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Providence Service (NASDAQ:PRSC)
Q2 2019 Earnings Call
Aug 08, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, ladies and gentlemen, and welcome to the Q2 2019 Providence Service Corporation earnings conference call. [Operator instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Ms. Suzanne Smith, chief accounting officer.

Ma'am, you may begin.

Suzanne Smith -- Chief Accounting Officer

Thank you, operator. Good morning, everyone. This is Suzanne Smith, chief accounting officer of The Providence Service Corporation. Thanks for joining our second-quarter 2019 conference call and webcast.

With me today from Providence and LogistiCare are Carter Pate, interim chief executive officer; Kevin Dotts, chief financial officer; and Dr. Robin Heffernan, chief operating officer. During this call, members of the management team will be referencing the presentation that can be found on our investor website under the Event calendar and in the current Form 8-K, which was furnished to the SEC yesterday afternoon. Before we get started, I would 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 in the company's filings with the SEC. We will also discuss certain non-GAAP financial measures in an effort to provide additional information to investors. A definition of these non-GAAP measures and reconciliation to the most comparable GAAP measures is also included in our press release, investor presentation and our Form 8-K.

Finally, we've arranged for a replay of this call, which will be available approximately one hour after today's call on our website, which is www.prscholdings.com, or via the phone numbers listed within our press release. With that, I will now turn the call over to Providence interim CEO, Carter Pate. Carter?

Carter Pate -- Interim Chief Executive Officer

Well, thank you, Suzanne, and good morning, everyone, and thank you for joining us for Providence second-quarter 2019 earnings call. The second-quarter marked the successful completion of the organizational consolidation, with the full transition of all Providence functions in Connecticut and Arizona to LogistiCare's headquarters here in Atlanta. Providence and LogistiCare are now operating fully under one management team. Now before I jump into the financials, I want to quickly hit on two items that will impact our capital allocation strategy.

As seen in our press release last night, Providence board just approved a new share repurchase program to replace the one that expired on June 30th. We also extended the maturity date of our credit facility by one year as the facility was set to mature at the end of last week. I'll let Kevin provide more detail on capital allocation, but I wanted to reiterate that capital allocation remains a top priority for us. Now moving into the financial results.

The second-quarter delivered strong revenue growth of 5.9%. But that said, the headwinds that we saw in the first quarter with regard to transport cost continued into the second quarter as we realized adjusted EBITDA of 5.8 million and adjusted earnings per share of $0.08. Now let's talk about our revenue growth just a bit. Our strong revenue growth was driven by a combination of new contracts and higher utilization in some of our non-at-risk contract.

As a reminder, our non-at-risk contracts include fee for service and reconciliation contracts. In addition, we're excited to announce the renewal of state contracts in Michigan and Delaware, which will bring revenue predictability over the next couple of years. We have been in Delaware since 2002, in Michigan since 2010, and these renewals demonstrate our continued value proposition and long-term relationship that we've had with our large payers. We also continue to see promise in some of our adjacent markets, including a promise of a new national Medicare Advantage and a national commercial insurance contract.

Although it's still too early to discuss economics. We're excited about continuing these adjacent growth opportunities. Now let me touch on margin. On the profitability side, as I mentioned previously, the headwinds that we saw during the last quarter continued into the second quarter.

These headwinds are from both industry- and company-specific factors and drove an increase in our overall transportation expense. So let me touch on the utilization aspect of that. In terms of industry headwinds, we saw utilization increase sharply during the first half of 2019, compared to the first half of 2018, driven primarily by two factors. The first is an overall shift in our membership base as we continue to see higher utilizing members becoming a larger part of our overall membership base.

As discussed in last quarter's earnings call at the beginning of this year, we saw the mix of membership within certain contracts move toward higher utilizers than we've seen in the past, thus, lowering our overall profitability on certain contracts. With the continued strength of the overall economy and all-time lows in unemployment, we are seeing healthier individuals become employed, moving off of the Medicaid roles. As a result, in certain contracts, we are left with a generally sicker population within our eligibility files, because of a majority of our contracts are based on full risk capitated reimbursement rate. We are losing margin associated with these generally healthier individuals, which helped offset higher transport cost associated with this more acute population.

