ModivCare Inc (MODV) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 Providence Service Corporation earnings conference call. My name is Whitley and I will be your operator for today. (Operator Instructions). This call is being recorded for replay purposes. I would now like to turn the teleconference over to your host for today, Ms. Alison Ziegler of Cameron Associates. Please proceed.

Thanks, Whitley. 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, 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 March 24. The replay number is 888-286-8010 with the pass code 52088848. Internationally you can reach the number at 617-801-6888.

This call is also being webcast live with a replay of available. To access the webcast go to www.provcorp.com and look under 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 2015 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 annual report on Form 10-K for the year ended December 31, 2014.

The Company's forward-looking statements are subject to change and are based on current expectations that involve a number of known and unknown risks, uncertainties and other factors which may cause actual events to be materially different from those expressed or implied by such forward-looking statements. These statements speak only as of the date of this webcast, March 17, 2015.

The Company is under no obligation to and expressly disclaims any such obligation, to update any of the information presented if any forward-looking statement later turns out to be inaccurate whether as a result of new information, future events or otherwise.

In addition to the financial results prepared in accordance with generally accepted accounting principles, or 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.

During this call the Company will also discuss certain pro forma financial measures giving effect to the results of certain recent acquisitions as if they had occurred at the beginning of fiscal 2014, which is also a non-GAAP presentation. 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.

EBITDA and adjusted EBITDA and the pro forma financial measures discussed are measurements not determined in accordance with or an alternative for generally accepted accounting principles and may be different from non-GAAP measures used by some companies.

A definition, calculation and reconciliation to the most comparable GAAP measures for EBITDA and adjusted EBITDA can be found in our press release. A definition, calculation and reconciliation to the most comparable GAAP measures for the pro forma financial measures provided can be found on our website, www.provcorp.com, and in our current report on Form 8-K filed with the SEC on March 16, 2015.

The items excluded or included in the non-GAAP measures pertain to certain items that are considered to be material so that exclusion or inclusion of the items would, in management's belief, enhance a reader's ability to compare the results of the Company's business after excluding or including these items.

Finally, for simplicity, we will be speaking in US dollars when referring to such things as contracts and revenues. Amounts translated from other currencies, including the British pound, have been translated at the exchange rates in effect for the corresponding time period. As such, these amounts may differ in future periods. I'd like to turn the call over to Warren Rustand, Chief Executive Officer. Go ahead, Warren.

Thank you, Alison. Good morning and Happy St. Patrick's Day. After our scripted remarks we will be available to take your questions. Joining me on the call today is Jim Lindstrom, our newly appointed Executive Vice President and Chief Financial Officer. Jim joined us in January from Integrated Electrical Services, or IES, where he was Chief Executive Officer.

With a previous background as a seasoned investor and operating executive, Jim led the strategic transformation of IES from an electrical contractor into a profitable industrial holding company. We are very pleased to have Jim as a part of our team and believe he is ideally suited to help us leverage the benefits of our strategic investments in 2014.

I'd also like to thank our outgoing CFO, Bob Wilson, for the positive contributions he made to Providence over the past two years.

Unlike our previous earnings calls, the CEO's of each of our verticals are not with us today. Given that we now have four separate verticals we have decided to limit the speakers on this call and future calls to just Jim and myself. However, we are planning to hold an Investor Day in the next couple of months, most likely following our first-quarter earnings report, where you will have the chance to hear from and interact with the CEOs of each vertical.

You hopefully noticed in our press release that we are attempting to provide you with more clarity around segment level performance. One challenge we have with doing this is our current treatment of Providence corporate expenses. As we refine our corporate allocation methodology we expect to be able to provide further clarity on segment level profitability. Jim will speak on this a bit later with more specificity.

2014 was a pivotal year for Providence in its evolution as a strategic platform of healthcare and social service assets. We acquired two excellent companies, Ingeus and Matrix, that we view as strategic long-term investments and growth platforms.

In 2014 we also made significant progress with the operational improvement strategy at Human Services as we continued the consolidation of back-office functions, the rationalization of administrative costs and the exiting of underperforming contracts.

We strengthened the leadership teams at our verticals, including the appointment of new CEOs at three of our four verticals. We also made a number of important hires in the Providence corporate office to support our new business structure and value creation strategy.

As a result of these changes Providence exited 2014 as a very different Company. Today Providence's portfolio of companies spans the healthcare and social services continuum.

Including the full year results of our Matrix and Ingeus acquisitions as if they had occurred on January 1, 2014, pro forma revenue was $1.8 billion and pro forma adjusted EBITDA was $159 million. This figure does not include an add back for non-transaction related stock comp of $4.2 million.

Our verticals are focused on maintaining their market leadership, reducing payer costs, improving outcomes and promoting healthy and productive communities. Each vertical is well positioned to benefit from the continued growth and the outsourcing of healthcare and social services by governments across the globe, the embracing of home and community-based delivery models and the expansion of populations covered by government-sponsored services including Medicare and Medicaid.

Moving forward we will look to accelerate strategic and operational improvements at our recent acquisitions, extend our services across adjacent markets and geographies and develop new services that leverage our current platforms, reduce healthcare costs and improve outcomes.

