ModivCare Inc (MODV) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2015 Providence Service Corporation earnings conference call. My name is Denise and I will be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I will now turn the conference over to Alison Ziegler, from Cameron Associates. Please proceed.

Thanks, Denise. Good morning, everyone, and thank you for joining us today this morning for Providence's conference call and webcast to discuss key management changes and our financial results for the three months ended June 30, 2015. On the call from Providence today is Chris Shackelton, Chairman of the Board, Jim Lindstrom, and David Shackelton.

Before we begin, please note that we have arranged for a replay of this call. The call 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 or 617-801-6888 with the passcode 80558015. This call is also being webcast live with a replay available. To access the webcast, go to www.provcorp.com and look under the event calendar on the investor information tab.

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, 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: August 7, 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 statements later turn out to be inaccurate, whether as a result of new information, future events, or otherwise.

In addition to the finance 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.

EBITDA, 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 measure 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 August 6.

The items included or 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 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'd now like to turn the call over to Providence's Chairman, Chris Shackelton. Go ahead, Chris.

Thank you, Alison. Good morning, everyone. I'm joining the call this morning to share some exciting news for Providence. As I'm sure you saw in our press release, the Board has concluded its CEO search and I am pleased to announce that Jim Lindstrom has been named the new President and CEO of The Providence Service Corporation. Jim will immediately take over the responsibilities that I have held as Interim CEO. Jim will also be joining the Board of Directors and I will continue as Chairman of the Board.

After a disciplined and intensive search process, it was clear that Jim's unique background as a proven public company CEO and a successful investor lined up extremely well with the capabilities we were looking for in our next CEO. Specifically, the Board was impressed with Jim's experience, thoughtfully stewarding shareholder capital for sustainable long-term returns.

A key differentiator for Providence is our ability to attract elite leaders and compelling acquisitions. To these points, over his career, Jim has demonstrated the ability to recruit and empower industry-leading talent with responsibility, autonomy, and accountability, which in turn have driven notable success from the companies he's worked with.

Furthermore, his cultural and organizational priorities have attracted like-minded business sellers who value these same important characteristics. As a shareholder at Providence, I also appreciate Jim's eagerness to invest personally in Providence shares through additional purchases, which will be disclosed over the next week.

As Interim CEO, I have been able to work alongside Jim on a daily basis and have seen firsthand the strength of his leadership, strategic, and operational acumen and importantly, his character and commitment to the mission and values of our Company. I am confident that these attributes will enable Jim to thrive as our CEO in partnership with our vertical CEOs, delivering long-term value to our clients, payers, and shareholders.

Now I am proud to hand the call over to our new CEO, Jim Lindstrom.

Thank you, Chris. That was a very kind introduction. First, let me just say how honored I am to be appointed the next CEO of Providence. And most importantly, I'd really like to thank our thousands of team members at Providence for all their hard work and being so welcoming to me since joining Providence last January.

Our team members, along with Chris Shackelton, our vertical CEOs and their leadership teams, and let's not forget our corporate team as well have really built a strong foundation over the past few years. It's not only a foundation that's built on solid business models, but also one focused on a core set of values and a long-term focus that differentiates us in many of our markets.

So before we get into a few highlights from the quarter, be a good idea to spend a few minutes on our strategy. First, while our businesses are in a variety of end markets and have a diverse set of characteristics, one of our common motivations at Providence is the difference that we are making in people's lives. And the fact that we are delivering mission-critical services on a personal level and providing solutions to our clients around the globe.

Our customers value these services because we back them up with operational excellence and integrity. This is evidenced by our many long-term partnerships and revenue streams. In a service business like ours, these partnerships only happen because of great leaders and our great people at Providence.

So one of my most important priorities is ensuring that we continue to develop, attract, empower, and hold accountable some of the most elite talent in our industries. And when you combine this with our scale, our technological capabilities, and a reputation in many of our markets, we think our verticals will continue to be the leaders in their respective markets.

With respect to individual vertical strategies, we are excited to announce that we will be holding an investor day in New York City on September 18. At the investor day, most of our time will be spent showcasing our vertical CEOs in their businesses.

