ModivCare Inc (MODV) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 Providence Service Corporation Earnings Conference Call. (Operator Instructions) And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to Laurence Orton, Corporate Controller and Vice President of Finance. Please go ahead.

Thank you, Candace. Good morning, everybody and thank you for joining Providence's Fourth Quarter and Full Year 2017 Conference Call and Webcast.

So with me today from Providence are Carter Pate, our Interim Chief Executive Officer; and David Shackelton, Chief Financial Officer.

So during this call, Mr. Pate and Mr. Shackelton will be referencing the presentation that can be found on our Investor website under the Events Calendar and also in the current Form 8-K, which was furnished with the SEC this morning.

But before we get started, I'd like to remind everyone that during the course of today's call, the company's management will make certain statements characterized as forward-looking statements under the Private Securities Litigation Reform Act, and those statements involve risks, uncertainties and other factors which may cause actual results or events to differ materially. You can find information regarding these factors in yesterday's press release and in the company's filings with the SEC. So the company will also discuss certain non-GAAP financial measures in an effort to provide additional information for our investors, and a definition of these non-GAAP measures and reconciliations to the most comparable GAAP measures can be found in our press release, investor presentation and in our Form 8-K.

Finally, we've arranged for a replay of this call, which will be available approximately 1 hour after today's call and you can find that on our website or it can be accessed via the phone numbers posted in our press release.

So with that, I'd now like to turn the call over to Providence's Interim CEO, Carter Pate.

Thank you, Laurence, and good morning, everyone. I'd like to start off and thank our shareholders, directors and employees for the very warm welcome to Providence that I received at the end of last year. In just over 3 months, I've not only learned a great deal about our complex operations and technology, but I've also gained a much deeper appreciation for the amazing work Providence's approximately 7,000 employees undertake every day and the meaningful impact these efforts have on the vulnerable and unrepresented population that we serve. So thank you to all for that warm welcome I've gotten.

Now let me remind investors or perhaps even clarify for those of you that are brand-new to the stock, that when we reference NET Services, it stands for non-emergency transport services and this is our segment name for financial reporting. We will also sometimes refer to the operating company name of LogistiCare as this is a one-for-one match. WD Services or Workforce Development Services, as we call it, primarily refers to our Ingeus operating group.

Okay. Now then, 2017 was an extremely productive year for Providence. And when I look back at what this management team set out to do, I'm happy to be able to speak to the company's myriad of accomplishments in 2017.

So if you have your deck in front of you, let's turn to Page 3 on the presentation. And on a consolidated basis, revenue increased by 5.5% in the fourth quarter while adjusted EBITDA for Providence grew at approximately 37%. Adjusted earnings per share was $0.66 in the fourth quarter or double what it was in Q4 of last year.

Now for the full year, revenue increased by almost 3%, which was better than originally expected due in part to our significant and successful business development efforts throughout the year. Importantly, we were also able to keep adjusted EBITDA margins relatively flat versus last year despite some fairly significant headwinds, including the ending of our New York State transportation contract and the continued wind down of the Work Programme in the U.K. This better-than-expected margin performance was driven by our multiple value enhancement initiatives across the organization aimed at operational improvements and technological innovation. Now importantly, we also saw growth in adjusted earnings per share of 8.6% and we ended the year with a very strong balance sheet. We generated over $55 million of cash from operations, leaving us with over $95 million in cash at year-end. As David's going to explain to you in just a bit, we've already deployed about $33 million of this cash in Q1 on stock repurchases.

Now turn your deck to Page 4 for a deeper dive into each of our segments. I'll start with LogistiCare, which grew revenue by 6.8% in 2017. Now importantly, LogistiCare also renewed many key state contracts in 2017 and early 2018, including New Jersey, Philadelphia, Virginia. Actually these 3 contracts alone represent almost $250 million of annual revenue and range in length from 3 to 5 years, each with further extension opportunities in them. As a result, these renewals have added to LogistiCare's revenue stability and visibility going forward.

