ModivCare Inc (MODV) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2015 Providence Service Corporation earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today, Ms. Alison Ziegler from Cameron Associates. Please proceed.

Good morning, everyone, and thank you for joining us this morning for Providence's conference call and webcast to discuss key management changes and our financial results for the first quarter ended March 31, 2015. On the call from Providence today is Chris Shackleton, Chairman of the Board; Warren Rustand, CEO; and Jim Lindstrom, CFO.

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 May 19. The replay number is 888-286-8010 or 617-801-6888 with the passcode 41247620.

This call is also being webcast live with a replay available. To access the webcast go to www.ProvCorp.com and look under investor information as well as the event calendar.

Before we get started, I would 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, as well as subsequent filings.

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, May 12, 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 a result of new information, future events, or otherwise.

In addition to 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, adjusted EBITDA, adjusted net income, and adjusted EPS.; 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 result of certain recent acquisitions as if they had occurred at the beginning of fiscal 2014, which is also a non-GAAP presentation.

EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS, 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 measure for EBITDA and adjusted EBITDA, adjusted net income, and adjusted EPS 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 May 11, 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 beliefs, enhance a reader's ability to measure overall operating performance and compare the results of the Company's business after excluding or including these items with other companies within its industry.

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 would now like to turn the call over to Chris Shackleton, Chairman of the Board. Go ahead, Chris.

Thank you, Alison, and good morning to everyone on the call. Before Warren and Jim take you through Providence's financial performance for the quarter, I would like to comment upon Warren's recently announced decision to step down as CEO.

First, on behalf of Providence and the Board, I would like to thank Warren for his many contributions to our company. On a personal level, I would also like to thank Warren as a colleague and a friend. Working alongside Warren over the past three years has been a remarkable and rewarding experience for me.

As you may recall, shortly after I became Chairman in 2012, we asked Warren, a fellow Board member at the time, to step into the role of CEO and help lead a transformation of Providence. Warren's leadership has made us better and has positioned us as a stronger organization. Over the next few months, as the Board conducts a formal search for Warren's replacement, I have agreed to assume the CEO responsibilities on an interim basis. At the Board's request, Warren has also agreed to stay with us for the remainder of the year as a senior advisor.

As many of you know, I have been an active Chairman over the past three years and have a strong familiarity with our operations and deep relationships with leadership throughout the Company. Given our holding company structure with businesses driven by terrific portfolio company CEOs, I don't anticipate any disruption over this interim period and I expect a smooth transition.

Looking forward, our company has a foundation of great businesses and talented leaders from which to continue to build an exciting future for Providence. Thank you for your continued support. At this time I would like to turn the call over to Warren.

Thank you, Chris. It has been my privilege to service Providence shareholders, Board, and employees as CEO over the past 2.5 years. I am proud of what we have been able to accomplish together. The Board is placing Providence in good hands under the strong leadership of Chris, Jim, vertical CEOs, and our leadership teams. But let's move to the main purpose of today's call.

I will make a few high-level observations and comments about our segment business and then I will turn it over to Jim for the detail. As you can see from our press release, we had a strong first quarter versus both prior year and our internal expectations. Organic revenue growth was experienced across all four of our segments, led by LogistiCare and Matrix.

Consolidated EBITDA margin also improved versus prior year as a result of the addition of Matrix margins, but also due to improving profitability at our Human Services segment. At our Human Services segment, the top line increased by 2.5% in the first quarter versus prior year as a result of organic and acquisitive growth. Our operational improvement strategy also drove increased profitability versus prior year.

At LogistiCare, which we refer to as NET Services in our press release, performance was better than expected. Revenue growth approached 30% as the result of new state and NCO contracts and increased membership, partially offset by contract expirations. The anticipated margin contraction we communicated on our last earnings call began to evidence itself as the expansion and woodwork populations are becoming more familiar with our services, thereby increasing overall utilization.

