Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 Providence Service Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Ms. Suzanne Smith, Chief Accounting Officer. Thank you. Please go ahead. .

Thank you, operator. Good morning, everyone, and thank you for joining the Providence Fourth Quarter and full Year 2019 Conference Call and Webcast. With me today from the company are Dan Greenleaf, President and Chief Executive Officer; and Kevin Dotts, our Chief Financial Officer..

During this call, members of the management team will be referencing the presentation that can be found on our investor website under the Event Calendar and in the current Form 8-K, which was furnished to the Securities and Exchange Commission this morning..

Before we get started, 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.

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

We 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 reconciliations to the most comparable GAAP measures is included in our press release, investor presentation and in our Form 8-K..

Finally, we have arranged for a replay of this call which will be available approximately 1 hour after today's call on our website, which is www.prscholdings.com or via the phone numbers listed in our press release..

This morning, Dan Greenleaf, our Chief Executive Officer, will begin with some opening remarks. After which Kevin Dotts, our Chief Financial Officer, will provide a more detailed discussion of our financial results. Then we will open the call for questions..

With that, I will turn the call over to Dan Greenleaf, President and Chief Executive Officer of Providence.

Dan?.

Thank you, Suzanne. Good morning, everyone, and thank you for joining us today for Providence Fourth Quarter 2019 Earnings Call. I'm very happy to be here for my first earnings call.

Before recapping our fourth quarter financial results, I would like to share with you some of the reasons why I joined Providence and touch on the significant opportunities that I believe can transform and grow this unique entity. Namely, Providence has a very compelling story.

The company provides mission-critical services as an essential part of the health care ecosystem. The company is the industry leader with a differentiated and difficult-to-replicate operating model. The company has a very strong balance sheet, and there are significant industry tailwinds propelling the business forward..

We are the nation's leading nonemergency medical transportation provider through the brand names, LogistiCare and Circulation as well as the owner of valuable minority interest in the Matrix Medical Network. My comments will focus on our nonemergency medical business which stands at the crossroads of health care.

We serve as an essential connector in the health care ecosystem, bring together members and providers through our mission-critical managed transportation services.

Our services improve access, enhance quality of life and provide better health outcomes for Medicaid and Medicare Advantage eligible members while reducing cost and variability for payers..

We provide services to our nation's most vulnerable patients, including the elderly, disabled and children. We take members, including the developmentally disabled to chronic care and behavioral health appointments, including dialysis, chemotherapy and substance abuse. We are truly the connectors of health..

Help fellow human beings get access to critical health care to improve their lives. We have a dedicated and committed team focused on serving our members with respect and compassion. With over 25 million calls a year into our contact centers and over 63 million rides, each interaction truly matters. So thank you once again..

Our company's mission, combined with our value proposition for payers is the reason why I'm here. Providence is benefiting as health care increasingly shifts from higher cost institutional settings to community-based care.

Our country is laser-focused on value-based health care system that increases clinical outcomes for our patients, improves the quality of their lives.

This positive tailwind, along with a rapidly aging population, a greater focus on preventative care and an expanding Medicare Advantage market is driving increased demand for nonemergency medical transportation services. This is an extremely sticky business, where we tend to be long-term partners with our payers..

We are excited for Medicare Advantage in 2020 as the number of Medicare Advantage health plans offering transportation benefits have grown 34% on a year-over-year basis. Transportation and medical appointments and pharmacies is one of the fastest-growing supplemental benefits within Medicare Advantage.

According to MedPAC, the total number of Medicare-eligible beneficiaries is expected to increase from roughly 59 million in 2018 to over 80 million by 2030..

Additionally, adoption of the CHRONIC Care Act opens a door for Medicare Advantage plans to offer customized nonmedical benefits to different segments of their populations to improve health outcomes.

This puts into motion the opportunity to significantly grow the Medicare market which we currently estimate is a $300 million market and to potentially a multibillion-dollar market..

Providence is the leader in this space at approximately 2.5x larger than our nearest competitor, and we are the only publicly traded company in this growing industry. Our national reach and scale matters.