Adjusted EBITDA margins at LogistiCare for the year came in at 6.5%. This was down from last year due to the ending of the New York State contract and higher utilization on our California MCO contracts, but still stronger than our original outlook for the year of approximately 6%. There are many components that contributed to this margin improvement versus outlook, including slightly better-than-expected benefits in 2017 from several of these value enhancement initiatives we talked about in the past with you, particularly our transportation cost initiatives, which had gained traction faster than originally anticipated. These transportation initiatives are not just about reducing direct cost per trip per mile, but also about improved network development to ensure that we have healthy networks in each of our markets to drive competitive transportation pricing, superior service levels and capacity levels adequate to dynamically and profitably responding to fluctuations and utilization.

Now our operation center initiatives, which are aimed at increasing efficiency and call times and customer service representative utilization also include rollouts of new systems such as workforce management, voice recognition software, claims processing tools and automated vehicle tracking are also really actually largely on track. However, we're experiencing a few delays and cost overruns related to the rollout of our next-generation LogistiCare technology platform, partially due to the embedding of more complex business rules and functionality. This platform is focused on greater efficiencies in our reservation input process. Thus, we now expect run rate savings to reach approximately $35 million by the end of 2018, eventually we'll surpass the $40 million level in the first half of 2019.

You may recall that at the beginning of 2017, we were originally expecting run rate benefits to only reach $30 million, so overall we're very pleased with the progress of our value enhancement initiatives. Also please remember that these savings are cumulative versus our 2016 cost base and not incremental on a year-to-year -- year-over-year basis.

Okay, we've also talked about in the past about reinvesting some of this approximately $40 million back into the business. In 2018, this reinvestment is starting to take shape and is mostly in the form of human capital investments, particularly in the areas of sales, strategy, technology and process improvement. With these investments, we're strengthening our position as the preferred provider of non-emergency medical transport services by finding innovative solutions to improve care while lowering cost. To this end, LogistiCare recently hired a new Senior Vice President of Growth and a new Chief Technology Officer, both of which are coming up to speed very quickly. In addition, one of our Providence level strategy team members has moved into the role of Senior Vice President of Strategy at LogistiCare. We're also in the process of hiring a new COO at LogistiCare. These additional team members are further deepening our bench of talent that will help us ensure the continued execution of our value enhancement initiatives and further development of our long-term growth strategy, both within our core NEMT market as well as in markets and services that are adjacent and complementary to transportation.

Okay, so let's turn to WD Services. 2017 represented something of a real turnaround for this segment, and Jack Sawyer and his team did a tremendous job effectuating this change on numerous fronts, including the area of business development and on the execution of various cost initiatives.

During Q4, we saw positive revenue growth of over 10%. Now this is the first time in 8 quarters that Ingeus has experienced a year-over-year revenue increase, so we're very pleased. For the full year, revenue did decline, but came in better than originally expected. David is going to speak about this and the revenue outlook for 2018 is also more favorable than in this past year as the year-over-year decline in the legacy Work Programme is abating and is deemed to be partially offset by the ramp-up of the Work and Healthcare -- Health Programme, which we secured 3 contracts, which altogether represent approximately $195 million of revenue over the next 5 years.

Ingeus' successful procurement under the Work and Health Programme, which provides Ingeus with the second-highest market share under the program, is a huge accomplishment for the Ingeus management team and is a testament to Ingeus' reputation as a world-class provider of employability services. Implementation of our Work and Health Programme contracts is on track, and as of the beginning of March, we are now providing services in all of our awarded contract areas.

In terms of adjusted EBITDA, Ingeus delivered a margin of over 5% in 2017, which represented an almost 400 basis point improvement in year-over-year improvement. A large part of this improved profitability was the successful execution of the Ingeus Futures program and the resulting reduction in the corporate and shared services cost infrastructure.

In addition, focused operational initiatives resulted in an improved profitability of both our French operations and the offender rehabilitation program. These accomplishments on both of the revenue and margin side, in addition to a substantially reduced CapEx profile, resulted in positive cash flow to Ingeus when the implementation cost for the Ingeus Futures program is excluded.