In addition to delving into their strategic thinking, each vertical CEO will present on business model specifics, market dynamics and trends, competitive landscapes, and growth opportunities. We will also spend time on priorities at the holding company level. So you will hear our thoughts on overall growth rates, margins, how we think about capital deployment, and examples of what we're doing with the verticals to improve their intrinsic value over the long term.

I think it's important to mention that one of the examples where the Board and the holding company team has been spending a lot of time over the past few months is on our long-term incentive structure for our vertical leadership and the holding company teams. And as we communicate the specifics of the structures in an 8-K next week and at our investor day, you will see a very clear alignment with delivering superior performance, encouraging an ownership mindset, and subsequently building long-term intrinsic value for our shareholders.

I have worked for and followed some of the best investors, capital allocators, and owner-operators over the last 20 years and have seen similar structures contribute to impressive results. I believe that these structures, together with the right strategic focus and capital management, can be quite powerful.

So moving on to the second quarter, let me start by saying that on the back of a strong Q1, we were pleased to see another strong quarter. And that our second-quarter results really did exceed our internal expectations across the board.

So moving on to the segments, I'll start with workforce development services, or WD Services, as we call it in our 10-Q. WD is comprised of Ingeus, Mission Providence, and our North American employment service subsidiaries.

So at the moment, most of our revenue and activity is centered around three major long-term partnerships: the UK work program, our Mission Providence joint venture, and our reducing/reoffending partnership, what we refer to as RRP, which is a partnership with the Ministry of Justice in the UK. These partnerships consists of contracts that represent a majority of WD's revenue and earnings power over the next few years.

During the quarter, both the RRP partnership and the Mission Providence JV continued their launch activity and the work program continued to slow as its activity enters its final phases in 2016 and 2017.

Operationally, all these partnerships performed well overall, but as I mentioned before, you measure the performance of these contracts over years and not quarters. Regarding the work program, you should know that we have put in place a project team to begin focusing on the expected renewal of the work program contract. Although a new RFP has not yet been released, we believe that we are about 9 to 12 months away from the retender.

Within our smaller entities, we are seeing a mixed level of operational performance, where we are seeing particular strength in certain operations under leaders like [Jayon], who is making significant headway with our private-sector clients in South Korea. We are excited to highlight more of these smaller but valuable entities at our analyst day in September.

Finally, we look forward to introducing the leaders of this segment in New York City in September, where they will focus further on explaining the business and offering our strategic insights into the portfolio partnerships and also how we are all looking at scaling into new and existing markets.

Moving to NET services, or LogistiCare, as many of you know it, Herman Schwartz and his team delivered another quarter of phenomenal revenue growth, driven by new contracts and increased membership. And as expected, EBITDA margin decreased year over year due to increased utilization over the summer period.

As we have spoken about previously, two of NET Services larger contracts, New Jersey and South Carolina, are up for renewal in the near term. The New Jersey RFP has not been released just yet, but we expect to be coming out in the coming weeks. The South Carolina RFP was released and we are in the process of responding to it.

We do not have a time frame of when the award will be made, but we do expect competition on these contracts we believe we offer the best solutions for our clients. Some of the best evidence for the effectiveness of our solutions is if you look over the long-term at LogistiCare's compound annual growth rate of revenue, which is about 13% since 2008. So Herman, Albert Cortina, and their team have done a phenomenal job of delivering unique solutions to their clients over the long term.

Lastly, on NET's strategic front, our focus on technology investment and differentiation is picking up with the key hiring of a new Chief Information Officer, who will lead our technology initiatives. Obviously, we'll delve more into these at the analyst day in September as well.

At HA Services, our assessment business, Walt Cooper and his team delivered another impressive quarter. Similar to Q1 of this year, this strong Q2 result was due to Matrix successfully pulling forward volume from the second half of the year. Importantly, we are also seeing increased customer diversity and operational excellence.

