Bryan Wong - Investor Relations James Lindstrom - Chief Executive Officer David Shackelton - Chief Financial Officer.

Bob Labick - ‎CJS Securities.

Welcome to the Providence Service Corporation first quarter 2017 earnings conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Bryan Wong. You may begin..

Good morning. And thank you for joining Providence’s first quarter 2017 conference call and webcast. On the call from Providence today is Jim Lindstrom, Chief Executive Officer, and David Shackelton, 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. The replay will also be available until May 24 by dialing 855-859-2056 or 404-537-3406 and using the passcode 17238216. During this call, Mr. Lindstrom and Mr.

Shackelton will be referencing the presentation that can be found on our investor website under the investor calendar and in the current Form 8-K which was furnished to the SEC yesterday.

Before we get started, I’d like to remind everyone that during the course of today’s call, the company’s management will make certain statements categorized [ph] as forward-looking statements under Private Securities Litigation Reform Act.

Those statements involve risk, 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 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 our Form 8-K.

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 exchange rate in effect for the correspondent time period. I’d now like to turn the call over to Jim Lindstrom..

Great. Thank you, Bryan. And thank you to Providence’s more than 9000 colleagues and our network of partners working to make a difference in over 25 million people's lives each year. In Q1 of 2017, I'm pleased to report that revenues grew almost 5% on a consolidated basis.

And as we have seen in previous quarters, the growth was driven by LogistiCare, the larger of our two US healthcare network management businesses. Not included in this growth due to our partial ownership was 10% growth at Matrix.

As we will walk through over the next few slides, we continue to accelerate the pace and rigor on building the foundation for future growth across all of our segments. On margins and profitability, margins decreased during the quarter. The cash generation was wrong with $36 million of cash generated.

We also had $5 million of CapEx, which is approximately 1.4% of revenues. Finally, on longer-term profitability and margins, we started to see the benefits of our rigorous value enhancement initiatives, which we have deployed over the last 12 months and I will detail further in my segment commentary.

Finally, on capital allocation, we continue to return capital to shareholders, with $18 million repurchased during the quarter, bringing our total repurchase to $122 million since the fourth quarter of 2015, 18% of the company's common stock and even greater percentage of its float.

Driving this return on capital has been two solid divestments in two US healthcare businesses, which have strong ROICs and cash flow characteristics. We anticipate these characteristics to continue, enabling us to return capital to you and/or continue to deploy capital towards acquisitions.

Moving on to the next slide, NET Services, as I mentioned, Q1 was highlighted by LogistiCare’s revenues increasing 11% to $324 million in the first quarter, primarily driven by new contracts. More importantly, our revenue outlook for the year has been enhanced.

This enhanced outlook was driven by few different events, from the award of our Virginia state contract to a competitor, which is now being retracted, to various extensions and re-awards.

Unfortunately, we are unable to go into too much detail on many of these events by contract or by state due to the various stages or non-public nature of where we are in the process. Second, on our member experience initiative, we've attacked on three fronts.

First, on the technology side, we are commencing piloting with our next-generation technology platform and are still on track to complete the rollout by year-end. Again, this will improve service and reduce cost across our network.

The cost reductions are anticipated to be more impactful in 2018 versus the changes in their call centers and transportation network, which will impact 2017 and 2018.

Second, in our call centers, our various work streams have started to improve efficiencies, such as average handle time where every 10 seconds out of a four, five or six-minute call can save north of $1.5 million. Third, on our transportation network, our efforts to improve our network capacity and efficiency have begun to payoff.

Last quarter, I reported that our new pricing models resulted in our spend across ten provider partners declining our cost with them by over 20% over $1 million per year. we’re now through the first stage in eight state and on a preliminary basis see close to $5 million of savings from these efforts in 2017.

Also related to transport network optimization, our focus on using on-demand networks continues to ramp very quickly with both pricing and average response time benefits for our clients. To summarize, we have 20 work streams in progress that we expect to complete over the next 18 to 24 months.