While longer-term we will look to opportunistically acquire additional companies, we are currently seeing higher returns deploying cash within our existing businesses on new contracts, new service lines and IT investments aimed at improving productivity. Ultimately the decision to acquire versus invest in our current business is a capital allocation question and we will pursue the opportunities that generate the greatest return for our shareholders.

Given the changes to our business in 2014 I'd like to spend a little time speaking about each of our four vertical starting with our recent acquisitions.

Ingeus, acquired last May, is a London-based workforce development and probation services provider. As we enter 2015 our core investment thesis for Ingeus remains intact. We are delivering under current contracts, winning large new contracts and diversifying the business beyond the core welfare to work market.

In 2014, and since our acquisition, we won contracts with a total value of approximately $800 million and are well-positioned to win additional bids with total contract values of well over $1 billion including a large bid for an employment services contract in Australia. In fact, we expect our revenue growth rate in 2015 to be and the mid-teens largely without the benefits of this $1 billion pipeline.

This revenue growth, led by our significant UK Ministry of Justice probation services contract, will help offset the anticipated slowdown of Ingeus' largest contract, a UK work program, which has already started to slow in Q4 2014 as expected.

As previously mentioned, the growth at Ingeus can require significant first-year investments around certain types of contracts, resulting in operating losses on a project-by-project basis. 2015 will be a year where we will experience a significant amount of start-up costs which will likely push Ingeus' pre-allocation EBITDA margins into the low-single-digits from a historical multi-year average range of 8% to 10%.

On a post allocation bases this margin range is approximately 200 basis points lower using our current allocation methodology. Jim will cover more of our financial expectations on Ingeus shortly.

When evaluating these financial expectations we believe it is important to measure performance over a multi-year time horizon, not year-to-year. The Ingeus acquisition represents a long-term investment in a company which delivers value added solutions to those in need across the globe.

In 2015 we look forward to building new capabilities and reinforcing existing ones in order to deliver superior services to our clients and generate industry-leading returns for our shareholders over an extended period of time.

Next let's turn to Matrix, a provider of comprehensive in-home health assessments that we acquired in October. Matrix had a great year 2014 including a portion of the year we owned it. In 2014 Matrix revenue increased by over 25% as a result of higher volumes, partially offset by lower pricing. Adjusted EBITDA margin also increased as a result of higher productivity and fixed cost leveraging.

Matrix's managing team is anticipating another strong year in 2015 with mid-teens revenue growth and plus 20% margins, pre-Providence corporate overhead allocation. Corporate allocations are expected to take off approximately 150 basis points to 200 basis points from this margin when using our current allocation methodology.

We are often asked about pricing trends at Matrix, so I'd like to spend a bit of time addressing that here. As was the case in previous years, pricing declined in 2014 and we expect it to do so again in 2015 albeit at a slower more modest rate than in previous years and not enough to offset the positive revenue impact of volume growth.

The historical pricing declines, generally in the low-single-digits, have been driven by both market factors, primarily competitive entry, as well as our sharing of scale benefits and productivity improvements with our customers.

Similar to LogistiCare, Matrix does not compete with other providers on price but rather on service quality. Our customers choose us not because we are the lowest cost provider but because we offer a high quality service that is comprehensive, accurate and delivered by a highly skilled workforce. We compete on our ability to properly stratify, assess and improve the health of the populations we serve.

At Matrix we see continued opportunity and growth in the Medicare Advantage market as we sign new customers and expand our relationships with existing customers. We are also adding new services such as in-home screenings and medication therapy management that supplement our core business.

Lastly on Matrix, I'd like to talk about the 2016 advance notice released in late February by CMS. We view the content of the advance notice as a positive for Matrix. In the letter CMS recognizes, as we do, the positive impact in-home health assessments have on improving patient health and lowering healthcare costs.

Turning to our legacy businesses, I will start with Human Services where our operational improvement strategy continues. In 2014 our revenue growth of 6% was related to a combination of organic growth and acquisitive growth.

While revenue grew year-over-year our profitability declined due to underperforming contracts in certain markets including our Texas foster care contract as well as substantial one-time costs including charges for impairments, transactions, restructuring activities and litigation. As we move into 2015 we expect to see organic revenue growth and improving margins as we continue to focus on productivity and realignment activities.

Our productivity initiatives focus on reducing turnover and introducing process improvement systems to reduce non-billable hours at the individual provider level. In this area Human Services is drawing upon Matrix's best practice and is instituting rigorous KPI and performance monitoring tools aimed at increasing accountability and productivity.

Our realignment initiatives at Human Services include the continued consolidation of our decentralized back office operations. We are also continuing to right size the administrative overhead in markets that have experienced declining volumes in recent years.

Importantly, realignment initiatives include what we term portfolio management or the continued review, identification and pruning of underperforming contracts, service lines and markets. The exiting of our unprofitable Texas contract in 2014 is an example of this active portfolio management.

While we are focused on these initiatives in our challenged markets, the majority of Human Services markets and service lines continue to experience organic growth as a result of the innovative and client focused solutions that our leaders and boots-on-the-ground providers are delivering in homes and communities across the US.

As we pursue industry-leading performance across all of Human Services, the expertise of our people and providers in these well performing markets is being tapped.

Our fourth vertical, LogistiCare, had another great year. In 2014 revenue grew nearly 15% due to the increased membership in multiple states, particularly New Jersey where we saw a 50% increase in membership throughout the year. This increased membership was driven by expansion and woodwork populations.

