Laurence Orton - Corporate Controller, Vice President Finance James Lindstrom - Chief Executive Officer David Shackelton - Chief Financial Officer.

Daniel Moore - CJS Securities.

Good day, ladies and gentlemen, and welcome to the second quarter 2017 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 be given at that time. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to turn the conference over to our host for today, Laurence Orton. You may begin..

Thank you Sonia. So good morning everybody, and thank you for joining Providence’s second quarter 2017 conference call and webcast. With me today from Providence are Jim Lindstrom, Chief Executive Officer; and David Shackelton, Chief Financial Officer.

By way of a brief introduction, my name is Laurence Orton, and I actually recently joined Providence as Corporate Controller, and VP of Finance, and among my responsibilities will be investor relations. I'm looking forward to building an ongoing dialogue with our investors as we move forward. 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 this morning. Before we get started, I will just run through the traditional formalities.

I would like to remind everyone that during the course of today’s call, the company’s management will make certain statements characterized as forward-looking statements under the Private Securities Litigation Reform Act. These 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 with the company’s other 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 Form 8-K.

And then finally, we have arranged for a replay of this call, which will be available approximately one hour after today's call on our website, where it can be accessed via the phone numbers that we listed in the press release. So at this point, I’d now like to turn the call over to Providence’s Chief Executive Officer, Jim Lindstrom..

Great. Thank you, Laurence and good morning everyone. We will be starting today's presentation on page 3 of the presentation that we filed with the SEC this morning. So on page 3, just a quick highlight on revenue growth.

We did report revenue growth of 2.5% on a consolidated basis and as usual, we encourage our shareholders to dig a bit below this number as there are a lot of underlying improvements within the so-so headline growth rate.

Underlying the headline number was a feature that we have seen in previous quarters, continued strong growth in LogistiCare, the larger of our two US healthcare network management businesses, and growth within certain countries and new health programs within our workforce development segment.

Not included in this consolidated revenue growth due to our partial ownership was 16% revenue growth at matrix. As we will walk-through on the next few slides, we continue to focus on improving the already strong growth prospects within these areas.

On margins, as many of you expected, our margins contracted versus a year ago primarily due to a few items.

First, the continued winding down of WD Services legacy work program contract in the UK; contract start-up and utilization challenges on a small handful of NET Services contracts; the ending of NET Services in administration services only, or ASO contract with the State of New York at the beginning of the second quarter.

Finally our value enhancement initiatives continue to be on track and give us confidence that the margin contraction will rebound. On cash, our operating cash flow was negatively impacted by temporary working capital items, but we don't see any ongoing issues here, and David will give a little bit more insight into that.

Capex continued to be dramatically lower than last year as well as sequentially. Our ROIC is now over 20%, a solid achievement. In my view this shouldn't be overlooked. Finally, we remain focused on capital allocation as we have returned via share buybacks $122.3 million since the fourth quarter of 2015, representing 18% of the company's common stock.

Our repurchases were stagnant during the quarter primarily due to M&A and contract activity, including dialogue over the renewal of the New Jersey contract. So with that we will move on to page 4 and cover NET Services. So first of all, let me welcome Jeff Felton, a CEO of LogistiCare.

Jeff brings great experience from McKesson Technology Solutions, where he had a set of network-based technology enabled businesses with revenues in excess of $500 million.

While Jeff will be laser focused on our value enhancement projects, he will also lead the charge will me on the longer-term growth strategy within NET that I will comment on in a minute.

We are pleased to file an 8-K announcing New Jersey’s intent to renew our contract for another five years, and much like the previous contract the new contract will generate approximately $170 million of revenues per year and again which further increases our confidence in long-term prospects for Providence.

As I mentioned, Q2 was highlighted by LogistiCare’s revenues increasing 10% to $338 million in the second quarter, primarily driven by new contracts and rate increases. Margins were impacted by the loss of our New York State [ACO] contract last fall, and start up and utilization challenges on a couple of contracts.

