Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Providence Service Corporation's Earnings Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Dan Greenleaf. Thank you. Please go ahead, sir..

Hey there. Actually, this is Suzanne Smith, Chief Accounting Officer, just to announce the call. Good morning, everyone, and thank you for joining the Providence First Quarter 2020 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 reconciliation to the most comparable GAAP measures is included in our press release, investor presentation and within 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, 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.

Dan?.

Yes. Thank you, Suzanne, and good morning, everyone, and thank you for joining us today for Providence's First Quarter 2020 Earnings Call. The world has changed dramatically since our last earnings call just two months ago. Coronavirus or COVID-19 has caused considerable turmoil among global economies and health care systems.

Our thoughts are with the individuals and families who've been directly and indirectly impacted by this crisis, and we extend our sincere gratitude to the health care workers and the first responders battling COVID-19 on the front lines.

I'm extremely proud of our teammates and transportation partners who continue to deliver essential services to members during this pandemic. Many members are patients with chronic conditions requiring transportation to critical ongoing medical appointment, such as for dialysis or chemotherapy.

By ensuring patients can get to and from necessary appointments in non-emergent settings, we are ultimately keeping them out of the hospital emergency room and intensive care unit, minimizing their exposure to COVID 19. Our top priority is the health and safety of our teammates, transportation providers and members.

We implemented a company-wide risk mitigation program following Centers for Disease Control and World Health Organization guidelines that consists of several factors, including remote working and social distancing practices.

We have been able to move 1/3 of our workforce or approximately 1,000 people to work remotely; a pause in all nonessential employee travel; a strict on-site and vehicle sanitation protocols; processes for rescheduling noncritical trips; a system for rerouting COVID-19 symptomatic individuals via local emergency medical services; proactive engagement with dialysis clinics, chemotherapy providers, methadone clinics, behavioral health and other providers of life-sustaining services to accommodate abbreviated hours of operation or reduce treatment capacity; and readiness to coordinate with designated state and local emergency management authorities, if needed, to fulfill transportation requirements.

During these extraordinary times, we have innovated our services to support our nation's health care workers and members while providing extra assistance to our valued transportation partners. We have also entered in key adjacent markets to meet the demand and the needs of members.

For example, we have formed partnerships with integrated health care systems in Arizona, Massachusetts, Pennsylvania and New York to provide transportation for health care professionals to and from health care facilities while also enabling mobilization of their staff to provide in-home care.

We established partnerships with several large payers in states to use our transportation network to provide ride to and from grocery stores and food banks in the same safe and reliable way members access transportation for their medical care. We are delivering food directly to members as well.

In the state of New Jersey, we are providing Medicaid members food delivery in multiple counties through partnerships with food banks.

Within the first weeks of a new home food delivery program launched by Middlesex County's Food distribution center, MCFOODS, in partnership with LogistiCare, we delivered food to approximately 1,000 food-insecure individuals who previously would have relied on public mass transportation to get to food pantries or other sources.

We are grateful for opportunities such as these as we continue to expand our services outside of our traditional patient-to-care-center delivery model to become true connectors in the health care ecosystem with an emphasis on social determinants of health.

In addition to innovating our services, we are offering financial assistance to our transportation providers whose resilience and response during this pandemic has been admirable.

We deployed a host of relief program aimed to protect the sustainability of our transportation providers, including bridge loans to address their working capital needs; stopgap support with provider insurance; the suspension of fees associated with timely filings of credentialing documentation; temporarily eliminating denials and late fee charges and adjustments in minimum credentialing requirements to expedite the recruitment of additional transportation providers; and an extension in the time for submission of nonessential driver credentialing and training requirements.

I am hopeful that the most severe phases of the COVID-19 crisis may be behind us. But if this pandemic persists for an extended period or worsens, we're in a strong position to weather the storm.

First, our services are essential, and we have a comprehensive risk mitigation program in place to protect our teammates in the key constituents in our transportation ecosystem.

Second, while it's difficult to precisely quantify the impact of COVID-19 on our business, in the short term, we have experienced lower member utilization under capitated contracts as shelter-in-place and social distancing practices have led to the postponement of less urgent appointments.

