Good day, ladies and gentlemen, and welcome to the Third Quarter 2017 Providence Service Corporation Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded..

I would now like to introduce your host for today's conference, Laurence Orton, VP of Finance and Corporate Controller. Please go ahead. .

Thank you, Charlotte. Good morning, everybody, and thank you for joining Providence's Third Quarter 2017 Conference Call and Webcast. With me today from Providence are Jim Lindstrom, Chief Executive Officer; and David Shackelton, Chief Financial Officer..

During this call, Mr. Lindstrom and Mr. Shackelton will be referencing the presentation that can be found on our investor website, under the events calendar; and in the current Form 8-K which was furnished to the SEC yesterday evening..

But 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 that are characterized as forward-looking statements under the Private Securities Litigation Reform Act.

And those statements do 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 during the call in an effort to provide additional information to our investors. A definition of these non-GAAP measures and reconciliations to the most comparable GAAP measures can be found in our press release, the investor presentation and our Form 8-K..

And finally, we have arranged for a replay of this call. It's available approximately 1 hour after today's call on our website, or it can be accessed via the phone numbers listed in our press release..

So now I'd like to turn the call over to Providence CEO Jim Lindstrom.

Jim?.

Great, thank you, Laurence, yes. And good morning, everybody, and thanks for joining..

I'm pleased to report another solid quarter by The Providence Service Corporation. Today, I will provide some highlights from the quarter, talk about each segment's accomplishments for the quarter and provide some strategic insight into 2018. David will follow up with additional segment-level financial commentary..

But first of all, before we move on into some of the results, let me thank our team members around the world for their dedication of the over 25 million lives that we serve each year.

We've recently had to deal with a few hurricanes and some other challenges in our communities, so I did want to reach out and thank everyone a little bit more personally, to the employees who are on this call. So thank you, and great job..

So moving on. As expected, in Q3 of 2017, our revenue was virtually flatting on a consolidated basis. As usual, we encourage our shareholders to dig into our 10-Q that is being filed this morning, as there are a lot of positive improvements within this so-so consolidated growth rate..

continued growth in LogistiCare, albeit a little bit more [ modeled lost on ] of certain contracts last year; and WD Services growth within certain countries and new health programs in the U.K. Not included in this consolidated revenue growth, due to our partial ownership, was 12% revenue growth at Matrix..

As we walk through the next few slides. We continue improving the revenue and earnings growth prospects within our U.S. health care services businesses. As many of you expected, our margins contracted versus a year ago primarily due to the ending of the key MCO contract last fall in NET.

Offsetting some of these pressures are value enhancement initiatives continue to be on track and give us confidence that the margin contraction in NET will begin to reverse. Again, I'd like to thank our team at LogistiCare for taking on these value enhancement initiatives.

And we're about 1/3 of the way through them; and hope to complete most of them by the end of 2018, as I've mentioned..

David will talk more about our cash performance in the quarter, but I was pleased with our strong operating cash flow, which was $28 million for Q3. On ROIC, we came in at 18% for the quarter, and that's an annualized number which again we're pretty pleased with.

Finally, we remained focused on capital allocation, as we returned via share buybacks $122 million since the fourth quarter of 2015 or 18% of the company's common stock. David will cover our capital allocation activities more in his section, which were highlighted by 2 small investments in the U.S.

health care industry, the sale of a joint venture in our WD segment and the extension of our share buyback program..

So moving on to the next slide and NET..

So first, we welcomed Jeff Felton as CEO of LogistiCare in July.

Jeff is off to a phenomenal start not only keeping our value enhancement program on track but also reviewing everything from our PR strategy to accelerating technology investments, to working with the Providence team to -- about -- on long-term growth strategies both within its core NEMT market and other adjacent markets.

Jeff is also focused on strengthening our talent bench even further, which we view as one of the strongest in the industry..

Q3 revenue growth at NET was modest at 2.4% partially due to the loss of our New York state ASO contract, which was negatively impacted -- which negatively impacted margins, along with startup and utilization challenges on a couple of contracts which the team is in the process of renegotiating.