In addition, we continue to make incremental progress expanding our assessment product into adjacent markets, such as the commercial and pediatrics markets. While these adjacent markets are still relatively small compared to our core market, we believe they represent longer-term growth avenues for HA Services. In addition, although it's still early and the population size is relatively small, our chronic care pilot we launched last quarter is so far delivering positive results in terms of decreased hospital admission rates and ER visits.

Finishing with human services, Mike Fidgeon and his team are doing an excellent job transforming the operations of the business as demonstrated by the substantial margin improvement in the first half of 2015 versus last year. Mike and his team have made substantial progress standardizing service delivery and increasing provider productivity, for example.

Other examples of initiatives focused on increasing provider productivity include the continued rolling out of clinical and billing EHR systems, the implementation of new pay models in certain markets, and the recent launch of town acquisition and management tools that are significantly improving our retention numbers.

On the top line, while Q2 was down slightly versus prior year, underlying organic growth was strong. Removing the negative impact of the Texas foster care contract that we chose to exit at the end of last year as well as the positive impact of bolt-on acquisitions that occurred in the second half of last year, revenue was up approximately 3%. In summary, the strong first-half performance at human services has increased our optimism in their second-half performance and our longer-term goals of 6.5% EBITDA margins.

So finally, as I move into the CEO role, I'm also very pleased to announce that David Shackelton will be taking over the CFO position on an interim basis. Our audit chair said it best in our release yesterday that David has provided key and vital leadership in the transformation of Providence, including overseeing acquisitions, supporting the transition to a holding company, and working closely with our verticals on strategy, reporting, and financial planning. Personally, he has been a true partner to myself and also other key players and managers within the Providence team.

So let me now turn the call over to David.

Thank you, Jim. To start, I'd like to remind everyone of a couple of the changes instituted last quarter to how we report results. First, we are now only allocating corporate costs or holding company costs that are directly attributable to a segment. Indirect corporate costs stay within the corporate category.

Second, because oversight of our legacy employment services operations in the US and Canada has moved from human services to WD Services, the results of these operations are now included within WD Services.

New to this quarter, we now have an equity investments line on our cash flow statement to more clearly breakout the capital conference contributions to our JV investment in Mission Providence.

And new to this quarter's conference call, we are speaking to performance at the segment level has posted the operating company or brand level. For example, instead of talking to performance at Ingeus, we are referring to WD Services, which is inclusive of Ingeus, Mission Providence, and our legacy workforce development operations in the US and Canada.

Now turning to this quarter's performance, revenue and adjusted EBITDA were $508.3 million and $36 million, respectively. Including the results of Matrix as if acquired on June 30, 2014, pro forma LTM revenue and adjusted EBITDA were $1.9 billion and $135 million, respectively. This EBITDA figure is down a bit from last quarter, primarily due to the year-over-year decreases in WD Services, which was down primarily due to contract startup costs.

Diluted EPS available to common shareholders in Q2 2015 was $0.26 or $0.67 on an adjusted basis compared to Q2 2014's adjusted diluted EPS available to common shareholders of $0.74.

Now moving into segment results. Revenue at NET Services was up 25.1% for the quarter versus prior year. First-half revenue was up 26.8% versus prior year. This growth is the result of new contracts on both the state and MCL level as well as increased membership under existing contracts.

As we move into the second half of the year, we don't expect year-over-year revenue growth to be quite as robust as we begin to lapse the start date of certain of our contracts that we began in 2014.

Margins at NET Services continue to creep down due to increased utilization and increased customer service costs, trends that we see continuing into the later half of the year. The Q2 increase in utilization on a year-over-year basis is due to new members becoming more familiar with the NET benefit. On a quarter-over-quarter basis, less severe weather also contributed to increased utilization and less margin contraction.

Moving to WD Services, adjusted EBITDA in Q2 2015 was $1.4 million, which includes the $1.1 million loss on our equity investment in Mission Providence and excludes $1.5 million related to the amortization of the fair value of restricted stock awards issued in connection with the acquisition of Ingeus. This performance for the quarter at WD Services was better than originally anticipated due to the delays and reductions in certain contract startup costs as well as additional complementary revenue sources associated with the RRP contract. The largest bucket of contract startup costs that are being incurred more slowly than originally anticipated are IT implementation costs on the RRP contract.

