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

Dan Moore - CJS Securities Shane Svenpladsen - Avondale Partners Mike Petusky - Barrington Research.

Good day, ladies and gentlemen, and welcome to The Providence Service Fourth Quarter 2016 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 call is being recorded.

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

Good morning, and thank you for joining Providence’s fourth quarter and fiscal year ended 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 of 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 Marth 24 by dialing 855-859-2056, or 404-537-3406 and using the passcode 61212113. During this call, Mr. Lindstrom and Mr.

Shackleton will be referencing the presentation that can be found on the Investor Relations portion of our website under the Events calendar. And in our current report on Form 8-K, which was furnished to the SEC earlier today.

Before we get started, I’d like to remind everyone that during the course of this call, the Company’s management may make certain statements, 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 of these non-GAAP measures and reconciliation to the most comparable GAAP measures can be found in our press release, investor presentation and today's current report on Form 8-K.

Finally, for simplicity, we will be speaking in U.S. 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..

Great. Thanks, Brian, and thank you all of you for joining today. So hopefully all of you have the slides that we posted this morning, covering the quarter and the year. One thing that you won't see in the slides is anything about the recent healthcare legislation. So, if anyone has questions about that, I can answer those in the Q&A.

So, turning to Slide 3, first of all, as we always do every quarter, we would like to thank our 9,000 colleagues around the globe to make a difference in over 25 million people's lives every year and we have made some pretty large networks primarily through our 9,000 colleagues particularly in the U.S.

healthcare services businesses and those networks are unique in scale and service delivery and really want to thank our teams for driving forward our leadership positions there.

So, moving on the first bucket here on revenue growth, as you can see revenues grew almost 7% on a consolidated basis in 2016 and what was driving that was really driving our little bit of margin expansion as well was the pace and rigor in which we're building the foundation for future growth.

On margins, we accelerated a lot of value creation strategies through strategic partnerships, operational improvement initiatives, technological innovation and finally through disciplined capital allocation, we repurchased over 17% of our outstanding common stock since the summer of 2015 and had the sale of a 53% stake in Matrix during the fourth quarter.

So, diving into the segments and we'll start with NET or logistic care. Logistic care's revenues increased 14% to $1.2 billion in 2016 and grew 12.9% in the fourth quarter. The revenue growth was primarily driven by contract adjustments due to program utilization acuity as well as increases to the population through existing and new contracts.

In terms of volume, which is care manager over 69 million in 2016. Adjusted EBITDA was $92 million in 2016 resulting in a 7.5% EBITDA margin, a modest increase from 2015. CapEx remained under 1% of revenue and working capital excluding cash remained negligible.

On a strategic front, I am pleased to report that we made solid progress since our last call. The member experience initiative which we referenced on the last call consists of 20 work streams designed to both lower costs and improve service for our clients to manage populations and it is well underway.

So first on the technology side and really overarching the member experience initiative is the rollout of our next generation of our own software called [LogistiCare]. LogistiCare provide a greater member-centric focus throughout our business processes.

It creates efficiencies, it connects our transportation provider's populations, call centers and other third parties. The piloting starts in April and will largely be implemented by year-end.

Second on our call centers, we've largely implemented our workforce management system in 18 call centers out of our 20, to seamlessly handle spikes in demand and redistribute volume during our inclement weather scenarios.

Centralized oversight of our workforce management system makes us more effective and we are well on our way to call center best practices by the end of 2017. Third, on our nationwide transportation network, we've initiated efforts to improve our network capacity and efficiency.

We are approximately a third of the way through our rollout of our real-time tracking system or AVL and we'll complete this largely by the end of the third quarter. So, with this capability we have real time insight into some of our most important areas of focus such as on-time performance and capacity utilization.

If any of you want to check this out, you can actually go to wellrydeinfo.com, that's WELLRYDEINFO.com and you can see some demonstration videos on how this works. On our transportation network work streams, which are part of the member experience initiative, we're rolling out tools aimed at ensuring optimal network contracting and spend practices.

So, in one of the first state to rollout this work stream we're seeing our spend across 10 provider partners declining by double-digit percentages, which will equate to over $1 million annualized and that's just again on 10 of our provider partners.

Obviously, we don't see that kind of benefit rolling out across our network, but we're happy to have a good start. We expect to have this fully rolled out by the end of Q3 or Q4 of this year. Also, related to transportation network optimization, we are increasing our focus where appropriate on utilizing on-demand networks.