Other states with increased membership included Georgia, Michigan and Nevada. We also picked up new state contracts in Rhode Island in Utah; new regions in existing states, Maine and Texas; and new MCO contracts in Hawaii, Kansas and Illinois.

LogistiCare's margins in 2014 were positively impacted by lower utilization among the expansion in woodwork populations. This margin improvement may not be permanent as we are seeing the expansion in woodwork populations begin to increase their utilization as they learn about the NET benefit.

Margin in 2014 was also positively impacted by bad weather in the early part of the year. Unlike our other verticals, bad whether positively impacts LogistiCare because it depresses utilization under a capitated revenue model. Looking ahead to 2015 we expect to see another year of double-digit revenue growth from LogistiCare.

While 2014 was a pivotal year for Providence, we will continue to transform the business in 2015. We will be working closely with our recent acquisitions on the strategic priorities which will involve making increased investments in the foundations that will drive long-term value creation.

At Human Services we will focus on organic growth and bringing margins back to historical levels. At LogistiCare we will be working hard to maintain our market leadership throughout the innovation and exceptional service. At Ingeus we will make the investments in new contracts necessary to drive future profitability. And at Matrix we will continue to build scale, penetrate new markets and roll out new products.

We have an energized management team that looks forward to tackling the challenges involved with building a world-class healthcare and social service company that is committed to promoting healthy and productive communities.

Let me now turn the call over to Jim Lindstrom, our CFO, who will provide more detail on the fourth-quarter and full-year results reported in our press release.

Thank you, Warren. Before I begin I'd just like to say that I'm excited to be part of the Providence team. I'm particularly looking forward to building the business and capitalizing on the opportunities that Warren and the team created during 2014.

So my following remarks -- instead of rereading the earnings release to you, which I'm sure you all have read, I will focus on the key drivers behind our recent performance and also those going forward. I'd also like to emphasize that we will not be providing guidance going forward, but helping -- but rather helping you frame your outlooks during times of transition or recent acquisitions.

So before turning to the financials, I'd first like to speak briefly about what we are spending an increasing amount of our time on. And that is a Providence wide value creation strategy as Warren alluded to.

First, this value creation strategy involves working hands on with each vertical to develop customized strategic improvement plans. Second, it involves the implementation of process improvement initiatives across the verticals to share best practices. Longer-term it involves the encouragement of recurring revenues as a means to improve capital efficiency as well as a refinement of capital allocation, philosophies and methodologies.

One of the most important aspects, if not the most important aspect, of my role is the proper allocation of your capital across our portfolio and new potential verticals.

So whether looking at IT CapEx at Matrix and LogistiCare, the underwriting of new contracts at Ingeus, bolt-on acquisitions at Human Services or new potential verticals, proper capital allocation must be considered and our opportunities must be prioritized based upon return on capital thresholds, particularly with respect to the risks inherent in those new projects.

So moving on to our financial results, as you saw in the press release, our 2014 net income of $20.3 million included multiple acquisition and financing related items. I would encourage you to review our 10-K and earnings release carefully to review these items. And as always, feel free to reach out to myself or Warren to discuss these further. I will highlight a few of them now.

First, we had $18 million of acquisition financing, integration and restructuring costs. We view these costs as upfront investments related to the pivotal changes made to our business in 2014. Many of these costs also help us to position us for the transformational changes we anticipate in 2015. Going forward we will maintain a vigilant eye on all costs, particularly G&A costs, which we expect to be approximately 4% of consolidated revenue in 2015.

It is also important to note that, as you may have noticed in the earnings release, we allocate these corporate costs, including these $18 million of acquisition, financing, integration and restructuring costs, across all verticals regardless of whether that particular vertical was responsible for generating the expenses.

For example, the operating income of Human Services and LogistiCare was burdened by $7.7 million and $3.7 million respectively of these costs despite these costs being driven by unrelated events such as the acquisitions of Ingeus and Matrix. Because we believe this allocation methodology makes it difficult to understand the underlying performance of each vertical, in future periods we intend to report corporate expenses in a separate segment.

Moving on to the cash flow statement, CapEx was an item that trended higher in 2014 to $23 million and that was primarily due to acquisitions. And given the high return opportunities to invest in our current business as opposed to acquiring new businesses, as we said in the press release, you will likely see our CapEx spend increase to $35 million to $45 million in 2015.

And I'd like to reiterate, like our corporate costs, we will remain vigilant on CapEx and focus our cash where it is expected to support growth, improve our customer solutions and drive operational efficiencies. Again, just want to reiterate that a majority of this CapEx is growth CapEx as opposed to maintenance CapEx. Please keep in mind that this outlook may change as our landscape changes.

Finally, in 2014 we also encourage asset impairment charges of $6.9 million related to certain units in our Human Services vertical; $4.5 million of bridge financing fees, which is in our interest expense line; $1.7 million in interest from a bridge loan, also in our interest expense line; and an adjustment to our contingent consideration liability of $16.3 million.

This $16.3 million adjustment reduced our G&A expense line and was primarily due to a periodic reevaluation -- or sorry, revaluation of the Company's obligation to pay additional consideration to certain sellers based on the achievement of certain earnings targets. We anticipate further reviews of this liability as our outlook changes, particularly at our Ingeus vertical.