We've developed a difficult-to-replicate operating model with core competencies and capitated contract models and risk assessment as well as expertise managing complex operational workflows, such as eligibility, contact center operations, network development, logistics and claims processing..

The company displays several attractive financial characteristics that I find compelling, including a reoccurring revenue stream, where approximately 85% of our revenue is capitated, a noncyclical core business with limited reimbursement risk as we are not impacted by CMS Medicare fee schedules and asset and CapEx-light operating model, excellent cash flow generation, a strong balance sheet with over $60 million in net cash, no debt and ample credit facility availability, allowing us the flexibility to allocate capital to the best and highest uses and an untapped hidden value in our nonconsolidated Matrix equity investment..

While we commenced 2020 with a strong platform for delivering services and growth in our core market, I see significant opportunities to transform the way we do things to create additional value for our stakeholders. My initial strategic priorities will center on 6 areas. Number one, enhancing the voice of the customer.

Number two, ensuring that the right people are in the right seats. Number three, delivering critical technology enhancements to our LCAD and Circulation platforms. Number four, reducing operational variation, driving out waste and improving quality in our customer service centers. Number five, accelerating profitable growth.

And then number six, rebranding the organization, including a unified message on our mission, vision and values..

Regarding my first priority, I'm intensely focused on the voice of the customer, which includes our patients, payers as well as our transportation providers.

I want to ensure we are prioritizing member satisfaction in a more efficient and effective manner, better reporting and transparency with our payers and investing in technology enhancements to make it easy for our members to schedule rides.

By enhancing our customer-centric approach and how we operate, we want our members to feel empowered to direct their health care and our payers to have full visibility and input into way we treat our members.

Providence will make this a priority, and I'm personally committed to developing strong relationships with our clients, along with the customer-first delivery model through our best-in-class patient care model..

To make this happen, I want to ensure that we have the right people in the right seats, which brings me to my second priority. I'm committed to putting the best management team and employees on the field to support the company in what I believe will be a transformative period over the next couple of years.

We've already made substantial progress with the appointments of new leaders within information technology and human resources.

Walt Meffert, our new Chief Information Officer, brings over 15 years of experience building high-performing information technology organizations in the health care industry; and Laurel Emory, our new Senior Vice President of Human Resources, brings over 15 years of experience in organizational behavior and development.

I've worked firsthand with both of these highly talented individuals, and I know they will be strong additions to our team..

On priorities 3 and 4, I believe there is significant opportunity to leverage technology to improve the membership experience further differentiating ourselves from our competitor, enabling expansion to adjacent markets outside of our core Medicaid market and helping us in reducing operational variation and driving out waste of the company..

One of the most important technology initiatives we are executing on is the development of the front-end member and provider platform. We are blending the best of our various LogistiCare and Circulation technology platforms into a single integrated technology solution.

Our front-end member and provider platform will be driven by Circulation's core user interface. One of the key features of this interface is the ability for riders to track their rides via mobile app. In addition, text messages and voicemail alerts will provide rider status updates.

Given approximately 30% of our 25 million annual calls are related to ride status, we are optimistic that features like this will generate significant value for our members improve our productivity. We look forward to talking more about this on future calls..

Also, we have several technology initiatives underway aimed at enhancing member experience by reducing the amount of time the contact center representatives spend on the phone gathering information so they can dedicate more time to helping members.

Outside of technology, we also see opportunities to drive out waste by implementing best practices in a single repeatable model throughout the organization..

My fifth priority is to accelerate profitable revenue growth. Our sales and growth teams have spent much of their time focused on reshaping the narrative as we look to change the image of nonemergency medical transportation from a mandatory Medicaid benefit into a key solution in addressing social determinants in health care.

This is particularly important within the Medicare Advantage market, where the services are currently an optional benefit which payers can provide..

Historically, we have seen Medicare Advantage plans provide nonemergency medical transportation benefits to differentiate themselves from other plans. However, these benefits are capped, and there are often other restrictions placed on the benefit.

The team has done a great job within this area, as we hope to launch several Medicare Advantage pilot programs this year as we start mapping out the potential benefit for our payers..

Staying on growth, we are excited to announce the recent partnership with CommonSpirit, the second largest nonprofit health system in the U.S. and with Lyft.