Now moving on to Matrix and our Matrix investment. Revenue growth for the year came in nicely at approximately 10%. During 2017, Matrix continued to expand as provider network and range of services by signing up over 10 new clients in the year and closing on the small, but highly strategic acquisition of LP Health.

In addition to -- in February, you may have seen that Matrix closed on its more substantial acquisition of HealthFair, bringing together 2 established population health care leaders, Matrix with its expansive in-home capabilities, and HealthFair, with its national fleet of mobile health clinics. This combination creates a network of more than 6,000 community-based providers across all 50 states, including approximately 1,800 nurse practitioners, which provide more options and flexibility for health plan members to access care, leading to even higher levels of engagement and improved management of their members' health.

So as you can see, 2017 was clearly a very successful year for Providence across the entire enterprise, both operationally, financially and strategically.

Lastly, before turning this call over to David, I'd like to touch on our capital allocation strategy in the context of our overall efforts to enhance shareholder value. Now since I became Interim CEO, I've had the opportunity to work closely with the board and management to gain a greater understanding into and appreciation for the strength of our businesses, quality of our people and the really many opportunities we have for growth. To ensure that we are capitalizing on the full growth and value creation potential at Providence, one of my priorities has been a close examination of our capital allocation and acquisition strategy as well as how we deploy resources across Providence, including between our segments and corporate, to best deliver on this strategy. Now through this process, I'm focused on ensuring shareholder capital continues to be deployed toward these activities, most likely to drive long-term value creation and generate the highest levels of return for our shareholders while also ensuring alignment with our overall strategic objectives.

Now to this end, as some of you have asked, I expect to remain in the role of Interim CEO longer than I originally anticipated when I talked to many of you back in November.

Now in conclusion, we're continuing to study and discuss a number of ways to enhance shareholder value, and I look forward to sharing additional information as part of the ongoing dialogue with investors.

Now with that, I'd like to turn the call now over to David to review our financial results a little bit more detailed. David?

Thanks, Carter. I'll start on Page 7 of the presentation and focus my commentary on the segments as we've already taken you through our consolidated results.

Starting with NET. Revenue increased 4.4% in the quarter driven by new contracts, including a large new MCO contract in New York as well as 2 new regional contracts in Texas. In addition, our revenue in the quarter benefited from retroactive rate increases in a couple of geographies to partially compensate us for the increased utilization we experienced throughout the year. These rate increases also largely explain our higher-than-anticipated adjusted EBITDA margin in the quarter of 8.7%. However, as expected on a year-over-year basis, our Q4 margin was down due to the ending of our New York State contract, partially offset by savings from our transportation-focused value enhancement initiatives. In addition, Q4 of '16 benefited from the reversal of long-term incentive compensation, making it different -- a difficult quarter to comp against.

For the full year, NET Services' 6.8% revenue growth was driven by new business wins as well as higher rates and membership on our existing contracts. Not only was this revenue growth rate at the high end of our targeted long-term growth rate segment of 5% to 7%, but was also higher than our original outlook for the year of sub-5%. Thus, we are very pleased with our successful business development and client retention efforts that occurred throughout the year.

On margin, LogistiCare's full year adjusted EBITDA margin of 6.5% was also higher than our original 6% outlook. However, it does represent approximately 100 basis points of contraction versus 2016. This decline was driven by the ending of our New York State contract as well as higher utilization than expected -- or higher utilization than last year. We did receive multiple retroactive rate increases to compensate us for this higher utilization, but a couple of these increases were not all the way to the beginning -- back to the beginning of the year so it was still a drag on full year margins. It's also important to note that LogistiCare's value enhancement initiatives only started contributing in net savings benefit towards the end of the third quarter. So for the majority of 2017, the fixed cost of the new processes and systems put into place to support the initiatives, which we don't add back to EBITDA, were not surpassed by the productivity savings.