Now in addition to membership changes within certain contracts, we also have experienced an overall increase in utilization driven by increased usage of nonemergency medical transport benefits, particularly within the mental health and substance abuse segments of our population. The opioid crisis is truly becoming a significant part of what we see every day. However, as we've mentioned in the past, when there are spikes in cost due to external industry or macro-driven trends, we're able to go back and approach our payers in an attempt to bring contractual rates back in line with cost. To date, we have been able to negotiate price increases on a couple of mid-sized state and MCO contracts, which will help out in the second half, which Kevin will provide more detail later on when he speaks.

In addition, we are actively engaged in pricing discussions with some of the largest payers. As a reminder to investors, these adjustments, as I've said many times in the past, may take several quarters to come to fruition. Now turning to unit cost. In terms of some of the company-specific headwinds, we also experienced higher transport cost on a per-trip basis, and I'm going to try to be very specific here.

The first cause was higher transaction fee no transportation carriers. Since last quarter, we've been able to successfully negotiate a reduction in these transaction costs, which we now expect to generate $10 million of cost savings in the second half of this year. We also saw an increase in transportation cost per trip due to an internal process and market-level oversight, which to be very transparent with all of my investors, we lost as we adopted a centralized operating model at the beginning of this year. As a reminder, we had created a center of excellence operating model as part of our effort to share best practices across the company and to standardize processes.

Although the centralized model worked very well in certain areas, including our call centers, that we have a direct contact with our members, our transportation network management functions caused a step backwards. Given transportation-provider relationships and cost management are very regional and market specific, the lack of senior leadership at the local market level during this ride resulted in a disconnect between day-to-day operations and profitability. We have since reinstated many of the processes and leadership to oversee transportation cost at these local markets in an effort to promote an ownership mentality at the field level where we can have direct communication with the management team to effectuate change. Although it's still early, we are already seeing positive trends and are cautiously optimistic for the second half of the year.

We think we've got this fixed. Now overall, since I've taken over as CEO of the combined companies, I've seen leaders in the business move at lightning speed to identify these issues I've discussed and challenges at hand, put a plan together quickly to address the challenges while continuing to provide excellent service to our members. In summary, despite the second-quarter results coming in under our expectations, the team has successfully secured several price increases from payers, renegotiated lower transaction fees with our national transportation carriers and continued active discussion with some of the other large payers in an effort to secure contractual adjustments. Now that said, due to some of the company-specific headwinds impacting the business in the first half of the year and the potential timing of potential future contractual adjustments, we are now expecting NET services adjusted EBITDA to come in below 6%.

Please note that this is before approximate $17 million of cost previously associated with the holding company, to which we're still on target to achieve $10 million run rate savings by the end of the year. In terms of our long-term outlook, we continue to remain confident in the underlying value proposition and fundamentals of Providence's nonemergency medical transport business and believe there will be significant value generated from the Circulation acquisition, which we still expect to achieve run rate savings of $25 million by the end of next year. Now before I turn it over to Robin in a minute, I want to talk a little bit about the technology transformation. I'm going to hit on our Matrix investment first.

Please be aware that beginning this chapter going forward, Providence will discuss Matrix home, legacy in-home business, and mobile, which used to be the Health Fair mobile business, financial results on a consolidated basis as a result of that company reorganizing its management of the business as solutions versus segments. For the second quarter of 2019. Providence recorded a loss in equity earnings of $1.3 million related to its Matrix equity investment. For the second quarter of 2019, Matrix revenue was $72.2 million and adjusted EBITDA was $13.7 million or 19% of revenue.