Once completed, we now expect the initiatives to result in annual savings of over $35 million versus the $30 million previously mentioned. We look forward to reporting tangible evidence of the progress to you as we have this quarter on our progress towards reaching or exceeding this goal.

Offsetting this progress during the quarter was the compressed profit margin versus last year. Adjusted EBITDA was $16.3 million in Q1, resulting in a 5% adjusted EBITDA margin. The decreased margin was driven primarily by a number of, hopefully, temporary factors.

First, as the business has experienced at times over the years, we experienced a spike in utilization costs due to start-up costs on new contracts.

More specifically, in states such as California couple of years – sorry, such as Florida couple of years ago and as states such as Florida move from state fee-for-service models to outsource models, demand can increase due to such things as improved service and availability under an outsourced model. Obviously, this increases costs.

And because it was not anticipated in the RFPs, it can be addressed jointly by the client and us over time. The last factor for the margin compression was due to Medicaid reimbursement dynamic in a large state and mild weather across several states, which may have also driven increases in the utilization.

At the moment, it may take a few quarters to work through few of these items. We do not anticipate any fundamental change on our long-term outlook. Looking at NETs revenues in 2017, we do have good insight into modest revenue growth, barring any change in our New Jersey contract.

And we see no significant change in our overall amount of profitability from last quarter. Next, as we mentioned last quarter, we're still in the midst of an intense operational period at LogistiCare. We look forward to reporting more progress on our member experience initiatives in future quarters.

Finally, we're ramping our rigor and focus on longer-term growth strategies at NET Services through organic and acquisition expansion in adjacent areas. And as we've done at Matrix, increased our sales effort and resources. Part of this effort will be dependent on the appointment of a new CEO.

We have made progress on this front and expect to name a new CEO this summer. Moving on to matrix, which is our second US healthcare business. So, last quarter, I reported that largely because of our efforts in late 2015 and early 2016, we ended the year with the strongest pipeline that I have seen at matrix since I joined Providence.

Well, I’m proud to say that our pipeline and our team's efforts are starting to pay off. We’re pleased to report a stronger sales growth at Matrix with a quarterly growth rate of over 10%. Regarding profitability, Matrix generated a solid adjusted EBITDA of $12.5 million, which resulted in a 22.4% EBITDA margin.

As usual, this EBITDA came along with CapEx under 25% of EBITDA and also we had experienced improvements in working capital during the quarter.

In 2017, we continued to work with our strategic partner to enhance the value of our operating platform in our network of over 1,000 nurse practitioners through potential acquisitions and complementary offerings.

On the acquisition front, we are reviewing multiple opportunities each quarter and so we feel it's only a matter of time before something is completed.

And on the organic revenue side, we continue to feel good about surpassing our long-term goal of 8% to 10% growth, winning several new clients during the quarter and continuing to feel good about our pipeline. As always, we are continuously seeking operational improvements to improve the effectiveness and reduce the cost of our services.

Moving on to WD Services or in GS, so, as expected, revenue declined 17% in Q1. Much of this was due to currency changes, but a large portion was also due to the continued wind down of the work program. Offsetting this decline was growth in a few of our international operations.

Q1 profitability was ahead on many fronts, including cash flow versus Q1 of 2016 and our internal expectations. As we noted in the year-end conference call, our restructuring efforts and increased operating rigor has started to pay off.

We're seeing primary KPIs ahead of last year and ratings in our largest contracts continue to be strong or even improve. In France and Mission Providence, we experienced slight profitability outside of restructuring cost, which again is a significant improvement from last year.

Also, in the quarter, we recouped certain previous costs incurred in our probationary services contract that we mentioned we were working on last quarter. So, in terms of the remainder of 2017, our outlook remains solid.