WD Services' delivery models across contracts incorporate sophisticated technology infrastructures, thus IT costs are a large component of most contract implementations. Importantly, these cost delays did not impact the go-live date of the contract. We have already begun to see clients and generate revenue, nor have the delays impacted the revenue we expect to generate from the contract in 2015 or over the life of the contract.

Losses at Mission Providence were also less than previously anticipated to lower-than-expected startup costs. Unlike the RRP contract, however, this is not timing related, but an overall reduction versus our original expectations.

Again, anticipated revenues have not been impacted. Mission Providence successfully opened more than 60 sites and began serving clients on July 1 of this year, a very significant milestone for Greg Ashmead and his team. By next week, over 32,000 clients will have been signed up to services by Mission Providence, a very impressive number in start.

Despite the reduction in startup costs in the quarter, our full-year view on WD Services' financial performance has not changed significantly. Delayed startup costs should be realized later in the year. A national contract in France is also incurring its own startup costs and anticipated volumes for a handful of smaller contracts are coming in lower than previously expected.

Moving to HA Services. Like Q1, Q2 was strong, with revenues of $55.4 million and adjusted EBITDA of $13.5 million, which represents a 24.3% EBITDA margin. Year to date, HA Services has generated $112.8 million in revenue and $27.1 million in adjusted EBITDA. Although, as expected, pricing has come down since last year. Productivity improvements and fixed-cost leveraging of both direct and indirect costs are allowing us to hold margins relatively flat, despite this expected contraction in pricing.

The pulling forward of volumes from the second half of the year into the first half of the year that Jim mentioned earlier improved economies of scale for HA Services in the first half of the year. Because volumes may be lower in the second half of the year, these scale benefits may not be as great.

In addition, a shift in our customer base while increasing customer diversity is requiring us to shift our geographic footprint, which is putting some pressure on productivity. However, we are continuing to identify and implement positive ROI capital investments that are helping to offset some of this pressure.

Finishing up on the segment reporting with human services, where the management team continued to outperform among along multiple dimensions, excluding the impact of both our decision to exit the Texas foster care contract and bolt-on acquisitions completed last year, organic revenue growth is solid particularly in California, Arizona, and Maine. Due to substantial realignment of productivity initiatives, human services adjusted EBITDA margins improved by over 300 basis points in the first half of 2015 versus last year.

In Q2, the human services management team also took steps to optimize the org chart and refresh reporting structures, both of which are already beginning to produce results. In addition to centralizing the crucial human resources infrastructure and the hiring of new head of HR, Bart Beattie was promoted to SVP of Operations in order to streamline regional VP reporting, promote operational best practices, and oversee performance monitoring on a national level.

And finally, before wrapping up, I'll touch on a few consolidated level items. G&A for the second quarter of 2015 was 4.6%, which was approximately 10 basis points lower than prior year. However, after backing out last year's acquisition costs as well as expenses related to stock award modifications this year, G&A for Q2 2015 was approximately 50 basis points higher than prior year. As we indicated on last quarter's earnings call, we are quite conscious of G&A costs and they are a focus for us as we are developing and rolling out our 2016 budget.

Our effective tax rate for Q2 2015 was 55.9%. Similar to last quarter, we are reporting a high effective tax rate because we aren't deducting a loss on the Mission Providence equity investment. Net interest expense for the quarter was $4.5 million, a level that should be fairly consistent for Q3 and Q4. CapEx for the quarter was $6.7 million or $13.1 million year to date. We expect CapEx to pick up in the back half of the year.

With that, Jim and I would like to open up the line for questions.

(Operator Instructions)

Bob Labick, CJS Securities.

Hi, good morning. This is actually Larry Solow calling in for Bob. Jim, first of all, congratulations on your appointment to CEO and also on another very good quarter. Just first question on WD services, can you maybe help us just quantify a little bit on the time and how much of the startup costs were actually pushed out in the quarter?