Looking forward to 2018, our current outlook for NET Services is for revenue growth to be below our long-term multiyear target of 5% to 7% and for margins to be approximately 7%. This anticipated margin expansion is driven by the ramp-up of the net savings associated with our value enhancement activities, partially offset by investments back into the business to support future organic revenue growth and service delivery quality.

Moving to WD Services. We saw strong year-over-year revenue growth in Q4 of over 10%, excluding the impact of exchange rates, growth was still strong at approximately 4.5%, driven by our offender rehabilitation program in the U.K., continued growth in our youth program and health services and growth in employability programs outside the U.K., including in France.

Adjusted EBITDA margins in Q4 at WD Services were a very strong 7.3%, this year-over-year improvement in profitability was driven by the successful execution of our Ingeus Futures programs as well as better results under our offender rehabilitation program in the U.K. and our employability programs in France. Q4 also included a couple of [in-year] timing-related benefits as well as recognition of the performance incentives.

For the full year, revenue at WD Services declined by approximately $40 million, which, again, was better than our original outlook due to higher-than-expected revenue under our offender rehabilitation program and a smaller-than-expected exchange rate headwind. Full year adjusted EBITDA margin at WD Services was 5.3%, which was at the high-end of our initial outlook and 370 basis points higher than 2016. This expansion was driven by many of the same positive factors I just referenced in regards to Q4.

Looking forward to 2018, we currently expect WD Services revenue to decline in the mid-single-digit range. This is an improvement to the rates of decline seen in '16 and '17, which were driven by a focus on profitability over share revenue growth and more conservative and fulsome bidding governments processes. The more modest decline in 2018 is expected to again be driven by the continued wind down of the Work Programme as well as lower revenues under the offender rehabilitation program, partially offset by the ramp-up of the Work and Health Programme and increased revenue associated with nonemployability services in the U.K. including within health and youth services.

Beginning in 2019, we expect to see revenue begin to grow again under our renewed business development efforts, which, again, are focused on achieving profitable growth without large upfront investments.

The adjusted EBITDA margin at WD Services in 2018 is expected to be roughly consistent with 2017 in the mid-single-digit range.

We expect the full year benefit of Ingeus Futures cost program to be partially offset by a couple of items: first, the Work and Health Programme contract is expected to be approximately breakeven in 2018 as the program ramps. Second, profitability under the offender rehabilitation program is expected to decline as 2017 included favorable contractual adjustments that we don't expect to be repeated going forward. Importantly, in 2018, we expect WD Service to be cash flow positive, which we view as a large accomplishment as we put the operational challenges and significant startup costs experienced in 2016 and 2017 behind us. It is important to note that the Work and Health Programme hasn't required and is not expected to require a level of upfront investment in CapEx, working capital or OpEx anywhere near the levels we experienced in '15 and '16 with the launch of our offender rehabilitation program and the French employability contracts.

From a capital return perspective, the Work and Health Programme contracts were bid and designed much more productively and with a greater focus on risk-weighted returns than was the case with some of Ingeus' prior service delivery programs. This is how we expect to bid futures contracts as well.

Next, looking at Corporate. On an adjusted EBITDA basis, spend was $7.9 million in the quarter or $3 million higher than prior year. Although we continued to experience year-over-year savings in our core operating costs, these inefficiency improvements were offset by an increase in cash settled stock comp of $2.3 million as our stock price increased in Q4 of '17, but decreased in Q4 of '16. The core operating cost improvement was also partially -- or was also offset by increased LTI expense despite our LTI program expiring out of the money. Note that in 2016 and 2017, we took expense of $3.3 million and $4.7 million, respectively, related to this program, which we'll now pay out.

For the full year, on an adjusted EBITDA basis, Corporate costs were $29.2 million, an increase of $3.6 million compared to 2016. Again, although our core operating costs declined, cash settled stock comp added $3.6 million of expense while third-party costs associated with specific strategic initiatives added $3 million, neither of which we take add-backs for. Excluding noncash share-based compensation of $6 million, cash costs at Corporate were approximately $23 million in 2017.

For 2018, we currently expect cash costs of approximately $20 million.