Now moving on to the verticals, I will start with Ingeus. As Warren mentioned, Ingeus is a long-term project based business that we look at over contract lifecycles. And while we are focused on the lifetime profitability of contracts, it is important to note that its long-term financial success is built upon an intense focus on short-term operational results.

And operationally I'd like to mention Ingeus' short-term operational performance is solid. We are currently experiencing pretty solid operational performance on our work program, so while attachment fees have gone away, job outcome fees have been discounted and referral volumes have slowed, Ingeus has been able to partially offset the resulting revenue declines on the work program contract with higher conversion rates and higher sustainment payments.

This is perhaps a good chance to better explain the lifecycle characteristics of Ingeus' contracts. While contract structures vary, most of our larger pay-for-performance contracts exhibit some similar features.

So first, as we think about first year start-up costs, we may inherit an operational cost structure that we must transform or improve where we may be required to invest capital to open new offices or increase IT capabilities to improve our delivery solutions for our clients. So these start-up costs are primarily expensed as incurred and may not be covered by the base service fee, thereby generating a cash or P&L loss during this first start-up or 12-month period.

As we emerge from the first year of the contract our base service fees likely begin to cover our cost structure. And as we enter the out years of the contract our profitability becomes more dependent on the operational foundation that we built during the first part of the contract, which can support the achievement of performance targets and hopefully superior ROIs over the life of the contract.

Ingeus was successful winning new contracts in 2014, the result of which will be, ironically and as you now understand, a negative impact on EBITDA in 2015. Note that on the top line however we expect to see healthy growth. To give you a sense of the pressure new contracts can place on EBITDA margin, in 2015 the MOJ contract is expected to generate a negative EBITDA of approximately $15 million.

Over the life of the MOJ contract, however, returns consistent with our investment parameters are expected to be realized with upside potential based on performance by results payments.

And if we are successful with our large bid in Australia overall EBITDA will be further reduced in 2015, again due to start-up costs. Though longer-term we expect Ingeus to return to its historical level of high-single-digit margins averaged over multiple years with opportunities for higher margins, but only if our operational results warrant it.

Finally, we should mention Ingeus was also impacted in 2014 by a $3.0 million expense related to the amortization of the fair value of restricted stock awards.

Moving on to Matrix where we are looking forward to another strong year. Growth is coming from continuing opportunities in the Medicare Advantage market both with existing and new customers. We are attempting to grow our presence in the commercial and Medicaid markets also. These markets are currently small markets for us but we are seeing signs of traction.

As is the case across all of our verticals, 2015 CapEx will be higher than in 2014 and is heavily weighted towards growth CapEx. Matrix has identified numerous high return IT investment opportunities related to increasing productivity and these productivity improvements are driving -- further driving down direct costs per comprehensive health assessment by further automating scheduling, provider logistics and member outreach.

Now turning to Human Services, revenue grew by over 6% in 2014. After stripping out the benefit of acquisitions, the positive contribution of the Texas foster care contract, which we exited in Q3, and the negative impact resulting from our exiting of management contracts, we are still able to grow revenues.

Human Services 2014 operating income was negatively impacted by $14.6 million of acquisition, restructuring, severance and impairment charges. We were also impacted by $1.4 million of litigation costs related to primarily what was a 2011 issue as well as losses from the now exited Texas foster care contract of $3.8 million.

When attempting to understand the performance of Human Services in 2014, we believe it is important to take these non-core and one-time impacts to revenue and EBITDA into consideration.

Looking forward to 2015, we expect revenue from continuing operations to grow on an organic basis at a rate higher than we experienced in 2014, but overall still in the low- to mid-single-digits. And on EBITDA we expect to see our productivity and realignment initiatives continue to yield margin expansion. Longer-term we ultimately see Human Services returning to its historical EBITDA margin level of approximately 4% after corporate allocations.

Returning to the portfolio management or pruning of underperforming contracts like the Texas contract that Warren mentioned, we will continue to prune our portfolio going forward, particularly in 2015.

Wrapping up with LogistiCare, we expect another year of double-digit top-line growth in 2015 with margins likely coming off slightly from the historically high levels seen in 2014. The biggest driver of margin is utilization, which is very difficult to predict. That said, we expect the expansion in woodwork populations to continue to increase their utilization as they learn more about the nonemergency transportation benefit.

Pricing in 2015 is also difficult to predict at this point given the different trends we see across markets and the fact that, as is typical, approximately 25% of our revenue is coming up for renewal in 2015. Our New Jersey contract, which represented approximately 10% to 15% of 2014 revenue, is included in this turnover in 2015.

The New Jersey RFP has not yet been released, but we believe that there will ultimately be rate compression on this contract. However, in other markets we are seeing positive rate movements.

So before we open up the call to your questions let me also provide a few comments on our tax rate. On our consolidated basis for 2014 our effective tax rate was approximately 27% compared to 37.7% in 2013. The decrease in the effective tax rate is primarily due to the adjustment in the fair value of the contingent consideration not being subject to taxes. Looking ahead to fiscal 2015 our effective tax rate should be between 40% and 42%.

With that I will hand the microphone back over to Warren who will then lead us into Q&A.

Thank you very much, Jim. I appreciate your comments. As is obvious, we are attempting to give you much more information on our vertical business units, our segment business units to assist you in the preparation of the models that you develop for others. So we will continue the discussion as we go into the Q&A and we look forward in future earnings calls to provide you with an even deeper understanding of that segment information.

