ModivCare Inc (MODV) 2012 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the 2012 Providence Service Corporation earnings conference call. My name is Kim and I will be your operator for today. At this time, all participants are in a listen-only mode.

We will conduct a question and answer session toward the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Ms. Alison Ziegler with Cameron Associates. Please proceed.

Good morning, everyone, and thank you for joining us this morning for Providence's conference call and webcast to discuss financial results for the fourth quarter and year ended December 31, 2012. Before we begin, please note that we have arranged for a replay of the call. This replay will begin approximately one hour after the call's conclusion and will remain available until March 21. The replay number is 888-286-8010, with the passcode 11430080.

This call is also being webcast live with a replay available. To access the webcast, go to www.ProvCorp.com and look for the event calendar on the IR page.

Before we get started, I'd like to remind everyone of the Safe Harbor statement included in the press release and that the cautionary statements apply to today's conference call as well. During the course of this call, the Company may make projections or other forward-looking statements regarding future events or the Company's beliefs about its financial results for 2013 and beyond. We wish to caution you that such statements are just predictions and involve risks and uncertainties. Actual results may differ materially.

Factors which may affect actual results are detailed in the Company's filings with the SEC, including the Company's 10-K for the year ended December 31, 2012, which will be filed on Friday. The Company's forward-looking statements are dynamic and subject to change. Therefore, these statements speak only as of the date of this webcast, March 14, 2013. The Company may choose from time to time to provide updates and, if they do, we will disseminate the updates to the investing public.

In addition to the financial results prepared in accordance with Generally Accepted Accounting Principles stated in the press release and provided throughout our call today, the Company has also provided EBITDA and adjusted EBITDA, non-GAAP measurements which present its earnings on a pro forma basis. Providence's management utilizes these non-GAAP measurements as a means to measure overall operating performance and to better compare current operating results with other companies within its industry. Both EBITDA and adjusted EBITDA are measurements not determined in accordance with or an alternative for Generally Accepted Accounting Principles, and may be different from pro forma measures used by some companies.

A definition, calculation, and reconciliation to the financial statements of each can be found in our press release. The items excluded in the non-GAAP measures pertaining to certain items that are considered to be material, so that exclusion of the items would, in management's beliefs, enhance the reader's ability to compare the results of the Company's business after excluding these items.

With that, I'd like to turn the call over to Warren Rustand, Chief Executive Officer. Go ahead, Warren.

Thank you and welcome to our call. With us today we have Bob Wilson, our recently appointed CFO, Herman Schwarz, CEO of LogistiCare, and Craig Norris, CEO of Social Services. Craig has accepted our invitation and the challenge of focusing his time and energy on social services in his new role as its CEO.

Since this is the first conference call with our recently restructured management team, let me take just a minute to introduce myself. While I have had the opportunity to meet many of you as several investor conferences earlier in the year, to our shareholders and investors that may not know me, I was appointed interim CEO in November. I have spent nearly 8 years on Providence's Board of Directors, the last five of which I served as lead director.

With the recent retirement of Fletcher McCusker and Michael Deitch, I was invited to help with the management transition as well as positioning of the Company as we look to take advantage of some new health-care trends that have become more clear with the reelection of President Obama, and the sustainability of the Affordable Care Act.

Also new to the Company, and on the call today, as I mentioned, is Bob Wilson, who, prior to joining Providence, was a managing director at the international accounting firm Grant Thornton within the firm's healthcare advisory services practice. Bob worked with Providence as part of our recently completed strategic review process and is an excellent addition to our management team, joining veterans Craig Norris and Herman Schwartz. We will all be available to take your questions following our scripted remarks.

Now, we believe this is an exciting time for Providence. The Company's operations and financial framework are strong. We reported that revenue increased 17% in 2012 to a record $1.1 billion on the strength of market share gains in our NET services segment.

While our profitability has been negatively impacted by lower margins in several NET contracts throughout 2012, we saw some improvement in the fourth quarter as we worked to stabilize or exit underperforming NET contracts. The impact of these margin gains was masked somewhat by one-time charges associated with the management transition that occurred in the fourth quarter.

Bob Wilson will provide additional detail on our financials, but for the year we saw net cash from operations increase to $42.5 million, of which we raised -- we used $3.5 million to repurchase 293,000 shares of common stock and further reduced debt to $130 million at the end of the year. Our management team is committed to improving shareholder value and we are focused on four key items -- improving operational efficiencies, growing organically, evaluating tuck-in acquisitions, and establishing a performance-driven management system throughout the Company.

As part of improving our operating efficiencies, we will continue to invest in our technology platform in 2013, including our proprietary LogistiCAD system and we'll introduce some technological enhancements on the social services side as well. This will help our employees operate our business more effectively and efficiently.