This national partnership will not only help us extend our reach beyond our core Medicaid market but also allows us to co-develop and test our transportation that can alleviate barriers to quality and affordable care. .

Finally, on rebranding. Given all the various moving pieces throughout the last couple of years, including the acquisition of Circulation and the folding in of the holding company into LogistiCare, we will look to rebrand our organization. This will allow the business to focus on one unified message on mission, vision and values..

Now moving on to the financials. We finished the quarter with revenue of $384.8 million, representing a 6.7% year-over-year growth and adjusted EBITDA of $10.2 million. For the year, revenue was $1.5 billion, representing year-over-year growth of 9%, and adjusted EBITDA was $51.2 million.

During the quarter, we successfully renegotiated 3 contracts which contributed $4 million of in-quarter benefit to both revenue and EBITDA. As the company has indicated on previous calls, certain external forces, including higher utilization, insurance rates and minimum wage, are resulting in lower profitability across a number of our contracts.

I really want to call out our contracting and pricing team under Chris Echols and Kevin Dotts. They have negotiated close to $50 million of rate increases across 11 contracts, which benefited 2019. Heading into 2020, the team remains busy with another 11 contracts that we are actively pursuing..

Staying on revenue. Our growth team has already inked $40 million of new business for 2020. It is important to note that the lead time for new businesses can be 6-plus months. So the work that our team has already put in will help position us well into the future..

From an operational standpoint, as many of you already know, there was an organizational change implemented at the beginning of 2019 to prepare the business for transformation. During this change, certain market-level oversight and processes were impacted resulted in higher transportation costs.

Subsequently, a decision was made to reverse some of these changes before I joined the company, and we are starting to see some encouraging trends within our transportation teams, particularly around network development. The transportation team has been busy on-boarding new transportation providers.

And for the first time all year, we saw a net increase in providers at the end of the year. This is important as network capacity and network health indicators that we look at in each market to gauge our ability to negotiate competitive transportation rates..

We're also seeing some positive trends within cost overrides. Most importantly, we saw our transportation cost per trip flattened toward the end of the year.

Because of these efforts are predicated on local-level operational execution, it may take a few quarters before we start seeing these early indicators translate into meaningful financial results..

We look forward to updating investors on future calls as we discuss more of our operating metrics in detail. We are very excited about 2020 and beyond. However, because we are still in the early stages of the turnaround and transformation, the company is not providing guidance at this point in time.

I view 2020 as a year we focus on improving patient experience and quality through investments in our people, process and technology.

Ultimately, we believe the value proposition of the company, combined with favorable secular tailwinds, be significant drivers of growth and want to make sure we have the right structure in place to capitalize on the various opportunities we see..

With that, I will now turn the call over to Kevin.

Kevin?.

Thanks, Dan. Before I get started, I wanted to talk about the organizational consolidation for a final time. As a reminder to investors, at the time of the announcement, we indicated that we would cut approximately $10 million of cost associated with the former holding company.

In 2019, former holding company cost on an adjusted basis was $13 million compared to $20 million in 2018. For 2020, we expect these costs to be $10 million, achieving the $10 million of savings that we originally indicated. Going forward, we will no longer break out these former holding company cost as the company now operates under one umbrella..

Moving on to the financials. Revenues increased $24 million or 6.7% in the fourth quarter to $384.8 million. Most of the year-over-year increase was related to either increased volume and utilization or rate increases secured during the year. Adjusted EBITDA was $10.2 million for the quarter.

As Dan mentioned earlier, we successfully renegotiated 3 contracts during the fourth quarter, which contributed $4 million of in-quarter benefit. For 2020, this benefit will be approximately $8 million annualized. In addition, we have another 11 contracts, which we are actively repricing.

These rate increases would be incremental to the benefits that we called out on previous calls..

Staying on revenue, one of the stats you will notice in the 10-K is the split between state and managed care or MCO revenue. During 2019, we saw a flip where MCOs are now a larger portion of our business, going from 47% of revenue in 2018 to 51% in 2019.

There are several reasons for this change, including, the trend of states pushing Medicaid lives to MCOs, different trip type eligibility rules set by MCOs and other trip-related dynamics, including more defined definitions of in-network facilities..