I think previously, you have discussed about a $30 million total number for RRP and Mission Providence. It sounds like perhaps that's a little bit lower. Can you maybe give us some color on that?

Hi, Larry, this is David Shackelton. So yes, as you pointed out, our contract startup costs were lower than we originally expected in the first half of the year. That's due to both delays and overall reductions.

So as in previous comments, we have estimated that for both the RRP contract and the Mission Providence JV investment startup costs would be approximately in the $30 million range for the year. We're now -- kind of our revised expectation is to see startup costs for the year approximately in that $20 million to $25 million range. However, there's still quite a bit of volatility in those numbers and the timing of that is often quite difficult to pin down exactly.

Okay. In terms of LogistiCare, you gave us a good update on the contract renewals in New Jersey and South Carolina. Could you remind us -- are there any new bid opportunities coming up in the near future or any significant contracts that are close to expiring?

Sure. We do track our pipeline very closely. I'd characterize it this way: there's a handful of contracts that we're bidding on across the US with primarily MCOs, but a couple state contracts as well. I'd say none of them sort of go to the level of a New Jersey or a South Carolina in terms of revenue size. They are sort of in the lower tier, so I'd put that in the under $50 million and less.

Okay. In HA Services, can you maybe just give us a little more your thoughts on consolidation in the industry? Obviously, Humana is I think about to be purchased, and if it has, any impact or expected impact on Matrix?

Sure. So there are two deals going on. Aetna is buying Humana and Anthem is buying CIGNA. All four of those are some of the top Medicare Advantage plans by membership. That's four out of the top six. We work with a few of those who've been named. I think it's been mentioned before that we do work with Humana -- they are our largest customer. We work with Aetna.

So the way things are shaking out and we've tracked it very closely and until everything was announced, we had permutations running of all the different combinations that were rumored in the press. And we think based on what we're seeing right now, that we're in fairly good shape.

We have good relationships with all the parties that are getting together. United is one that we don't work with and they were rumored to be one of the acquirers. And turns out that they are not.

So we think we're in pretty good shape. But again, these things take at least a year or two to really work out. And sometimes the target management team end up dominating the area that we're working with. So it's tough to say -- we really won't know, but we think that we are in sort of solid shape.

Okay. And just lastly, just a sort of updated view on your priorities for free cash flow? You've obviously had a pretty active couple years on the acquisition front. Are you still pursuing acquisitions aggressively or is the paydown of debt more of a priority in the near term? Thanks.

This year, it's really been on the paydown of debt. We've had a lot of work to do -- even though we do have a holding company structure, there's been a lot of work to do integration-wise with Matrix and more so on Ingeus just because it's the international footprint.

We run a pretty thin staff here at corporate, so I'd say we haven't really focused too much on acquisition since I've been here. I think we are probably going to start ramping up that activity over the next 6 to 12 months as our free cash flow pays down to a debt level that we're probably more comfortable with over the longer term.

We're also going through a strategic planning process right now with all of our verticals and as part of that, the acquisition evaluation and strategy is a big part of that. We really look to our vertical CEOs to really sort of come up with what we think can be some of the best ideas. Certainly, the best proprietary ideas as we look at investments. So we'll talk about it more at the investor day, but I certainly wouldn't expect anything in the near term.

Okay. Great. Thank you very much.

(Operator Instructions)

Mitra Ramgopal, Sidoti.

Hi, good morning. First question on the WD segment. You talked about some things affecting the overall results there as it relates to timing, maybe some volumes not as high as expected, and also the startup costs could move around a little.

As you look at that segment, when do you think you will feel comfortable in terms of getting a good feel for the overall business in terms of the visibility?

Well, I don't recall us saying anything about volumes being light. I think overall on the major contracts, we're very satisfied with the operational execution.

In terms of our comfort with the business, we're very comfortable. As we've gone back and look at and evaluated the track record of Ingeus, for instance, on the work program over time, which we actually just did again with Chris Shackelton over in London a few weeks ago. We feel very good with their bidding and estimate process.