So at this time we would like to turn the questions over to you and respond as best we can to those things that you would like to ask.

(Operator Instructions), Bob Labick, CJS Securities.

Good morning, this is actually Dan Moore filling in for Bob.

Thank you, Dan, good to hear from you.

And thank you for the additional color and detail. Mentioned a little bit about CapEx, the depreciation roughly $17 million, CapEx more like $35 million to $40 million for this year and you mentioned Matrix. Can you give us a little bit more color on some of the other segments that will be allocated, the incremental CapEx and what types of ROIs are you expecting?

Sure, so one of our other areas where we are spending an increased CapEx line is at LogistiCare. And again, it is primarily IT related. We view LogistiCare as a scalable business and we see opportunities for operational efficiencies by increasing some of the IT investments.

We also obviously have some start-up costs at Ingeus as well where we are seeing some increased CapEx and that is obviously to support the team's growth that we are looking for in 2015.

Human Services, as you might expect, is less capital-intensive. So while we see some growth, it is not substantial. In terms of ROIs, we are not disclosing specific ROIs across the board on any of our capital investments, but I will say that they are at a minimum consistent with our overall investment strategy.

And in addition, Dan, we emphasized in the script and as we talked earlier the notion that these are focused on the growth side of our business as opposed to the maintenance side of our business. And the great majority of the funds in all four of our verticals are designated for growth opportunities, particularly in the IT side. Matrix is a classic example where productivity improvements through IT will enable us to drive margins to a higher level.

That's helpful. Maybe just switching gears. Can you provide a little bit more color on the reversal of the contingent consideration? How that decision was derived and, if you were to win the mission in Australia, for example, is there a potential for adding back a portion of that earn out?

Okay, this is Jim, I will take that one. So as part of any yearend process or any time when we see significant changes in the outlook for a business, we will -- we look at our goodwill impairment, we look at the contingent consideration liability.

And as part of that yearend process with our change in outlook at -- over the earn out period for Ingeus, that is important to note that the contingent liability really looks at the earn out period because that is what it is related to. That drove some of the changes there.

Obviously it doesn't change our longer-term outlook on the business. And it is something that we will re-look at as we win or lose business as our outlook changes. So -- and we will have to readjust the liability when we do that evaluation, so. So in the end, yes, it can and probably will change over time.

Very good. And lastly, and I'll jump back in queue, LogistiCare -- obviously you touched on this in your prepared remarks, but maybe a little bit more color around ramping up of a number of MCO contracts in Q1 and additional bids and renewals expected for 2015.

Well, as we talked about in the ramping up of the new contracts in the MCO business, we are competing for about $100 million in MCO business as we started the year. And we have competed successfully for about $20 million of that business.

We have lost about $20 million to $30 million of that business to competitors and we still have about $30 million outstanding for which we are competing at this time. And our ramp-up is traditional with previous comments that we've made about that in regard to cost to start up the business or stand up the business as we have seen.

So there would be some small start-up cost depending, again, upon the size of the contract in the scope of the contract. So we hope that that's helpful.

In terms of new contracts, one, as you know, we've talked about some of those new contracts. We have about 25% of our total revenue at risk or being put out to bid this year starting with the largest contract which is New Jersey, which is now about $150 million. That is where we've seen the greatest expansion of the woodwork population which has been substantial in total increase in population served in the state of New Jersey. So about 50% increase, as we said in our prepared remarks.

So we will continue to grow those contracts and compete for those contracts. And we are seeing a slight shift from the broker model perhaps to more of the MCO model and we are tracking that and we will compete with that and that probably means there will be a few more ASO models that we will see out there in the near future.

That is great color and Happy St. Patrick's Day to you as well.

Thank you, Dan, we appreciate it.

Brian Hoffman, Avondale Partners.

Thanks for taking the questions and also thank you for all the detailed information, that was very helpful. First, Warren, I just want to make sure I heard you correctly. Did you state that for Ingeus in 2015 we could expect mid-teen revenue growth excluding any potential win in Australia, is that correct?

That is correct.

Okay, great. Thank you. And then Ingeus in the fourth quarter, it appeared to be a bit weaker in the fourth quarter relative to the third quarter. I know you discussed a few reasons for that. I am just curious if you can give us a bit more color, maybe the breakdown on what caused the weakness sequentially there in terms of changes to the large work program contract that were enacted in the third quarter versus start-up expenses for new contracts? Thanks.

Jim and I both might share this a little bit. First on the slowdown in the fourth quarter, it is expected and a part of our model because the DWP contracts were slowing the number of referrals coming from the government. As we said previously, even though there is a slower rate of referrals, we have a higher conversion rate and as a result of that have been able to keep it pretty well stabilized.

And that was a part of the DWP negotiations or renegotiations of the contract and the extension that was granted on the DWP contract. And also fully expected that those slowdowns will occur and these performance-based contracts regardless.

Even the Ministry of Justice contract, for example, which we have just won, we would expect in the third, fourth, fifth year you'd begin to see that slowdown as a part of a normal transition. So that is part of the slowdown that we have seen as a result of the referrals coming from the government. Jim, any comments on that?