We are seeing longer trips within our MCO contracts, particularly as MCOs have a list of preferred facilities or providers. As our MCO business grew over the last couple of years, capitated reconciliation and fee-for-service contracts have increased to approximately 30% of our revenues with a capitated recon contract.

We are still paid a PMPM or a per member per month but our payment is trued up in 6-month intervals based on various factors, including utilization and transportation rates..

For fee-for-service contracts, we typically bill payers after we pay the transportation claims resulting in a natural collections lag. As such, the mix shifting towards more MCO business we have seen in accounts receivable rise over the last couple of years.

That said, the trade-off of slower payment terms is P&L protection as we have an automatic feature to recoup higher transportation costs..

Moving below revenue, our gross margin percentage, defined as revenue less purchased services was 21.1% for the year compared to 23.8% in 2018. The 270 basis point reduction was attributable to several factors, including higher cost per mile and utilization in addition to processes impacted by the previously discussed centralization efforts.

We continue to address some of the margin compression through contract renegotiations. From an operational standpoint, as Dan mentioned, started to see some encouraging trends within transportation cost towards the end of the year and look forward to discussing some of these metrics in more detail on future calls..

Our adjusted operating expense defined as all other operating expenses, excluding purchase services and after adjusting for add-backs, was 17.7% of revenue in 2019 versus 18.6% -- excuse me, 17.7% of revenue in 2019 versus 18.6% in 2018. The 90 basis point reduction was attributable to cost savings generated as part of the organization consolidation.

In 2020, we may give back a portion of these savings as we look to make investments in our team, our processes and our technology. To the extent possible, we will aim to call out any onetime figures during 2020..

Moving to our cash flow statement. Operating cash flow for the year was $60.9 million, which includes $31 million of tax refunds and $6.6 million of tax avoidance generated from the sale of WD Services. .

Matrix equity investment. Moving on to our investment in Matrix, for the fourth quarter of 2019, Providence recorded a loss in equity earnings of $23.5 million related to our Matrix equity investment.

The loss was primarily as a result of Matrix incurring a pretax goodwill and intangible asset impairment charge of $55.1 million related to its acquisition of HealthFair. .

In the fourth quarter of 2019, Matrix generated revenue of $64.6 million and adjusted EBITDA of $6.3 million. For the year, revenue was $275.4 million and adjusted EBITDA was $44 million. Despite facing volume churn early in 2019, Matrix delivered volume growth driven by increased membership and yield.

Adjusted EBITDA was primarily impacted by the mobile's underperformance along with higher indirect and direct costs..

For fiscal year 2020, Matrix management expects volume growth by -- driven by higher membership, increased yield and new logos. Matrix continues to mitigate industry-wide price compression from renewals by providing add-on services, operational efficiencies and productivity initiatives to maintain its margin profile..

A quick note to our investors before turning the call over for Q&A. We expect to file our 10-K either aftermarket today or early tomorrow morning as we await the final audited financials for Matrix..

This concludes our prepared remarks. With that, operator, please open the call for questions. .

[Operator Instructions] Our first question comes from Bob Labick with CJS Securities. .

There's a lot of good information there. So just first, congrats on the successful renegotiations. Obviously, the $4 million contributions in the quarter are very good, and it's the continuation of what you've shown in Q3 in last year. So it's great.

Can you tell us how much -- it sounds like maybe half or so, but how much of that was retroactive and then prospective? And then talk about the potential for additional renegotiations just without -- if you don't want to use numbers, that's fine, but order of magnitude of the opportunity ahead of you. .

So Bob, again, yes, we've got $4 million. I think all of that was, let's say, within the quarter, so it wouldn't have gone back to the prior part of the year. So that was $4 million in. So then we pick up the benefit for the next 12 months. That makes it $8 million. We're working on an additional 11 contracts right now. And so that's kind of in play.

It's hard to determine exactly where those pricing elements will be. But obviously, as we close those during the year, then we would obviously report out on what that impact is within each of the quarters. .

