ModivCare Inc (MODV) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Providence Service Corporation Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Laurence Orton, Interim Chief Accounting Officer and SVP of Finance. Mr. Orton, you may begin.

Thank you, Sara. Good morning, everybody. Thank you for joining Providence's First Quarter 2018 Conference Call and Webcast. With me on the call today from Providence are Carter Pate, Interim Chief Executive Officer; Bill Severance, Interim Chief Financial Officer; and David Shackleton, Chief Transformation Officer.

Just to remind you that during this call, Mr. Pate, Mr. Severance and Mr. Shackelton will be referencing the presentation that can be found on our investor website, under the Events Calendar, and then the current Form 8-K, which was furnished to the SEC yesterday evening.

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. Those statements involve risks, uncertainties and other factors which may cause actual results or events to differ materially. Information regarding these factors is contained in yesterday's press release and the company's filings with the SEC.

The company will also discuss certain non-GAAP financial measures in an effort to provide additional information to our investors, and a definition of these non-GAAP measures and reconciliations to our most comparable GAAP measures can also be found in the press release, the investor presentation and in the Form 8-K.

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

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

Well, thank you, Laurence, and good morning to everyone, and thank you for joining us this morning. I will start the call by jumping straight into this quarter's strong financial results as well as some of the operational highlights before handing it over to David to provide an update on the number of the strategic activities, including the organizational consolidation that we announced in April. Bill will then talk us through the earnings in more detail.

Now starting on Page 3 of the presentation that Laurence referenced. I'm pleased to report that the operational momentum and positive year-over-year earnings growth that we experienced in 2017 has continued into the first quarter of 2018. On a consolidated basis, revenue increased by 1.6% in the first quarter. Now there's some noise in this number due to our adoption of a new revenue standard, which decreased revenue by around $9.3 million. Revenue did benefit by over $6 million from favorable foreign currency movements, largely due to the strengthening of the pound in our WD Services segment. When I take out these 2 impacts, consolidated revenue grew by a little over 2%, with LogistiCare growing at 5%.

Adjusted EBITDA for Providence grew by 24%. Adjusted earnings per share for the quarter of $0.63 was an 80% increase on the same period last year. Cash from operations was also very strong at $25.6 million, which allowed us to spend around $37 million on share repurchases during the quarter yet still end the quarter with $86.2 million of cash.

Now then, turn to Page 4. And LogistiCare you'll see grew reported revenue by 3.9% in the quarter. However, if you back out the change in accounting on one of our contracts due to the new revenue standard, LogistiCare achieved actually 5% year-over-year growth. Now Logisticare's adjusted EBITDA margins in Q1 2018 were over 7%, a solid improvement versus Q1 2017. There are a number of factors that contributed to this margin improvement, including increases in rates to bring pricing back in line with our increased utilization we started to experience in a couple of states back at the beginning of 2017.

Now in addition, our value enhancement initiatives focused on reducing transportation cost, had a meaningful and positive impact to our margins on a year-over-year basis. We expect the benefits of these transportation cost initiatives to continue to increase as we continue to implement our new costing models, technology and transportation contracting best practices across our extensive network.

Now turning from our transportation cost initiatives to our operational service initiatives. On our last call, we noted that the rollout of our next-gen LogistiCare technology platform was experiencing some timing delays and cost overruns. Now to address this issue, we brought in a new Chief Technology Officer with significant experience in implementing these type of large-scale cloud-based technology solutions. The good news is that when we look holistically at where we stood on our cost saving initiatives at the end of the first quarter of 2018, particularly in light of the wins on the transportation cost work streams, our overall view of achieving $40 million still holds.

Now again, remember that we are and plan to continue to reinvest a portion of these savings back into the company to support future top line growth, service quality improvements and our strong competitive positioning.

Now on the people front, in addition to the new CTO we hired, we brought in a new Senior Vice President of growth whose primary role is to develop and deliver new contract opportunities. We were pleased to announce the renewal of the Virginia contract in the quarter and feel very good about the state in our pipeline and our new opportunities. Also, the addition of a new Senior Vice President of Strategy will help widen the field of future opportunities as we actively explore ways to organically expand into new service lines that leverage our technology, network development, management capabilities and capitalize on our experience with large, complex, risk-based models.

