ModivCare Inc (MODV) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Providence Service Corporation Second Quarter 2014 Earnings Call hosted by Alison Ziegler. May name is Bennie and I will be your event manger this morning.

(Operator Instructions)

And now, I'd like to have Alison, please go ahead.

Thanks, Bennie. Good morning everyone and thank you for joining us this morning for Providence's conference call and webcast to discuss financial results for the second quarter ended June 30, 2014.

Before we begin, please note that we have arranged for a replay of this call. This replay will be available approximately one hour after the call's conclusion and will remain available until August 14. The replay number is 888-286-8010 with the pass code 66142782. This call is also being webcast live with a replay available. To access the webcast go to www.provcorp.com and look under the Investor Information tab as well as the Event Calendar.

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 2014 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 recent filings with the SEC, including the Company's 10-K for the year ended December 31, 2013.

The Company's forward-looking statements are dynamic and subject to change. Therefore, these statements speak only as the date of this webcast, August 7, 2014. 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, GAAP, 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 differ from pro forma measures used by some companies. The 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 pertain to certain items that are considered to be material. So the exclusion of the items would, in management's belief, enhance the readers' ability to compare the results of the Company's business after excluding these items.

Finally, for simplicity, we will be speaking in US dollars when referring to such things as contracts and revenues. Amounts translated today from other currencies, including the British pound, have been translated at current exchange rates, and as such, these amounts may differ in future periods.

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

Thank you, Alison and good morning. After our scripted remarks, we will be available to take your questions. With us today on the call, we have Bob Wilson, our CFO; Herman Schwarz, CEO of LogistiCare, who today is in Atlanta; Mike Fidgeon, Chief Operating Officer of Human Services, who is joining us from Canada; as well as Therese Rein, Chief Executive Officer or Ingeus; and Greg Ashmead, Chief Operating Officer for Ingeus who are in London.

We are pleased to report our first quarter following the Ingeus acquisition which closed on May 30. Ingeus comprises our new workforce development services segment and included in our second quarter results is one month of Ingeus operations. I will let Therese and Greg speak in more detail on Ingeus business, but our early integration efforts continue to move ahead and our financial operations have been combined.

We are optimistic about the long-term global opportunity we have in outsourced employability programs through Ingeus. Ingeus has a strong base of operations and a robust pipeline and has secured several new contracts since the acquisition closed. Revenues and EBITDA, however, are anticipated to be below last year's record levels as expected at the time of acquisition as the UK Department of Work and Pensions contract [shifts to playing] longer-term outcome fees rather than upfront attachment fees for each referral. Ingeus is the performance leader with respect to the DWP contract. We are optimistic that we are well positioned to continue to be a resource for the Department of Work and Pensions and participate in future opportunities it presents.

We acquired Ingeus because of its long-term growth potential and its capacity for achieving higher EBITDA margins than our other core businesses. We do understand the cyclical nature of its contracts, revenue and EBITDA, but believe over the longer term, it will deliver favorable results at higher margins for Providence. And with its diverse global customer base and workforce development experience, we are well positioned to pursue growth opportunities on a global basis.

Turning now to our legacy businesses of NET and human services, we reported solid financial results in the quarter. Our NET services segment continues to grow through market expansion as well as new contracts and has maintained its recent market and margin improvements. We are also beginning to see the benefits from the Affordable Care Act in certain markets in our census. In our human services division, while we experienced revenue growth due primarily to the Texas foster care redesign contract that began in 2013, cost related to this contract had continued to run higher than anticipated. After trying to work with the Texas Department of Family and Protective Services to address the shortfalls in funding, last Friday, we provided notice to the Texas DFPS that we were exercising our right of termination for this contract.

Unfortunately, we cannot provide a quality foster care program that has the standards we are committed to providing without additional funding from the legislature. We will continue to work with the DFPS during a transition phase to ensure that children are not impacted.

We continue to focus intensely on performance improvements and other key human service markets and are pleased with the progress we have made thus far and expect additional progress over the balance of 2014.

Let me now turn the call over to Bob Wilson, our CFO who will provide more detail on the second quarter results reported in our press release.

Thank you, Warren. Looking at second quarter results for 2014 compared to the second quarter of 2013, revenue was $344 million, an increase of 19.6% from $287.6 million. NET services revenue increased 9.3% to $216.3 million from $197.9 million. Human services revenue grew 10.1% from $98.8 million compared to $89.8 million.