Offsetting this were lower payroll costs as a percent of revenue and the rate adjustments associated with extraordinary utilization in one of our larger programs that impacted us historically.

Capex continues to be light, well under 20% of EBITDA, and looking forward on a member experience initiative we have previously reported that we are engaged on three fronts.

First on the technology side we are in the process of developing a host of technological enhancements to our platform that are well underway, and will improve service and reduce cost across our nationwide network. The cost reductions are anticipated to be more impactful in 2018 versus the changes in our call centers or transportation network.

Second in our call centers, our various work streams have started to generate improved efficiencies. [indiscernible] , or transportation network our efforts to improve our network capacity and efficiency are beginning to pay off with financial benefits and improved service levels.

So to summarize, we have 20 work streams in progress that we expect to complete – largely complete by the end of 2018. We now expect over $40 million in annual net benefits on a run rate basis. This is up from the $35 million we communicated last quarter.

You should also keep in mind that a portion of the $40 million of net benefits maybe reinvested, and will likely be reinvested back into the business. We hope to disclose a more accurate reinvestment figure to you later this year once Jeff and I have more fully worked through the strategic plan.

In the strategic plan, we hope to incorporate incremental reinvestment areas in areas such as sales and marketing, and potentially expanded solutions to further enhance the member experience and support longer-term growth. In terms of longer-term growth, we see great potential in the non-emergency transportation market.

Previously thought of as primarily a Medicaid program with the addition of Jeff Felton as CEO, our small investment in circulation and a lot of strategic work that we have already started on, we do see great growth potential in areas such as Medicare and managed, other [indiscernible] improve our target market size over the longer-term.

So we look forward to reporting more about this longer-term strategic growth plan later this year. Moving onto page 5 with matrix, which also falls under our US healthcare business umbrella.

So in our Q4 2016 earnings call, I reported that largely because of the initiatives in late 2015 and early 2016 matrix ended 2016 with the strongest pipeline that I have seen at matrix since I joined Providence. Matrix’s pipeline and these efforts are now paying off.

I'm pleased to report matrix’s strongest sales growth since I have been at Providence was a quarterly growth rate of over 16%. Regarding profitability, matrix generated adjusted EBITDA of $15.3 million or 25.2% adjusted EBITDA margin.

As usual, this adjusted EBITDA was generated with a Capex spend of less than 25% of EBITDA, which together with improvements in working capital during the quarter enabled continued debt pay down.

So in 2017, we have continued to work with our strategic partner, Frazier Healthcare, to enhance the value of matrix’s operating platform, an important network of over 1000 nurse practitioners. We have looked at a lot of acquisitions and expanding complementary offerings.

I would say in summary, while we have continued to work on acquisitions and see a lot in our pipeline, we do remain focused on making sure that we do have an optimized balance sheet, and we look forward to reporting back to you on any excess capital capacity, and how we intend to deploy that towards acquisitions or other.

On page 6, moving onto WD Services. So as expected [indiscernible] part of this decline was due to currency fluctuations, but was mostly due to the continued lying down of the legacy UK work program. Offsetting this decline was growth in a few of our international operations. Sure we are now profitable in Q2.

Our longer-term confidence and short and long-term cash flow trends in the business continued to improve in Q2. And as we noted in the year end conference call, our restructuring efforts and increased operating rigor has started to pay off.

Our UK restructuring program called the GS Futures program has largely been completed, resulting in cost savings consistent with our previous communications of over 10 million pounds in 2017, and almost 18 million pounds in 2018. Please note that these reductions were built into our long-term thoughts on profitability communicated previously.

We continue to see our primary KPIs ahead of last year, and our ratings in our largest contracts continue to be strong or even improved. In France and Mission Providence we experienced profitability outside restructuring costs, a significant improvement from last year. Finally Capex remains much lower than previous years.