However, looking forward, we are pleased by our business development efforts and pipeline, which includes the award of 2 new contracts in Texas, renewal of our key Philadelphia contract and the securing of multiple MCO contracts. CapEx continues to be light under 20% of adjusted EBITDA for the year, so far, despite our value enhancement investments.

Looking forward on those value enhancement initiatives, we have previously reported that we are engaged on 3 fronts. First, on the technology side we are in the process of developing a host of technological enhancements for our platform that are well underway and will improve service and reduce costs across our nationwide network.

Second, again, in our call centers our various work streams have started to improve efficiencies. Third, on our 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 by the end of 2018. Once completed, we continue to expect over $40 million in annual net benefits on a run rate basis, a portion of which may be reinvested back into the business.

Beyond those improvements, we have been working pretty hard at evaluating ways to accelerate our growth beyond our long-term revenue growth expectations of 5% to 7% that we have shared with you previously. These growth areas include serving clients in Medicare and other adjacent areas where our NEMT value proposition can take hold.

We are partway through the strategic development of this plan and hope to report more in the new year..

So that's it on NET.

Why don't we move over to the Matrix investment on Page 5 of the slide deck?.

So in our Q4 2016 Earnings Call, I reported that, largely because of initiatives in late 2015 and early 2016, Matrix ended 2016 with a very strong pipeline. Because of that pipeline and solid tailwinds, I am pleased to report that this pipeline has been delivering, as reflected in Matrix' sales growth, up 12% this quarter and 13% year-to-date.

Regarding profitability, Matrix' adjusted EBITDA margins that were almost 21% in the quarter were slightly below previous quarters due to pricing, client mix and disruption caused by the hurricanes to assessment delivery in our call center..

As usual, this adjusted EBITDA was generated with moderate CapEx spend in a -- at a rate of a little more than 25% of EBITDA in the quarter due to the impacts I just mentioned. Together with the improvements in working capital during the quarter, we were able to continue to pay down debt..

In 2017, we've continued to work with our strategic partner Frazier Healthcare to enhance the value of Matrix' operating platform and network of over 1,500 nurse practitioners through acquisitions and complementary offerings.

To do this, Matrix recently signed an agreement to purchase LP Health Services from Munich Re, which will expand Matrix' network of health providers to 4,000 providers across 50 states, with a variety of capabilities and skill sets..

Moving on to WD Services. So we had a lot going on over the last quarter at WD. First, we sold our stake in Mission Providence, bringing in $15.8 million of cash. Second, we've had some great key wins in the Work and Health Program tenders.

Thus far, we had secured contracts under the program worth $131 million over 5 years, and we are still awaiting word on 3 additional contracts worth an additional $129 million..

So as you see in the revenues during the quarter, we did see them decline a little bit, but despite that, we improved adjusted EBITDA margins to over 5.5%. A big part of the revenue decline was due to the continued wind-down of the legacy U.K.

Work Program, but despite that, our value enhancement work was largely completed in Q2 and therefore contributed to this rebound in profitability, which as we mentioned in our press release was somewhat masked by a favorable $5 million contract adjustment credit in last year's Q3 P&L.

So while we continue to see the Work Program slowing down, based on the value enhancement activities and new contract awards, we are optimistic about the stability and profitability of this segment for the rest of 2017 and into 2018.

This optimism also incorporates the constructive industry dialogue with the Ministry of Justice that remains on the probation system review. Despite this optimism and these constructive industry dialogues, nothing has been yet finalized with the MOJ which would improve the profitability of our offender rehabilitation program..

So with that, I will turn the remaining time over to David for a few other points in our financials. .

Thank you, Jim..

I'll start on Page 7 of the presentation. And I'll focus my commentary around the segments, as Jim has already discussed our consolidated results..

Starting with NET. As anticipated, year-over-year top line growth slowed in the quarter from a first half growth rate of over 10% to 2.4%, resulting in year-to-date revenue growth through Q3 of 7.7%.