Lastly, on Page 7, with our Matrix investment. First, remember that Matrix is treated as an equity investment and therefore we don't consolidate its revenue with Providence's. We also don't include any portion of Matrix's EBITDA in our definition of Providence's consolidated adjusted EBITDA. In 2017, Matrix achieved approximately 10% revenue growth due to an increase in assessment volume, having signed 11 new health plan clients throughout the year. Because some of these clients were only onboarded partway through the year in '17, these new client wins are also expected to continue to drive revenue growth in 2018.

Adjusted EBITDA margins in 2017 for Matrix were 22.5% or 240 basis points lower than last year, driven by pricing, but partially offset by continued productivity improvements.

From a strategic advancement and acquisition standpoint, Matrix had a very active year. Not only did Matrix continue to organically add diversity to its customer base and bring new products online including quality visits, post-acute care transition services and peripheral artery disease offerings, Matrix also acquired LP Health and HealthFair.

LP Health was a small acquisition with a price tag of only about $4 million, but as I spoke about on our last call, the acquisition was highly strategic in that it will aid Matrix's expansion efforts in the Medicaid market while also expanding in Matrix's clinical capabilities. HealthFair, which closed last month, was a much more significant, acquisition, with a $160 million purchase price that was funded with debt and rollover equity. Neither Providence nor Frazier needed to contributed -- contribute additional equity. Post transaction, Matrix had net debt of approximately $310 million and Providence's ownership percentage was 43.6%.

HealthFair's 2017 revenue was approximately $45 million. Thus, Matrix's pro forma 2017 revenue was approximately $273 million or Matrix's standalone $228 million of revenue plus HealthFair's $45 million of standalone revenue.

In 2018, we expect this pro forma revenue to grow by over 20% as a result of Matrix's strong revenue pipeline, including the new logos signed partway through the year as well as HealthFair's recent success winning several large national clients. And because of HealthFair's higher margin profile and expected revenue and EBITDA synergies from the deal, we expect margins -- Matrix's margins to expand in 2018.

Before turning the page, I'd like to touch on our full year -- our full income statement, which isn't in this presentation, but is on Page 7 of our earnings press release. In particular, I'd like to spend some time dissecting the impact of the tax reform act on our net income.

Because the federal tax rate has declined to 21%, in 2018, we remeasured the deferred tax liabilities on Providence's books at year-end, resulting in $19.3 million of additional net income in Q4 '17. Matrix also did a similar exercise, which ultimately resulted in additional net income to Providence of $10.2 million in the fourth quarter. Thus, the total impact of the tax reform act on our net income was $29.5 million. In our calculation of adjusted net income and adjusted EPS, we've removed this benefit. Also removing the impact of the tax reform act shows that our marginal tax rate for Q4 and the full year was 55.9% and 40.3%, respectively. This is still above our statutory rates due to our -- largely due to our inability to recognize benefits in foreign jurisdictions where we are generating losses.

In addition, because no awards were made under our corporate LTI program, we had to unwind the deferred tax assets we've been building since 2015 as we have taken accumulative expense of $9.4 million under this program. This unwind resulted in a $3.6 million increase to our tax provision. In 2018, we expect our marginal tax rate to be approximately 30%.

Moving to the cash flow summary on Page 8. In Q4, our cash flow from operations was strong at over $18 million. For the full year, we generated $55 million of cash from operations. After removing the tax payments since 2016 associated with the 2015 sale of our Human Services segment, 2017 is down from last year because the 2016 numbers included Matrix in the first 3 quarters of the year. Cash flow from continuing operations was up in 2017.

Full year CapEx in 2017 was just under $20 million, which represents a $12 million decrease from 2016. In 2018, we expect CapEx to again come in around $20 million, which is still higher than I think we can get to on a run rate basis. As Carter mentioned, LogistiCare next gen is taking longer to fully implement than originally anticipated, so NET's CapEx will continue to run at higher than historical levels in 2018. [All insights], though, is that we still expect to ultimately receive the same efficiency gains associated with the new technology systems as we only launched its development in 2016. Thus, the expected ROI of our investment in next gen is still very attractive and consistent with our capital allocation philosophy.