Second quarter revenues does include a pickup of $28.8 million in revenue in June related to the completion of the acquisition of Ingeus, our new workforce development business segment. Mike Fidgeon, Herman Schwarz and Therese Rein of our human services, NET services and workforce development business segments will provide more detail around this in a moment.

For the quarter, we reported net income of $6.7 million or $0.46 per diluted share compared to net income of $5.9 million or $0.43 a share in 2013.

EBITDA was $18.6 million compared to $15.2 million. Adjusted EBITDA was $21.2 million compared to $15.7 million. For the six-month period ended June 30, 2014, the EBITDA was $34.4 million compared to $32 million. Adjusted EBITDA was $39.4 million compared to $32.5 million for the same period in 2013.

Impacting the second quarter of 2014 were acquisition related charges of approximately $2.5 million and the $4.3 million for the first half of the year. This item is included as an add-back item for adjusted EBITDA.

EBITDA margin increased slightly to 5.4% in the second quarter of 2014 from 5.3% in the second quarter of 2013 and adjusted EBITDA margin increased to 6.2% in both the second quarter and the first six months of 2014, up from 5.5% in the second quarter of 2013 and 5.7% for the first half of 2013, both representing progress towards our often stated goal of -- an intermediate goal of achieving 6.8% EBITDA margin.

General and administrative expenses for both the second quarter of 2014 and year-to-date 2014 was 4%. And at this point, we expect this to be the case for the balance of the year.

For the first -- for the six-month period ended June 30, 2014, our effective tax rate was approximately 42.9% compared to 40.6% in the same period of 2013. This increase in effective tax rate is due to certain non-deductible transaction related expenses, primarily related to the Ingeus transaction. For this and other reasons, we do anticipate our effective tax rate will be between 42% and 44% for the full year.

At June 30, 2014, we had unrestricted cash and cash equivalents of $123 million compared to $99 million at December 31, 2013. Our strong cash flow from operations and the increase in our borrowing capacity of $75 million that was completed in May of 2014 enhances our financial flexibility as we continue to focus on growing our operations.

Of the $240 million borrowing capacity under our revolving credit facility, we borrowed $115 million during the second quarter to pay down convertible debt of $47.5 million and complete the acquisition of Ingeus for $55.1 million and the remainder was used for capital purchases. There were some significant increases in certain balance sheet accounts at June 30, 2014 compared to December 31 of 2013 that were due primarily to the acquisition of Ingeus on May 30, 2014. And I'd be happy to answer specific questions around that during the question-and-answer period.

I will now turn it over to Herman to discuss the performance of the LogistiCare business for the quarter.

Thank you, Bob. Good morning, everyone. Revenues in the NET segment grew to $216.3 million in the second quarter, a 9.3% increase compared to the same period last year. The positive trend was generated from increased membership in several states due to Medicaid expansion and/or the addition of the woodwork population as well as the implementation of new state contracts in Utah and Rhode Island and managed care contracts in Michigan, Ohio, Illinois and California.

Our margins in the quarter benefited from the membership increase without a corresponding increase in utilization. Transportation expense ran at 75.2% of revenue in the quarter versus 77.6% last year. This is a normal phenomenon however and that new members typically take a little while to familiarize themselves with available benefits, and we fully expect utilization to trend upward in the second half of this year.

On a sequential quarterly basis, transportation expense did increase 2.5 points from the 72.7% level we experienced last quarter. But this increase is to be expected given the extreme winter weather and therefore higher cancellation of trips that we experienced in the first quarter.

Non-transportation expense as a percent of revenue increased compared to last year, but was less than planned for the quarter. We manage transportation in 39 states plus Washington DC and have a census of 19.5 million eligible members, up from [17.2 million] eligible a year ago.

We went live in Rhode Island in May and our new management team and operation in the state has performed very well in managing the normal start-up challenges. Our four new regions in Maine started on August 1 and the two new Texas regions are slated to start on September 1.

We will also be implementing a couple of significant managed care contracts in the third quarter and preparing for several other possible fourth-quarter starts.

The RFP for the Long Island region of New York State has been released and is due to be submitted in early September. This is not a huge contract in terms of revenue, but it complements our New York City business and we already do business on Long Island. So it is an opportunity on which we are heavily focused.

The RFP in South Carolina, where we are the incumbent is expected to be released in the near term. We received no indication as to the structure the state will pursue in terms of full risk versus ASO. So we are anxious to see this RFP and assess our interest in continuing that relationship. We continue to pursue some very large managed care opportunities and are hopeful we can close these prior to year-end.

I'll now turn the call over to Mike to discuss the human services operations for the quarter.