Although we had a number of favorable growth drivers in the quarter such as membership growth under existing contracts; 2 new contracts in Texas; and [ mostly with ] MCO contracts, including contracts in New York and Florida, year-over-year revenue growth was dampened by the rolling off in Q2 of our New York state contract as well as the turnover of a couple of MCO contracts in Florida and California.

For the full year, we expect revenue growth of approximately 7%, which is at the high end of the 5% to 7% growth we have been communicating..

As far as adjusted EBITDA margins at NET in the quarter, we saw a slight year-over-year compression driven by the rolling-off of our ASO contract in New York during Q2 of this year as well as continued significant year-over-year utilization increases on a couple of large full-risk MCO contracts in one specific geography.

The process to reset rates to reflect this unforeseen higher utilization has been moving slower than initially expected, but we continue to work constructively with the payers in this geography to address and understand this challenging utilization behavior amongst their populations.

And we expect to reach a mutually acceptable solution in the near term. Also, as we've spoken about on prior calls, we are constantly adding new MCO contracts that from a revenue perspective more than offset the impact of contracts rolling off, which is leading to revenue growth.

However, we have recently seen these newer contracts coming in at lower margins than those expiring, leading to margin -- leading to pressure on margins. This downward pressure from contract mix and utilization trends was only slightly offset by our value enhancement initiatives aimed at better managing transportation costs on a per-trip basis.

These initiatives as well as those focused on efficiencies within our operation centers remain largely on track, but as we have spoken about previously, the majority of the anticipated net reduction to our transportation and payroll cost structures driven by the initiatives isn't expected to show through on our P&L until next year.

Thus, for 2017, while we're only capturing a portion of the benefits from these initiatives, we still expect NET Services to deliver an adjusted EBITDA margin of approximately 6%..

At WD Services, in the quarter, revenue moves -- revenues moved as expected given the trailing-off of the legacy Work Program contract. In addition, [indiscernible] last year, our revenue included the benefit of a $5.4 million contractual adjustment on our offender rehabilitation program.

Excluding these 2 items, WD Services revenue grew on a year-over-year basis, primarily driven by nonemployment services in the U.K. such as our diabetes health program; and employment services outside of U.K., including in France..

Profitability-wise, WD Services delivered an adjusted EBITDA margin of 5.5% in Q3. Taking into account last year's contractual adjustment I just spoke about, which flowed directly to the adjusted EBITDA, core operational profitability improved significantly on a year-over-year basis, driven by our value enhancement initiatives taking hold in the U.K.

and in France. Consistent with our last couple of calls, we expect full year EBITDA margins at WD Services in the low to mid-single digits..

Moving to corporate. For the quarter, our costs did increase slightly on a year-over-year basis.

Although we saw savings associated with accounting, insurance and internal and external auditing, these improvements to our core corporate cost structure were offset by third-party costs associated with the strategic initiatives and the timing of incentive compensation accruals versus last year.

For the full year, excluding share-based compensation, we still expect cash costs of approximately $18 million..

Moving to our Matrix investments. You'll have seen the recently announced acquisition of LP Health Services.

Although small and funded using Matrix' balance sheet cash, the acquisition is strategic and synergistic, as it expands Matrix' clinical scale toolbox and helps accelerate expansion into the Medicaid market as well as into products aimed at closing quality care gaps engaging with hard-to-reach health plan members.

LP Health increases Matrix' product capabilities, market opportunities and revenue diversification potential. And as Jim mentioned, this acquisition takes Matrix from a network of approximately 1,500 nurse practitioners to a network of approximately 4,000 clinicians composed of nurse practitioners, RNs, LPNs, dietitians and social workers.

Note that this increase in the number of clinicians is not proportional to an expected increase in Matrix' revenue, as LP Health's average utilization of its clinicians is lower than the average utilization of Matrix' NP base..

From a financial perspective and again reminding everyone that we do not consolidate Matrix' financials, Q3 through increased by 11.6% on a year-to-date basis -- sorry, 11.6% on a year-over-year basis, bringing year-to-date revenue growth to 12.8%.