In the first quarter of 2020, our adjusted EBITDA grew 31.5% to $16 million, and we generated $38.8 million of operating cash flow. Kevin will discuss the financial results in more detail later in the call. Third, with the increase in unemployment, health management associates is predicting an increase in the Medicaid roles.

With approximately 85% of revenue under capitated contracts, we could see an increase in both revenue and adjusted EBITDA. Fourth, we have an asset- and CapEx-light business model that is noncyclical in nature with a recurring revenue stream.

Fifth, we're the clear leader in the industry with significant positive tailwinds, including an increasing shift in health care away from higher-cost institutional settings, an aging population, a greater emphasis on preventative care and expanding Medicare Advantage market.

Transportation to medical appointments and pharmacies is one of the fastest-growing supplemental benefit within the Medicare Advantage market. According to MPAC, the total number of Medicare-eligible beneficiaries is expected to increase from roughly 59 million in 2018 to over 80 million by 2030.

Finally, our strong balance sheet, with net cash totaling $92.4 million at the end of the quarter, positions us well to withstand external shocks.

Moreover, during the quarter, we proactively borrowed $162 million under our revolving credit facility as a precautionary measure to enhance our financial flexibility given uncertainties surrounding COVID-19's impact on global economies and financial markets.

During the quarter, we also expanded our credit facility from $200 million to $225 million and extended the maturity date to August 1, 2021. As we announced this morning, we purchased National MedTrans, a nonemergency medical transportation business that fits tremendously well with LogistiCare.

National MedTrans brings us more than $200 million of estimated annual revenue across 12 states.

In addition to deepening our national presence, this acquisition continues to solidify our #1 position in the industry, establishes long-term strategic and economic partnerships with key payers, furthering our ability to address various social determinants of health.

And it adds more than 5 million trips per year and brings approximately 2 million additional members to the LogistiCare platform. The acquisition consists of only ongoing contractual relationships, excluding the legacy business operations, and will allow us to add revenue and gross profit without incurring significant redundant operating expenses.

Much like our business, approximately 85% of the National MedTrans business is capitated. We are not providing specific bottom line guidance for the acquired business. However, we will expect it to have gross margins in line with that of LogistiCare, be accretive to Providence's earnings and support meaningful long-term value creation.

While we may continue to pursue selective, opportunistic acquisitions such as this, our primary focus is on our organic growth strategy, which we continue to advance this quarter.

Our key internal growth priorities include acting on the voice of the customer; ensuring the right people are in the right seats; implementing critical technology advancements; reducing operational variation, driving out waste and improving quality in our customer service centers; accelerating profitable growth; and rebranding and driving cultural transformation to unify Providence, LogistiCare and Circulation under one umbrella.

In reference to the voice of the customer, we remain intensely focused on our #1 priority, which is listening to our payers, their members and our transportation providers.

Our actions during the COVID-19 outbreak, such as providing members with transportation to the grocery store and offering financial assistance programs to our transportation partners, demonstrate exactly what I mean by listening to the voice of the customer.

We've made considerable progress placing the right people in the right seats, which includes the recent appointment of Kenny Wilson as LogistiCare's new Chief Operating Officer.

Kenny joined us this week and brings more than 3 decades of executive leadership experience in the health care industry, encompassing a range of senior operational, managerial and commercial roles.

Prior to LogistiCare, he was the Chief Commercial Officer of the health care division of Sodexo, President and Chief Operating Officer at Hanger and held various roles at Cardinal Health and prominent sales management positions at Baxter Healthcare.

With Kenny's appointment, LogistiCare has added 7 key executives to its senior leadership team since August 2019. We have assembled a best-in-class management team that I believe will be -- will drive transformational change and growth at the company.

As I noted on our last call, there is significant opportunity to leverage technology to improve the member experience, further differentiate ourselves from our competitors, enable expansion into adjacent markets outside of our core Medicaid market and help us to reduce operational variation and drive out waste.

We expect to formally launch our front-end member, next-generation provider platform, which includes Circulation's elegant core user interface in the third quarter of 2020. This interface enables riders to track their rides via mobile app. In addition, text messages and voice mail alerts will provide ride status update.