Now then, turning to WD Services on Page 5. I'd like to reiterate that the underlying performance is better than the headline reported numbers would suggest, especially for adjusted EBITDA. Bill will explain in more detail later, but the adoption of the new revenue standard had a negative impact in the quarter of $5.4 million on revenue and $3.5 million on adjusted EBITDA. Obviously, the new accounting standard does not impact what we really care about, which at the end of the day is cash flow. Positive currency movements did benefit in Q1 2018, so I'll focus my commentary on the operational performance prior to the impact of the new revenue standard and currency fluctuations.

Now as expected, revenue declined due to the continued wind-down of the legacy U.K. Work Program. However, our diversification efforts outside of employability as well as the new contract wins have muted the impact of the Work Program wind-down. As of the beginning of March, we were providing services in all of our awarded contract areas for the new [Work K], Work and Health Program. In addition, as volumes have gradually started to ramp up under the Work and Health Program, mobilization cost under the program had been less than expected. We also continued to develop business outside of our traditional employability programs as shown by the positive momentum under our health contracts for diabetes prevention in the U.K.

As I said, the new revenue standard had a large impact on both reported revenue and adjusted EBITDA performance in the quarter. In addition to Q1 2017 was actually a tough quarter to comp up against as it included a significant positive contractual adjustment for our offender rehabilitation contract, resulting in a negative delta of approximately $4 million when compared to Q1 2018. When you combine this with the $3.5 million negative impact from our new revenue standard, you can quickly see that the underlying performance is much more favorable compared to the headline numbers and adjusted EBITDA was very strong for the quarter.

Now, before Bill takes you through the financials in more details, I'd like to hand the call over to David to take you through Matrix results as well as to say a few words on the organizational consolidation plan we recently announced. David?

Thank you, Carter. On Page 6, I'll touch briefly on our investment in Matrix where we continue to be excited about the strategic and financial benefits provided by the acquisition of HealthFair. The integration of Matrix and HealthFair is in full swing and is off to a good start, including the integration of the call centers, member engagement employee departments and IT platforms. We've also begun sharing the NP and clinical networks of the 2 companies and have made progress on joint in-home and mobile clinic offerings. Although the synergy realization was very minor in the first quarter, this was expected, and we are on track to realize our targeted full year synergy numbers.

Outside the integration, we were also pleased with Matrix's full operations during the quarter. New client volumes, increased existing customer volumes, as well as better-than-expected customer adoption of peripheral artery disease screenings, help to support strong organic revenue growth in the quarter. We did see margins contract on a year-over-year basis as a result of new contract start-up costs at HealthFair. Excluding HealthFair, Matrix's year-over-year margins were fairly consistent.

Now before handing the call back to Carter, I'll spend a few moments on the organizational consolidation plan we announced last month. As we spoke about on our last earnings call, we've continued to focus on our capital allocation acquisition strategy as well as how we deploy resources across Providence, including between our segments and corporate. We've also emphasized on our last couple of calls that we continue to see the company's highest return opportunities both currently and in the future as residing in and directly around LogistiCare. These return activities include OpEx and CapEx investments into existing systems and service lines, including for example, our value enhancement initiatives, potential organic expansion into new service lines and potential acquisitions.

Our decision to integrate the activities and functions performed at the holding company level into LogistiCare is a result of the strategic review and these observations. Consolidation plan also stems from shareholder's feedback to simplify the Providence story in creating a more streamlined company structure with a smaller corporate infrastructure. We believe that by essentially folding or lifting and shifting the holding company infrastructure into our core asset LogistiCare, we will be able to save at least $10 million on an annual basis as well as create an organization with greater strategic, operational and cultural alignment, allowing us to more efficiently allocate growth capital and strategic resources.