Adjusted EBITDA margins were 20.8% in the quarter, down from last year due to pricing, revenue mix and the impact of the hurricanes..

Moving to the cash flow summary on Page 8, I'll first remind everyone again that year-over-year comparisons are tough because the 2016 numbers include Matrix on a forward consolidated basis, while the 2017 numbers do not. This is not as apparent in Q3 numbers -- it's not as apparent in Q3 numbers as it is in the year-to-date numbers.

Unfortunately, disc ops accounting doesn't trigger a restatement of our cash flows..

In Q3, our cash earnings before working capital were strong in over $11 million. Adding in the $16.6 million working capital benefit, we generated close to $28 million of cash from operations in the quarter.

However, as I pointed out before, working capital is volatile on a quarter-over-quarter basis given the cadence and batching of transportation provider payments at NET Services. Thus, although we have seen a year-to-date benefit of working capital of $14.2 million, we may get some or all this benefit back in Q4..

CapEx was $4.5 million in Q3. And we expect a similar level of spend in Q4, which will bring full year CapEx in 2017 to approximately $20 million, a significant decrease versus last year. Looking forward to 2018, we expect CapEx to decline further as the CapEx spend associated with this year's value enhancement initiatives trails off.

This lower CapEx, together with the improved profitability driven by these value enhancement initiatives, is expected to result in improved cash generation in 2018..

Moving to our summary balance sheet on Page 9. We ended the quarter with no long-term debt and $92.2 million of cash. This cash balance includes the $15.8 million of net proceeds received from the sale of Mission Providence..

The book value of Matrix is currently at $157 million. However, from an intrinsic perspective, we believe more value sits in our Matrix investment holding for our shareholders than is reflected by this book number.

For example, using a 10.5x EBITDA multiple, which is consistent with Frazier's buy-in valuation but doesn't give us multiple extension credit from an improved growth profile and revenue diversification we've achieved since Frazier joined us; as well as LTM EBITDA of $52 million; and net debt on Matrix' stand-alone balance sheet of $176 million, a more appropriate pretax current valuation in our view is closer to $175 million.

As Matrix continues to grow earnings, diversify its customer and product base and generate strong cash flows, we see this value steadily building..

Before turning to Page 9, I'll hit briefly on a couple of income statement items. First, as seen in our press release, despite its sale during the quarter, Mission Providence is still included in continuing operations. Today, that's [ attributed to it did not ] qualify for disc ops treatment and we continue to provide employment services through WD.

Thus, the $12.6 million gain on sale as well as the $500,000 and $1.5 million equity net loss of investee associated with Mission Providence during the quarter and year-to-date, respectively, are still included within income from continuing operations net of tax. From the P&L, you will also see our effective tax rate for the quarter was only 16.6%.

This was due to there being no tax liability associated with the gain on sale of Mission Providence due to previously incurred losses and the availability of deferred tax assets.

The effective rate will increase again in Q4 due to our continued inability to recognize benefits in foreign jurisdictions or losses on a pretax income basis are being incurred.

In addition, if no awards are made under our corporate LTI program, which will be the case if our 90-day VWASP as of December 31 remains below $56.79, the new accounting standard on share-based payments will require us to unwind the deferred tax asset we've built, as we have expense accumulative $9.4 million under these awards since the LTI plan was initiated at the end of 2015.

Under the old rules, this unwind would have taken place through a PIK..

Ending on Page 10. Our capital allocation activities in Q3 continued to demonstrate an increased focus on our U.S. health care services businesses.

This is reflected by our exiting of Mission Providence, which will allow us to continue to redirect capital away from our WD Services segment and towards high-return activities such as investments in and around our U.S. health care services businesses.

This is also reflected by this year's elevated CapEx spend at NET Services due to targeted technology investments aimed at improving service delivery and operating efficiencies. In addition, although currently less significant on a dollar and cents basis, the emphasis on U.S.

health care services can be seen by our investment in circulation through NET Services and Matrix' investment in LP Health.