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 and improve our productivity.

In addition, we continue to make progress on our enhanced interactive voice response system, which we expect to launch in the second half of this year.

On the topic of reducing operational variation and driving out waste, we're employing a single, repeatable model throughout the organization and are highly focused on cost-containment initiatives, improved efficiency, increased profitability and improved quality.

Regarding accelerating profitable growth, obviously, our acquisition of National MedTrans business significantly advances our plan. In addition, we were very pleased to renew and extend our preferred partnership with Lyft this quarter with a multiyear commitment. Our joint effort will improve access to care for millions across the U.S.

who rely on LogistiCare for reliable and convenient transportation to fulfill their medical needs. Our nationwide Lyft partnership was established in 2017. And we are Lyft's largest nonemergency medical transportation partner. This agreement represents the country's most significant collaboration between an NEMT manager and a rideshare company.

Our philosophy is not about winning or maintaining business at all cost, but rather about driving transformational growth from a solid base. We have made the deliberate decision to walk away from certain lower-margin contracts.

This contributed to flat year-over-year revenue comparisons for the first quarter, it helps improve the health of our business. During the first quarter, we successfully renegotiated 3 contracts, which will contribute $3 million of benefit during 2020 and $5.5 million on a full year run rate basis.

Kevin Dotts, Chris Echols and the team remain busy with another 6 contracts, which they are actively pursuing rate increases. The overall cadence of the RFPs in our industry has slowed down as a result of COVID-19, but several large opportunities remain up for bid. We are vigorously seeking to win these, as appropriate, for our business.

Finally, we are in the initial phases of formal rebranding as we are collecting internal messaging feedback from teammates across the company. Although the COVID-19 pandemic has slowed some of our work in this regard, we are excited to eventually roll out a unified message on our mission, vision, message and values.

In closing, our strategy to transform LogistiCare has commenced in earnest amidst an unprecedented macro scenario. Given uncertainty surrounding COVID-19 and multiple in-flight initiatives, we will not be providing guidance at this time.

However, we are very optimistic about our ability to optimize LogistiCare's business and create significant value for Providence's shareholders. We are well positioned to gain market share, lead and innovate the industry and emerge stronger as our nation moves through and beyond the COVID-19 pandemic.

I thank our transportation providers once again for helping our country's most vulnerable patients receive access to critical care during these challenging times. I also want to take a minute to thank the LogistiCare team who, time after time, stand up and respond when our patients and customers need it the most.

I cannot thank them enough for what they continue to do under the circumstances. With that, I will now turn the call over to Kevin..

Thanks, Dan.

Our first quarter revenue totaled $367.3 million, a slight decrease of 0.1% from $367.8 million in the prior year period, primarily reflecting contracts we no longer serve, including MCO contracts in California, Louisiana and New York, combined with lower trip volume associated with certain profit corridor contracts due to the COVID-19 pandemic.

As Dan discussed earlier, we intentionally walked away from certain contracts that had low profitability. Higher rate adjustments secured in the latter parts of 2019 partially offset these factors. We successfully renegotiated 3 contracts during the quarter, which contributed to $150,000 of in-quarter benefit.

For 2020, this benefit will be approximately $3 million and $5.5 million annually. In addition, we have another 6 contracts that we are actively repricing. Moving to service expense. Our gross margin, defined as revenue less purchased services, was 23.9% of revenue in the first quarter of 2020 compared to 21.5% in the first quarter of 2019.

The 240 basis point improvement reflects lower purchase transportation cost due to lower utilization across multiple contracts as a result of COVID-19 pandemic. In addition, we benefited from the proactive decision to walk away from certain underperforming contracts as well as multiple rate increases we secured in the latter portion of 2019.

From an operational standpoint, as Dan mentioned, we started to see some encouraging trends within our transportation cost towards the end of last year, driven by company-specific actions. We look forward to discussing some of these metrics in more detail on future calls once we return to a more normalized environment post COVID-19.