Yes, I would just add that there were also some sort of internal changes going on at Ingeus during the fourth quarter, a lot of activity focused on the start-up costs for 2015 and beyond. So we named a new CFO at Ingeus for the global operation during the fourth quarter.

We had some further changes to the senior leadership. We created -- London really started to develop as the global corporate center for the business. We had some other start-up costs from some other projects flowing in which we don't disclose. But other than that I think Warren hit on everything.

Is that helpful, Brian?

Yes, yes, that is. Thank you. Another question sticking with Ingeus. We have heard about incentive or the bonus payments that can be expected for the year long period that I believe ends at the end of this month. Can you give us any color, update on when we can anticipate those revenues, those payments to get recognized? And will it be one lump sum or spread evenly over the duration of the contract?

Yes, as a part of the negotiation that the Department of Pension and Works had with all vendors who are contracted under this agreement, there was a pushing out of these incentive payments which had previously been expected for March. They have been pushed out to encompass higher rates over a longer period of time with an extension, a one-year extension on the existing contract.

So we will receive those payments, but they will be a part and parcel to the normal course of business over the remaining balance of the contract. So that is the adjustment that was made and that is true of all vendors, not just us. That was part of a renegotiation of that contract with the DWP.

Okay, so do we know when those begin or has that not been disclosed yet?

Well, those payments begin now as we continue --.

They do, okay.

Yes, they begin now as we continue to push through the balance of the contract.

Got it, okay. Great. And then one last question for me. I appreciate the segment level detail in the press release helping us to get to your adjusted EBITDA for the individual segments.

When I look at -- and I will pick Matrix for an example, and I am calculating about a 16.1% adjusted EBITDA margin, can you just help us think about that number relative to the 20% plus number you've previously talked about with respect to Matrix given the corporate expenses that are included in there? Thanks.

Sure, Brian, this is Jim. So you are right around the approximately 16% when you adjust for some of the items you mentioned. And as Warren alluded to in his remarks, the corporate allocations are going to represent, based on the current allocation methodology, 150 to 200 basis points. So that gets you a little bit closer to 20%.

We should also note that as part of the acquisition and transition to Providence there were some other I'd say transition costs around severance, some professional fees at the end of the year which probably weren't captured in total in the acquisition cost that we disclosed. So without those we feel more confident about the 20% plus as something that we are -- that is achievable in 2015.

Great, thank you.

So I think you will see -- in general in 2015 I will note that the acquisition integration, restructuring cost should be minimized and certainly not as confusing as -- and extensive certainly as we saw in 2014. So I think it will make things a lot clearer.

I think as Jim mentioned, the transition costs were not completely added back and that the fourth quarter is a slower quarter for Matrix anyway in normal course of business.

Great, thank you very much.

Andrew Hendel, Beach Point Capital.

I was just wondering, when I calculate adjusted net income and adjusted EPS, should I be reducing net income for the quarter by the $16.3 million contingent consideration adjustment and adjusted EPS by about $1.00?

That's -- are you trying to get to sort of that tax consideration or just like theoretically what you should --?

Well, kind of what a normalized net income number would be, right? Because am I right that you reduced expenses by $16.3 million?

We -- the G&A line was affected -- was negatively -- was moved downward by $16.3 million. So that number will not be repeated quarter after quarter. And while we might recognize changes in that liability, which could go up or down over time, again, it is not -- we don't treat it as an ongoing operating expense or benefit.

Got it. And how much liability is associated with Ingeus on your balance sheet? In terms of that earn out, that could be reducing the expense on net income.

I don't know that off the top of my head. I can get that back --.

We can get back to you on that, Andrew, if you would like.

My -- I would say the estimate is it is probably under $3 million to $5 million, but I will -- I would like to get back to you on it if we could.

And I heard some rumors about Ingeus giving outcome payment revenue breaks on the UK work program in order to win as many sites as they just won. Is there any color in terms of how large those revenue breaks are? Or is there any veracity to that rumor?

Yes. No, I mean we are shaking our heads here just listening to your question. We are not aware of that. But certainly we will think about that but we are not aware of that at the present time, no.

Okay. And then just in terms of the quarter, I guess Matrix closed three weeks in. Is $31 million of EBITDA for the quarter kind of a good run rate for the business? I guess that would get you to $125 million or maybe $130 million for the year on a kind of run rate basis.

No, we're not going to give any sort of run rate guidance going forward. I think the best we can do is -- I'd prefer you back to Warren and my comments to build your model around each vertical and look at it that way. But we are not going to give any sort of run rate or guidance going forward.

Got it. And then just in terms of pro forma EBITDA, you mentioned I think it was $159 million. And I believe in a November investor presentation you had shown it as $166 million. Is there any color in terms of why that may have gone down?

Sorry, which --.

Am I right that there was a November IR presentation where you showed pro forma LTM EBITDA at $166 million?

Yes, that was September 2014 LTM. And what we talked about in this conference call was full year 2014.

In addition to that, stock comp probably had not been added back in and then the DWP slowdown also impacted that as well. So those two factors would have to be calculated.

Got it. All right, terrific, well, thank you for answering my questions.

Mitra Ramgopal, Sidoti.

Just a few questions. First, as we look at 2015 and beyond, is it fair to assume you pretty much exited all of your underperforming contracts or are there still a few to be worked out?