The small size of these acquisitions doesn't necessarily reflect how we view this acquisition strategically or the time devoted to our acquisition efforts but rather in a conservative and select approach to acquisitions, on using our shareholders' capital and the current market environment.

In addition, given the substantial organic value-creation opportunities we see within U.S. health care services, we extended our share repurchase program through December of 2018. We continue to see share repurchases as an attractive way to return capital to shareholders and generate attractive returns over the long term..

I will now turn the call back over to Jim in order to wrap up. .

Great. Thanks, David..

So just a few quick final comments..

So as we enter the end of the year, we anticipate continued solid performance in 2018. Our value enhancement programs in LogistiCare are expected to show through as they have in Matrix and Ingeus recently.

We believe in the power of our value enhancement programs and our teams to enable our critical yet overlooked businesses to reach their full potential. These programs present significant long-term opportunities in our business. And our strong balance sheet position all come -- can all come together to position us well for 2018 and beyond..

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

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

Just wanted to start. I now you've touched on this a little bit on the call already, but in terms of the value enhancement, particularly for LogistiCare, as it's so important, could you just update us on kind of the timing of where we stand and a sense of the rollout next year? And maybe $40 million is a lot.

Maybe put in -- I know you have 20 work streams. Put into buckets where most of this comes from so we can visualize where the $40 million comes from in kind of an easy way. .

Sure. So maybe I will take a shot and then hand it over to David. So we are -- let me preface all this by saying that we are going through the budgeting process right now.

And so talk about quarterly timing, I think, will be a bit premature for us at this point, but as we said, one thing that I think continues to we feel good about is the run-rating of $40 million by the end of 2018. The $40 million is comprised of approximately 20 work streams.

They fall into 2 different sort of categories, the first of which is in our call centers and our operational centers, where we do everything from eligibility and field inspections and credentialing, right through to call -- general call center activities reaching out to facilities, talking to clients, talking to their caregivers about getting them to their medical appointments.

There's a whole process going on there where we're improving the efficiencies and getting our call centers up to best-in-class operating levels. The second part is the transportation provider network were -- traditionally had been managed on a fairly decentralized basis, and technology had not been really a part of that process.

Now we're incorporating technology to look at capacity within the markets, to incorporate service levels, to better price some of the contracts that we have and get them on par with the rest of the rates that we see across the system. And so that's approximately half of the $40 million, give or take.

And in terms of overall progress, we are about 1/3 of the way through the activities. In some areas, we're a little bit behind. Some, we're ahead, but overall we're on track, like we said in the script.

And I think David might hit on this more, but in terms of this year's impact, I think we're looking at somewhere in the $5 million to $10 million range of the actual impact for this year. Obviously, that's coming in through the second, third and fourth quarter at varying levels. And the actual run rate is a bit higher as we go into '18.

So we'll have benefits going into '18 from this.

David?.

Yes. So that's right. In 2017, we do see approximately $5 million to $10 million of benefit to adjusted EBITDA from initiatives. And this benefit is included in the approximately 6% full year EBITDA margins that I referenced during my portion of the scripted remarks.

Of that $5 million to $10 million, more is related to transportation cost reductions than the contact center, operations center savings.

You can't actually see this through the purchased services line in our P&L because we've had changes in utilization, but if you were to look at transportation costs, assuming constant utilization and a constant level of service mix, you would see the benefit on a per-trip basis.

Also, when looking at NET's margins on a year-over-year basis, the $5 million or $10 million benefit is being masked a bit by the loss of the New York state contract, which was -- as we spoke about previously had a higher-than-average margin; as well as the utilization pressure we were seeing in a specific market which again we're trying to neutralize through rate renegotiations.

.

And maybe just finally, as we look at sort of reinvesting some of that $40 million, some of the areas that Jeff is looking at beefing up is sales and marketing, business intelligence and a few other areas to make sure that we have sort of the best resources and full resources at each level, but there are -- we haven't identified any significant areas where we need to reinvest at the moment.

But again, we're still in the budgeting process and the strategic planning process, but as of right now, we don't have anything of major significance. .

Got it, okay. That's really helpful.