Now Matrix year-over-year revenue decline was primarily due to lower mobile visits but was partially offset by very strong home visits growth. Adjusted EBITDA decreased year over year, primarily due to lower mobile revenue partially offset by cost reductions and higher-than-expected home visits. Matrix management continues to exceed its expectations for this year, despite beginning its year with a volume churn setback which has now been overcome by a combination of robust membership growth and higher yield from its home solution. As expected, the company is managing through a challenging year for its mobile solution, which we've discussed really the last two quarters, however, there are early indications of a stronger second half.

Finally, Matrix has won five new logos in the first half and expects to see continued momentum. OK. Now I'd like to hand it over to Robin Heffernan, our chief operating officer. Robin?

Robin Heffernan -- Chief Operating Officer

Thank you, Carter. As you know, we have embarked on an aggressive path to transform our NEMT services, which includes process improvement, a technology upgrade and growth in adjacent markets. Before I speak to our process improvements and technology, I'd like to reinforce a couple of points that Carter mentioned on growth. I cannot stress enough the importance of growth for us, and we have a number of dedicated efforts and people to ensure that we are on a strong and positive growth path.

As part of this, we recently brought onboard a new executive vice president of growth, who will be focused on driving growth within our core NEMT market, as well as leading expansion activities into adjacent markets, such as Medicare Advantage, veterans, and commercial. As Carter mentioned, in the second quarter, we were promised a national Medicare Advantage contract and a national commercial insurance contract. Both of these opportunities will allow us to demonstrate a broader success story for health outcomes, namely, turning better transportation and delivery logistics into healthy and happy populations with lower rates of disease progression and lower total medical cost. Equally important to our transformation agenda are the process improvements we are making.

We continue to leverage our call center assets as a national resource pool, which is driving higher quality service for our clients at a lower cost. We also recently began using our trip coordinators as a shared asset to improve our trip matching optimization and, again, deliver a higher-quality experience for clients at a lower cost. With these improvements, we've been able to achieve a 10% reduction in cost per call without compromising quality. Fundamental to our transportation is the integration of the circulation technology platform across our business.

We have received numerous increase from investors, believing in this transformation and asking about its progression. We're pleased to share that we are seeing early success. Our first market conversion was Massachusetts, which was successfully executed in May. This conversion added approximately 1 million annual rides to the circulation platform, which saw no degradation in performance.

Additionally, we released several critical feature enhancements, which all performed as intended. For example, support for mass transit, meals, lodging, gas reimbursement, enhanced workflow and credentialing support. Of course, we also had key learnings to improve subsequent conversions, the largest of which is our driver credentialing. Based on our learnings, we have strengthened our implementation team and we're excited to add two additional markets this year, North Carolina in November and Virginia in December.

We also expect to migrate all ride-sharing rides onto the circulation platform in September. Expected volume flowing through the Circulation platform by end of year will be approximately 8 million rides on an annual run rate basis. We continue to have strong demand from our clients to convert their market next as the technology continues to be a differentiator in this industry. Finally, as related to technology, as we stay on schedule for our product road map and market conversions, we have also reduced our technology ride cost by 20% due to higher server efficiency and lower pricing with our technology vendors associated with higher ride volume.

In summary, we're excited about our growth initiatives, and we continue to streamline our contact center operations, driving down our market operating expense. We also remain on target with our technology rollout schedule, expecting to convert substantially all our legacy LogistiCare markets by the end of 2021. With that, I'll now turn the call back over to Carter.

Carter Pate -- Interim Chief Executive Officer

OK. Thanks, Robin, for that update. Is -- I'm now going to go to Kevin Dotts, our chief financial officer.

Kevin Dotts -- Chief Financial Officer

Thanks, Carter. As a reminder to investors, at the beginning of the year, we combined the NET services and the corporate and other segments into one, while also recasting service expense and G&A expense to reflect the removal of the holding company operating structure. As Carter mentioned earlier, the second quarter saw the completion of the organizational consolidation as all activities performed at the corporate level in Connecticut and Arizona are now being performed in Atlanta. From a cost standpoint, we remain on track to achieve $10 million of run-rate savings by the end of this year.