Thank you, Herman. Good morning, everyone. For the second quarter of 2014, our client census in human services was approximately 59,900 clients. This is up approximately 12.8% or 6,800 clients from the prior-year quarter. All clients are being served from 360 local offices in 24 states, the District of Columbia, and three provinces in Canada. There are approximately 7,000 employees serving 526 contracts.

Revenue for the quarter in human services increased 10.1% to $98.8 million from $89.8 million in the second quarter of 2013, primarily related to the impact of the Texas foster care contract, expansion of services in Virginia and the contribution from a tuck-in acquisition in Idaho that was completed in the first part of the second quarter.

We continue to have challenges in certain markets due to a variety of factors, chiefly managed care consolidation and the ability to adjust our staffing levels to adapt to fluctuations in volume. We continue to believe that markets going through the stresses of managed care consolidation will continue to consolidate provider networks. This will benefit larger organizations like Providence that can offer a broader range of services.

As we have stated previously, we have been involved in ongoing discussions with the State of Taxes to make changes to the contract to improve the overall financial structure and quality of care to children in our network.

Unfortunately, we were unable to reach an agreement that was satisfactory to both parties, and we made the decision to provide notice of termination of the contract to the State on August 1. We are currently working with the State to develop an orderly transition plan. We do not have a firm estimate on the timing of final completion of services, but we intend to fulfill our obligations under the contract.

In addition to completing the wind down of the Texas contract, the challenging markets referenced above are the subject of intense management focus right now and we expect to realize significant improvements this year.

I would now like to introduce Therese Rein, who will discuss the workforce development operations at Ingeus. Therese?

Thank you, Mike, and good morning everyone. We welcome the opportunity to speak with everyone for the first time. We're delighted to be part of the Providence Group and the integration is proceeding apace. Greg Ashmead, the Chief Operating Officer, is on the call with me here in London and will be available at question time too.

Ingeus is currently serving over 250,000 jobseekers in 10 countries across 163 delivery sites with more than 2,500 colleagues assisting those people from welfare into decent lasting work. There continue to be a large pipeline of opportunities for Ingeus globally that we're currently evaluating, a portion of which we could bid on before the end of this year.

Since the transaction closed, we have won three new contracts. The first is a contract in Northern Ireland which should start up late this year or early next year. This is a full-year contract with an opportunity for contract extension. While we already have a presence in England and Scotland, this is our first contract in Northern Ireland, and we will continue to look for additional opportunities for organic growth in this and other markets where we have established a presence.

We were also recently awarded a contract in Greater Manchester, which is being funded from the European Social Fund, and we are bidding in the UK on a large Ministry of Justice contract that is being [hotly] contested. Both of these are examples of how we look to expand organically in markets where we already are and leverage where we have established a base of operations.

Ingeus has further been awarded two contracts with Lincoln College to provide career and employability services in three vocational colleges, which are being operated by them in Saudi Arabia. We will also provide shared services to Lincoln College employees there. The employability contracts are over 7.5 years. The shared services contract that we're providing is over five years. The total full life value of these contract wins spread over five years is expected to be about $15 million per annum.

We will have startup expenses with any new contract as we invest in the necessary people and systems to ensure a proper launch. These upfront costs are always incorporated by us into our target margins upon which our bids are built and are recovered at length of the contract.

We're very excited about the opportunities that we have in front of us and we believe that our partnership with Providence will prove fruitful.

With that, I would like to turn the call back to Warren.

Therese, thank you very much. Before I open the call up to questions, I'd like to reflect on how we are progressing towards some of the goals we had set for ourselves.

In December of 2012, we discussed five areas of concentration that needed focus to be able to transform the Company. These were; first, to operate efficiently and effectively; second, to pursue organic growth; third, to pursue acquisitive growth, larger scale; fourth, invest in technology; and fifth, implement a performance management system throughout the Company.

To this end, we have steadily improved our EBITDA margins, made four tuck-in acquisitions, acquired Ingeus, increased the investment in technology and by the end of the year, we'll implement a performance management system. Additionally, we have new executives at almost every senior positions across the Company.

We are working hard to position Providence for the future and will pursue financially compelling service expansion opportunities in order to extend our mission, which is to create healthier communities.

We'd be happy now to take your questions. Operator?

Thank you. (Operator Instructions) Bob Labick, CJS Securities.

Good morning. Congratulations to all on a fantastic quarter.

Thank you, Bob.