And then just kind of sticking with LogistiCare and NET market in general, I kind of want to take a half step back and just ask you to talk a little bit about, in the market environment, what's changed over the last 5 years maybe in terms of competition, customer concentration and ride sharing; and how the value enhancements improve your opportunity going forward.

.

Sure. So let me take a shot, and then I'll hand it over to David. So looking at it from a simple supply-and-demand perspective, we have probably 2 comments on supply. The first comment is we haven't seen a lot of new entrants in sort of the traditional core NEMT market.

This market has been largely comprised of a handful of smaller, privately held competitors; and then us, obviously publicly held and a bit larger than the privately held businesses that are out there.

So because of the capitation, I think, largely; and the sizes of some of these contracts, we again -- and the margin profile, we've not seen a lot of new supply coming into the core market. I'll come back to the adjacent market in a little bit because I'll address some of the on-demand entrants that we've seen.

On the demand side, we primarily serve the aged, blind and the disabled. They're a vast majority of our rides; and also children, obviously, most of which are -- whom are within Medicaid. And these people and the contracts that we serve, they require a lot of work around eligibility compliance, credentialing. We have people who do field inspections.

We have some facility with the nurses to help our clients navigate their health care maze. And so that's fairly what -- well, it looks maybe a little bit simple on the surface, and some people would just call us a broker. We're a lot more than that. And so those populations continue to grow.

And like I said on the demand side, there aren't a lot of new entrants, so we're one of the few that actually can figure out this maze and help our clients and the individuals navigate it and get to their appointments. And again, these are largely for all individuals that fall into the aged, blind, disabled and child category.

There has been a move towards MCOs in the industry to take on more of the administration of the Medicaid contracts within the states. We've also seen some states and some of these MCOs break down the contracts into regions. And so with those contracts, the dynamics change. They can be smaller. You can be bidding on them more frequently.

Population outcomes and retaining populations within the programs and looking at areas like satisfaction are becoming more and more important. And so I think that's why -- one of the reasons why we wanted to go with Jeff Felton, because of his experience there and, as you see, additional resources hired into LogistiCare.

You'll probably see more with some of that MCO background or health care approach, which we think can differentiate us from some of our competitors. On the on-demand topic, we obviously partner with Lyft through LogistiCare. Through circulation, we partner with Uber.

They've been terrific resources for us in a few different markets, but really this is to replace some of the taxi rides that we might use for replacement rides when we need the resource that is on demand, areas like hospital discharge. And so it's a very, very small portion of what we offer but, I'd say, a very valuable one.

And we'd love to figure out ways to utilize the on-demand partners a little bit more, but as of right now, we haven't figured it out. And I don't think they've figured out how to utilize them in the larger market, which again the vast majority of our market is the aged, blind, disabled and children.

And just from a contracting perspective as well, our contracts are largely capitated, so they are -- we get paid on PMPM basis, per member per month. And so we take on risk.

And we haven't seen a lot of new entrants, whether on demand or maybe a new entrant who's trying to break into the market who'd be willing to take on risks without -- and where we have, we've seen some negative impact from that.

So David?.

That -- I would agree with all that. I might just add on the -- Bob, you'd also asked about the customer concentration, which Jim kind of hit on with his comments on the MCOs becoming a larger part of our overall revenue base.

And even when you look at our state book of business, I think concentration within that book has gone down, especially when you look at how states are dividing up into multiple regions. So if you take a state like Maine or Texas, there's multiple regions.

And you can look at those as those individual regions have individual contracts, which is all I think beneficial for the recurring revenue diversification side of NET. .

Got it, really helpful color on all that. And then last question, and I'll jump back in queue. Just you mentioned the extension of the current share repurchase. You obviously have a lot of cash. Can you just talk a little bit about capital allocation and M&A? You've had some divestitures.

If -- how you're thinking about your balance sheet over the next few years. .

Yes. This is David. We do recognize that we have a large cash balance and no debt. As we talk about, we did extend our share repurchase program through the end of next year.