Through the first half of the year, former corporate holding company cost on an adjusted basis were $6.2 million, compared to $12.9 million in the first half of 2018. Moving on to the financials. Debt services. Revenue increased 5.9% in the second quarter to $363.9 million.

This growth in revenue was driven by new manage care organization, MCO contracts, in Minnesota and Louisiana, and a new state contract in West Virginia, as well as higher revenue from our not-at-risk contracts. Lastly, we picked up additional revenue from circulation which contributed $11.3 million of revenue. These increases were partially offset by the impact of contracts we no longer serve, including the state contract in Rhode Island and an MCO contract in California. Adjusted EBITDA was $5.8 million for the quarter which includes $1.5 million of certain corporate cost previously housed within the holding company.

Excluding these cost in both periods, adjusted EBITDA as a percentage of revenue was down 280 basis points as a result of higher transportation cost driven by factors that Carter mentioned earlier. As Carter mentioned, although margin during the quarter was below our normal expectation, we have been successful in negotiating significant cost savings, which will benefit the company during the second half of the year. On the transportation side, we secured $10 million of cost savings related to a reduction in transaction fees imposed by national transportation carriers. In addition, we recently were able to secure price increases on a number of our midsized contracts.

In total, these price increases represent approximately $12 million of revenue, which will drop to the bottom line versus the first half of the year. Excluding transportation cost, we have seen a year-over-year reduction of 10 basis points in cost as a percentage of revenue. If we were to exclude Circulation, we saw a 50 basis points reduction, compared to the second quarter of 2018. These results and cost savings are a confirmation of some of the early success that we are seeing across the business as we are able to share best practices of costs for contact centers and back-office operations.

Capital allocation. Moving on to capital allocation. As Carter mentioned, Providence's board recently authorized a new $100 million share repurchase program through the end of the year. As has been the case with our historical buybacks, we continue to believe that buying back our shares is an attractive use of shareholder capital.

We also extended our $200 million credit facility by year to August 2020. Without a key catalyst, driving a need for a more fulsome refinance, we view the current extension as a great opportunity to maintain near-term flexibility without having to sacrifice cost and fees. Although we have historically repurchased shares using our balance sheet cash, the extension of the credit facility will allow us to be more opportunistic in our share repurchasing efforts. Turning to the balance sheet and cash flow.

We ended the quarter with $29.8 million of cash. As expected, we gave back some of the positive working capital benefit accumulated during the first quarter of the year. As mentioned on our previous calls, because the company pays its transportation providers on a bi-weekly basis, we typically see one additional payment made in the second and fourth quarters. That said, we continue to expect 2019 to be a solid year for cash generation.

During the second quarter, we completed our federal tax return and refund request associated with the tax benefits from the sale of WD Services and expect to rebate tax refund of approximately $28 million in the fourth quarter of this year. Continuing on WD Services as part of our wind down process in Saudi Arabia, we were able to extract an additional $3.4 million in July, totaling $6 million of cash extraction since the beginning of the year. With that, I'll turn the call back over to Carter. Carter?

Carter Pate -- Interim Chief Executive Officer

OK. Thanks so much, Kevin. Thank you, Robin. With that, I think, operator, if you can come back on and open up the line for Q&A?

Questions & Answers:


Operator

[Operator instructions] And our first question comes from Bob Labick from CJS Securities. Your line is open.

Pete Lukas -- CJS Securities -- Analyst

Hi, good morning. It's Pete Lukas for Bob. You guys, I think, did a really good job detailing what impacted the margins and what's being done to turn them around. Can you just expand on the types of discussions you're having with both the transportation providers and the state MCOs? And also expand a little bit more on -- you mentioned timing on that, saying it may take a few quarters.

Carter Pate -- Interim Chief Executive Officer

Yes. Let me kick off, and then I'll hand it over to you, Kevin. The best way I can have that discussion about margin is to just be very frank with all the investors that at the beginning of the year management made a redesign of the organization as we were planning for operational scale and growth. We're trying to streamline the operations, and during that whole period, scale was the rule of the day.