Our adjusted operating expense, defined as all other expenses excluding purchased services and after adjusting for add-backs, was 19.5% of revenue in the first quarter of 2020 versus 18.2% in the first quarter of 2019. The increase in spend was primarily attributable to investments in our team, processes and technology.

We expect operating expense as a percentage of revenue to come down in the back half of the year as we continue to execute on our various operational productivity initiatives. In the first quarter of 2020, our adjusted EBITDA totaled $16 million, and our adjusted net income equaled $9.9 million or $0.58 per diluted share.

I'd like to note that our reported income from continuing operations net of tax of $16.3 million in the first quarter of 2020 included a tax benefit of $11.1 million due to the impact of the Coronavirus Aid, Relief, and Economic Security Act, otherwise known as the CARES Act.

As a result, we expect to collect $27 million in the third quarter of 2020 related to the carryback of net operating losses. However, we will have higher taxes payable going forward due to the elimination of the NOL carryforward. Moving to our cash flow statement.

Cash flow provided by operations in the first quarter was -- of 2020 was $38.8 million, while cash used in investing activities totaled $1.6 million, in line with last year.

On May 6, 2020, we entered into an amendment on our credit agreement, which expanded the revolving credit facility from $200 million to $225 million, extended the maturity date to August 1, 2021, and increased our letter of credit sublimit from $25 million to $40 million.

This quarter, we borrowed $162 million under our revolving credit facilities as a precautionary measure to enhance the company's financial flexibility given uncertainty surrounding the COVID-19 pandemic and its impact on global economies and financial markets. We ended the quarter with $92.4 million of net cash.

Finally, on March 11, 2020, the Board authorized a new stock repurchase program under which the company may repurchase up to $75 million of the company's common stock.

Since the Board-authorized program started on March 11, 2020, we repurchased 195,576 shares for $10.2 million through May 5, 2020, and we have approximately $64.8 million available under the share repurchase program. Let me go to Matrix and our equity investment. Before we turn over the call for Q&A, I want to cover Matrix for the first quarter.

Providence recorded a loss of $2.6 million related to Matrix equity investment. On a stand-alone basis, Matrix generated revenue of $61.3 million and adjusted EBITDA of $9.9 million, both down from first quarter of 2019.

Matrix was impacted by the slowing comprehensive health assessment volume in March due to COVID-19 with in-home and mobile assessments placed on pause.

Given Matrix's business is based on health care workers going into the home or skilled nursing facilities to complete comprehensive assessments, the demand for these in-person services dropped significantly in March, particularly as the business is primarily geared towards the Medicare Advantage population.

In response to the reduction in in-home and skilled nursing facility assessments, the Matrix team quickly moved a portion of its volume to telehealth assessments.

In addition, Matrix has formed a partnership with a national essential retailer to deploy Matrix's health care workers across the country for wellness checks at its retail distribution locations. In the face of the COVID-19 pandemic, the Matrix management team quickly pivoted and redeployed their extensive nationwide clinical worker network.

As such, the Matrix management team is cautiously optimistic in their outlook for the year as they look to remain on plan with their initial internal expectations. This concludes our prepared remarks. We will now go to the question-and-answer session.

Operator?.

[Operator Instructions]. Your first question is from Bob Labick from CJS Securities. .

This is actually Lee Jagoda for Bob. So just starting with the acquisition. I know in the 8-K, it looks like you paid about $80 million for the acquisition.

Can you talk to it on a multiple of EBITDA, either looking backwards or looking forwards?.

Kevin, do you want to handle that one?.

Yes. I think it's -- I think from a multiple, I think it's in line with kind of where we are. I think it's slightly a little bit more positive. I think you think of us as somewhere between 9 to 11 type of multiple normally.

And I think basically we actually feel like for $200 million of revenue to get to margins that are equivalent to where LogistiCare is, I think it's actually probably -- at $80 million, I think it's a little bit slightly favorable..

Okay.

And to the extent that the margins are similar to where you are today, are there other synergies in terms of either overhead or call centers that you can realize by putting the two businesses together?.