This process is expected to take approximately 12 months and result in $7 million to $8 million of transition cost in 2018, approximately 50% of which is expected to be noncash. An important step for execution of the organizational consolidation plan is the building of the appropriate infrastructure and systems in Atlanta and hiring the right leadership in Atlanta including a permanent CFO. I'd also like to share with you, as you may see in our press release, that in support of our efforts to create this more streamlined organizational structure and allow us to more effectively deploy capital and focus strategic resources towards the significant growth opportunities at LogistiCare, we've also decided to explore strategic alternatives in regards to our WD Services segment. We look forward to updating investors on this process at the appropriate time.

In summary, we are very excited about the deconsolidation and we will address the shareholder value creation by sharpening our focus on significant growth opportunities available to LogistiCare.

Carter, let me now turn the call back over to you.

Okay. Thanks, David. Let me now introduce Bill Severance who took over from David as Providence CFO on an interim basis during the organizational consolidation. Bill is expected to hold this role until we hire a full-time CFO based in Atlanta. Bill was previously Providence's Chief Accounting Officer for the last 2 years and has a great and in-depth knowledge of the financials and the operations of the company.

Bill, now I'll turn the call over to you to walk us through the financials this morning.

All right, 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. Our reported revenue increased 3.9% in the quarter. NET was impacted by the implementation of the new revenue standard, which resulted in 1 contract now being reported on a net basis. The impact of the revenue standard was a reduction in reported revenue of $3.9 million, but this change had no impact on adjusted EBITDA.

On an apples-to-apples basis, revenue growth was 5% on a year-over-year basis. The key revenue drivers were new MCO contracts in Indiana and New York, and new state contracts in Texas. Revenue also benefited from increased membership and rates across various existing contracts and favorable contract adjustments. These increases to revenue were partially offset by the ending of the MCO contracts in Florida and certain state contracts including the New York contract, which ended in April 2017, as well as reduced membership for our renewed state contract in Virginia.

Adjusted EBITDA margins were at 7.1% compared to 5% last year. The significant improvement resulted from higher rates negotiated to align with the higher utilization we were seeing in the prior year, the benefits of our value enhancement efforts to lower transportation cost as well as favorable contract adjustments in Q1 2018, partially offset by higher utilization across certain contracts and the end of the state contract in New York. Our outlook for the full year 2018 for NET Services is unchanged. We continue to forecast NET Services revenue growth to be below our long-term multiyear target of 5% to 7% and for adjusted EBITDA margins to be approximately 7%.

Moving to WD Services. Reported revenue for the quarter was $69.4 million compared to $75.5 million last year, or an 8.1% decline. The new revenue standard resulted in a reduction of revenue of $5.4 million. However, the significant appreciation in the U.K. pound resulted in an offsetting $6 million of benefit, thus, on an apples-to-apples basis, revenue declined approximately 9%. The decline in revenue is primarily due to the wind-down of the legacy U.K. Work Program as well as a reduction in contract adjustments for our Offender Rehabilitation business. However, during Q1 2018, we did see a favorable impact from our health contracts as well as contracts across most of our international businesses. We have also started to see referrals under the new Work and Health Program.

WD Services reported adjusted EBITDA for the quarter was $2.8 million as the revenue standard had a negative impact of $3.5 million. Adjusted EBITDA, excluding the negative impact of the new revenue standard, still declined slightly as compared to the prior year, as the prior year benefited from a more favorable impact of contract adjustments in our offender rehabilitation business. These headwinds were offset by lower corporate and shared service cost due to the impact of the Ingeus Futures restructuring programs. Although we expect a continued negative impact from the new revenue -- on both revenue and adjusted EBITDA during the remainder of the year, we don't expect the impact to be as significant as it was in the first quarter. We still expect full year reported revenue in 2018 for WD Services to decline in the mid-single-digit range and for adjusted EBITDA margins to be consistent with 2017 in the mid-single-digit range.

Turning to corporate. We incurred an adjusted EBITDA loss of $7.4 million in the quarter, which is $400,000 higher than the prior year. The major driver was an increase in expense for cash-settled awards of $1.1 million due to the significant increase in our stock price. This was partially offset by a lower underlying operating cost and noncash stock-based compensation. For the full year, excluding the organizational consolidation implementation costs that David referenced, we expect adjusted EBITDA at corporate to be approximately negative $26 million.