First, our UK restructuring program called the Ingeus Futures program remains on track, resulting 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 were built into our long-term thoughts on profitability communicated earlier. Second, we constructively work with Ministry of Justice on the Probation System Review or PSR in order to improve the profitability of the offender rehabilitation program.

Third, in the UK, and on the Work and Health Program activities, I'm pleased to report that we were successful in moving to the third and final round on two out of the three regions where we are in contention. In Q3, we communicated to you that these contracts could generate approximately $15 million annually.

We also have been shortlisted for contracts in Manchester and London. Last quarter, we mentioned that we were competing for £38 million or $47 million. Well, due to us moving to the short list and new notifications, the new annual amount is as much as $78 million, which again includes Manchester and London.

Of course, none of these have been awarded, but we’re on the short list for each of these contracts. In other business development news, we’re off to a great start in our new contract in Singapore and expansion effort from our South Korean operations.

And we’re bidding on additional opportunities in the UK health sector where we have made good headway in diabetes prevention. I would like to thank our WD Services teams and our Providence value enhancement team who have been working tirelessly over the last few quarters on improving our operational effectiveness in multiple countries.

I would be neglectful not to mention that they have done this, while also maintaining operational effectiveness and even improving our competitive rankings in certain areas. Finally, I’ll now turn the time over – the remaining time over to David for a few other points on our financials..

Thank you, Jim. So, turning to page seven of the presentation, you can see that consolidated revenue in the first quarter of 2017 was $399.5 million, a 4.6% increase over the $382 million of consolidated revenue delivered in the first quarter of 2016. On a constant currency basis, this year-over-year growth was 6.5%.

The almost 200 basis point delta between our actual dollar revenue growth and constant currency growth is preliminary due to the depreciation of the pound against the US dollar that occurred in 2016.

Assuming no other major FX movements, these growth rates should move closer together starting in Q3 as we lapsed the Brexit referendum vote, which occurred at the end of Q2 2016. Segment level adjusted EBITDA in the first quarter of 2017 was $22.5 million or 5.6% of revenue versus $24.1 million or 6.3% of revenue last year.

Total adjusted EBITDA was $15.6 million or 3.9% of revenue versus $16.3 million or 14.3% of revenue last year. The 40 basis points of margin contraction was driven by utilization increases at NET Services, the drivers of which Jim spoke to earlier.

Remember that our reported total adjusted EBITDA does not include the results of JV investments in Matrix or Mission Providence, which have been broken out separately on page seven. Now, diving into the segments, I’ll just try to add some additional commentary to what Jim mentioned.

At NET Services, a large part of the 11% revenue growth in the quarter was driven by new MCO contracts, particularly in California, Florida and New York. For the full year, our revenue visibility has also improved since our last call due to new contract wins, extensions which take us through year-end and a couple of rate increases.

Assuming we hold on to New Jersey, we now expect revenue to grow approximately 5% to 7% in 2017, which is consistent with the long-term growth trends of the segment we have communicated on a few occasions now. On NET’s margin, Q1 was a bit disappointing due to the utilization levels and new MCO contract ramp characteristics we saw.

However, we don't believe the underlying factors to be permanent and we're making great progress on our value enhancement initiatives. While Q2 could still see pressure similar to Q1, we now believe full year margins should be approximately 6%.

At WD Services, the revenue decline for the quarter was consistent with our full year expectation of a $60 million decline in revenue. Margins at WD Services in the quarter were very strong due to the factors that Jim mentioned.

While Q2 will likely be challenging from a margin perspective, on both a year-over-year and quarter-over-quarter basis, as we continue to work with the MOJ on the Probation System Review, the second half of the year is expected to benefit from the Ingeus Futures initiative as redundancies associated with this initiative are on track to be completed by the end of Q2.

Consistent to what we communicated on our last call, we still see WD Services generating low to mid-single digit EBITDA margins in 2017 with potential for upside through current contract renegotiation in the UK.