At Ingeus, known as WD Services, the biggest news for the quarter was our securing of a five-year contract to deliver employment services in Australia through Mission Providence, our newly-formed joint venture. With this win in Australia, the total value of contracts won by Ingeus since our acquisition is now over $1 billion. This win also builds upon the diversification of Ingeus beyond the UK welfare-to-work market that began in a big way with our securing of the UK Ministry of Justice probation services contract in Q4 2014.

Lastly, Matrix, referred to as AJ Services, had a great first quarter in addition to revenue growth and margins both coming in higher than expected. We were pleased with the progress made by Matrix in establishing inroads into the commercial and Medicaid markets. While still representing a relatively small percentage of overall revenue, these markets represent an exciting opportunity for Matrix.

In addition, Matrix commenced member visits under its Care Direct offering with a pilot customer in April. Let me now turn the time over to Jim.

Thank you, Warren. I will start with a few housekeeping items. First of all, in our press release you will notice a few changes to the way in which we are reporting our results.

First of all, since joining Providence this year, multiple investors have communicated to me the difficulty or challenges they have in understanding the underlying performance of each of our segments, largely due to our corporate cost allocation methodology. As a result of this feedback, we are no longer allocating all corporate costs to each segment. Instead we are allocating to each segment only those corporate costs that represent expenses directly attributable to that segment.

Indirect corporate costs are now captured in the new corporate and other category. We hope these changes provide the greater clarity that you, our investors, are seeking.

Second, you will notice that the workforce development services segment is registering financial activity in the first quarter of 2014, which is before our acquisition of Ingeus. This is the result of our decision to transfer the oversight of our employment services operations in the US and Canada from our Human Services management team to the management team at Ingeus. We see obvious synergies between Ingeus and these operations and Greg Ashmead and his team are already taking advantage of them.

Third, we are now providing adjusted net income and adjusted EPS available to common shareholders. This was also done based upon shareholder feedback to provide net income and EPS on a basis that is more reflective of our true earnings power. The most significant adjustment made to net income in order to arrive at adjusted net income is stripping out the intangible amortization expense, which is the result of our historical acquisition activities.

Fourth, you will now notice that we have an equity investment line item on our income statement, which is under other expenses. This line item is the result of our joint venture investment in Mission Providence using the equity investment methodology. Note that in the calculation of segment-level EBITDA, we are including the loss on this equity investment within the Workforce Development Services segment. For Q1 2015, this means that WD Services EBITDA includes a $2.5 million loss on our investment in Mission Providence.

Fifth, while we do not have an exact date, we are aiming to hold an analyst day, as we previously discussed in New York City, in early October.

Turning to this quarter's performance, our vertical CEOs and their leadership teams drove exceptional first-quarter results. Despite the strong first-quarter performance, the comments we made on last quarter's earnings call relating to our annual growth and margin expectations for the full year 2015 remain largely intact. We are no means adjusting our full-year expectations upwards as a result of the strong first quarter. Our quarterly performance can be volatile and, therefore, Q1 should not be used to infer full-year performance.

Diluted EPS available to common shareholders in the first quarter of 2015 was $0.32, or $0.77 on an adjusted basis, a 28% increase from Q1 2014's adjusted diluted EPS available to common shareholders of $0.60. First-quarter 2015 results included a $2.5 million loss on equity investment related to contract startup costs at Mission Providence and a $1.5 million expense related to the issuance of restricted stock awards in connection with the acquisition of Ingeus.

Revenue and adjusted EBITDA for the quarter were $506 million and $36 million, respectively. And including the results of Matrix and Ingeus as if they had been acquired in March 31, 2014, pro forma LTM revenue and adjusted EBITDA were $1.9 billion and $143 million, respectively.

So starting with our verticals, we'll start with LogistiCare first or our Net Services segment. Herman Schwarz and his leadership team generated an impressive 28.6% revenue growth in the first quarter versus last year. This growth was largely fueled by new contracts, rate adjustments in select markets, and increased membership that was partially tempered by contract expirations.