No, we are still working on that. There are other contracts at which we are giving close scrutiny and we would expect that there may be some additional contracts that we will be exiting in 2015. Obviously the big one was Texas, Mitra, we have talked about that before. And that had a big impact on us.

But there are some other contracts and some other markets that we are looking at very carefully and we'll be reporting those as we move through the next earnings call.

Okay, thanks. And absent the one-time costs related to the Ingeus/Matrix acquisitions, etc., how far along are you in terms of rationalizing your cost structure?

On the Human Services side we're making good progress. The consolidation of the back-office functions, at one point we had about eight back office functions today we have two -- two operations and we would expect to continue to further consolidate that.

In addition to that we have rationalized our workforce. We have had some layoffs as a result of this rationalization and so that has reduced our cost overall. Beyond that we have actually reorganized some offices in two or three different states where we reduced manpower but also restructured our service lines and rationalized the actual physical locations we are in and reduced that as well.

So, that is the pruning that we are talking about and that is the continued review of the Human Services business. And we think overall that there will be a slight reduction in revenue over time, but that should have a positive impact on our EBITDA margins. So we will continue to talk with you about that as we move through it.

Okay, thanks. And regarding the NET and the Matrix businesses and the guidance you've provided in terms of growth for 2015, are you baking any of the Medicaid expansion on Obama care right now or are you just relying in terms of the existing population?

Specifically at LogistiCare we have not pro forma'd any of that increase in population historically. And so we manage that as it comes along. As we said, in New Jersey we have had about a 50% increase, both woodwork population and expansion population, to the base contract that we started a few years ago. So it is been pretty dramatic. Less dramatic in other states, Michigan and Nevada for example, but still we see that population coming but we don't pro forma that population.

Okay, thanks. And, Jim, I missed a couple of your comments regarding depreciation and amortization for 2015. And I believe on the interest expense line there were a couple of adjustments to get to a more normalized number and if you could repeat those for me.

Sure. So on the interest expense line, yes, I realize it looked a little high at $10 million for the quarter and that is why I wanted to break out the $4.5 million for the bridge financing commitment fee. And then I believe it was $1.7 million for the interest associated with that bridge loan.

Okay. And depreciation and amortization, the fourth quarter was obviously a lot higher than what we have seen previously. Is that a good number going forward?

Because we have some, I would say, acquisition-related, some one-time items in there. So let me get back to you on sort of what we think, if we are going to disclose that, of a run rate going forward.

Okay, that would be great.

It's not something we are prepared to do it this time.

Okay, thanks. And then finally, Warren, again a big picture question. Obviously you have had Ingeus now for a couple of quarters, Matrix now one quarter -- in terms of what's your feel so far. Would you say these acquisitions are sort of exceeding your expectations are pretty much just in line?

No, I think they are exceeding our expectations. We are pleased with the progress of both companies, very different businesses, different kinds of contracts. And we have to lag time that we've talked about between business performance and actual results at Ingeus, that is why we have to look up that over a longer period of time, not even on a quarter-to-quarter basis but a year-to-year long time horizon.

Matrix obviously is much more direct and constructive in the tie between operational performance and results, which are on a month-to-month, quarter-by-quarter basis. But both are performing excellent, excellent work.

We are particularly pleased with the new contracts that we have won since our acquisition, over $800 million in contracts won without any consideration for a potential win in Australia. So we think that as we look out to 2016, 2017, 2018 those contracts will be performing very well for us.

Matrix continues to hit it out of the park in terms of its margin and its increase in business, 25% last year. We expect similar growth perhaps in the mid-teens this year, but they continue to do very, very well. So, the answer to your question is that we are very pleased with both acquisitions.

But I would just reiterate that particularly around Ingeus it is a long-term investment that goes out beyond three, four, five years. And a lot of the investment that we are making over the next year and potentially longer if Australia is won, the benefits are further out beyond sort of the next three or four years. So it is important that we look at it literally over the next three, four, five, six, seven years which are the lives of some of these contracts.

Well, Mitra, as you know, the investments that we make in the front end of these contracts with Ingeus and stand up as a drag on our margins and our EBITDA and will continue to do that in the short term. Longer-term we are expecting to have the contracts perform as expected.

Okay that is great, thanks again for taking the questions.

Rich D'Auteuil, Columbia Management.

Just a few questions. So you mentioned New Jersey on Herman's business, that the RFP isn't out yet. Is it expected in the timeframe of the fall or what is the timeframe at this point?

Rick, we are expecting that RFP to be out in the next 30 to 45 days which may mean we would see a brief extension of the existing extension which we have in New Jersey. And so -- and that might be a 90-day extension or so. So we expect it to be fully resolved both with the RFP being out and the contract left -- the new contract left well within 2015 perhaps in the early to mid fall.

Okay. Is South Carolina on the list of re-bids this year?

It is. They had a pause simply because they changed out the leadership there. The person who had been leading that effort left to go to another state, they brought a new person in. And so, necessarily it got extended.

We are still watching that and we are waiting for that RFP to come out and see what that looks like. They may be moving to an ASO model. And so, we will see that shortly and we are looking forward to seeing how the state wants to approach it.

Okay. Maybe it would be helpful to hear what is the status of the Australia bid on Ingeus? Is it imminent on award or --?

Rick, we really can't speak about that. We are in this very interesting and sensitive period with the government of Australia. The projection that the government of Australia had at one point said that they would expect to make an announcement sometime in late March to early April and that is about all we can say at the present time.