At the holding company level, costs declined approximately $700,000 in Q1 on a year-over-year basis, primarily due to decreases in audit costs, SOX implementation costs and legal costs. We hold the audit costs and SOX costs of our segments at corporate as well as a significant portion of legal costs.

Recall that, in 2016, we took out $4 million of professional service fees versus 2015. And excluding the cash-settled equity awards held by a director, which we have referenced on prior calls, corporate cash costs for the year are now projected to be around $17 million.

Now, taking a look at our JV investments, Matrix had a great quarter with revenue up over 10% and adjusted EBITDA margins of over 22%.

This solid performance isn't necessarily evident when looking at Providence’s income statement where 46.8% of Matrix’s net income flows through the equity and net loss of investees line and is burdened by transaction costs or to non-cash amortization expense and increased interest expense due to the recapitalization that occurred in conjunction with the transaction.

Finishing up on our JV investments, Mission Providence delivered positive adjusted EBITDA as the contract continues to mature and restructuring initiatives drove down the cost structure. Moving to page eight, cash flow from operations was strong at $36.2 million for the quarter.

Note that this is not directly comparable to first quarter 2016 as Matrix’s cash flows aren’t included in last year's numbers, but not this year's numbers.

The $32.8 million working capital benefit was primarily due to an increase in accrued transportation expenses at NET, but also a $9 million accrual related to litigation at our discontinued human services segment. CapEx in the quarter was $5.7 million.

Full year 2017 CapEx is still expected to be approximately $20 million, down significantly versus 2016 despite this year's investment in multiple value enhancement initiatives. And it’s not shown on this page, but our effective tax rate for the quarter was 56.8%.

If you back out this quarter’s equity and net loss of investees of $2.1 million from the calculation, the effective tax rate is closer to 43%. The equity and net loss of investees line, which captures the results of our unconsolidated JV investments, already embeds the majority of taxes associated with Matrix.

The 43% rate is still above our statutory rates due to our inability to recognize benefits in foreign jurisdictions where losses are being generated. Turning to page nine, we ended the quarter with approximately $83 million of cash.

Again, we’re also calling out on this page, the book carrying value of our retained interest in Matrix as of quarter-end of $156.4 million. Given we do not include Matrix in our adjusted EBITDA or adjusted net income, it is important not to overlook this significant component of the company's overall value.

Note that this book carrying value decreased slightly versus the end of the year due to Matrix’s negative net income for the quarter.

The carrying value is not marked to market, thus as EBITDA grows at Matrix – as EBITDA grows and Matrix continues to generate cash and pay down debt, the carrying value will not be updated to reflect an increase in underlying value of our equity.

Turning to page 10, there are not many updates to report on this page as our capital allocation strategy has not changed since our last call.

We're still seeing attractive returns on the CapEx side, particularly in relation to IT investments and continue to see share purchases at our current trading level as a great way to generate returns over the long term, especially given the substantial work being performed and traction being gained on the various value enhancement initiatives at LogistiCare, in GS and Matrix.

I will now turn the call back over to Jim..

Great. Thank you, David. So, hopefully, you saw again this quarter our rigorous focus on helping our companies reach their full potential.

On various strategies, particularly in the US, they’re designed to create competitive advantages, primarily through strengthening our operational excellence and the value of our networks and also capitalize on long-term trends, playing out in healthcare – the aspiration to improve clinical outcomes, the growing demand for access to care and the lowering of costs.

So, when combined with the demographics of an aging population, these trends produce growth drivers that we believe will create sustained long-term opportunities for Providence. Thank you, everyone, for joining today and I will now open it up to questions..

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

Good morning..

Good morning..

Hi. I wanted to start with LogistiCare. Obviously, you touched on this. So, I was hoping we could elaborate a little. There was a higher utilization you mentioned in a couple of different programs. I don’t know if you can elaborate on that.

But in the past, when this has happened, you’ve also gone back and worked side-by-side with those programs or states to get back to a normal utilization and, I guess, margin level.