We believe this will position us to take advantage of the increased Medicaid population that we expect to start seeing in 2014 as a result of the Affordable Care Act. With healthcare reform, there is increasing attention to the ideas around integrated care, which embraces both behavioral and physical health. It specifically focuses on the most expensive populations as a mechanism for reducing costs and improving quality of patient care.

We will continue to advance our technology to better enable us to serve these new clients. Our experience as an in-home provider of services and our ability to manage large patient networks positions us nicely for these emerging healthcare trends.

Integrated care is moving forward in multiple states as we see accountable care organizations, health homes, and services for dual eligibles becoming more pronounced. In 2014, approximately 11 million potential new enrollees will join Medicaid. This rises to some 21.3 million by 2021. While not all of these additional Medicaid beneficiaries will impact our NET operations, to the extent that they are eligible for our NET services, we expect they will promptly enroll for our services and have an immediate impact.

In contrast, the impact on social services will be more gradual. Some 26 states plus the District of Columbia have opted in to this expanded Medicaid benefit, while 17 states have opted out, and seven are still weighing their options. This movement and these trends are opportunities for Providence. This is why we are focused in 2013 on the positioning of the Company to allow us to efficiently and effectively prepare for the future of healthcare.

Let me now turn the call over to Bob Wilson to provide more detail on the fourth quarter and full year results reported yesterday.

Thank you Warren. Revenue for the fourth quarter of 2012 was $286.5 million, an increase of 17.3% from $244.3 million in the comparable period in the prior year. Revenue from our NET services segment grew 29.9% to $200.8 million in the fourth quarter from $154.6 million in the fourth quarter of the prior year. Revenue from the social services segment declined 4.5% to $85.7 million compared to $89.8 million in the fourth quarter of 2011.

Both Craig Norris and Herman Schwartz, the leaders of our social services and NET business segments, will provide more details around this in a moment.

We had net income of $2.9 million, or $0.22 per diluted share in the fourth quarter of 2012 compared to net income of $3 million or, again, $0.22 per diluted share in the fourth quarter of 2011. Impacting the fourth quarter of 2012 were payments of approximately $1.3 million, net of stock-based compensation forfeitures related to the retirement of two executives at Providence. Adjusted EBITDA for the fourth quarter of 2012 was $13.2 million, up 23.3% from $10.7 million in the same period last year.

Turning to the full year 2012 for a moment, total revenues, as Warren mentioned, were $1.1 billion, an increase of 17.3% from $943 million for the full year 2011. Revenue related to our NET services segment grew 29.1% for the year, from $750.7 million in 2012 from $581.5 million in the prior period. Revenue from the social services segment decreased 1.7% to $355.2 million, down from $361.4 million for 2011.

Net income for the full year was $8.5 million or $0.64 per diluted share compared to net income in 2011 of $16.9 million, or $1.27 per diluted share. As was reported in the third quarter of 2012 and discussed on our earnings call at that time, included in our full year 2012 results is a non-cash $2.5 million asset impairment charge [righted to] certain intangible assets of the Company's Canadian subsidiary. Based on our analysis as of December 31, year end, there were no additional intangible asset impairment charges in 2012 related to our Canadian or any other operations.

Our effective tax rate for 2012 of 49% was unfavorably impacted by two things. First, more of our business and pretax income, particularly in the NET business segment was generated in higher tax rate states. And, secondly, the asset impairment charge related to our Canadian operations, which has a lower statutory tax rate in Canada. We anticipate our effective tax rate in 2013 will be between 42% and 44%.

G&A costs in 2012 were 4.8% of revenues, lower than in 2011, primarily as a result of revenue growth. We anticipate G&A costs to be in the range of 5% in 2013. Adjusted EBITDA for the full year 2012 was $43.5 million compared to $50.3 million in 2011.

In our press release reporting results for the quarter and nine months ended September 30, we reported adjusted EBITDA that included add-backs for NET startup costs and stock-based compensation, both of which we have excluded from adjusted EBITDA for the fourth quarter and year ended December 31. This reflects a modification of management's philosophy as it relates to presenting non-GAAP measures of performance.

For example, as it relates to the two specific items that I referred to above, first with regard to the NET startup costs, they were unusually high in 2012 as a result of the great success in garnering new contracts in the latter half of 2011, but we consider this to be a normal cost of doing business on an ongoing basis. Secondly, as it relates to stock-based compensation, the same general principle applies. While having no cash impact in the year of expense recognition, we anticipate that this will be a recurring component of our cost structure into the foreseeable future.

Let me turn briefly to the balance sheet, if I may. We strengthened our balance sheet in 2012 compared to 2011 by -- in several ways. First, we increased our unrestricted cash balance by $12.7 million from $43.3 million to $55.9 million at December 31, 2012.