Also we do not see any significant outlays, including from potential wins in the new Work and Health Programs. So overall cash flow continues to be positive. In terms of the remainder of 2017, our outlook remained solid. Business development remains a focus with good progress in certain countries and in our core UK employability efforts.

We are well positioned in contention for several contracts in the DWP, London, Manchester and Scotland tenders. In short, we anticipate hearing about these awards beginning in September, through the end of Q4.

In other business development news, we are also off to a great start in our new contract in Singapore, and an expansion effort from our South Korea operations, and bidding on additional opportunities in the UK health sector, where we have made good headway in diabetes prevention.

So as we look forward, we expect to see the benefits of these business development efforts within WD Services, which would start to show up in the financials later this year and in 2018, when we anticipate that revenue declines will start to flatten out and growth in profitability begin to increase.

Finally, although we are constructively working with the Ministry of Justice on their probation system review in the UK in order to improve profitability of our offender rehabilitation program, we have nothing to report of as of right now, but hopefully will later this year.

I’ll now turn the rest of the time over to David for a few other points on our financials..

Thanks Jim. Starting on page seven of the presentation, I will not go into the consolidated results as Jim has already done so, and instead focus my commentary on the segments. NET had another strong revenue quarter largely driven by new MCO contracts in California, Florida and New York.

However unlike Q1, Q2 benefited from a significant rate increase that was secured in a large existing contract to offset the impact to our transportation costs of recent utilization increases. In terms of margins, similar to last quarter, NET’s margins contracted in the second quarter of 2017 versus the prior year.

This was due to start up costs associated with MCO contracts in California and Florida, which has begin to alleviate as we move into Q3, as well as increased utilization on a couple of large contracts on which we are still in the process of trying to renegotiate rates with the payers, which we are already seeing some success doing.

Q2’s margins were also negatively impacted by the rolling off of our ASO contract with the State of New York at the beginning of the quarter. Remember that ASO contracts tend to be higher-margin as transportation costs are paid directly by the client, and do not essentially flow-through our revenue line as is the case for our other contracts.

Also, the impact of margins of our value enhancement work in the first half of the year was fairly negligible.

Although the major call center and transportation costs savings programs remain on track, the largely fixed costs of the new processes and systems put into place to support these initiatives on an ongoing basis is they don’t add back to [indiscernible] surpassed by the associated productivity steps.

The savings are expected to begin to exceed the incremental support costs in the second half of 2017, but only by a small margin. The real value of initiatives isn't expected to materialize until the end of 2017 and beginning of 2018, eventually reaching a run rate net benefit of over $40 million by the end of 2018.

Looking forward to the rest of 2017 net NET Services our confidence continues to grow with regards to our previously communicated outlook. This increased confidence is based on secured rate changes, new contract awards and value enhancement activities.

We now believe we are at the high end of our 5% to 7% revenue growth outlook for the year if not a little above, and our conviction in achieving approximately 6% margins has also increased. Moving to WD Services, revenue declined in line with our previously communicated full-year expectation of a $60 million decline versus 2016.

The margin contraction in Q2 of ’17, versus Q2 of ’16 was almost entirely due to decreased profitability on the work program under which we are no longer receiving referrals.

Excluding the work program, margins in Q2 ’17 were significantly higher than Q2 ’16, as the profitability of the rest of the business continued to show improvement, including our offender rehabilitation program and French operations, which have both shown significant profitability improvement on a year-over-year basis.

When combined with the large decrease in the year-over-year Capex spend, this improved profitability is translating into material improvement in cash flows at WD Services.

Also note that WD Services Q2 margin did not meaningfully benefit from the redundancies associated with our GS futures initiative as these redundancies were only completed towards the end of the quarter. Consistent with our last call, we expect low to mid single digit EBITDA margins at WD Services for 2017.