Contract additions included our new Rhode Island state contract as well as new MCO contracts in a handful of states including Michigan, Virginia, and California. We also picked up four new regions in Maine and two new regions in Texas since Q1 2014. Contracts that expired since Q1 2014 and have not been renewed include contracts in Mississippi and a managed school transportation contract in Connecticut.

Membership increases have largely occurred in expansion states, including New Jersey and Michigan.

As anticipated, margin is creeping down from the highs experienced in 2014 as a result of increased utilization in certain states as the expansion and woodwork populations are becoming more familiar with the NET benefit. We expect this increased utilization trend to continue to pressure margins throughout 2015. Q1 2015 was also up against a tough margin comparison versus last year as a result of less severe weather, and that was particularly experienced in the Northeastern US.

We were also subject to increased customer service cost. And on this last point, we are seeing increased customer service cost as a percentage of revenue as our contract portfolio includes more and more MCO contracts. MCO contracts typically require more account reps as well as call center personnel than state contracts, so in order to alleviate the higher call volumes associated with MCO contracts and improved overall user experience, we are investing in developing and bolstering our overall IT capabilities.

Lastly, on LogistiCare, the status on expected RFPs in a number of states is unchanged; therefore, we assume that we will extend multiple contracts by at least a quarter or more in some of these states.

Moving along to our Workforce Development segment, which is now comprised of Ingeus and Human Services, former Workforce Development operations in the US and Canada. Our CEOs of Ingeus UK and Ingeus International, Jack Sawyer and Greg Ashmead, and their respective teams were quite busy on the new business front this quarter.

In the UK, Jack and his team are focused on rolling out our reducing reoffending partnership contract, which is performing in line with our initial expectations. We have also referred to this contract as the MOJ contract in the past. On the international side, Greg and his team are generating strong backlogs in France, South Korea, Saudi Arabia, and obviously Australia through our joint venture.

To expand a bit on Australia for a moment, as Warren mentioned, Ingeus formed a JV with a nonprofit incumbent employment services provider that is proving to be a great partner for us as we reenter the Australian employment services market. Given the number of regions we have won in Australia, our annual revenues from the contract are expected to be in line with many of our mid-tier size contracts found across Providence. Most of these contracts generate $50 million to $75 million per year of revenue.

One key difference is the fact that we have a partner in this initiative and will incur startup costs similar to other Ingeus contracts. In 2015 we expect this expense to be just under $15 million. Strategically, we are pleased with our mix of regions in the Mission Providence win, which includes Sydney, and we look forward to working with our JV partner and the Australian government in the provision of world-class employment services to the citizens of Australia.

Financially, this segment generated adjusted EBITDA of $5.2 million in Q1 2015. This adjusted EBITDA included incentive fees of $4.7 million related to 2014 activity on a major contract. We do not expect to recognize additional incentive fees related to this contract until Q1 2016.

Consistent with previous comments, we expect to incur $30 million in startup costs for our RFP-- as we referred to it previously, our MOJ contract -- and Mission Providence initiatives for the full year [2015]. Again, these startup costs are in line with the lifecycle characteristics of Ingeus's contracts we described earlier on our prior earnings call. Understanding these characteristics is crucial for understanding Ingeus's financial performance.

As a quick refresher, Ingeus's contracts are long-term in nature, typically five to seven years, with significant year-to-year variability in revenue and profitability due to such characteristics as upfront startup costs, contracted changes in base service fees over the life of the contract, and payments based upon long-term performance. As a result, we believe Ingeus's performance should be measured over a multiyear time horizon and not year to year and certainly not quarter to quarter.

With our recent success in converting our backlog into signed contracts, we expect the next few quarters at Ingeus to be largely focused on execution within the UK, France, Saudi Arabia, Australia, and other countries where we are experiencing strong growth.