Is there an opportunity for that? What were some of the causes, a little more specifically, that led to the increased utilization?.

Thanks, Bob. So, just speaking more strictly to the utilization increases within NET Services, I’ll start with – and Jim referenced this – our California MCO contracts, and you're right to compare this to some states where they transition from a state-based fee-for-service model to a capitated broker model.

So, when you're at a state-run program where call centers are open from 9 to 5 and transportation providers are submitting claims to a state office, you then transition to a capitated model with higher customer service levels, a 24/7 call center and a dedicated NEMT claims management department for transportation providers.

You can see utilization increase higher than what may have been estimated during the contracting process due to this new environment being up and running.

So, now that the utilization is more clear, we can work more collaboratively with our MCO partners and perhaps kind of attempt to restructure some of those contracts going from perhaps fully capitated to reconciliation and price discussions can happen again, similar to Florida, what we saw in Florida in 2015 when they transitioned to an MCO environment.

I think the other factors, we also saw old claims from California – in California, from transport providers that made their way to LogistiCare – made their way to the LogistiCare system..

Okay, thanks. And then just shifting to value enhancement initiatives, in particular as it relates to LogistiCare, you obviously are making good progress there. You’ve increased your expected savings. So, a couple of questions.

One, how much of now $35 million potential savings is in LogistiCare versus WD versus Matrix? And then, two, how much gets reinvested into bidding versus flows through to the bottom line?.

So, that $35 million is just LogistiCare, first of all. The amount that is in Ingeus was – that’s where I was referencing the £18 million and that’s the Ingeus Futures program. So, LogistiCare, it encompasses the $35 million.

I’m sorry, the second part of your question?.

Sure.

How much of that $35 million then kind of – would you expect to flow through to the bottom line over time or would you be reinvesting and bidding to grow the top line?.

I think, over the longer term, some of this will be given back, certainly as we lower the cost structure over the sort of large scale that we have. In the short term, because of the longer-term nature of our contracts, we still retain the pricing power inherent in the contract. So, it's a little bit tough to tell.

I will say that when we do find out more about contracts, particularly around pricing, and besides what happened in New York on the MCO contract this past fall, we are very competitive pricewise. There aren’t really that many people bidding under us. That doesn't seem to be sort of a big issue for us.

Again, I attribute that to our scale and size and efficiencies. So, it will be tough – it’s tough to put the number on it over the longer-term..

Got it. Okay. And then, shifting over to Matrix, I think you mentioned this, but just worth going back on, the 10% growth was a nice – was very nice in the quarter.

Is it all organic? And is it driven by new services, new clients, how do think about that? And it sounds like you are still looking for add-on acquisitions there, if you can talk a little about that..

Sure. So, there were no acquisitions during the quarter. It was all organic. Most of it was – all the growth was in the core business, that being the HRAs.

They’ve slowly been rolling out some additional testing services in a few different niche areas, which are add-on solutions to the core offering, but it’s not driving the revenues in any sort of material way yet. So, the growth really for this year is coming from both existing clients and new clients.

In terms of acquisitions, we’re continuing to look at both acquisitions within sort of the core offering. So, it could be the other HRA players, but I think we’re just as interested in some adjacencies that can sort of leverage the network in areas such as in-home care and care management, in particular.

So, in terms of the effort going behind it, they did hire a full-time VP of strategy, who – 100% of his time at Matrix is focused on – almost 100% is focused on M&A at this point or forming partnerships. So, there’s a lot of – again, a lot of focus on it..

Okay, great. I’ll hop back in queue. Thank you..

Thank you..

Thank you. I’m showing no further questions at this time. I’d like to hand the call back over to Jim for any closing remarks..

Great. Thank you again for your participation. And again, as always, if you have any questions, please feel free to reach out to David or myself. We’d be happy to spend time with any of you on the phone or in person. Thanks. Bye-bye..

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