Yes. I will take that, Dan. Great question, Lee. The benefit of what we've inherently done here is we've acquired effectively these as contracts and effectively without having to bring in any back office overhead, we will obviously have to support that with contact center support, but we will embed that in our network.

So there should be -- well, the gross margin rates, as I mentioned earlier, are in line and equivalent with where we are at LogistiCare. On the bottom line, we believe this is going to be pretty accretive for us..

Great. And then just looking at the core operations, can we start kind of big picture? And just remind us what happens when more people stay at home and how that's impacted both the end of Q1 and thinking about Q2 so far..

So if I understood the question there, Lee, specifically, I mean, what we saw in the later part of March is we saw our utilization drop off fairly materially. And I would say through April, that trend has been consistent. I think it's a little early in May at this point to prognosticate what's going on there.

But I believe that March right now, as far as we can tell, is looking reasonably favorable -- excuse me, April..

April. Great. And then, Kevin, I don't know if you want to touch on some of the restructuring initiatives and some of the things you're doing to optimize the call centers and where we stand there..

Sure. We actually -- we shut down one of our contact centers or call centers out in Las Vegas. That will provide us significant annual savings, over $3 million. There have been significant efforts on what we consider to be zero-based budgeting. Obviously, nobody is traveling, so that will be a benefit that we will realize here in this coming quarter.

There's been other technology initiatives that Dan had mentioned as far as our introductions of our IVR and certain other technology initiatives that will continue to drive productivity. There's also been other procurement reductions. So we feel like we're on track. I think it's a little early in the quarter to see the benefits of that at this point.

I think as we get into the third quarter, I think we can get to a little bit more quantitative view as to kind of how those look in the second half of the year..

Got it. And then just going back to the utilization question.

To the extent that utilizations dropped out in April and certainly in March, are you starting to see any pressure from your payers to renegotiate contracts lower?.

Yes. Listen, we're not -- let me answer this, Kevin..

Sure..

We're really not prepared to talk about that. I mean what we're prepared to talk about is, listen, we think -- I wrote an article 3 weeks ago about the patient tsunami. I think everybody knows that there's going to be a significant increase in utilization again. We're already seeing things ticking up over the last couple of weeks.

The other thing I also want to point out, as I've said in my script, is that we're doing other things. We're delivering food. We're taking health care workers to their offices. We are taking people to grocery stores. And so we've done, I think, a yeoman's job of making sure that the resources that we have were being deployed in the right way.

While they were maybe not deployed in a more conventional or traditional way, we are deploying them in a way that we think is in the best needs of our customer base right now. So I think it's -- so I think everybody understands we're in this together. We haven't seen anything like that and don't expect to see that given what we would expect to see.

And it is also -- the other thing you need to keep in mind, as I did state in my remarks, I would expect that Medicaid enrollment is going to increase significantly. So obviously, we need to keep a healthy transportation provider network, and they know that takes investments. So I think that's where we are right now..

That's very helpful. One more for me. In terms of your balance sheet, obviously, you have plenty of cash on the balance sheet, generated very strong cash flow in the quarter and then still chose to kind of draw down the revolver.

Any kind of insight into why, other than the obvious, which is the acquisition?.

Yes. I think, Lee -- go ahead..

Yes. I'll start there, and I'll let Kevin jump in.

Obviously, listen, you're asking, Lee, why we took down the revolver?.

Yes..

Yes. I mean we were being, I think, sensible. We -- no one knew at the time that when the COVID crisis went into full swing, did we have any idea of what was going to happen. And we were being, I think -- I would just think being good fiduciaries in terms of the business.

So in the event something did happen, we -- or something that would happen unexpectedly, which we would be in a position to -- be in a better position to weather that storm. So that's really what it boiled down to..

We would now like to turn the call back over to Mr. Dan Greenleaf..

All right, folks. Well, thank you all for participating on our call this morning. While we won't be on the road for investor conferences in the near term, given the COVID -- given COVID-19, we remain accessible for one-on-one calls. Please reach out to our Investor Relations firm, The Equity Group, if you're interested in scheduling a follow-up call.

We look forward to reporting back to you in August, we will release our second quarter 2020 financial results. Stay safe, and have a great day..

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