And some of the decisions that were made at that time would remove the ground supervision that directly link the management team to the field, while at the same time, we realized that there were changes going on in the marketplace by growing trends in the opioid crisis, as well as additional benefits from payers that impacted utilization and our ability to control transport cost. I'd describe that since I took over as the interim CEO here at LogistiCare as most likely the perfect storm. You've got a redesign going on, you've got movement in the marketplace with your utilization, you've got your cost that is moving out underneath you as many of the states were driving to $15 minimum wage, there was insurance increases going on with the drivers, the economy continued to boom, and we saw double-digit utilization increase. All of this was moving during this change we were doing.

We did not catch the trend and fully appreciate the cost that was moving from underneath us until really we were into April. This is on us. And as the CEO, I own this. We have taken immediate action, and I think Kevin and Robin did a good job of trying to articulate that this was an all hands-on deck during the past 30, 45 days, and we have been negotiating extremely aggressively with our TP providers, one of which we were able to ink a deal right at the end of the quarter, which I think Kevin articulated, that will show us about a $10 million improvement in our cost base in the second half of the year.

That has driven us also. As many of you that have been with us or been with me for the last two years, and we've told you before, when we see these type of trends that are being pushed by the states, by the MCOs, that once we catch the trend and we can let enough time go by, we can rebuild the model, go back to the state and ask them for -- or claw back. That is exactly what we've done in the past, but it does take some time. We expect that many of those negotiations will bear fruit in Q3 and into Q4.

And those contracts negotiations, I am personally involved in the largest ones. We've had some early successes that Kevin talked about in our opening comments, but there's more to come. So it's really a two-pronged effort -- really, I guess, a three-pronged effort. One, reestablishing what worked for years here in LogistiCare with that direct line of sight out in the field with the managers owning the P&L, directly having influence on the ground level that got put back in place just recently in the last month and a half.

No.2, the renegotiation of the transportation cost with our providers that was relaunched in order to regain the high ground honor and control our cost. And then finally, the effort with the states and the MCOs to renegotiate that. Kevin, what else would you add to that explanation to answer the question about cost?

Kevin Dotts -- Chief Financial Officer

Yes. No, Carter, I think you covered it pretty well. I think from the perspective, again, you covered the fact that we already have locked in a $10 million benefit second half versus the first half on the transportation providers based on eight contracts we've already locked in. We've got a 12 million locked-in improvement.

There's another five or six contracts we're currently working through. There are a couple of contracts that are suboptimal where we are informing some of those potential customers that they are facing possible termination which would actually improve profitability. So I think we're looking at all the angles there. I know we're not per se.I think we had given guidance earlier this year that we would be kind of in the higher range.

We're now bringing that down a bit based on this temporary first-half situation, but I think we can get back to the same margin rates as we go forward, later this year going into next year.

Pete Lukas -- CJS Securities -- Analyst

So just following up on the -- you mentioned margin rates there, assuming it is a perfect storm, and you've taken immediate action, what can normalized EBITDA margins be in the second half of 2020? And is there still growth to 8% plus with Circulation?

Kevin Dotts -- Chief Financial Officer

Yes. I think we still see the possibilities of being in the mid 6% range on a go-forward basis.

Pete Lukas -- CJS Securities -- Analyst

And in terms of Matrix, you sound cautiously optimistic on Health Fair, what's been done to turn that around? And is there opportunity for that to be profitable this year? Or is that a 2020 proposition?

Carter Pate -- Interim Chief Executive Officer

I will tell you at this particular point in time, the Health Fair, which is now referred to as mobile, with the changes that they did inside of Matrix, is it has continued to underperform. There is some strengthening. We do see some strengthening, but I think it's going to continue to be some headwinds. The real bright spot, however, is that if you recall my comments back in -- early this year when we were talking about Matrix and the disappointment in Health Fair, we also talked about we had some headwinds in the core business.