Moving to our summary balance sheet on Page 9. We ended the year with over $95 million in cash and no long-term debt. As I will talk about on the next page, we've been active with our share buybacks in Q1 2018 under a still active 10b5 plan, so we do not expect to have -- so we do expect to have a lower cash balance at the end of Q1 despite continuing to generate cash from operations.

We are also again calling out the book value of Matrix on this page, which is currently $170 million. As I've spoken about previously, I do not use view this book value as being consistent with the intrinsic value of Matrix especially after the synergistic acquisition of HealthFair.

Lastly, on Page 9, our share count, common plus preferred on an as-converted basis, as of 12/31/17 was 15.4 million. Given our share repurchase activity thus far in Q1 under a still active 10b5 plan, this number has fallen to 14.9 million as of March 5, 2018.

Finally, and importantly, on Page 10, as Carter spoke about earlier, capital allocation continues to be a key strategic priority for us as it is a critical driver of value creation for our shareholders. As we have spoken about on previous calls, we continue to consider our capital allocation priorities along 3 dimensions: one, OpEx and CapEx investments aimed at driving organic top line growth and margin expansion within our current businesses; two, capital return to shareholders; and three, value-enhancing M&A.

In terms of the first bucket, OpEx and CapEx, we continue to see high-return opportunities within our core asset NETT (sic) [NET] Services, thus we continue to deploy shareholder capital back into NET to improve the quality, efficiency and flexibility of our workforce, technology systems, operation centers and transportation networks. Our continuing investment in next gen is a good example of this type of investment activity that is aimed at driving market share expansion and operating efficiencies.

Within NET, we are also actively exploring ways to organically expand into new service lines that leverage our technology, network development and management capabilities as well as our experience with large, complex risk-based models. We do not see the same opportunities, however, to attractively deploy capital back into WD Services. In fact, we've been shifting capital away from WD Services as demonstrated by the sale of Mission Providence in 2017 as well as the segment's significantly reduced CapEx spend in 2017 and the pullback of bidding activity on large contracts that require significant upfront investments.

In terms of the second bucket, capital returns to shareholders, despite the recent improvement in our stock price, we continue to view share repurchases as a very attractive way to generate higher returns for our shareholders. Since our last earnings call and through March 5, we've used $43.8 million of shareholders' cash to repurchase 708,000 shares. Included in this figure is approximately $33 million spent since year-end under a 10b5 plan. We're still active under this 10b5 plan as we still have $25.8 million of capacity under our current share repurchase program and under this plan. Since we began repurchasing, at the end of 2015, we've now repurchased approximately 22% of the company's common shares.

Lastly, in terms of M&A, the third bucket of capital allocation, we currently anticipate any future opportunities at the Providence level to be focused around NET Services. We believe there is room for further consolidation in the non-emergency medical transport industry where there are a number of small and growing companies that could potentially add incremental value to LogistiCare by adding new transportation services, care categories and network capabilities. In addition, we expect to continue to explore select opportunities that are adjacent, complementary and synergistic to NET, such as businesses whose service delivery models share characteristics with NET, including tech enablement, network based and a payer focus. As we consider future M&A, we will remain very disciplined and we'll take into consideration and balance a number of factors, including the strategic goals, competitive landscape and growth opportunity of our segments.

So with that, I will now open up the line for Q&A. Operator?

(Operator Instructions) And our first question comes from Bob Labick of CJS Securities.

I just wanted to start with, I think Carter touched on this, he's going to stay a little longer as Interim, but his title is still Interim. So could we talk a little bit about what changed? Why he's going to stay longer than he had expected? And then what qualities are being sought in the permanent CEO?