We haven't been able to be as aggressive the last couple of quarters on, I think, share repurchases as we would have liked to be given blackout windows here on the Providence side, but we do continue to see that as a way to return capital to shareholders and to generate returns. On the acquisition side, we touched on 2 small acquisitions.

I mean those don't really move the needle in terms of our cash balance. We do still remain active in the M&A markets in terms of diligence as in terms of looking for complementary businesses within NET Services.

I think, despite those efforts and largely reflected of kind of the current M&A environment, the prices that NET assets are trading at, we've just seen better opportunities to deploy our cash internally through lines like the value enhancement initiatives at NET.

But it does -- capital allocation still remains kind of front and center in our minds and a key part of our job responsibility. .

Maybe Bob, I'll add in onto that. This is Jim. So maybe just thinking about the capital allocation in 3 buckets. David hit well on the share buybacks. We're obviously of -- we've obviously been pretty active there over the years, and hopefully, we'll continue to be. So that's one bucket he mentioned organically, and then through the acquisition bucket.

I think, in terms of new verticals, we just see -- because that is one question we hear from investors. We don't see a lot of great opportunity right now. We just see a lot of high prices, a lot of cash out there, and so to envision going into new verticals is pretty low on our radar screen.

I personally have spent a lot of my career cleaning up for others and their aggressive and sometimes irresponsible acquisitions. And so we're a bit more disciplined because we've looked through and we've cleaned up after them. And right now with the prices where they're at, it's a bit difficult.

I think where we do get a bit more enthused is and where we spend most of our internal activity is in and around Matrix and LogistiCare.

We just see a lot of smaller companies who are doing great jobs in adjacencies in areas like nutrition or fitness or home safety in and around the community, but a lot of what we see are small, fast-growing businesses. And unfortunately right now with high price tags, what -- why we're spending anytime is because we see the potential in them.

And we also -- very attracted to the scale of the LogistiCare and Matrix network, which is they're both leaders within their industries. So I think overall very patient and disciplined obviously in terms of the capital allocation strategy. .

Our next question comes from the line of Mike Petusky from Barrington Research. .

So I guess, first, let's talk about LogistiCare a little bit and this commentary around utilization challenges. On the one slide, it said certain markets. And then towards the end of the presentation, you guys said you were working on one geography where you're trying to get some relief.

I guess what I'm wondering is how widespread are the utilization issues.

Is it one contract? Is it -- what part of the country is it? Can you just, I guess, speak to that issue?.

Yes, it is not widespread. We were seeing it in one market, and that one market has a couple of MCO contracts. .

Any idea what's driving that?.

I think part of it is, I mean, we're seeing about -- it's somewhere around a 15% increase in the utilization versus last year. Part of that is changes in the composition of the population that we're serving. And again, I -- we're still going to add this on previous phone calls.

This was a -- these were populations that were previously served through county programs and state programs; and then came onto a fully capitated, full-risk program through LogistiCare. But there's not any -- I think it's a number of small underlying trends but no one specific driver that we've identified in terms of changes in coverage. .

You're seeking relief, pricing relief, on one of those pieces of the business, or for all of it. .

All of it. .

And yes, again, Mike, this is something we've encountered before. And I have I think a pretty good track record in terms of our relationships with our clients. And we're [ shooting for ] some of these. All right, thanks. .

Okay, all right, [indiscernible]. And then on the WD, the margins on WD have sort of bounced around in the mysterious in terms of my ability to sort of model out. And I guess what I'm wondering is, you seem to indicate that a lot of the value enhancement initiatives have been most of the way implemented within WD.

And I'm -- I guess what I'm wondering is are margins sort of going to be a little bit more consistent kind of mid-single digits going forward? Is that a reasonable expectation? Or is the fact that you've won new business and there'll be startup in all the rest of it? I mean, how should we think about that?.

I think you will still continue to see volatility quarter-over-quarter within WD Services not necessarily driven by contract startup costs. For example, when you look at the Work and Health Program contracts and contract value that Jim had mentioned we don't envision a lot of upfront investment.

