this fall.

And we could see some CapEx spend around that and at this point we're expecting to be in the single digits, but we just don’t know sort of much beyond that.

So I think when you sort of add that up maybe you're somewhere around and this is very preliminary you know, $30 million for next year and I think overall we'd like to get it closer to 20 and 25 in 2018..

So Bob, approximately we're again preliminary hoping to bring down CapEx next year by $10 million to $15 million and then 2018 forward, bring it down by even more..

Okay. Great.

And then last one from me, on WD Services, obviously you've discussed how you're attacking at operationally, can you talk little bit about the kind of lessons learned so far and how you view the maybe 3 to 5 year opportunity now versus a year ago how you though about it, is that changed at all?.

Sure. So I think the – a lot of the success or failure for some of these longer terms contrast start at the – in the bidding phase.

It really – how you sort of bid the opportunities, the commitments that you make to the infrastructure to deliver those services you know, start actually before you even submit the bid, really in the – even in the design phase. So I think we're being much more disciplined about that now under Jack Sawyer's leadership.

We've added a new business development head from Serco and Capita. Capita is a company we respect quite a bit and has been very disciplined around sort of their operational and financial strategy. So we're shifting to operate more under those sort of discipline areas of practice.

I think what we'll probably see over the next couple of years is perhaps a little bit of - not so much growth on the top line, but we could even see some areas shrink a little bit and that’s also contribute to by the work program expecting – we're expecting that to be smaller than it has been in the past.

Offsetting that is we expect to see sort of higher profitability. We're still pretty focused on that 8% to 10% margin.

And then longer term we're already starting build and plant the seeds to diversify in some smaller contracts, like the diabetes prevention contract, that just - we just launched, which don’t have sort of the large upfront, capital cost and P&L hits that we've seen in some other contracts, and are less subject to underwriting estimates that don’t fall inline with reality when the projects come to fruition.

And I think if we do anything larger we're being a lot more disciplined in how we model out opportunities.

So we'll run a lot more sensitivities you know to the down side to protect ourselves, now that obviously means that we'll probably not – our win percentage will go down as well, but when we do win I think we'll offer you lot more confident in our ability to execute profitably.

So just to sum up, I don’t see a lot of top line growth, we could even some shrinkage over the next year or two large shrinkage, however profitability we see moving the other as exemplified by our core businesses outside of the start up costs two quarters in a row being at or north of our 8% to 10% margin.

So I think you know, all now we feel – we're working hard on it and I think longer term we feel good about the business..

Okay. Great. Thank you very much..

Thank you. And our next question comes from Mike Petusky with Barrington Research. Your line is now open..

Good morning, guys. Just kind of following up, I guess on that WD area, its seems like most of that business is actually working pretty well, with the exceptions of Mission Providence in France.

I guess I was wondering I think you alluded to infrastructure kind of being not completely right size in both of those contracts, is it difficult to kind of fix issues around that within those contracts in a short period of time or are those fixable over the course of a couple of two, three quarters.

And then just are there opportunities to renegotiate aspects of those contracts given the volumes not being there, I guess, what can you do with the problem contracts you know in near term and then over the longer term?.

Sure. So we attack it on a few different fronts, you know, the biggest thing that we can do in a place like Australia as we sort of drilled down into what's driving the profitability is driving more sort of throughput. So that’s really what are Ingeus team is focused on.

So how we can improve client engagement, getting people on the front door, but then also improving outcomes. One of the areas that we're trying to improve outcomes is around the verification process, which across the industry down there is not – is showing some teasing issues. So that’s one area. On the cost side, that kind of varies by area.

We've already started some cost reduction down in Mission Providence recently in France, I think you know, most people are aware that it’s a little bit more difficult to right size your infrastructure. So that can take a little bit more time.

And then the third area, but clearly we're focused on it - and then the third area is around contract renegotiations. So in Australia I think most of our peers that we've talked to some of said publicly and there is trade value, others talked about it, around some of the issues that we're talking about.

You know, obviously we're working closely with the government down there to improve area such as the verification process around outcomes, you know looking volumes coming through, I can't comment on any restructuring of contracts anywhere while they are in process.