Thanks, Bob. Over the last couple of months, I had a discussion with the board as well as the significant management team members here about the progress we were making on these value initiatives, and to some extent, we've been spending a lot of time and resources on this particular issue and we wanted to ensure that we have further alignment on this capital allocation and acquisition strategy before we jump to the next level of finding our permanent CEO. So there's still a lot of focus on the strategic side of this as we line up what exactly will be the skill set we're looking for in our next CEO. I'm going to envision that I'll be here a number of months more, but retain the title as Interim, so that I beat you to the next question, I am not a candidate for the permanent CEO, so that's not on the table. But I do think there's some real work here to be done before we finish the outline of what is the skill set and where -- what is it we're looking for in the next permanent CEO. So it's all sort of driven, Bob, by the progress and the strategy that we have around this value initiative here. Hopefully, that answers your question.

It's certainly helpful, but just in terms of the strategy and the capital allocation, shouldn't the new CEO be a part of that? Or is it hard -- wouldn't it be harder to find someone after-the-fact as opposed to having that person be part of that process? Why create the strategy in capital allocation then find the person as opposed to finding the person and then having them work as part of the strategy?

Yes, there -- what I would call there's some basic leveling exercise here, some groundwork that needs to be done to take advantage of what I see as some intermediate opportunities here. So we're looking at those strategic initiatives. But we're sort of setting the table, I guess, the way I would phrase it, that we're setting the table so that the next CEO that buys into this program and is aligned with our board's vision here can take advantage of the groundwork. I think we just simply don't want to have an interruption of the progress we're going to make in the next 2 to 3 to 4 months on this. So view it as sort of setting the table.

Got it, great. And then sticking with that capital allocation, can you talk about, you highlighted this, but maybe go a little deeper in terms of -- towards NET, can you talk about the opportunities that are out there? Are there opportunities within your core market? Are there opportunities to go to adjacent markets perhaps? Or how are you thinking about the opportunity set for investment both organic and inorganic for NET?

Well, at LogistiCare, I would tell you we've got a terrific CEO, Jeff Felton, tremendous leadership. I don't think I've ever been more impressed with an individual, just has a great vision for the company. And to that end, the adjacent markets are something both geographic as well as complementary to the existing work that we have are where Jeff is looking at. Jeff also sees great value in the value enhancement initiatives. This next gen, which is our IT component of the -- we call it next gen, the next generation is really a core foundation that Jeff is focused on this year and I think David and I both talked about that for a minute. So I would say there's both organic and inorganic opportunities within his direct sector for expansion of that footprint and Jeff's all over this.

Okay, great. And more on an operating level, you mentioned some rate improvements, I think, towards the end of Q4. Are the rates utilization and margins for LogistiCare all set to the levels that you expect? And is the majority of the margin improvement coming from the value enhancement? Is it -- what are the underlying contract margins doing year-over-year knowing that you had some very nice margin expansion obviously from the cost savings and value enhancements?

David, you want to take that, the margin question?

Yes, so Bob, like, for example, if you look at our expected 50 basis points of improvement between '17 and '18 from second half to approximately 7%, the majority of that expansion is coming from the value enhancement initiatives. There are some benefit coming from the full year impact of the higher rates that we talked about. But I would say our overall book of business, there is -- as contracts like the New York State contract that we lost roll off are being replaced by new business that is at a slightly lower margin, so we are seeing some slight degradation in our underlying -- in the margins of our underlying book of business. But again, that's been more than offset by the value enhancement initiatives, which do allow us to bid more competitively and grow that top line going forward.

Got it, but the modest degradation in the core is more a mix issue than a contract-by-contract issue, correct?

Yes, I think it's okay to look at it like that.

And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Carter Pate for any closing remarks.

I just wanted to thank the warm welcome that I've received from the board, the employees here. This is -- always being an interim is always an uphill battle to get individuals to realign and continue with the progress they've already made. This team was simply amazing this past quarter and the results reflect that. I will tell you I'd like to also publicly thank Jack Sawyer and Jeff, again, my CEOs in the respective core businesses that have just done a lot of heavy lifting here. We've got an amazing team at Providence. I'm excited about the upcoming quarters and what we've got laid in front of us, and I look forward to talking to some of you individually. Thanks so much for your interest and time today.

Ladies and gentleman, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.