Just want to start over in the human services side. Obviously you just discussed, you made the decision to exit the Texas foster care contract which I'm sure you did not take lightly. Could you talk about -- you've mentioned in the past there are some other contracts that are operating below your expectations. Are there similar tax, have you approached the states or municipalities where you are looking to potentially exit more in the future or what's the status with some of those contracts and what's the time frame to getting back to a more acceptable, to you, level of operating earnings in human services?

Let me make a couple observations, Bob, and then we'd let Mike add flavor to that. The first is that Texas contract was our largest human services contract at about $30 million a year. And we took that to be very serious and worked very diligently with the State of Texas. And we might add parenthetically that we've had a great relationship with the State of Texas and we continue to do business with the state -- with LogistiCare and look at other opportunities.

But in this particular contract a specific design of the contract, provisions of the contract, coupled with an underfunding situation from the state legislature made it very difficult for us to achieve the high standards in foster care that we wanted. So we made determination to exit.

Secondly is I would say that our finance group, coupled with Mike and his group and operations, are working hard to look at all of our contracts in a way that would reflect our ability to perform well in those contracts. Where we determine we cannot for various reasons, as we did in Texas, we may find it necessary to end that relationship. We hope we don't have to do that. We hope we can get all contracts performing at a high level, but that's not always the case, as you know. So we will continue to scrutinize that carefully and we will look diligently to find those areas where we believe we can improve our performance and therefore improve our bottom line.

The third part of your question is timing. And as we think about the timing over the next several months, certainly we hope for increased performance across human services as a result of these decisions like Texas by the end of 2014, but we know it's also a longer-term process. It might take several more months for us to do that.

Mike, any additional comments you'd like to make on that?

Yes, Warren I'll add a few more thoughts to that. Hi, Bob. Good to talk to you again. Under our new leadership model, we've implemented some new processes as Warren has alluded to and part of that is putting more focus on all operations routinely and especially starting with those areas that have been underperforming. So I think we've talked at length about Texas.

To give you a couple of other examples of areas that we are currently addressing with improvement processes and seen improvement in are states of Florida and Arizona and the area of DC. Florida is one of those environments where managed care has moved in. I talked about it on the last call at some length. And we are identifying area by area, regional office by regional office the elements that are causing us to underperform and in some cases we are making adjustments in staffing, making adjustments in strategic growth and operational efficiencies. And on some occasions we have made the hard decision to close small underperforming offices in order to invest our resources in those localities and the ones that have the best potential for future growth.

Timeline wise, we have already seen improvements over the course of the second quarter since we put some intensive effort in the State of Florida in particular at the beginning of that quarter. We are seeing month to month gradual improvements and we anticipate that we'll have Florida back to an improved break even and then profitable within the calendar year, improving each month and each quarter as we move forward from this point.

Arizona in a similar way is another example I would offer. We have a contract there that operates a little bit differently than some of our managed care environments that are more fee-for-service driven. In Arizona we are capitated and we (technical difficulty) in that particular contract. And so the way that we operate and improve efficiencies has to do with not maximizing service delivery across all authorizations but providing the absolute right amount of service at the right time to the clients in order to improve their outcomes as quickly as possible. And so our target there has really been maximizing our clinical efficiencies as well as the staffing patterns that will allow us to deliver the best service at the right time to get the right outcomes and also trigger some performance pay thresholds that we enjoy in that particular contract.

That area we've also seen improvements just in the last quarter since putting an intense scrutiny on that with our partners from HR, IT, finance along with operations wrapping some virtual teams around each of the programs and the office and doing a better analysis. And we're already seeing the positive results of that. So it's another area that we think will continue to improve certainly throughout the third quarter and the calendar year.

And then the last example I would give is one that started even sooner than the focus of the last 90 days and that would be DC. We started to address our DC issues with the decision to make -- a final decision about overall investment in DC and whether or not our time and resource and energy spent there was going in the right direction. We made some leadership changes a couple of years ago and the results have been very positive. As a percentage of revenue on income DC is one of our highest performing operations and we think we will continue to be able to serve more people in DC as a result of our ability to focus more on client care and quality than worrying about some of the operational inefficiencies and pay struggles that we had historically been challenged with.

Okay, great. Yes, that was great color, thank you. If I could, just moving on to LogistiCare, Herman, a great quarter and thank you for the color you provided. I was wondering if we could maybe just take a step back and if you could talk a little bit about the trends and give a framework for expectations of state and also, kind of, for lack of a better term, MCO outsourcing, the growth opportunity ahead there. And then, I know it's difficult to do, but give us a broad framework for the potential expansion population woodwork and otherwise that you see over the next few years just to set the parameters of the opportunity ahead of you.