However, because of the structure of the contracts, because we are dealing with people who we're looking to get them into employment over the long term, what we're doing today can actually take a year or two years to really show up in our financial results. So while we have confidence that operationally, we are doing everything very well, we won't have sort of obviously clear financial results for a year or two.

We can give -- as we've said before, we think of this is sort of an 8% to 10% EBITDA margin business over time. I'd say that continues to be the case. And when we say over time, we think of it as over a three-year average. So obviously we're below that this year and there has to be some years where we obviously perform better than that. And we think that will coincide with the ramp-up of the volumes in Mission Providence and also when we get through the transition costs that we are incurring in the RRP contract.

So I wish I could give you a clear answer. I think it will really help when we get in front of everybody in September to understand the complex dynamics of each contract. But in general, we feel very comfortable.

Mitra, the comment -- just to clarify, the comments regarding volumes at WD Services, those were not related to RRP or Mission Providence, where we feel like we're off to a good start. They were in reference to some very I guess we consider minor contracts in the portfolio as well as you know, the work program as expected is starting to wind down. So referral volumes are starting to come down as expected.

Thanks for clearing that up. Also on the Matrix side of the business when we look at that, in terms of your expectations over the next 12 months plus, are you seeing any benefits yet in terms of healthcare reform helping you? And maybe if you can talk a little on the competitive side, if you are seeing any prices there?

Sure. We have seen definitely competition in the core market. There some solid competitors out there. We obviously think that we are providing sort of the best solution for the client.

Some of the things that we mentioned in terms of some adjacent solutions that we are providing to some of our clients, like pediatric assessments, providing what we think is a more comprehensive healthcare assessment, the ability to ramp up faster due to the density of our operations in some of our states we think is a clear advantage.

So there's definitely price pressure. We think the rate of the price pressure has slowed. There's definitely competition, but as you will see at the investor day, we think that we will continue to provide some of the best solution for our clients.

Okay. Thanks. And just switching quickly on the LogistiCare business, you continue to see some really nice growth there. Anything in particular you are doing differently to basically generate the kind of gains you are seeing or is this pretty much just a pretty underpenetrated market that you will continue to take share?

So Mitra on LogistiCare the revenues, this is one area where healthcare reform is benefiting us -- being the membership rate the Medicaid rolls are increasing. So if you look at some of our existing contracts, like the Jersey and Michigan, we are benefiting from the increased membership. But then we also in 2014, we did begin some new contracts in the first half of the year. So as we enter the second half of the year, we will already have lapsed those start dates, so the revenue growth isn't expected to be quite as strong.

Okay. Thanks. And then finally again, Jim, I know as you look at the Company since joining it, certainly a lot has changed over the last 18 months. But is your plan basically to sort of just build out on pretty much what you've come into? And we should sort of expect the business to look very much the way it is today in terms of the four segments, at least for now?

Yes, that's right. We think we have four great segments, four great verticals, four great leadership teams. We're obviously working with each of them through the strategic planning process right now.

And first and foremost, as we think about capital allocation, as we generate extra cash flow, it would be great to -- and some growth rates in some of these verticals, we would like to put capital back into the businesses that we have because they are the ones that we are obviously most comfortable with and we see some pretty good opportunities out there.

So while we're -- I'd say we are open to a fifth vertical. We are very selective and we have not spent a lot of time on it since I've been here. And I think it could be a year, it could be two years -- we're going to be pretty selective about it.

Okay. Thanks again for taking the questions.

Mike Petusky, Barrington Research.

Good morning. First of all, Jim, congratulations on the new gig. And a few questions. I guess first question, with increasing membership, I was wondering if you guys could give a update on the current revenue run rates associated with the New Jersey and South Carolina NET contracts?

So Mike, this is David. We no longer speak about our contracts on that level of detail. I think we have mentioned in the past that the New Jersey is quite a significant contract for us currently, so it's a plus-hundred million dollar revenue contract. And then South Carolina is smaller than New Jersey. I think in our filings, we actually present the percent of revenue that the New Jersey contract represented.

Okay. And I haven't gone through the recent filing. So that's disclosed as of this past quarter?

Yes, it's disclosed as of this past quarter.