Lastly on Page 7, for our Matrix investment, remember that Matrix is treated as an equity investment and therefore we don't consolidate its revenue or adjusted EBITDA with Providence. Matrix closed the HealthFair acquisition in February 2018. The information on Page 7 only includes the results of HealthFair since the date of acquisition and none of the information is presented on a pro forma basis.

Revenue in Q1 increased by 20.7% over 2017 with approximately 50% of the revenue growth attributable to HealthFair. Adjusted EBITDA margins of 20% were negatively impacted due to start-up costs for HealthFair contracts. We expect to see margin improvement over the remainder of the year. From a Providence income statement perspective, we recorded an equity loss of $2.3 million in the quarter due to the impact of HealthFair transaction-related expenses recorded in the quarter. Matrix ended the quarter with net debt of $310 million.

Moving on to Page 8 for the cash flow summary. In Q1 2018, cash flow from operations was a very solid $25 million. Note that year-over-year, cash flow is down, as Q1 2017 benefited from the timing of transportation provider payments, which reversed in Q2 2017. We are pleased with the health of our cash flow generation to fund operations, strategic initiatives and share repurchases. CapEx for the quarter was $5 million, lower than the $5.7 million from last year and in line with our expectations for the full year of $20 million.

Moving to Page 9 for the balance sheet summary. We ended the quarter with over $86 million in cash and no long-term debt. Our book value in Matrix is $166 million. With the HealthFair acquisition, we feel even stronger in our view that the book value significantly understates any market-based approach to value this asset. Our share count, which is common plus preferred on a converted basis, as of quarter-end was 15 million.

For share repurchases, year-to-date through May 7, we have bought back 589,000 shares for $37.4 million at an average share price of $63.46. As we previously reported, we increased our buyback capacity by $78 million and our current capacity is approximately $99.5 million for purchases through June of 2019.

With that, I will now open up the line for questions. Operator?

(Operator Instructions) Our first question comes from Bob Labick with CJS Securities.

I wanted to start with -- I noticed there was an S-1 that came out last night that registered the shares for Coliseum Capital, both their common and their preferred shares. I wonder if you can give any commentary on that, if there's the opportunity for the company to buy back the preferreds or the common or any color around it would be great.

Well, Bob, first of all, let me apologize. We're out here in Tucson this morning and allergies are catching all of us this morning so apologies for the raspy voice. But yes, thank you for the question. I guess our perspective is that Coliseum has been just an absolute terrific long-term shareholder. I guess they've been with us about 6 years, and I'm guessing they got in the stock around, as I recall, somewhere around $10 a share. Chris has been our Chairman of the Board since I think it was 2012, and really, we've just had tremendous shareholder value creation over these years.

Regarding the S-1 and the shareholdings, I have no reason at all to believe that Coliseum won't remain a significant shareholder even though we're just registering the shares. Regarding Chris, personally, I interact with Chris on a -- sometimes daily, weekly basis and he is incredibly highly involved in leading this board, constantly talking about strategic initiatives and continuing to drive value. He is solely focused on driving value for the shareholders. So I don't view this as a significant event even though I'm sure it caught the attention. I have all the confidence in the world that Chris will remain a significant shareholder and have no reason to believe otherwise.

Got it. I appreciate that. Shifting to fundamentals. Margins at LogistiCare were very strong. You highlighted them at 7% and I don't remember -- 200 basis points year-over-year. Could you maybe try to break down a little bit -- I know this is a little bit difficult. But obviously, there were a bunch of nor'easters in the Northeast, so New Jersey being the biggest contract. How much was the benefit from that? How much was from the improvements under the value enhancement initiatives, kind of bucket the opportunities. And then with that, I know you spoke a little bit about it, but maybe talk about the, I guess timing or phasing in of the benefits from value enhancement over the course of the year.