Sure, Bob. In terms of the trends, I mean as we've talked about most of the bigger states have already moved into kind of an outsourcing mode. And so the trend that we're seeing now is many of these states, as impacts Mike side of the business as well, are shifting to a managed care environment.

In some of those cases they carve the transportation management into the managed care contracts and some of the others they pull it out and continue to run it themselves like in New Jersey. So like I answer quite frequently, it does tend to be unique to each and every state.

But where the growth is coming from, particularly on the managed care side is in the new programs being promoted by CMS. So you've got the dual eligible programs where they're combining the Medicaid and Medicare members who are in both pools and giving those to the managed care organizations to manage and transportation historically has been carved into those things. So that's where we're seeing a lot of potential growth coming out of the managed care organizations.

We do believe that growth will continue on both sides of the house, membership is increasing. It is still difficult to tell exactly where it's coming from. We've got several states that are in the expansion group of states. We have seen significant growth in less than a handful of them and in some others we've seen almost no growth at all. So it's hard to kind of pinpoint.

I can tell you in New Jersey, which is clearly the biggest state in terms of membership growth that from what we can tell based on the quoting that's in our files, the expansion population makes up about half of the new membership and the woodwork population makes up the other half. So it doesn't appear in some of the other states that it's quite that significant in terms of the woodwork population being half. But, again, that is also a function of the backlog the states were experiencing and just processing into Medicaid to start with.

In terms of the future and into next year, I think a lot of that at this point depends on which states we see move forward with expansion next year that did not opt in this year. So, for instance, we know that Pennsylvania is looking at it. They've applied to CMS for some waivers or in the process of applying, Iowa as well. So some of those are waiting to see what they get back from CMS and over the next 3 to 4, 5 months we'll know better who's going to opt in next year and that would dictate the amount of growth we would expect from that initiative.

We don't think that New Jersey will grow at the same rate it did this year again next year. I mean, I think you can expect that the initial enthusiasm for expansion and all the promotion and press that goes on about it has driven a lot of that population in those states already. So we do anticipate growth, but we don't know where it's going to come from yet.

Okay. Great. Thank you very much. And then just jumping over, in general on the Ingeus side, I wanted to get a sense of I think at some point you will be putting out an 8-K giving us a little bit more background. I was wondering if you could give us some kind of broad guidance. You mentioned earlier obviously, Warren, that you'd expect down from record levels a year ago. But if you can give us any kind of sense on a go-forward basis on the revenue or margin side as broadly as you would need to do to be comfortable as we model going forward?

Yes, I appreciate the question, Bob. Thank you very much. I'd like to ask Bob Wilson to jump in on that.

Sure. Hi, Bob. Nice talking to you again and you and I had other conversations on this topic too. So I think as we've discussed before, we need to think of 2014 as a plateau year for Ingeus. 2013 was a convergence of several factors that just worked very positively for the Company.

And a couple of things that are going on in 2014 are that, for example, there is four sort of revenue triggers, if you will, under the largest contract, the Work and Pensions contract, which represents about 60% of all of Ingeus by the way currently, and the first of those levers are attachment fees. And those were built into the revenue flows in the first -- basically first half of the contract. We're now halfway through that contract, 2.5 years in and by contract those went away as of July 1.

Through the first half of that contract those represented over 40% of the total revenues under that contract. So those no longer are part of the revenue sources and it's all tied to the other three levers which represent more based on performance, job outcomes and sustainment of job outcomes and then incentive payments.

So it's difficult to give specific guidance other than we should consider that 2014 will be relatively significantly lower. That said, as we talked about also on other calls, Ingeus is, over the long haul, think of a five-year time horizon, is a very good business and we're very comfortable with their margins both historically as well as projecting out.

We think that their projections suggest that they will over a long period earn EBITDA margins that are at or better than our current businesses and in fact there are some back-end opportunities for earning revenues that we believe potentially based upon performance so far may start to kick in 2015.

So I know I really didn't answer your question, just like I didn't last time, but it's challenging other than the fact that it's a business that can't be looked at in one year or quarter increments.

Okay. No, fair enough, fair enough. Sorry, go ahead Warren.

Hope that's helpful to you, Bob.

Moving in the right direction. Just to clarify on the last point that you made there, Bob, in terms of the, I guess, incentive payments on the current large program in Ingeus, is that still a 2015 potential event and what does it kind of take to get paid on that? Is it a all or nothing or is it a graduated scale and when we will know more about that in the accounting treatment?