So, you may have seen our announcement with Lyft. We have also been piloting our own version of Lyft, but with drivers who have highly credentialed healthcare backgrounds and on this pilot, you can check it out further at www.provadocarepro.com.

So, to summarize on NET, we have 20 work streams in progress that we expect to complete over the next 18 to 24 months and once completed, we expect the initiative to result in annual savings of over $3 million, which is consistent with what we mentioned last year, I am sorry, last quarter.

Looking at NET's financials in 2017, we really don't see our thoughts changing versus what we conveyed last quarter. the loss of our ASO contract in New York City and a few other contracts will bring revenue growth for the year below our multiyear 5% to 7% CAGR target that we talked about previously.

Retaining our contract in New Jersey is obviously key to keeping the topline growth positive in 2017 and besides being extended through May, we have no news on the New Jersey contract at this time.

On margins, we continue to expect adjusted EBITDA margins to be in the low 6% range in 2017 due to the replacement of lost higher margin contracts with lower once.

However, we expect our membership -- our member experience initiative to offset these lower margin contracts; particularly, in the second half of 2017 where much of this margin contraction should be recouped. So, by the second half of 2018, we expect the initiative to be generating over $30 million of run rate annual savings.

Lastly, and looking into the latter half of 2017 and 2018, we're really focused on building the foundations for other complementary services for our network and business development strategies at LogistiCare.

So, from the recruitment of a new CEO with a healthcare and technology background to investments in our sales and analytical resources, we're pretty optimistic that we continue to have untapped potential that we will be able to communicate more extensively on throughout the year. So, moving on to Matrix, our second U.S.

healthcare business, during the quarter, we recognize a $109 million gain associated with the sale of the 53% stake in the business to Frazier Healthcare.

In 2016, we predicted sales growth would be tough and although sales decreased slightly, we remained focused -- we remained during the year, focused operationally and expanded our sales team and resources.

So as a result on the sales resource investment, we ended the year with the strongest pipeline that I have seen at Matrix since I joined Providence. I'll comment on that a little bit more in a little bit. Regarding profitability, Matrix generated adjusted EBITDA of $51.7 million or a 24.9% EBITDA margin, surpassing last year's margin by over 1%.

I should also note this EBITDA came along with CapEx under 25% of EBITDA and had negative working, or negligible working capital for most of the year. We continue to view our operating platform and network of over 1,000 practitioners as the core value in the Matrix business.

To supplement this network in 2016, we launched ancillary services, again invested in our sales capability and chronic care initiatives and drove operational efficiency initiatives to expand margins.

We unfolded six new clients, further demonstrated that our chronic care initiative is lowering cost and improving outcomes and again launched some new products. As we look into 2017, again our investment in sales resources appears to be paying off as we expect enhanced revenue growth in 2017 surpassing our long-term goal of 8% to 10%.

I will say it is probably -- will be backend loaded thought. So, moving on to WD services or GS revenue declined 12.8% in 2016 and 25.5% in Q4. Much of this was due to currency changes, but a large portion was also due to the continued winddown of the work program and unfavorable volume mix under our new Offender Rehabilitation program.

Offsetting this decline was growth in a few of our international operations and in NCS or U.S. Citizenship Program, which has grown to almost $30 million of revenues over the past years with strong profitability. 2016 profitability particularly Q4 was tough and slightly off of 2015.

The loss was entirely due to continued challenges in France and in our probationary services contract, which experienced structural contractual changes in late 2016 as we mentioned last quarter.

We do see some light at the end of the tunnel for these two challenges, first in France, which contributed a negative $4.6 million to adjusted EBITDA in 2016. We've started to see volume improvements and breakeven profitability in early 2017.

Second, our Offender Rehabilitation program loss of almost $6 million for the year, mostly in Q4 was simply due to an increased caseload that is not reflected appropriately in how we are paid. The structural mismatch also contributed significantly to our current projections and resulted in much of the $20 million impairment during the quarter.

The new Interim CEO for our Offender Rehabilitation program who joined us from Maximus, along with the NGS leadership team and other industry participants are currently in discussions with the Ministry of Justice about recouping certain costs incurred and restructuring the payment structure, which we hope to report on next quarter.

These two challenges, France and our Offender Rehabilitation program, are not indicative of our 2017 outlook. First in the U.K.

we submitted bids on four of six regional frameworks in the U.K.'s next version of the work program called the Work and Health Program and I'm pleased to report that we are successful in moving to the next round on three out of the four regions where we bid.

These three regions represent £38 million of potential annual revenue, exceeding the $15 million of annual revenue we communicated to you in our long-term thoughts on the contract last quarter.