Got it. Okay. And then I think you touched on this in the prepared remarks, but maybe we can go a little deeper. Obviously, there's been a big industry headwinds to the transportation cost. And you, I think, said that you're due to the successfully getting more transportation providers, your network is actually growing, again, which is fantastic.

And obviously, it gives you some leverage going forward. Can you talk a little bit about transportation costs in more depth as they trended at the end of the year and where they can go, again, order of magnitude percent? There's a couple.

If your costs are 76% and they were 80%, what are the -- what's the opportunity to capture some margin coming back?.

So yes, I think we feel pretty confident that we're trending very well. The one point that I would look at is, there was some noise in the third quarter as it relates to repricing of large contracts.

And so if I normalize inherently repricing of some very large contracts back in the third quarter, and I compare that to the performance in the fourth quarter, what I'm looking at sequentially is there's a basic -- what is hitting the bottom line was about a 400 basis point improvement.

A lot of that driven through the idea that the transportation cost is being managed..

And as Dan had noted in his area that the -- we're seeing that cost per mile and unit cost kind of flattening at this point. So we anticipate that we'll make continued opportunity. We'll continue to make progress, excuse me, on that for 2020, and we should see increased gross margin as a percentage increase.

It should be up, I would say, probably a couple of hundred basis points at best. .

Okay. That would be fantastic. To get that back, that would be great. And then I think we've talked in the past, too, on the opportunity at the call centers. Obviously, transportation cost is the biggest component of service cost, but call centers is still an opportunity there.

You talked about the integration of Circulation at the front end of LogistiCAD and the opportunity to reduce volumes of calls and times of calls.

Is there any way to quantify the potential cost savings over time at the call centers from enhancing the technology and IVR and things like that?.

Yes, I think it's very, very significant. Our IVR utilization is somewhere in the 2% to 3% range right now. And our experience has been that companies are somewhere in the 15% to 30% range. I think best-in-class is 30%.

So if that just kind of gives you an order of magnitude in terms of the number of calls we're answering that we think actually could be automated. And we've already talked about the potential around where is my ride..

So if you start adding up what the IVR system might be able to do and what -- what the -- where is my ride app will be able to afford in terms of what the patient will be able to see, I mean you can kind of do the math pretty quickly in terms of volume.

I mean I think theoretically, you could see a 50% reduction in call volume at the call centers if you just think about between an IVR system and an app that allows patients to see where their ride is because those are, again, 2 of the more predominant reasons why people call into the call center is setting up the ride and then secondly is asking where my ride is.

.

Got it. Okay. That's great. And then on Matrix, I think you said this. I just want to verify.

How is the core Matrix doing? And is it -- were most of the losses from just bigger losses at HealthFair/mobile? And is there an opportunity to turn that around in 2020? Or is that something that has to be shut? Or what can happen with the mobile/HealthFair?.

Yes, I character it this way. I think you're exactly right. I think we saw the home health services side of the business continue to grow through the year. We are seeing additional services being offered at higher price points.

So I think the expectations are for 2020 that the home health services will continue to demonstrate good growth, improved average sales price. That will offset, I think, what is, again, the drag that they're seeing from the mobile business at this point. .

Got it. Okay. Last one for me, I promise. Obviously, a pristine balance sheet at the end of the year, $60 million plus in cash, no debt.

Can you talk about the capital allocation priorities and what that might be used for?.

That's a great question, Bob. I think number one is that, from my perspective, we have to continue to enhance our technology platform. And we're very fortunate to be in a position where we can make those kind of investments. And so I -- so that's one of them. It's just making sure that we deliver on the Circulation select and LCAD product.

Number two is really and it's technology related is automating.

I think we've -- the company has done, I think, a less an ideal job in terms of the things they could have automated over the course of the last several years, and we think there's a significant opportunity to enhance the patient experience, to enhance the customer experience and obviously to lower cost overall.

So I think that's something else that we are very intensely focused on.

So Kevin, do you want to say anything more?.

No, I think that's right. I think there's going to be significant improvement just operationally. And then, as you talked about, driving out variation. .

Right. .

And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Dan Greenleaf for any closing remarks. .

No, I don't have anything else. I just want to thank everybody for participating on the call today, and I look forward to providing you an update in -- after the first quarter. .

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..