I'll maybe speak to the accounting and then ask Therese or Greg to maybe give more of the particulars around how those work. But I guess at their most basic level we're now sort of in the last 2.5 years of that contract.

There are three measurement periods. The first one we're in the middle of. It started on April 1, runs through next March. And then another one kicks in and another one kicks in after that, I believe. Rather than having revenues based on specific client outcomes this is more of a global measure of performance that exceeds the program's expectations. We won't know really. We're now kind of four months into that 12-month contract measurement period. So it's a little premature. We're not counting eggs at this point. We're not booking anything. We're not accruing revenues. We'll re-address that at the end of the year. But it might be that we wait until we definitively know at the end of the first quarter next year what our actual outcomes are in relation to sort of the standards that have been set forth for those payments.

Last comment, then I'll ask Therese and Greg to maybe fill in more color. Based upon our own internal measures of performance so far both historically under the program going back 2.5 years as well as the first four months, we think we're optimistic that based upon that performance that we'll work out -- it will work out well for us in terms of the incentives. But, again, we need to get through the period to really know for sure.

With that I'll maybe turn it to either Therese or Greg to add additional color on that.

Thanks, Bob. Bob, it's Greg Ashmead speaking. Bob Wilson, I think you described the practice very well. I think the only thing I would add is the performance measure is based on any job -- job outcomes on a graduated scale as -- to the number of referrals that come to us.

We are performing against those percentages quite well. In fact, Ingeus as an organization is, out of the first three years of this contract, the highest performer in all of the contracts that we are operating under the work program. So things are progressing well. Our performance continues to lead the market and we are very confident about the future in relation to that.

Great. All very helpful colors. Thank you very much.

Thank you for your questions, Bob.

(Operator Instructions) Mitra Ramgopal, Sidoti.

Good morning. First, I have a couple of questions on Ingeus. I was wondering if you can give us a sense as you look at growth opportunities I believe right now you're in about 10 countries, it the plan to continue to gain share within those countries or is it, as you look out over next three to five years, to expand that footprint?

Therese, Greg, would you like to comment on that?

Hi. Very nice to meet you. Our focus in our existing countries is to be the highest-performing provider in helping people who are long-term unemployed for all sorts of reasons into decent lasting work. And that is the basis of work that we do and the basis on which our reputation is built. In each of our existing countries, we want to continue to do that and to continue to win more contracts to help more people into work. So we are focused on growing in those countries. However, we also have opportunities in other countries and we evaluate those carefully and await opportunities to arrive.

Thanks. I know you mentioned that one of the contracts you are bidding for is very competitive. Could you give us a sense as to the main players in the UK market and where you stand relative to them?

Thank you for the question. There is a range of major players internationally that are bidding on the Department of Justice -- Ministry of Justice contracts. At this stage, we are in the middle of a bid process, so I really don't want to go into a lot of detail on it. But I think it's fair to say we believe that we put together a very solid consortium with some local players that have an enormous amount of experience in this sector.

[They are in] combination with us and they have reputation for delivering high quality welfare to work services really, I think, stands up in good state. But I wouldn't really want to comment too much on the market at this point because we're in the middle of the bid process.

No, that's fair enough. And I don't know if you can give us also a sense like typically what has been your success rate in terms of when you bid for a contract?

In the United Kingdom our success rate, we believe, is over 50%. But it depends on what sector we are bidding in. As you know the closer you are to your absolute core services, the high your success rate is. So if we're talking about fewer welfare to work programs, our success rate is much higher than that.

But as you move away into some of these adjacent areas, obviously your competition mix changes and experience base changes. But we have a very good success rate in United Kingdom and our reputation is, with government, is excellent. So I think a lot of the time success rates are heavily influenced on the relationship that you have with, obviously, the purchases and our relationship really couldn't be better.

Okay, thanks again for taking the question. Herman, I just had a quick question regarding the South Carolina contract. Again, if you don't like the structure and you choose to walk away, are you comfortable that you have enough opportunities elsewhere to sort of mitigate the impact in terms of the loss of revenue there?

Well, I mean -- we would certainly hope that some of the managed care work that we're working on would replace that revenue. But at the end of the day, if the structure of that contract -- I mean, the only reason we would walk away from that contract is if we felt like the structure of the contract was set up in such a way that we couldn't make any money or we would lose money. And we certainly don't want to end up in another situation like we had ourselves in Wisconsin couple years ago or Mike's fighting through in Texas.