We've submitted our updated proposals and look forward to hearing back from the government on the next short list in April with final awards in September of 2017. Second our U.K. operations are undergoing a significant restructuring program, called the Ingeus Futures Program of which you can see the restructuring costs in our quarterly numbers.

In general, the cost reductions would reflect fewer positions through both redundancies and attrition and result in cost savings of over £10 million in 2017 and £18 million in 2018. These efforts are well underway with most of the redundancies being implemented by the end of Q2.

Please note that these reductions and the cost benefits associated with them were built into our long-term thoughts on profitability committed last quarter and a few comments we'll make in couple minutes. Emission Providence, we significantly reduced our losses to $317,000 in Q4 2016, including pretax profitability in December. As in the U.K.

we are undergoing a reduction of approximately 50 positions to ensure profitability this year and beyond.

Finally, I'd like to remind you that most of WD services today are focused on employability services for governments in what continues to be a low unemployment environment, made more challenging by both fiscal pressures that have intensified over the last six months, particularly in our U.K. operations.

In response, we are moving quickly to offer new health and training services, reducing our costs and exiting operations where we do not see future acceptable returns.

As a result, and consistent with last quarter, we continue to see modest low to mid-single-digit EBITDA margins in 2017 for this segment with potential upside from current contract renegotiations in the U.K. Finally, I'll now turn the time -- rest of the time over to David for a few other points on our financials..

Thank Jim. Before I begin, I would like to remind everyone that the results of Matrix prior to our transaction with Frazier in October are presented in this cost, while the results of Matrix after the transaction are accounted for under the equity method.

Thus, the only impact Matrix has on our results from continuing ops in 2016 is through the loss on equity line but we're taking up 46.8% as measures of net income for less than 2.5 months. Matrix's results are excluded from our consolidated revenue, adjusted EBITDA and adjusted EPS.

However, because our retained interest in Matrix represents substantial value for our shareholders, we've provided Matrix's revenue and adjusted EBITDA in our earnings press release. So back on the presentation on Page 7, we've shown revenue and adjusted EBITDA by segment and total for Q4 and the full year.

Segment level adjusted EBITDA, which excludes our holding company corporate costs was $24.2 million in Q4 2016 a 51.7% increase over Q4 last year. With full-year, adjusted EBITDA from our segments with $97.8 million versus $91 million last year.

Total adjusted EBITDA was $72.2 million or 4.6% of revenue in 2016 versus $66.3 million or 4.5% of revenue in 2015. Jim already went through the major revenue and adjusted EBITDA trends for 2016 by segment as well as our high-level 2017 expectations by segment. So, I'll just reiterate a few items and make some additional comments about 2017.

On NET, our current expectation for the segment adjusted EBITDA margin in 2017 to be in the low 6% range is consistent with the margin contraction of 50 to 75 basis points I referenced on our last call as 2015 margins came in approximately 50 basis points higher than we are previously expecting.

On WD, Jim spoke to the challenges with our Offender Rehabilitation programs and our operations.

As a point of reference, excluding Offender Rehabilitation and France as well as costs related to closing our operations in Sweden and Poland, WD's full-year adjusted EBITDA margin was approximately 7.5% in 2016 and almost 200 basis point improvement over 2015.

Looking forward to 2017 for WD, we expect revenue to decline approximately $60 million primarily due to depreciation of the pound to the dollar, a continued winddown of the work program and reduce fee for service revenue under the Offender Rehabilitation program, partially offset by modest net growth elsewhere.

So, this revenue outlook can improve depending upon the outcomes of the Ministry of Justice's review of the transforming rehabilitation programs funding model.

On our corporate holding company costs, expenses increased slightly in 2016 over 2015, primarily due to a $4.5 million decrease in benefits associated with stable claims expenses on our reinsurance and self-insured programs compared with 2015.

This decrease in insurance claims benefit was partially offset by decreased third party professional expenses of approximately $4 million. Lastly on our Matrix investment, what's presented on this slide is a 100% of Matrix's results.

In Providence's P&L, only the portion of Matrix's net income or loss related to our 46.8% retained interest for the period post the transaction with Frazier and through yearend is captured. During this post transaction period, Matrix generated a net loss of $4.2 million which included $6.3 million of transaction related expenses.

The negative $4.2 million of total Matrix net loss translated into a loss into a loss in equity earnings of $1.8 million related to our retained interest, which is a number that flows into our P&L in the press release.