Yes. I think in Q1, what we saw was the benefit from value enhancement, it was about $5 million. The initiatives have really ramped up year-over-year. There obviously was very little benefit in Q1 '17 so as we ramped up our efforts there. The question, David will kind of take you through more of the details of the phasing of the savings. But to your last question on the nor'easter. So I don't think that we really saw any significant benefit or reduced utilization from that, so it's a little bit different than some of the other actions that happened last year in Texas where there was a really drop in utilization, but we didn't really see any benefit from that in the quarter.

Yes, Bob, this is David. I will agree. We didn't -- yes, we really didn't see benefit from utilization, either in -- a drop in utilization either in the Northeast or anywhere in the country. We actually saw some headwinds to utilization for example, in New York, I believe. In terms of the impact of value enhancement in Q1 this year, it was about, as Bill said, about that $5 million. We're still on track to what we said previously. We expect to be -- the programs ultimately result in about $40 million of cost savings before reinvestment back into the business, getting to about $35 million of run rate by the end of 2018. I think as we move throughout the year, those cost savings will continue to ramp up, and we expect about $20 million of impact in 2018 on a year-over-year basis from the cost savings. We do expect, however, to reinvest about $15 million -- sorry, $5 million of that benefit, resulting in that 15 year-over-year improvement. Remember, too, on a year-over-year basis, we did have approximately 2017, approximately $5 million or $6 million of savings. So again, that year-over-year impact before reinvestment being about $20 million.

Got it, okay. That's very helpful. I appreciate that. And then just sticking with it, obviously then given that there was no real utilization benefit that you -- terrific margins in that regard, but what do you think is driving the higher utilization year-over-year? Anything that you can point to? Or -- and how do you expect utilization to trend? Is there a reason to believe it's going to continue to increase? Or how are you thinking about that?

We have no reason to think that utilization is going to continue to increase and it's always difficult to pinpoint exactly on a quarterly basis why we might see a blip in utilization, for example, in New York. I mean sometimes it's caused by things that are outside of our control such as reimbursement rates for different services under Medicaid, which induces greater offerings of those services by providers and thus, greater consumption of Medicaid services by Medicaid members, but it's quite difficult for us to pinpoint exactly on a quarter-to-quarter basis, utilization changes.

Got it, okay. I certainly understand that. Jumping over to Matrix. Last call, you discussed a pro forma growth of 20%, I guess off of a, call it, pro forma basis of about $275 million. Obviously, you didn't have HealthFair for the full quarter this time, but can you help us think about how that growth will build out? Is there a ramping of contracts or anything that makes it nonlinear that you can help us discuss and model? And then do you still believe that 20% pro forma growth is a good number? And will that be the run rate or full year expectations that you thought before?

Yes. So Bob, yes, you got that number right. So in 2017, on a combined pro forma basis, HealthFair and Matrix did generate $273 million of revenue. And I still view the 20% growth off of that $273 million as appropriate. You are right that there is a ramp to that growth in 2018, particularly in regards to HealthFair. I think I mentioned on our last call that HealthFair as well as Matrix had signed up a number of new customers at the end of 2017. So Q1 2018, there was a lot of implementation work at HealthFair, including the ramp and the production of their bus fleet that's needed to deliver this volume. And so I think Bill had mentioned when you back out HealthFair for the quarter, HealthFair, since the closing of the acquisition in February through the end of the quarter, contributed about $6 million in revenue. So when you back that out, you can see that Matrix, just core Matrix, grew organically almost approximately 10%. HealthFair's growth for the full year is expected to be over that amount, thus driving kind of year-over-year pro forma revenue growth to that 20% number.

We have no further questions. I would now like to turn the call back over to Carter Pate for any further remarks.

I don't have any closing remarks. I just thank all of you, enjoy the conversations that we have during the quarters. Looking forward to meet some of you that I have not had a chance to meet so far. Strong quarter for Providence, particularly LogistiCare has gotten a terrific start. We look forward to continued conversation -- conversations with our shareholders. Thanks so much for getting up early and listening in this morning, guys. Bye-bye.

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