Secondly, we reduced our long-term debt obligations by $20 million, including an accelerated repurchases of convertible notes. And, thirdly, we repurchased common stock or treasury of $3.5 million.

While our net accounts receivable increased from $87.2 million in 2011 to $98.6 million in 2012, primarily as a result of growth in the NET revenues, our AR remains stable and strong with days revenue outstanding at December 31, 2012, of 32.5 days compared to 33.8 days at December 31, 2011.

I'm now going to turn it over to Craig to discuss social services segment results for the quarter and the full year.

Thank you, Bob. For the quarter, our direct client census on the social service side was approximately 51,500 clients. This is a decrease from the prior year quarter of roughly 9000 clients. All direct and indirect clients on the social service side are being served from 358 offices in 27 states, the District of Columbia, and Canada. Combined between our owned and managed entities, there are approximately 9000 employees serving 834 contracts.

In the social service segment for Q4, we did see revenue and census negatively impacted primarily due to reductions in our work force and job training programs, as we have been discussing all year. In addition, our home-based tutoring census, as well as contract totals, have been negatively impacted by policy changes in the No Child Left Behind Act. The change in this program is an option grant that the school districts to opt out of third-party tutoring under certain circumstances.

We have made very conservative estimates for this business in 2013, due to these new policy changes. Overall, this is a very small element of the social services segment.

We have now started our new child welfare contract in Texas and our new workforce development contract in Wisconsin. We will be starting these contracts up in the next several months and look forward to strong new relationships in each of these new opportunities.

We have also recently started a new integrated care pilot in California. In this contract, we are case managing patients with high end medical needs as well as serious mental illness. As mentioned in the press release, managed care reform is still transitioning in a number of markets. Ideally, states will have these environments stabilized prior to the anticipated enrollment influx in 2014.

We see ourselves as strong partners with managed care and will continue to evolve our capabilities, including our expansion of strong technology enhancement.

Lastly, as I mentioned before, the behavioral health care industry is very much in a state of transition. We are seeing increasing consolidation opportunities in this space and Providence is in a good position to grow our market share, both through our organic growth as well as tuck-in acquisitions.

Now I will hand out Herman Schwartz for more details on the NET operations. Herman?

Good morning. Thank you, Craig. We are pleased that the NET segment continued to post increased revenues and surpassed the $200 million threshold during the fourth quarter. The revenue growth experienced in 2012 is a function of the unprecedented record of contract wins we experienced throughout 2011, and represents a tremendous amount of hard work by our employees to expand many of our existing contracts and to implement several new operations.

While we are optimistic about winning new business that could benefit the second half of 2013, I do want to caution you that, for reasons I will discuss in a moment, this growth rate will not be repeated this year. We recognize that the revenue growth in 2012 did not lead to similar growth in profitability as we experienced margin challenges starting in the first quarter.

The combination of lower rates from the competitive bid environment in 2011, increased utilization and a handful of major contracts, and the effective startup expenses for the new and expanded contracts, did lead to lower than expected margins for much of the year. We implemented corrective actions to improve those contracts that were significantly underperforming in the first half of 2012 and began to see positive trends as a result of these steps.

Our fourth-quarter margin returned to a level similar to that of a year ago and was consistent with our targeted performance level. We did, obviously, benefit in the quarter from reduced utilization in late October and early November, as a result of Superstorm Sandy, but we also received positive impact from operational steps to reduce transportation costs in several significant markets and from a key rate adjustment in Missouri.

For 2013, we have placed a higher priority on restoring and maintaining our margins than on growing the top line. For example, while we did negotiate a rate adjustment in Missouri, it was not sufficient to ensure a viable, long-term program for us. So we also agreed with the state to end our emergency services agreement and allow the contract to go back out for competitive bidding.

We did submit a new bid in Missouri where we believe the RFP is structured in a more financially responsible manner than the current agreement.

The other troubled program we have discussed frequently is Wisconsin, where we exercised contract clause to terminate our agreement with the state. The state did release a new RFP, but in this case we chose not to submit a new bid, as we were not confident that the risk was manageable. We have reached a viable arrangement with the state and will continue to operate in Wisconsin until a new vendor is prepared to assume the program.

As you can imagine, with only 50 states available, it is extremely difficult to walk away from even one opportunity. But in the past six months, in an effort to improve margins, we chose not to pursue a contract in Alabama and to exit underperforming programs in Arkansas and Wisconsin. In addition, because of our refusal to price at the lowest level, we only won one region in the RFP for the state of Maine, in spite of the fact that we received the highest technical score in seven of the eight regions that were up for bid.

Another factor having a negative effect on reportable revenue in 2013 is the shift of our Connecticut program from an at-risk capitated model to an administrative services only -- or ASO -- structure. In this contract specifically, although we do manage the program and authorize payments to the transportation providers, the transportation costs no longer pass through us. While this does eliminate the margin risk of utilization, for accounting purposes we can only recognize revenue to the extent that we are being paid for the administrative functions.