But obviously we're going to try our best to get the best outcome with these long-term government partners, but its kind of work for both parties. So we've seen it happen in the past, in some areas. But again we're not prepared to talk about until we have an outcome..

Okay. All right, great. And then I guess, just in terms of capital allocation, obviously you guys have been fairly aggressive with the share repurchase.

In terms of what you guys are seeing though on the M&A front I mean, would you expect obviously you guys generated good cash flows, you expect to generate good cash flows, have the firepower to do something on external growth initiatives.

I mean, would you expect to be more active over the next say 12 to 18 months in terms of M&A?.

We do, yes, we do. That’s we won't be building the expertise at the board and then also the holding company level unless we had expected to. We feel that our financial firepower will step up. And so that’s you know, that’s something that we're looking forward to it.

It’s been as I mentioned difficult with valuations where they are, thus you know, clearly not wanting to use stock, because of – we're actually buying it back. So yes, we're hopefully waiting for valuations to get more reasonable and then also for our financial firepower to pick up..

Are there any areas of particular interest that you would be willing to share in terms of the types of assets you're interested in or looking at or having discussions around?.

Sure. So one of the – our big focused areas is in in-home care or care coordination. We've had a fantastic operating model in Matrix with a lot of potential to do other things.

So we see you know, by having these NPs in the home, we see a lot of different chronic conditions, whether it be issues with diabetes, heart issues, vascular issues, we see environmental issues as well. So areas around fall protection or just sort of people so having trouble with their activities from daily leaving.

We see opportunities in or weakness in the lot of member’s nutritional capabilities. So there is just a lot of work that needs to be done there. And I think obviously a lot of other people see the opportunities there too. So its – we've looked at a lot of potential partnerships, but again it has been difficult to the valuations.

Outside of that area, we have looked at a few opportunities very high level and on a preliminary basis connected to LogistiCare, but we're much more focused on the value enhancement project there, this may soak up a lot of our time over the next 12 to 24 months.

And then occasionally we do look at some other opportunities in you know, call it in area such as training and human capital areas which we just view is sort of big areas for that are consistent with our what we're seeing in terms of secular trends.

Ingeus is being asked to do a lot more, not only on the health side, but on the education and training. Again there we just feel like we have so much to tack over the next six months in terms of getting these start up projects profitable that we really don’t want to distract there with any acquisitions. So….

Got you. Just – okay, sorry..

I just say, we are – what we're trying to I guess, minimize is on the other hand is what we're trying is stay away from this may be probably some areas around big concentrated exposure to, whether it be more exposure to certain governments that we already have exposure too or clients as well, we are focused on more diversification around the client base..

Got you. And then just I get the quick one for David, you mentioned that you expect the tax rate to remain elevated for the remainder of the year.

I mean, do you see that I know you are not giving '17 guidance or anything like that, but do you see that kind of returning to more normalish 40%, 42% ranges in '17 or will that stay abated [ph] as you look out beyond '16?.

Yes, I think it will be combination of factors. One, where our profitability is on a geographic basis, and then two, our ability to demonstrate profitability in scenarios where we're currently generating offers.

So I can tell you our – able to - for example in France demonstrate ongoing profitability, you can't – it’s difficult to use those losses to offset profitability, to offset gains.

So I do expect that over time as certain geographies where we're currently loosing money as those become profitable that will start to see the tax rate approach more to 42% range, but it will – it could take time..

Okay.

So maybe even elevated for a period of time in '17, it sounds like, what I am hearing is that fair?.

Yes, possibly..

All right. Guy's, thank you so much. I appreciate it..

Thank you. And I am showing no further questions at this time. I would just like to turn the call back over to Jim Lindstrom for closing remarks..

Great. Thank you everyone for your participation. As always, David and I are here to answer any questions or to visit in person. We see a lot of familiar names on the call this morning and I think of each of you is long-term partners. So we welcome your participation and welcome calls going forward. So, thank you..

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. And you may all disconnect. Everyone have a great day..