So if we look at a contract and think because of the way they have structured it or the potential penalties and liquidated damages that are associated with it that it's just not going to be compensatory then there is no revenue in the world that's worth that. So the decision would be made based on profitability, not based on revenue.

Okay, thanks. And finally I just had a quick question regarding the credit facility. I know it was expanded recently, certainly giving a lot more flexibility as it relates to expansion opportunities. And I was just wondering as you look at expansion opportunities now that you have workforce development, is the focus going to be both international, US or is it also going to be focused primarily on workforce development?

I wouldn't say that we have a primary focus. Clearly, businesses we are now in with three verticals, LogistiCare, human services and Ingeus, allow us to see an expanded marketplace. And as a result of that, we're going to continue to review opportunities and expansion and growth throughout the US, North America, because of our Canadian operation, and in the 10 countries and beyond that we're currently in with Ingeus.

So we feel like our boundaries or our abilities to see a broader marketplace with more diverse offerings are there. Now we have to find specific opportunities for potential acquisition and/or organic growth, and we're going to continue to focus on that.

As you know it's been a real determination by this management group to look at opportunities to continue to grow this business and the good news is that we're seeing a lot of opportunities and we're analyzing several of them and we'll be back to the market at the appropriate time to talk about what we're going to do about those opportunities.

Okay. Thanks again for taking the questions.

Thank you, Mitra.

Mike Petusky, Noble Financial.

Yes, good morning. Just a quick question, I guess, around the statement. I think it was said a large pipeline of opportunities in terms of Ingeus as you guys look out. Can you quantify that a little bit, I guess, both in terms of dollar opportunity and how many opportunities are we actually looking at? I mean, is it handful, is it dozens, I mean what, I guess, comprises that pipeline if you could help on that? Thanks.

Therese, Greg, would you like to take a shot at that?

Perhaps the best way of describing this is we have more opportunities for current bidding of significant size and length of contracts than we have ever had before. To put a number on that seems unhelpful but I think it's worth saying that we are currently considering a whole range of opportunities in the area of employment services or equal work force development. So in skills, in-house placement, in the justice area and in other areas in which we have competency, capability and where we can be sure that we will be able to deliver well what we say. But the size and range of these opportunities we are currently quantifying and prioritizing and assuring ourselves that we can deliver with quality and competency and confidence.

Mike, I might add this. Sorry to interrupt you, but one of the things that we liked about Ingeus from the start was their reputation with the governments in which they find -- in which they do business, right. And so as a result of that great reputation there is not only business in their core competencies but in adjacencies as well. And so we're beginning to see opportunities across a broad range of services that are here for Ingeus has not been involved in.

So Therese is right. When we look at Ingeus, we see lots of contract opportunities, lots of bidding opportunities and in the aggregate it's quite substantial. So we're going to continue to pursue as many as we can that makes sense for our business.

Okay. I guess one -- I was just also wondering in terms of the resolution, obviously Ingeus has been able to sign a few deals even just in the last month or so, but I guess in terms of resolution of a material part of this pipeline, I mean does that come over the next six months, over the next 12 to 18 months? I mean, what's the timing, I guess, on the awarding of some of this business?

Clearly, there are some bids or tenders that have already been submitted and we'll be hearing on some of them before the end of the year. But additionally, there is a longer period of time. As you know, in government contracting the sell cycle often is quite large. So we're talking about six months, 12 months 18 months, we will see additional opportunities but some of these contracts will be decided before the end of 2014.

The ones that you're already -- I guess are 2014 potential, I mean are some of these material in nature?

Some of them are material in nature.

Brian Hoffman, Avondale Partners.

Hi. I just got a few quick questions for you. First, the $2.5 million in acquisition expenses. I assume that's included in the G&A line, just want to confirm that with you guys.

Yes, Brian. This is Bob Wilson. In fact thanks for asking that question because it allows me to correct -- slightly correct a comment I made earlier. By math G&A expenses were actually 4.7%, but actually that includes the transaction advisory costs which for the quarter were $2.5 million, for the first six months about $4.3 million. So if I normalize those out then G&A has been running consistently at 4%.

Okay, great. And then human services growth which was clearly strong at just over 10%. Are you able to give us a growth rate excluding the Texas foster care contract to help think about what sort of growth we can look at once that rolls off?

We're all thinking on that one, Brian. Give us a pause here for a second. That may be something we'd want to calculate and look at. We haven't thought about in that exact way and we could get back to you in a one-off conversation, if that would be all right with you.