In terms of the sales pipeline for new state-based business, we are mostly in a wait-and-see mode, as both Rhode Island and North Carolina are in the decision-making stage. We expect award announcements from these states as well as Missouri sometime during second quarter. There are no other open RFPs at this time, although there are a couple of states that we know are contemplating adoption of the broker model.

Additionally, in some of the larger states that have not yet adopted a broker model, we are seeing a trend of moving more of the population to a managed care environment, in which the MCO entities must provide transportation. Our relationships with managed care organizations continue to grow and we anticipate additional opportunities as managed care programs penetrate more states and evolve to cover more populations.

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

Herman, thanks a lot. I appreciate it. As you can see, we have made a lot of progress improving several poorly performing NET contracts, and with our decision not to rebid our Wisconsin contract, have demonstrated our commitment to forgo business that will not generate an acceptable rate of return. As a result of the corrective actions in our NET segment, anticipated cost savings generated by increased operating efficiencies we are putting in place, and the recent improvement we see on the social services side, we do expect operating income to improve in 2013 over 2012.

We have a strong cash balance. And, while we continue to pay down debt with our improved financial flexibility, we will look at opportunities which help further position our business for the changing health care trends. The entire management team is cautiously optimistic about the opportunity we see today on both sides of our business.

With that, I will open up the call to any of your questions and we look forward to responding.

(Operator Instructions) Bob Labick, CJS Securities.

Good morning. Congratulations on a nice quarter.

Thank you, Bob.

I had a couple of questions. I wanted to start on the social services side. Maybe, if Craig could talk a little bit about the foster care program, I believe you said it was in Texas, I think. Is this is the one you referred to as a large southern state program on the last call? And is that still on track, then, for the $13 million or so in 2013 and then growing thereafter?

Correct, Bob. That's what we referred to as the southern state reference previously. It's on track. The startup was delayed by about a month, but it is in startup mode and that's kind of a rough number estimate for the year, I guess.

Okay. Great. And then just looking at the rest of social services, can you tell us a little bit about the size, or remind us of the size of the Wisconsin program? And then where you see -- you had a little bit of margin growth, but still well below your targets. You spoke a little bit about investing for 2014 as well.

Could you tie those two together on social services, and let us know if you think margins are going to grow, be flat, be down, based on that, or where you see it?

Yes, I think some of the margin deterioration this year, we saw a little bit -- the workforce business brought some of that down. There were some programs transitioning through managed care changes. And, as I've said before, there's sort of a period of adaptation that goes on as we move through those changes.

That is not done. There still will be more of these things, but we have moved through a number of states. So I do think the margin on the social service side will improve in 2014.

Great. And then just, I'm sorry; the size, roughly, of Wisconsin?

Oh, I'm sorry. Yes, I think we said on the last call it's in the $6 million to $7 million range, I believe.

Okay. Great. And then, for Herman, on the LogistiCare side, great quarter in terms of margins and the gross margin recovery. Presumably, that still had Wisconsin as a negative or less as an impact there. Where do you see those margins?

And then, you actually went through a number of puts and takes. Could you maybe tell us, though, kind of run rate quarterly revenue, including the Connecticut shift and just backing out Wisconsin entirely? I know it goes through February 17, but Q2 run rate revenue to give us a sense there?

I'll give you some figures, Bob, and you can kind of work from them, and if there are not enough specifics we can certainly talk later. But Wisconsin was definitely into the fourth quarter and actually will likely be in through the first half of this year. While we did terminate, effective February 17, in an effort not to leave the state high and dry and put them in a position where they had nobody to run the program, we do have an agreement in place to continue to run it, as I mentioned, until they can secure a new vendor.

We were able to negotiate an increased rate that helps offset some of the pain we were feeling there in order to do that. So we feel like we've reached a viable arrangement that serves the state. It also serves our reputation and kind of completes the task, as you will, in Wisconsin.

Wisconsin is about a $40 million annual contract, so you figure it will be in our run rate for about a half a year.

I mentioned Arkansas. We talked about this on the last quarter call. But with that ended right here in the first part of this year, and that's about $11 million or $12 million a year, so that's out.

Missouri is in our run rate right now, was in in the fourth quarter; is also in. And we anticipate that the new RFP will start back -- or the new contract will start July 1, or thereabouts, so that will also be in for about a half year. And that's at about $30 million annually right now. Obviously, if we win the new contract, the second half of the year will be at a higher rate than that.

Connecticut, the impact of going from an at-risk capitated contract down to an ASO is fairly significant. It's about $40 million to $45 million a year.