Moving to corporate, corporate costs in the quarter were flat versus last year, despite seeing increased cash settled stock-based compensation expense of $1.4 million in the quarter due to our share price increasing during Q2 ’17, while a decrease in Q2 ’16.

However, for the full year, we still expect to achieve corporate cash costs of approximately $18 million. Due to the volatility of cash settled share-based compensation expense it is difficult for us to precisely predict corporate’s P&L for the year. Moving to matrix, we saw another very strong quarter.

Remember that we treat matrix as an equity method of investment, so its revenue and EBITDA are not included in Providence’s revenue and EBITDA. Matrix’s balance sheet is also not consolidated with Providence’s. So the benefit of matrix’s high free cash flow and debt pay down isn’t reflected on our consolidated cash flow statement or balance sheet.

Moving to page 8, we have our cash flow summary. Year-over-year comparisons are difficult on this page because the 2016 numbers include the strong cash flow from matrix, while the 2017 numbers do not. [indiscernible] accounting doesn’t trigger restatement of cash flows.

Also working capital can be very volatile on a quarter-over-quarter and year-over-year basis, which we saw play out in Q2 of this year, particularly within NET Services during the last week of June, where we experienced a large temporary mismatch between payments and collections.

This temporary imbalance largely corrected itself in the first week of July. You can also see that on a year-to-date basis, working capital was relatively flat as we currently expect it to be on a full-year basis. Staying on page 8, Capex spend was significantly down for the quarter on a year-to-date versus last year.

This was due to a large decrease in WD Services’ Capex needs, offset slightly by increased Capex spend at NET Services to support the value enhancement activities. Consistent with our last earnings call, we still expect 2017 Capex to be approximately $20 million.

Before turning to page 9, I will mention that our effective tax rate for the quarter was 42.7% still higher than our statutory rates due to our continued inability to recognize benefits in foreign jurisdictions where losses are being incurred. Now moving to our balance sheet summary on page 9.

You can see that our cash balance fell from last quarter due to the temporary working capital movement I just discussed, which reversed itself in July. Our preliminary July balance sheet has cash back to approximately $80 million. Ending on page 10 with capital allocation, I will make two points. First, we continue to pursue M&A targets.

Recently we are seeing increased opportunities to deploy capital on strategic assets that are aligned with NET’s mobility and network enhancement efforts. Although it was a small investment for us, only $3 million, and non-control our investment in circulation reflects this increased focus.

Circulation utilizes technology solutions to more efficiently manage healthcare logistics and transportation, including a fully digital platform that is complementary to and capable of leveraging LogistiCare’s nonemergency transportation network.

Second, the fact that we did not repurchase any shares in Q2 did not reflect the departure from our view even after taking into account the recent increase in our share price that repurchasing shares is a great way for the company to generate attractive returns over the long term.

As Jim mentioned, M&A and contract activity kept us out of the market in Q2. We believe the substantial value enhancement initiatives being undertaken across all of our companies will eventually translate into increased profitability and more valuable enterprise for our shareholders. I will now turn the call back over to Jim..

Great. Thank you, David. So, just a few final comments, so as we entered the second half of the year, we anticipate continued solid performance. Our value enhancement programs will begin to show through as they have in matrix in the past few quarters.

We believe in the power of our value enhancement programs enabling our businesses to reach their full potential. These programs’ significant long-term opportunity in our businesses and our strong balance sheet position all come together to position us well for 2017 and beyond. So with that I will open it up to questions..

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

Good morning. It is actually Dan Moore filling in for Bob. Good morning Jim. Good morning David..

Good morning..

Obviously the biggest piece of news first quarter was the New Jersey win, maybe just talk a little bit about that, and update us on the level of competition in the industry more generally?.

This is Jim. I'll take that. So, yes, in general no major changes I think from the contract structure that we previously had, which we communicated in the 8-K. In terms of the level of competition, it was fairly small and select.