The bright spot here on Matrix is that they were able to overcome those headwinds in the core business and they are exceeding internal expectations every month. That is what's driving their ability to overcome the -- a bit of a continued disappointment in the mobile business. We're still looking for some stabilization, but it's clearly -- they've got their hands full on the mobile side of the practice, but honestly, the core has been outperforming. And I'm very optimistic about the second half in the core business.

Hopefully, they can continue to get their arms around the mobile side and it will stabilize. We're optimistic about the second half but it's been a bit of a disappointment, honestly, on the mobile part.

Pete Lukas -- CJS Securities -- Analyst

And lastly for me, you've now authorized the buyback, how committed are you to using the buyback? And how do you view that in terms of other uses of capital?

Carter Pate -- Interim Chief Executive Officer

Well, we are committed. It's the lead headline on our discussion today. I was very pleased with my board that they -- when we unveiled the turnaround plan here after the disappointment of Q2, I feel that support that they would authorize that buyback and give me a significant amount of dollars behind, we intend to use that.

Pete Lukas -- CJS Securities -- Analyst

And sorry, one last one for me. Just a little background on CEO change and characteristics you're kind of looking for, for a replacement?

Carter Pate -- Interim Chief Executive Officer

OK. As far as the CEO change, as you know, I've been here, it'll be two years in November in the interim role. As a part of the organization consolidation, you will recall that it was always the plan to collapse the public holding company management team into LogistiCare and I would be exiting my role. The board decided that the company needs a CEO with a more strategic healthcare, logistics and operational background, and we're moving forward with that.

I've been asked to step into the role of interim CEO of both Providence and LogistiCare and assist the board in its search to find my replacement. The board's begun its search process, a firm has been hired and they're under way, we actually had meetings this week here in the Atlanta office and discussions. The search will involve both internal and external candidates and the board is hopeful to have someone in place by early Q4, so that I can have some time for transition before I exit in December. I don't know if there's anything else you want to add, Kevin, to that search.

Kevin Dotts -- Chief Financial Officer

Yes. No, I would just add, Pete, that Carter is, obviously -- right now, he's got the experience from MV Transportation, he's got familiarity with the LogistiCare business. So I think in the interim period right now, he's got a great skill set to lead the company. I would also remind investors that his contract runs until the end of the year, which, based on, as you just mentioned, recently kicking off the search, that should provide enough time for a smooth transition while the board goes through its process on the search and we'll give an opportunity for Carter to kind of mentor to a selected candidate.

And at some point, I guess, that whether -- it'll be up to the new CEO as to whether -- what that transition period would look like through the end of the year, But again, his contract does run through the end of the year and should provide opportunity for a good transition.

Carter Pate -- Interim Chief Executive Officer

OK. We've got a good plan for a handoff. So I'm looking forward to the board selecting the right candidate to lead us.

Pete Lukas -- CJS Securities -- Analyst

Very helpful. That's everything for me. Thank you, guys.

Carter Pate -- Interim Chief Executive Officer

All right. Thanks, Pete.

Operator

And that does conclude today's question-and-answer session. I'd now like to turn the conference back over to Carter Pate, for any closing remarks.

Carter Pate -- Interim Chief Executive Officer

Well, basically, I know it was a trying quarter, investors, but I hope you'll hear the confidence that I have in what we've done in the last six weeks since Jeff departed. I am so very proud of all the people and how they've responded and the welcome reception I've gotten down here at LogistiCare. Although I knew everybody down here, the opportunity to work with everybody on a daily basis has been one of the most rewarding chapters in my career. And I'm excited about what's going to happen in the next quarter, and I'm actually looking forward to our next conversation.

Thank you, operator, and thank you, guys.

Operator

[Operator signoff]

Duration: 36 minutes

Call participants:

Suzanne Smith -- Chief Accounting Officer

Carter Pate -- Interim Chief Executive Officer

Robin Heffernan -- Chief Operating Officer

Kevin Dotts -- Chief Financial Officer

Pete Lukas -- CJS Securities -- Analyst

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