To Matrix; Walt Cooper and his team drove a strong first quarter. Operationally, we were able to complete more assessments from our 2015 plan in Q1 than we thought we could. Obviously that drove revenues and subsequently this drove the operating leverage in Matrix's business model and increased margins above our internal expectations. Recent productivity improvements and lower direct spend also contributed to the strong margins.

Please keep in mind that our quarterly volumes will fluctuate due to client demand and we consider Q1 2015 to be an example of a stronger-than-average quarter for Matrix in 2015. Finally, the Matrix team continues to expand their assessment offerings around such areas as osteoporosis and colon screening, and also initiated their pilot program in their new chronic care initiative. We look forward to reporting more on these strategic initiatives over the next year.

Moving on to Human Services, Mike Fidgeon and his team lead a solid operational and financial first quarter. Revenue grew 2.5% as the result of organic and acquisition growth that was partially offset by our decision to exit the Texas foster care contract last year. Excluding the impact of acquisitions and the Texas foster care contract, revenue growth was approximately 3%.

Adjusted EBITDA margin increased approximately -- a little bit over 300 basis points to 4.3%, driven by our productivity and realignment initiatives. Note that on our Q4 call, we indicated that we see Human Services ultimately returning to its historical EBITDA margin level of approximately 4% after corporate allocations.

Given our change in corporate cost allocations, the 4.3 adjusted EBITDA margin we reported this quarter is not apples to apples with this 4% target. Using the old corporate cost allocation methodology, Human Services margin would have been below this 4% target. Thus, we still believe Human Services margin has room to expand.

Finally, I will touch on a few other consolidated level items. First of all, G&A was 4.9% for the first quarter of 2015 versus 4.7% last year. This increase was primarily due to increased stock comp mix -- stock compensation expense for cash and [share sale] awards. We continue to keep a close eye on our G&A costs, particularly at the corporate office. And as we begin to develop our 2016 budget, we are incorporating elements of zero-based budgeting across our verticals and our corporate departments.

Next, net interest expense for the quarter was $6 million. This interest expense includes a $1.3 million expense for fees and interest on the bridge financing related to the Matrix acquisition, which was paid off in February. This bridge financing again was taken out this past quarter with the proceeds generated from our issuance of convertible preferred shares in February.

Our effective tax rate for the first quarter was 53.9%, which is higher than the 40% to 42% range we indicated for 2015 on our Q4 earnings call. The delta is largely the result of not being able to -- the $2.5 million loss on equity investment related to the Mission Providence JV. Given that we expect the JV to continue generating a loss for the remainder of the year, our effective tax rate will be above 42% for the year.

Finally, I would like to thank Warren for his leadership at Providence. I look forward to working with him and Chris during this CEO transition and wish him well in his future endeavors. He was instrumental in assembling a team of leaders at the corporate level and within our verticals who have driven outstanding financial results during this past quarter, and who are also focused on delivering superior intrinsic value over the long term for our investors. And more importantly, a team with the overarching priority of delivering superior outcomes for our millions of clients across the globe.

With that, let's open the line for questions.

(Operator Instructions) Bob Labick, CJS Securities.

Good morning. This is Dan Moore filling in for Bob. Just regarding LogistiCare, were there any one-times or sort of makeups in the revenue number, or is that a reasonable quarterly run rate to think about for the balance of the year?

Just referencing the quarter, there were no sort of large one-time items during the quarter. Nothing sort of pressing up or down. I think it's consistent with the trend that we expressed last quarter regarding the margin pressure for the reasons that I just explained on the call. And, again, we don't see going forward any reason why that pressure wouldn't continue versus last year's margins.

Understood. Any update --? I apologize if I missed it, but any update on the South Carolina contract and any other major contract rebids beyond what you mentioned, or perhaps additional color regarding what you mentioned in the prepared remarks?

South Carolina has yet to issue its RFP and so we expect that to be issued in the not-too-distant future. They had a change of leadership in South Carolina within the government; as a result it slowed that process down and we are still very interested in that RFP.