Okay. And when does that --

That took place starting February 1.

Okay. And the gross profit dollars would be slightly lower, but still close? Or how does the profitability, if you are not on a margin basis, but on a dollar basis?

Are you talking about with the Connecticut and ASO?

Yes.

It's going to be -- the dollars will certainly be less. Margins, in an ASO contract, we have some that are very attractive. We have some that are not as attractive.

Frankly, at times, depending on how that ASO contract is structured, they can kind of go in both directions. In the case of Connecticut, specifically, we anticipate that the margins will be similar to what we were experiencing prior to us taking over the entire state. So when we had two out of the three -- or four out of the five regions in Connecticut, we had fairly low margins. And in this case, the ASO margins should be higher, even though on a dollar basis is going to be slightly less.

Right. Okay. Great. And then just one general question, I guess, probably for Warren. On M&A you talked about in the past potential tuck-ins, and at the close of your remarks you said, obviously, looking for things. Can you just update us on the landscape out there?

You obviously have very strong cash flow. And if you can't find anything, will you continue to pay down debt or would you look at buying back more stock?

Regarding the balance sheet, we'll continue with every opportunity to pay down our debt, improve our balance sheet. We are in a strong cash position, as you mentioned. We will continue to look for the tuck-in acquisitions.

What's happening on the social services side is a bit of a consolidation where we are seeing many of the small providers who have historically not invested in technology, with the new regulations and with the advent of managed care impacting these states, are now being pressed for technological advances that they may not be willing to invest in. And they also have higher levels of regulatory compliance.

And so, as a result of that, we are seeing many of the small providers who are actually exiting the business. And we'll have an opportunity, we believe, in certain circumstances, to actually benefit from that by assuming or assimilating those client populations.

In addition to that, we are finding some of the small providers who have a little bit larger size businesses unwilling to make those capital commitments and are looking to exit. We are in discussions with several of those at the present time. So to the degree that we need to use some of our cash resources and our balance sheet to finance that, we think we are in a particularly good position to do so.

Great. Thank you very much. I'll let others ask questions. Thanks.

Thank you.

Kevin Campbell, Avondale Partners.

Good morning. Thanks for taking my questions. Herman, maybe you could just start with renewals that you guys have beyond Missouri this year and next year.

Well, Oklahoma's contract expires in June of this year and all indications are that we are moving forward in the shooting negotiating a new contract with them through that RFP process. Hasn't been definitively signed yet, but we are working with the state. And then, other than that, Michigan, which is a very small ASO contract, expires late in the year, I think at the end of November. And that's all we have this year that's actually expiring.

And anything of size next year?

Next year being 2014?

Yes.

South Carolina, I believe, the contract that we took on when AMR left, I believe that expires in 2014. But, Kevin, I'd have to get back to you. With all that's going on with Affordable Care Act and everything, we are not as focused on the renewals right now as we are on just trying to get ready for all of that.

Yes. Craig, maybe some questions for you on the social services side. So typically your client census improves from 3Q to 4Q, and that's education related, and I know you have some issues there on the tutoring side. This year it didn't improve. It was flat sequentially. Is that all related to that education piece not coming back, or is there some other part of the business that explains that?

It's mostly the tutoring. Well, as I said, it's the tutoring and the workforce development. But I think that the tutoring, for example, probably is a bigger part of that, Kevin.

What happened is -- and this has kind of been rolling out throughout the year. What happened in that piece of business is the President's administration gave the school districts much more flexibility in opting out of that requirement. And throughout the course of the year, schools have kind of been backing down.

So we would normally see a pretty big influx of clients in the October, November, December timeframe along with school district contracts. But you will notice, both contracts and the census were impacted, and it has a lot to do with the tutoring business which, again, as I said, it's not a huge part of the business overall.

So should we expect much less seasonality than you had before, since it's not such a big part of the business? Or is there still going to be that traditional seasonality in the census number from other factors?

Well, we still have school programs on the Medicaid side. We have school-based programs where we provide Medicaid mental health programs in the schools, which is a much larger part of the business. So we still have that aspect to the business.

The tutoring, which was specifically funded through No Child Left Behind, I think that's more of the business I think you will see less of. And we've made last much less assumptions of that business this year.

And then on the just overall revenue growth in social services, at what point do you expect to lap these headwinds from workforce development and from the tutoring business? What point do we lap that can start to see growth, and what type of growth do you think it will have -- organically, that is? Is 3% to 5% sort of the range or how should we think about that?

Yes, I think there is a few things that have kind of impacted that. The workforce business in Canada was a big driver of that. And just as I say that, of course, we won Wisconsin so that's going to prop some of that back up.

We brought Texas online, which will be a big driver of revenue this year and next year. And I think transitioning through some of the managed-care changes and get us kind of back on an even keel will help us get back to sort of the revenue growth. But I think the 3% to 5% is probably a good target once some of the managed care environment stabilizes. And I do think some of them are stabilizing.