Okay. And then just a couple of things regarding the going forward. With the two big acquisitions you did last year, your cash earnings are significantly different than your GAAP earnings. And it would be helpful I think to specifically state what cash earnings are for investors.

It seems to me like that is probably the appropriate way to measure you going forward. So that is one thing that I would like to see and I think others have expressed the same thoughts on that.

And then maybe as you look to lay out your Investor Day, as it relates to these Ingeus contracts I -- it probably wouldn't be helpful that to get into the nitty-gritty detail of each one. But in aggregate or hypothet -- not hypothetically, but sort of a model for how you would expect a new large piece of -- a new large win to track from year one to year two to year three and four and five if they are five year contracts.

And that would be I think helpful for investors because if we are kind of going backwards in the first year and taking losses and even EBITDA negative impact, at some point along the way to get to a 10% operating margin obviously you have to have significantly more than 10% to make up for the dip you took.

And I would like to see how that lays out over the duration of a contract in general. I mean I don't know that you need to do it specific to an individual contract, but how it is conceptually laid out.

Yes, we -- I guess -- this is Jim. On the first point on cash earnings, that is something that we have talked about internally and it is something that I focused on pretty heavily in past lives. And so we will be focusing more on cash earnings internally over the next -- rolling that out over the next three to six months and certainly want to relay that progress to investors and looking at a cash earnings number is I think a great idea.

And on your second point, I agree that if we could somehow show sort of the lifecycle of one of these typical contracts that that's what we attempted to do a little bit in our remarks here. And we have seen some other companies that we compete against do it fairly well in some of their analyst presentations. So we will try to take the best of what they have done as a model.

We do have to recognize that each of these -- as you know, each of these contracts is different and we do have sensitivities around the customer side of things as well. So -- but both great suggestions and something that we've been thinking about a lot and something hopefully we can present over the next few months to you. Thank you.

Thank you very much.

Mike Petusky, Barrington Research.

I guess just a question around the $1 billion pipeline represented at Ingeus. I guess a handful of questions. How much of that roughly is Australia related? How much of that is in markets that you are currently already doing business in? How much of that is new markets? Could you just -- and I guess how much of that is expected to be awarded in 2015? If you could just give some detail around the pipeline.

We can't give a lot of detail and it is just a matter of our policy that we don't want to give too much detail. But maybe suffice it to say, and I will stand corrected by my colleagues here, but suffice to say it's in multiple markets, not a single market. That that pipeline is expected to develop over the course of 2015.

And that we are competing in a variety of circumstances and not all for the same kind of contracts. These are different kinds of contracts that have different terms and different kinds of compensation associated with them. So it is a very diverse portfolio. I hope that is helpful. We just can't talk too much about it.

Okay, could I -- Warren, could I just try to ask a little bit more on that? I mean is Australia more than a third of that, more than a half of that? I mean can you just give some sense of that?

Yes, we can't -- we are really at this really interesting juncture with the country of Australia in regard to our bid. And we and other vendors have agreed not to discuss this at all in any way publicly. And therefore I can't give you any more light on that. As much as I'd like to we just can't do it.

Okay, let me try one more on this subject. Are there any new potential pieces of business, meaning the pipeline, that would get you guys involved in new countries, new markets?

The answer is -- to that is that all of the new -- all of the contracts and pipeline we're talking about are in existing markets, but they are across multiple markets where we currently have operations.

There might be some new services within those markets as well.

That's right, new services within markets as well. So maybe that gives you some sense. And if you have looked at our contract wins recently, for example, that we can talk about, one is a national citizenship contract, three-year contract, for example, in Great Britain. One is an English language contract.

One is for -- in Saudi Arabia we have won actually three contracts there which are really on campus kinds of employment counseling and services which are different and unique contracts. So they're interesting in that they bring a diversity to our contract bidding which Ingeus has not previously seen.

Okay, would it be fair to say then that also -- some of these would be much smaller contracts than -- a lot of your historic contracts and even recent contracts wins have been very sizable. So maybe more contracts in the pipeline but smaller, is that fair to say?

Yes. Well, we can't comment again. Mike, you are being very good and very persistent at your questioning, which we respect and admire. But there are just some things we can't talk about. Sufficient to say that the -- some contracts, again, that we have recently won, to give you magnitude, the National Citizenship contract is a $98 million contract over three years. The Northern Ireland contract is a $60 million contract over five years.

These have been previously disclosed in other earnings discussions and those are contracts we've actually won. So whether those are large or small is in the eyes of the beholder I guess, but they are -- we think they are good size contracts.

Okay, absolutely. All right, thanks, guys, appreciate it.

There are no further questions in queue. I will now turn the call back over to Mr. Warren Rustand for closing remarks.

Well, first we would like to wish you a Happy Saint Patty's Day again wherever you are, enjoy the day. Secondly, we would like to thank you for your interest in Providence. Providence is an exciting Company and an exciting story, there are lots of things -- not without its challenges, not without its strengths.

But we are really enjoying the opportunity to diversify this business in new and interesting ways and we will be speaking more and more about that. In addition to that, as we've said previously, we will continue to give more segment information as we move to other earnings calls in the future. And your suggestions are appreciated and your interest in our Company is appreciated. So have a terrific day and thank you for your time.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.