All right. Perfect. And then I guess staying with that subject, what's your best guess in terms of decisions on each of those contracts -- the timing of decisions?

Let me just correct, David. I think that actually is in the 10-K. It's not updated in the Q, the New Jersey.

Sorry, yes, it's in the 10-K -- it's listed.

So on the timing, we are in the process of responding to and asking questions on the South Carolina contract, our RRP. There is no date that is out there. We are -- we think that we will still be working on its through the spring of 2016, so it is going to take a while -- probably several months before we find out the answer.

But we really don't know an exact date. Like I said, it could be a few months, it could be five months. And then New Jersey, we keep thinking it's coming any day, but we've been saying that to ourselves for a month or two. So unfortunately, I can't give you a better answer than that.

Is there data from New Jersey set as far as when that might be decided ultimately? Or like is it year end or is it into next year sometime?

They haven't disclosed a particular date when they want to sign a contract. We have -- we've technically been extended on our current contract into next year, but we don't know when the RFP is actually coming out or what the terms of an RFP will be. We don't know the competitive dynamics around that RFP yet, and even when the RFP is released, the actual start date can move around.

Okay. All right, great. Earlier in the call, you guys referenced increasing customer diversity inside of the health assessment business. But I didn't catch -- did you guys actually say that you had signed some new contracts there or what where you actually saying there?

I'd say it's a combination of new customers that we're consistently adding. And we are also adding some new adjacent services, like the pediatric assessments, which from a revenue perspective isn't huge yet, but we are piloting. And then just increased volumes coming from the existing smaller contracts that we have with clients. So we are seeing as we go into the second half of the year some fairly good run up from those smaller contracts.

Okay. Great. And then two more. Real quick on human services, you guys are making some progress there. I was just wondering -- I know you guys have looked or have been in the process of looking pretty hard at your contracts and the margins and what's acceptable, what's not acceptable.

I guess my question is how far into that are you guys? Are you guys nearing completion of really reviewing what you want to hold onto and what you want to continue with and any renegotiations? Any commentary around that?

Yes, so we typically don't see a lot of renegotiation of contracts in human services. Human services tend to be contracts that are for one-year or evergreen basis. There's also a lot of licenses I think we refer to in the past as hunting and fishing licenses.

In terms of where we are and taking a hard look at our current contract lines of businesses, something that we refer to as pruning our portfolio, which Texas was a -- the Texas foster care contract was a good example of. I think we are fairly far along in the process of examining the human services business.

We don't expect anything as large as the Texas foster care contract to be pruned away at this time. We all always have -- obviously different -- some service lines and some markets that generate lower margins or at times negative margins, but there's currently no plans for any major movements, such as or to the extent of the Texas movement.

Okay. Great. And then just last one. Earlier you said that G&A would be a focus area for the Company. I think you guys characterized it in terms of 2016 budgeting. But just thinking longer term, maybe even three years-plus down the road, what do you guys think is an appropriate level in terms of percentage of revenue that that line item -- could it be sub 4% 3 to 5 years down the road or what should it be?

I think characterizing it as sub-4% over the next few years I think is accurate. As Jim mentioned, we run pretty lean at the holding company level and our management teams at each of our verticals are also very focused on G&A. And as we continue to grow revenue and continue to be more and more cost-conscious on the G&A side, there will be both fixed cost leveraging. And I think, again, dropping down below 4% is something that we believe is achievable.

All right. Great.

Mike, I'd just at add that in the 10-K -- I just pulled it out. New Jersey was the 2014 17% of NET Services revenue, 15.3% in 2013, and 15.2% in 2012. And I'd say it's fairly consistent with that this year.

Perfect. That's really helpful. Thanks, guys. Really good quarter. Thanks.

(Operator Instructions)

We have no further questions. I will now turn to call back over to management for any closing remarks. Please proceed.

Great. Well, thank you for your participation. We are obviously very excited about Providence and we look forward to talking and seeing all of you hopefully at the investor day in September. Thanks. Bye-bye.

This concludes today's conference. You may now disconnect. Have a great day, everyone.