So I don't think we are at the beginning of that process. I think we are more toward the end of that process. And our assumption is that the states kind of have to be set in their systems prior to the Affordable Care Act rolling in, in January, and I think they are trying to kind of get those systems stabilized.

So I'm hoping what you'll see, as we move through the year, that whatever systems we are going to change, we're going to evolve, we're going to implement managed-care and we kind of get through that process. And then we can get this thing started back up once January rolls around and the new influx of enrollment begins in the system.

So we should think about, in 2013, overall revenue growth in social services maybe being down in the first half of the year as we are doing some of that transition, and then start to grow in that 3% to 5% in the second half of the year? And maybe it's flat overall for the full year and then 3% to 5% beyond that?

I think that's an okay way to look at it.

Okay. And that's great. Warren, maybe we can talk about margins now. You mentioned in the press release and in your prepared remarks that operating income should grow in 2013. Is that from the adjusted operating income number that you guys had provided, or is that from the GAAP operating income that you reported? Maybe we can just start there before I ask some other questions on margins.

I'll just make a couple of general observations and then I'm going to ask Bob to make more direct comment to you. As you know, as we were asked to come in and make a transition, we looked first at the operations of the business. And it is our belief that we can actually run our business more efficiently and effectively than we have previously. And so, as a result of that, we have set some higher targets, and we publicly stated that our EBITDA margin target is 6.5%, which is historically where we have been.

As you have noticed over the last three years, we have actually slumped a bit. We are down in the 3.7% to 4% range. We believe we are going to turn that around this year and improve that, and we think we will continue to work hard on that.

So when you look at the adjusted EBITDA -- and Bob made some very direct comments about how we think of adjusted EBITDA, which is different, perhaps, than what was reported earlier, or the third quarter of last year. And so we think about it -- it's a slippery slope, because it's a bucket in which you can find yourself putting a lot of things and justifying a lot of things. So we've decided that the startup cost for our business -- NET business is going to be a normal course of business, and we're going to report it as such.

So I think that as we look at that and then compensation in the same way. So as we think about those two items about previously mentioned, we're going to report adjusted EBITDA differently than we have in the past. So, Bob, you can go ahead and comment on the balance.

Well, just, as you know, we aren't providing any explicit guidance, but we certainly are working on a number of fronts to improve off of 2012's performance. And some of that is, as Herman mentioned, rationalizing, if you will, the pricing on the contracts that he has on that side of the business, getting some of that behind him, as well as focusing on our cost structure as well. I might just leave it at that, I think, at this point.

But, as we think about that improvement in operating income, I just want to make sure I'm thinking about it -- looking at the right numbers. So for the year 2012, your EBITDA was $39.2 million. You're adjusted EBITDA was $43.6 million. So should we expect growth from that $39.2 million or the $43.6 million? I just want to make sure I know which one.

I guess if I were you, consistent with Warren's comment earlier about how we are thinking about adjusted EBITDA, I would be focusing on the EBITDA number.

Okay.

I mean, we are going to find -- I mean, we are going to try to use adjustments to the EBITDA number to come up with adjusted more around one-time or unusual items, and not keep it as a -- we are not going to put things in there that don't belong there. So I guess, in that sense, I guess I think EBITDA is the number to focus on.

Okay. As you think about the long-term target -- the 6.5% -- what sort of timeframe do you think it takes to get there? I recognize you are -- part of that is actually in the contract and other more improved efficiencies. Is that a two- to three-year plan; a three- to five-year plan? How long do you think it will take to get to that 6.5% number?

Well, internally, what we're saying is that we are taking a three-year plan for the business, and that we expected to make progress against both the growth target, which we have set out there at a minimum of 10% per year, and the EBITDA number of 6.5%. So we would expect to make substantial progress toward those numbers over that period of time.

So we are taking a bit of a longer-term view of the business in regard to our strategic intent and the actual actions that we take in regard to the business. So hopefully, that will help you without giving you too much direction.

Yes, absolutely. Thanks. And then the operating cash flow, in the quarter it was -- for the year it was great, but for the quarter was down. Is there some seasonality there on the operating cash flow? And maybe help us think about the normalized annual operating cash flow number and CapEx number.

Right. First, with regard to CapEx, we are continuing to invest in primarily technology as it relates to CapEx. We are not a bricks and mortar Company, as you know. That will be a multi-year initiative on our part.

You should anticipate that CapEx in 2013 will be consistent with 2012. But, again, we are viewing this over a longer period of time; again, a longer horizon.