But you will still see kind of some volatility, especially as we're going through some of these renegotiations with some of our payers, including the MOJ, where you could see contractual adjustments. I spoke about, for the full year, we expect mid to single -- low to mid-single-digit margins.

I think, as we look out into 2018, we don't -- I wouldn't say that we see on a full year basis a huge amount of deviation from that, probably closer to the mid-single-digit range. .

We removed about 400 positions, and so we fundamentally changed the cost structure at WD. And we reorganized around contract and business lines and really downsized our shared services and corporate centers.

And so it's just that it is a leaner business, no doubt about it, and so we can handle some of those potential bumps in the road or, hopefully, in a much better fashion than we have been. So we feel -- overall we feel pretty good about it. .

Okay, yes. And David, sorry. I briefly had to step away from the call just as you were getting into the discussion around effective tax rate. I think you started to say just I was stepping away that it -- there was going to be kind of an upward adjustment in the fourth quarter.

And could you just briefly, briefly summarize what you said around that?.

Yes. So I started off by just pointing out that we have a low tax rate, effective tax rate, this quarter. It was under 17%. And I was indicating that you shouldn't expect such a low rate in Q4 because we won't have that gain on sale of Mission Providence, which wasn't subjected to taxes in Q4.

So we will see kind of a return to where we were the first half of the year in terms of the effective tax rate.

And then because we're reaching the end of our calculation period for our corporate LTI, if no awards are paid out under that program, you could see upward -- further upward pressure on our effective tax rate, as we have to unwind some of the tax benefits that we've received in the past from expensing that cash-based program. .

And this year, that holding company LTI flow through to the P&L at the rate of... .

About a 4... .

About $4 million. .

Yes, $4 million, yes. .

Mike, and I just thought of, had one other thought on your previous question on WD. We have these value enhancement initiatives not only in the U.K. but also in France a little bit and Australia within Mission Providence.

And so when I say we've fundamentally changed the business, I think that's partially reflected in the Mission Providence sale for a business that lost $10 million, $11 million of OI the previous year and then to get the price that we did. We had to fundamentally sort of improve the trajectory of the business to get a price like that.

Don't apply the same value base. It shouldn't [indiscernible]. I'm not suggesting that at all to WD and as a whole, but I would say it was a very similar fundamental-type work that we did. So hopefully, that helps and gives you a reference point. .

Okay, great, okay. And just last question; and it's really pivoting off of Jim, I think, something that you had just said a few minutes ago. I -- you referenced spending time on Matrix. And I guess it just kind of put a thought in my mind, and I was curious.

At this point, I mean I assume that you spent some time on it, but I guess I also assume that Frazier carried the heavier end of that load.

If you were assessing how much of management's time is spent in kind of thinking about the Matrix business, would you be able to ballpark that?.

I'll give you a -- I'll take a shot at it. So first of all, I think what enables us to sort of have -- and that's David, me and the rest of the holding company team, which is not large. It's, I think, more reflective of the management team that we have at Matrix and the operating model.

It really is a superb management team, a great operating model, so it just doesn't require a whole heck of a lot of attention from us right now and particularly with how they're doing. I'd say Frazier does spend more time on it than us, but I'd say it's modest. David and I are on the board. They have 2 members on the board.

And then there is one other independent; and the CEO, Walt Cooper. And so for us, it's not an extraordinary part of our time, but we're on the phone every week talking about M&A opportunities -- or every week or 2, and then have the occasional other items pop up. So I don't know, David... .

Yes, I mean we'd also participate in the monthly operating reviews, which we had to -- which we had started under our ownership. And yes, I would echo, yes, echo, a lot of Jim's comments. As we're getting into the budgeting process for Matrix for next year, we're pretty close to that.

For example, I'll be joining a budget prep call for them tomorrow but not a ton of time. .

Thank you. At this time, I'm not showing any further questions. I would like to turn the call back over to Jim Lindstrom for any closing comments. .

Great, thank you. Thanks, everyone, for participating. We appreciate your support. And we'll hope to talk to you soon..

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 great day..