Flipping Page 8, cash flow from operations excluding approximately $22 million of taxes paid on the sale of our human services segment was $53.4 million in 2016, a substantial increase of $13.2 million in 2015.

Our CapEx from continuing operations in 2016 was $32 million of which approximately $14 million was related to new program specific CapEx within WD services.

In 2017, we expect a significant drop in new programs with CapEx, partially offset by implementation CapEx for the logistic and member experience and Ingeus Futures initiatives, the net result being approximately $20 million of expected total CapEx spend in 2017.

On taxes, which are broken out on this page, our provision for 2016 was $17 million despite generating a loss from continuing operations before income taxes.

There are a number of factors driving this result including our losses in equity earnings, including our losses in equity earnings line already containing an embedded tax benefit, as well as our inability to recognize the benefit to our provision in foreign jurisdictions such as France and some extent the U.K.

where we are generating losses and have not yet demonstrated a history of generating gains. Turning to Page 9, we ended the year with no debt and approximately $72 million in cash. We've also called out on this page, the carrying value of our retained interest in Matrix.

Given we do not include Matrix in our adjusted EBITDA or adjusted net income, is important not to overlook this significant component of the company's overall value. Turning to Page 10, we have our familiar one on capital allocation.

We view this page many times, but we keep recycling it because it speaks to one of the most important decisions we make as a management team, that being the use of your capital. Starting with CapEx on the left, we should see an approximate 40% decline in CapEx from continuing operations from $32 million in 2016 to approximately $20 million in 2017.

This $20 million is still above where we ultimately want to get CapEx or getting the attractive returns we're seeing on implementation CapEx dollars related to LogistiCare member experience initiative we're happy to keep CapEx elevated for another year.

Moving to share repurchases, we continue to believe buying back shares is an attractive use of your capital over a multiyear period.

Given where our shares are currently trading versus our assessment of the value of our Matrix investment and a value that LogistiCare and GS which are being further enhanced through our respective value enhancement initiatives. Lastly on acquisitions, we had and will continue to seek out actionable targets.

However, until we're confident we've had an opportunity that meets our specific criteria and risk return thresholds, we will not bring your capital to risk. That takes us through the pages in the deck. I'll conclude by saying that overall, we're pleased with both the financial and operational performance at Providence in 2016.

We highlighted the various strategic initiatives we've worked hard on last year and we'll continue to focus on this year, each of which we believe will contribute to margin expansion beginning in the second half of 2017 and stronger topline growth moving into 2018. I'll now turn the call back over to Jim..

Great. Thanks David. So, in summary, hopefully we conveyed our challenges and opportunities transparently and the progress of our longer-term initiatives and as we saw at Matrix, these initiatives can take time but they can also generate significant value as you saw in Q4 with the substantial gain from the sale to Frazier.

So, with that, I will now open up to questions.

Operator?.

[Operator instructions] Our first question comes from the line of Bob Labick with CJS Securities. Your line is open..

It's actually Dan Moore for Bob this morning. Good morning..

Good morning..

In terms of legislation coming out of Washington this week that the repeal replaced legislation currently underway in house, appears to be making some progress on the bill.

What's the latest outlook for the legislation and how it might impact LogistiCare?.

Sure. So just to remind everybody, our focus at LogistiCare is helping particularly frail population.

So, age, blind and disabled, those in poverty, those going to dialysis or some sort or rehabilitation and the populations that we serve and where they're going, we think the service is largely preventative in nature and has pretty good preventative benefits.

So, we're focusing every resource right now and a lot of it has to do with this member experience initiative on being the most cost-effective service for them, which I think really resonates with the people that we've met with in Washington and at the governor level.

So, along those lines, we're increasing our research and regulatory resources to prove out that preventative nature of the service. On the replacement bill, itself, obviously, there are a lot of different iterations that have been discussed.

What is currently out there in the replacement bill, so high level, there are no Medicaid benefits changes related to NET, which again this is largely a reconciliation process. So, they can't make those changes at the moment. It's possible they could come in future bills. But as of right now, there are no Medicaid benefits changes.

They are moving towards a federal contribution per category of member in Medicaid adjusted for inflation in Medicaid, so that actually goes through the end of 2019 and then in 2020, the member contribution is capped, but again there are no benefit changes on NET after 2020.

So, in general, we don't see too many things actually affecting us in the current legislation as is drafted through 2020..

Very helpful and just switching gears, you talk to remarks about this a little LogistiCare, expand on your experience so far in ridesharing, the implications for Lyft for nonemergency transportation and maybe more specifically now the experience and feedback received if the states like it, if the managed care organizations, their receptivity at this stage, any color would be great, thanks..