With regard to operating cash flow in the fourth quarter, that was impacted by some of the costs that were related to the restructuring, if you will, or the one-time costs that we incurred in the fourth quarter relative to transitions. So in that sense, probably a bit of an aberration in that sense and probably think of it more on a quarter over quarter basis, consistent with what it's been over the course of the year -- the full year.

And so last year for the full year was $40 million, I think, if I'm remembering correctly, up from $30 million in the prior year. Should we expect it to maintain at that $40 million-ish range? Or it looks like it sort of has moved around. So two years ago was $44 million and then $31 million and then $42 million. So I'm just trying to get a sense for is $30 million the right number or $40 million or somewhere in between probably, but.

Well, again, I think you can look at this year in its totality to probably better gauge what we think our cash flow from operations will be going forward. Certainly, our goals and objectives are to improve off of 2012, both from a net income standpoint, from an EBITDA standpoint, and from an operating cash standpoint as well.

Okay. Great. That's helpful. Thank you very much.

Thank you.

(Operator Instructions) Rick D'Auteuil, Columbia Management.

Good morning. Couple things, mostly on to Herman, so I guess Craig is off the hot seat here.

Thanks, Rick. Appreciate it.

Yes. You get a pass. Anyway, just on the startup costs in the fourth quarter, I know you are not breaking them out for one-time purposes, but I'm curious, what were they in the fourth quarter and what were they for the year?

In the fourth quarter they were between $400,000 and $500,000.

Okay.

Which is right where we had targeted and had estimated for you guys, I think, before. And, for the year, they were approximately $3.5 million.

Okay. And as we sit here today, not, I guess, anticipating when, but just with what you know today, what would you expect? I mean, basically, it should be nothing in the first half, right, because I don't think we have anything starting up in the first half.

I mean, the only potential, really, there would be -- I mean, we do have a little startup in Maine, but that should not be significant because it's not a really big operation.

And then, if Missouri -- if we were to win Missouri starting in July 1, it would require us to move call-taking, which we currently do in Arizona. We would have to move that within the state of Missouri. So there would be some startup and training and what have you associated with that in the second quarter to get prepared to start July 1, if that's the startup date.

So it really, at this point in time, Rick, with nothing firm up for a July 1 start date, I would tell you it's just a little bit in Maine. If Rhode Island and Missouri and even North Carolina come in, and want to start July 1, and then we will incur startup costs in the second quarter.

The other side of that is, we might incur a little bit of wind-down cost in Wisconsin as we transitioned out of that state. And the same would be true if that were to happen in Missouri.

Okay. So how big is the -- Rhode Island is probably a small program, right?

It's not as small as you would expect, given the size of the state. Between Rhode Island and North Carolina, in terms of what we see in the pipeline, is $50 million to $60 million potential.

Okay. So they could have a meaningful startup expense associated with them if you were to win them.

Correct. I mean, nothing is going to be like -- nothing would be like -- you got to remember, last year we started some huge programs. New York City was gigantic. South Carolina was a big expansion. Georgia was a big expansion. Texas was a big startup. So, I mean, Rhode Island is not in those leagues. North Carolina, depending on how many regions we might win, could be.

Okay. So Kevin asked a question on whether the guidance on -- or the comments on improved operating EBITDA numbers this year are expected, and what should we be using for the base. I mean, you are not going to have severance that's planned, right, or any -- no, I don't think your senior management is likely to be in that role. So it's not quite to be a meaningful number on that side.

The startup expenses are going to be substantially down. I mean, can't we go back and say that we will beat the adjusted number with a little better margins on LogistiCare and the social service side? That shouldn't be that difficult a bogey to step over, right?

That's correct. You are thinking about it the right way, Rick.

Okay. You know, because my sense is that that was too conservative to say, all we are doing is setting a bogey on being better than the year that we had all of these issues that we won't have this year. Okay. And then, did New Jersey ever get fixed, Herman?

I knew you were going to ask that. We still do not have a signed amendment in New Jersey. It is still working through their process. But that being said, I mean, fixed is a relative term, Rick.

It is performing better than it did last year due to some of these steps that I indicated that we took in the second half of the year to improve efficiencies in transportation costs. So even without the rate adjustment that we are hoping for from New Jersey, it has improved. Not to the level we need it to be, but it has gotten better.

And it's on the governor's desk. Is that where it's --

I believe it is now sitting in the Treasury Department, which is just like the fifth department it's had to move through.

But does it mean that it's already gotten approval from the governor or not?

You know, the governor's office has supposedly signed off on it when we negotiated it. The last we heard, it was coming out of the -- I don't know if the Attorney General or the contract department, and moving to treasury. But I honestly could not tell you what each role each department takes in terms of looking at it and what they are looking for.

I mean, it should be better. We had snow this year, right? And we had a hurricane. And so is it just the utilization part is better, or are there other aspects of the contract (multiple speakers)?