Sure, not a problem. And then a last quick question I've got, Therese you mentioned that the value of certain contracts was $15 million per year. Was that just for the two Lincoln College contracts or was that also including the Greater Manchester and Northern Ireland contracts?

It's for all of the contracts combined.

Okay, great. Thank you very much.

Thanks, Brian.

[Rick Voltaig]

You weren't going to get off the hook without getting at least one from me, right?

We expected it, thank you.

Just a follow-up to some of the questions regarding the UK work contract. Even though there was a change in the formula for revenue with an increasing weighting toward incentive, is the funding for the program changing? So in other words, is the total expenditure from the client changing at the 2.5 year mark?

Therese, Greg, do you want to comment on that?

Yes, thanks, Rick. It's Greg Ashmead speaking. The way this was modeled is really, as Bob described, the first half of the contract included attachment fees. The reason for that was in the establishment of this market, the government was prepared to invest more upfront to get the program up and running.

The attachment [is phased] from 1 of July this year which was part of the program and [all] part of our business modeling.

Also job outcome fees were discounted from 1 of July this year as part of the competitive process for bidding this program. Those discounts keep kicking from 1 of July also. The whole rationale of this program from government is that ultimately the savings on benefits actually fund the program and that is actually factored in they managing to not only save on benefits but also to get people paying taxes.

In 2013, we placed approximately 50,000 people into decent lasting jobs over six months. So you can imagine the net impact for government.

So, yes, they are spending less on the program as the program progresses, but there is no change in funding levels for the sustainment fees which are paid to us on a monthly basis providing people stay in work.

Okay, so the incentive element to it doesn't get richer as the attachment fees roll off?

There's is a difference between the incentive fees which we talked about earlier and the sustainment fees which are paid as payment by results. The sustainment fees don't change at all, the level of the sustainment fees don't change at all. And the incentive fees, as I described earlier, determined -- it's a performance fee on the overall contract based on the number of job outcomes as a percentage of referrals.

But as it relates to each of the contractors, right, they're all graded separately.

The performance of each provider is evaluated separately. So the payment of -- so when someone walks in the door for the first half of the contract if they walk in our door for the -- in the first couple of years then there was an attachment fee that came with them.

When they went into a job there was a job outcome fee and when they stayed in the job for each month there is a payment fee, a sustainment fee. So what drives up revenue is when we help more people stay in the job for a long time. So that's out performance.

The incentive fee is based on an overarching of our performance compared with what was required and is a separate payment.

But in the first 2.5 years, was there anything allocated toward incentive? Is that a new component of the revenues source for you?

It's Greg again. It was not a new component. The incentive fee was part of the original contract that if we dissect threshold levels of performance against three key client groups and you have to achieve those levels of performance which, as I would say, job outcomes as a percentage of total referrals. So that was said at the beginning of the contract. We are exceeding all of those threshold at the present time but obviously the performance period is evaluated in March 2015. And that's the first real period where there will be an incentive potentially paid. As we mentioned earlier, we are ahead of the threshold. So we are confident, but we don't know the outcome yet.

Okay, thank you.

Hey, Rick. This is Warren. Bob would like to make a comment about this as well.

He, Rick, just to add more color to what Therese and Greg have already commented on, again they've alluded to it at the beginning, but the economics of this contract were set established at the very beginning. The economics were modeled by Ingeus, modeled very rigorously. So they knew full well when they entered the contract 2.5 years ago that there was going to be a discount on outcome fees come July 1 of this year. They knew the attachment fees were going to go away and they knew that the sustainment fees were going to remain solid.

I think what's also important to kind of -- so given that the economics of the contract are very strong, comes back to an earlier comment that was made, but needs to be looked at in the context of a long time horizon of five years plus a tail after the contract ends.

The other thing to keep in mind, if you think about how Ingeus delivers their services under this contract, the vast majority of the costs are incurred prior to job outcome. So costs as you move into sustainment and then certainly incentives, they don't drop to zero, but they drop substantially because I think the interaction with the client is substantially less than it is, very intense, in the early part. So rather than just focus exclusively on revenues, one also needs to look at the cost structure over that same time horizon to get sort of a view of discrete economics, if you will, over the life of the contract.

Thank you.

Thank you, Rick.

Thank you. We have no further questions.

We'll wait just a second to see if there are any further questions before we close. Hearing none, we'd like to thank you again for joining us on our call today and we do appreciate your interest in Providence. We look forward to updating you after the third quarter and have a wonderful day.

Ladies and gentlemen that concludes the call for today. You may now disconnect.