Sure. So, we actually launched our pilots with Lyft lift in the second half of last year. We're now active in 18 states and its growing quickly every week. I would still say the overall volume is fairly minimal compared to our overall scale.

In terms of our Provado Mobile Health pilot, that is in two states and I think we're approaching the utilization of these services cautiously because we've received different viewpoints on the rollout of these services from both individuals and from our clients at the state and MCO level.

Let's say there's a lot of interest, but I think people are very, very cautiou as well.

So, we're looking at -- we're actually undergoing a project right now and have been for a little bit now looking at each market and really looking at the population how it breaks down, who the client is, what are the restrictions in the contract, what are the costs of implementing the network, what are the cost of recruiting drivers, really compiling a detailed business plan and model around that.

So, it takes some time because each market is different, so I think over the next few months, we'll have a greater view of the penetration.

In terms of specific experiences, we've seen so far, we've seen some nice benefits on the service side and on the cost side from the ridesharing, but again this is in limited markets and limited usage and so we wouldn't want to make any -- set out any grand expectations on what this could be in a couple years, but it would certainly be a key part of our transportation network strategy..

Appreciate the color. Thank you..

Thank you. Our next question comes from the line of Shane Svenpladsen with Avondale Partners. Your line is open..

Good morning.

With respect to the umbrella agreement under which the new Work and Health program is being procured, nice to see you guys win or you selected initially in those three regions, would you consider subcontracting in the regions you're not currently in and I guess how you view the economics there?.

That has not come up. Actually, I am sorry, we do have subcontracting in some of the unit -- in some of the areas that we do work in and actually we have had some discussions about subcontracting in some other areas that we are not in, but in terms of this discussion aren’t formalized.

So, I wouldn't see it as a huge opportunity at the minute and plus there still are five participants in each at each stage. So, there's some opportunity, but I don't think we can get too much clarity into that, the potential opportunity there..

Okay.

Fair enough and then with the London region, which I believe are being procured outside of this umbrella agreement, could you just give us an update on that process that's going?.

I think we're still waiting to get the framework and how that's going to be laid out. So, we're barely into the process at this point..

Okay. Okay. And just lastly a 9.1% EBITDA margins in net services this quarter pretty nicely at level we're looking for, is there anything worth calling out there that was unique in the quarter or is that something that those kind of margins excluding New York City headwind in '17 are those margin are going to be sustained..

We have no service expense as a percentage was a little bit lower David..

Operationally, it was a good quarter, but again it was definitely higher than we are expecting and one of the items impacting that was the accrual with the reversal of accrual for a long-term incentive plan that we have at our LogistiCare segment, which is based on multiyear performance. So, a couple of things happened.

One our former CEO did leave that segment. So, some of his long-term awards were reversed and given our outlook for 2017, again resulting from loss of the New York City contract our 2017 projections did come down in the valuation model for that long-term award.

So, the whole, we ended up expensing about $4 million less in the quarter than we were expecting to when we last spoke..

All right. That's helpful. I'll get back in queue..

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

Good morning.

David, I didn't catch it if you mentioned, did you give a margin expectation for WD for '17?.

Yeah, Jim actually didn't hit in his prepared comments in which it was low to mid-single-digits..

And you said you saw corporate overhead would come down a few million dollars in '17 as well..

Yes. We're still very diligent on corporate costs and we're trying to take out another couple million dollars of cash costs in 2017..

Okay.

And then could you remind me the timing for Virginia, Pennsylvania, Georgia, are those midyear of those end of year decisions? What's the timing and actually if you give kind of aggregate dollar, New Jersey I think I've some handle on, but aggregate dollars associated with those three awards?.

Sorry, so Virginia is midyear, Philly is new year and what was the third one?.

Georgia..

Georgia is in the fall. So, aggregate across those -- across those three, it's approximately $150 million to $175 million in annual revenue..

And are there any pieces of business that you guys are bidding on that would represent new business that could be -- that are significant that could be awarded here over the next three, six months?.

So, we recently won some portions of Arkansas in terms of other new -- there are a lot of smaller sort of MCO contracts that we're bidding on..

I would say, looking at both state contract opportunities and MCO contract opportunities that we're looking at and bidding on right now is approximately represents $75 million to $100 million in annual revenue..

Okay. That's all I got for now. Thank you..

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

Yeah, I don't have anything else to say. So, thank you very much everyone for joining and as usual, please feel free to reach out to us at any time with any questions or comments. Thank you. Bye, bye..

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