I think largely due to the size of the contract, most of our limited competition is smaller, much smaller than the scale of LogistiCare. In terms of overall competition, we aren't seeing any major changes in our core Medicaid business.

In terms of trends, I think you have obviously seen an increased focus on IT and the member experience that I think that LogistiCare is leading, and we are starting to see that most recently in the feedback from one of the – something that we have been on in terms of IT scores that we are at the top of the list there.

So, I think everything is in our favor in the core Medicaid area. I think as we look outside of that we do see some new entrants like circulation and a handful of other start-ups looking at some markets that we are not currently in, and so that is an area that we are going to be expanding into one way or the other through the NET segment.

I think just sort of other trends that we are seeing, we are seeing continued outsourcing towards MCOs, and smaller contracts, I think that is one reason why you are probably not hearing about as many from us.

So, smaller, as we look at sort of our renewals coming up over the next year, I don't think there is anything over 75 million, and as we look at our bids, I think 90% of what we have in our pipeline is under $30 million a year. I would say there is a large number of contracts, but in general they are smaller as the states outsource more MCOs..

Very helpful and maybe one more, a two-parter, can you provide a little bit more color and update on matrix, I know part of the rationale for the JV was the opportunity for additional M&A opportunities – what you are seeing there and then at this stage how would you think about valuing matrix given the growth that they have seen since you partnered with Frazier?.

Yes, on the M&A it is very active. I think the partnership with Frazier has definitely been a strategic positive. They have a full-time – sorry, they have a dedicated internal resource now, who is pretty much solely focused on partnerships and M&A, and we are seeing a lot more and are in some active discussions most of the time.

I would say some of these opportunities would give us the opportunity to deploy more capital in and a lot of them – we have a lot of excess capital and we are generating a lot of cash.

So some of these opportunities actually might not require us to put in capital, which will be great, and in terms of value, David has done some great work on this and I will hand it over to him for how we look at it..

Yes, in terms of – I think it is a good question because it is important not to – given that matrix is not included in the revenue or adjusted EBITDA or adjusted net income that we report to not overlook Matrix because it is significant value to the company.

So the way we look at it is not – it is on our books right now at a book value of $157 million.

But if you want to calculate more of a market value, I guess, you could call it – we often take the 10.5 times EBITDA multiple that Frazier brought in at, and apply that – so if you apply that against matrix’s EBITDA, which was or LTM EBITDA of $53 million, and then you subtract out their current net debt of $180 million, and then apply our 46.8% ownership that gives you about $175 million, which is almost $20 million higher than the book carrying value.

Yes, so again it is important to recognize that it is not – that it is often not picked up, but it is a significant part of our overall value..

I appreciate it.

Maybe I'll sneak one more in and hand it over, you made some interesting investment in circulation, just any color, or anything you like to expand on there, thanks again?.

Sure. This is Jim. So it is a very small investment for us and I think it came out of our research and strategic work, in and around some other potential growth areas for non-emergency transportation. And circulation is doing a great job. They are a partner with Uber, which we are not.

We are partnered with Lyft, and they are doing a great job with more of a software as a service model working with hospital discharge units, clinical trials, companies to as more of a in-house software option, which we obviously don't offer at LogistiCare. We are more of sort of the full outsourced option and much larger scale.

So, in terms of working together, Jeff Felton, we anticipate him going on the board of circulation as we do have a board seat. And he will be spearheading when and if and how LogistiCare and circulation work together, and again it is if and when and how. There are no definite plans at this point for them to work together.

But we are excited about both companies..

Great. Well, thank you everybody.

Are there any other questions operator?.

Thank you. And that does conclude our question-and-answer session. I would now like to turn the call back over to Jim Lindstrom for closing remarks..

Great. Thank you. So, as always we are around and available for further questions, or discussions, suggestions from any of you. So please don't hesitate to give us a call and I hope everyone enjoys the rest of their summer. Thanks. Bye-bye..

Thank you..

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