Regarding New Jersey, the RFP is still not on the Street. We expect an extension beyond the current extension that we have that may, in fact, run through the end of the year before that contract is decided.

Very good and one more, switching years. As you look out to 2016, how would you characterize the contribution or potential contribution or loss from MOJ and Mission Providence? Collectively would they likely to be at least breakeven or perhaps is there upside to that?

Well, it's hard to comment on them too specifically on an individual basis, but I would say they are both -- in terms of financial results, we expect them to be fairly consistent with how we described contract performance in Ingeus during the last quarter. So during the first year we expect to invest in startup costs or transition costs, so we could see, as we have stated throughout, the $15 million of investment in both contracts. And then the second year we expect to breakeven or swing to the positive as we complete those transition costs and that transition period.

And that goes on for a couple years where we could see some more profitability based on I'd say less -- revenues that are less susceptible to the performance by result structure. And then as we enter the last third of a contract, that's where we see more the payment by result becoming an increasing proportion of the revenues.

So to be a little more specific, I think the second year -- and again remember Mission Providence, although we have started some of the work already in May, we really expect to ramp up in July. So we will see a loss continue most likely into 2016 as the first 12 months operationally will extend into 2016. And then we will see breakeven and profits, hopefully, coming after that for both contracts.

Thank you for the color. I will jump back in queue.

(Operator Instructions) Mitra Ramgopal, Sidoti & Company.

Good morning. First, just getting back on the G&A. If you were to ex stock comp, what would sort of be a more normal percentage for that?

We don't break it out that way, but I will say that we did have, as I mentioned, some cash settled awards and those cash settled awards are revalued on a quarterly basis. And so that added -- and you will see this in our Q -- about $2 million to our corporate G&A line, which that's probably worth about 400 basis points.

So I know last quarter we talked about hitting a 4% G&A number. I think we are probably -- that was assuming sort of a flat stock price for revaluation of those cash settle awards, so we could see that number, as a percentage of revenue, creep up above the 4% level for the year if that is where you were heading.

Yes, thanks. Then back on the tax rate; I guess the 42%-plus number applies for the entire year and not necessarily just for the remaining quarters.

You think about the tax rate sort of pre the equity investment in the joint venture and then, obviously, the joint venture throws it off. And that's how we get to the 50%-plus.

Okay, thanks. When we look at the sequential improvement we saw in workforce development, I don't know if we have -- was that largely due to the MOJ contract?

I'm sorry, can you repeat the question?

The sequential improvement we saw in workforce development, was that mostly due to the MOJ contract?

So as I mentioned, we had some payments come through related to our work program, which will not be repeated again till Q1 2016. So it was that $4 million-plus related to 2014 and then we had some additional payments that were for activity in Q1 2015. So that certainly contributed to the overall level.

Okay. And switching to Matrix, I was wondering if you could comment again on the first quarter, if it's essentially really volume-driven and you are still seeing some pricing pressure and if the pressure is pretty much in line with your expectations.

Yes, we do continue to see some pricing pressure. We've seen it flatten out in terms of the pace of change as we described last quarter. I would say that that continues. We do continue to see the pressure, but it certainly isn't to the extreme that we've seen in the past few years.

Warren, anything?

No, I think it's a natural course that we will see continued pricing pressure as Jim suggests, but more moderate than we expected. And we will continue to deal with that through process improvement and offset those price decreases through process improvement, which is has been the history of Matrix over the last four years.

Thanks. Again, I guess it's still relatively -- this is probably the first full quarter you have had with Matrix and again you can probably tie in with Ingeus. As you look back at both acquisitions, are you pretty much performing in line with expectations or at this stage you are actually exceeding them?

In line with expectations and appreciate the first quarter that Matrix had. I don't to extrapolate from that first quarter any additional increases over the course of the year. We still maintain our expectations for the year.

Thanks for taking the questions.