No, I mean, utilization -- you know, certainly any time we have the weather issues, that helps us. We have also worked very hard in changing the mix of the providers that we are using and looking to make sure that we have -- you know, utilized them as efficiently as possible. We continue to develop the network and bring in folks that we think can operate more efficiently and try to drive some of the business in that way. But it's a combination of utilization and just lowering the cost itself.

Okay. How is New York and Texas performing?

We are very pleased with both at this point.

Is there -- so in the opportunity to grow, we talked about what states were on the docket to put in a broker model. There is still growth potential in those states in a fairly meaningful way with different counties, right?

Correct. New York broke themselves up into regions, New York City being one of those regions. I believe there are five or six in total. And one region is performed by a local vendor.

The other regions have not yet -- one has gone out to bid and we are waiting on a decision from the state, but there is still Long Island; there is still the -- I think it's the northern part of the state that is still available. So they still need to move, at least in their plans, from the county-based system that they have to a regional broker model across those regions. And that would be in an ASO format.

And then once they have done that, they have said that their next step would then be looking at going to and at-risk or a capitated model. So that's a few years down the road probably, but there are some opportunities to win other regions as they come up. Texas, we anticipate, might be putting out more RFPs probably by the end of this year for other regions as well.

(inaudible) Okay.

I don't think you can -- if you are trying to model, I don't think you should count on anything out of those two states for 2013.

No, I am just saying it's not absent -- you haven't just won everything there is to win, and now we are in the operate mode with no growth prospects on the horizon.

Correct. That's correct. That's a true statement.

(multiple speakers). Okay. All right. If the New Jersey thing comes through, to the best of your knowledge, is it still retroactive to, I think, November 1?

You know, to the best of our knowledge, that's what we had hoped for. We haven't gotten any indication that it will be any different.

Okay. On the -- I think that's all my questions on LogistiCare. Just for Bob, there is a debt payment due later this year; is that right?

No. That is not quite right. Under our credit facility, we have to demonstrate at September 30, that we have -- well, I mean, there is a normal course of amortization of debt, of course. But I think what you are referring to is, on our credit facility there is a September 30 date covenant requirement that we demonstrate the ability to have -- either through our revolver or through our unrestricted cash the ability to pay off the converts. And if that is what you are referring to, we are very confident that we will be in that position at that point.

Okay. What is the outstanding balance today on those?

On the converts, $47.5 million.

Okay. And the current rate?

Pardon me?

The rate?

It's LIBOR, I believe, plus -- no; I'm sorry, 6.5%.

Okay. And even under any scenario, you would expect -- are you pursuing refinancing those at more advantageous terms given the cash flow that's generated here?

I mean, we are not -- it's not an urgent for us. We are certainly looking at and evaluating potential options, but there is more to come on that. We don't have anything to report.

Okay. All right. That's all I have for now. Thanks.

Thank you, Rick.

(Operator Instructions) Jack Wallace, Sidoti and Company.

Thank you for taking my call this morning. Just have a two-part question for you as it revolves around the NET business. One, you talked about how there is a number of, obviously, big wins back in 2011 that -- sort of some big growth this past year, which we just saw. There were limited new contract opportunities for 2012 and 2013.

I was just wondering if you could maybe talk a little bit about opportunities to expand some of the existing contracts. And then the second part being, as you mentioned when talking about the New Jersey situation, opportunities to have more efficient use of your vendors -- maybe a better mix there. I was just wondering if you could comment on those. Thank you.

In terms of expanding existing, I think we've talked about it -- a few of them, in terms of -- our hope is that both New York and Texas, in the long run, offer opportunities to expand to other parts of the state and to continue to grow. Florida is going through a transition to managed care over the course of the next year or two. And we believe that will offer opportunities as well.

Again, the client will not be the state directly. It will be through a managed care environment, but right now, while we have a fairly significant presence in Florida that, we believe, leaves us a lot of opportunity to grow with those managed care environments. So there's some big states out there. California is going through some transitional changes that offers opportunity.

From that perspective, I would say those are kind of the four that, top of mind, Jack, that I think we've got opportunities in, in the future. And then, like I said, there are some other states that I wouldn't call an expansion, but would be brand-new to the broker model that we are hopeful and talking to, and waiting to see if they end up coming out with an RFP or moving in that direction.

In terms of the second part of your question about New Jersey, I'm not sure what you were asking me to comment on.

Okay. I have no further questions at this time. I would like to turn the call over to Warren Rustand for closing remarks.

Well, thank you again for joining us on today's call. We look forward to your continued interest in our company and, for those of you who would like to follow up with any additional questions, please don't hesitate to contact us directly. We believe 2013 will be a good year for Providence and we look forward to updating you after the first quarter. Again, thank you very much for the call today.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

Thank you, Kim.