(Operator Instructions) Keith Rosenbloom, Cruiser Capital.

Congratulations on really just terrific performance. Could you shed some light on the CEO search and what your thinking is given the structure of the business? Are you going to be looking deep inside the Company or are you casting a far and wide net? Can you just give us some thoughts on what you are looking for?

Thanks, Keith. This is Chris Shackleton. I appreciate where the question is coming from. Maybe a couple points.

First, this is a process, as we mentioned in our press release, that the Board has been working on with Warren since earlier this year. Earlier in March we initiated a broad search process with Heidrick & Struggles, a nationally recognized firm, for both an internal and an external search process, which we are quite focused on progressing in a thoughtful and disciplined manner. Given the stability of the business, the holding company structure combined with the depth and strength of the leadership team and my familiarity with the business, we are perfectly comfortable with the timeline and our ability to drive the business through an interim period.

With respect to your question specifically on timing, I fully expect this to be a short interim period. At the very least I commit to you that I will be back on the second-quarter call with a substantive update, but, frankly, I hope we have our next CEO identified and announced well before then.

Okay, thanks a lot for that.

Bob Labick.

Thank you again. Just curious in terms of the accounting of the start-up expenses expected for Mission Providence, how much of those are likely to be capitalized and how much do you expect to run through the P&L.

We are running through approximately, like I said, up to $15 million through the equity line this year. Are you trying to get to sort of a cash number?

Correct, correct.

That's going to be a little higher, probably closer to 2015 -- closer to $18 million, I'd say $18 million to $20 million. But, again, that number is in flux and as we roll out it could be better by a few million dollars; it could be worse by a few million dollars. We are going through things like bid out phases as we roll out the contracts, so our CapEx is a little bit in flux right now.

Understood. That gives me order of magnitude. Thank you.

(Operator Instructions) Mitra Ramgopal, Sidoti.

Yes, I just wanted to follow-up. I know previously you used to disclose number of clients, for example, in the NET business or Human Services, etc. Was that released or is that not going to be done going forward?

We did omit that from the filings this quarter. We are -- as we have added obviously two new acquisitions, the definitions around that is certainly something that we are taking a new and fresh look at. And, frankly, even within the Human Services and LogistiCare model. It just -- because we had different definitions amongst the different segments we thought it was better sort of pull it out and think about the right metrics going forward volume-wise that we could share with shareholders. So we are working on sort of reinstituting what that might be over the next few quarters.

Okay, sure, understood. Again, I thought the breakout starting this quarter in terms of the segments, etc., is certainly very helpful.

Mark Goodman, Chartwell Investment Partners.

Thanks for taking the question. I was just wondering, on the Matrix business, if you could comment on the relationship with your large customer there and how that is evolving, given their recent acquisition that they have done in that market.

Our largest customer there, as you know, is Humana and they have been a really great customer and a great relationship for a long time. And they have made an acquisition of this particular company. We had discussions with them in advance of the acquisition simply to understand that.

They are really particularly interested in acquiring nurse practitioners for their Humana in-home group and want to be able to proceed with that, as opposed to necessarily expanding and growing the health risk assessment business. So their attraction to that business is the personnel component of that, which they want to apply toward their in-home healthcare program, which they already have.

So we will continue to work closely with them. We continue to get substantial volumes from them and consider it a really outstanding relationship.

Great, thank you.

With no further questions in the queue, I would now like to turn the call back over to Jim Lindstrom for closing remarks.

Great, thank you. Just one item to note that I did misspeak in terms of the G&A line with the improvement relating to the cash settled awards. I said they would improve by 400 basis points. I meant to say 40 basis points, Mitra, so just wanted to clarify that.

Other than that thank you all for participating in today's call. If you have any questions, please feel free to reach out to Chris Warren or myself going forward and we look forward to speaking to you on the next call and hopefully seeing you all at our analyst day in early October. Thank you.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect. Have a great day.