Q3 2019 Earnings Call

Sure the third quarter 2019, Providence Service Corporation earnings Conference call.

Time, all participants' lines listen only mode. After the speakers presentation. There will be a question answer session to ask a question during the session you're ready to press Star then one or your telephone.

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I like to turn the conference over to Mr. Smith, Chief Accounting Officer. Please go ahead.

Thank you operator, good morning, everyone.

This is Dan Smith, Chief Accounting Officer of the Providence Service Corporation and Thanks for joining today's third quarter 2019 conference call and webcast.

With me today, our card or paid our interim Chief Executive Officer, and Kevin Dotts, Who's our Chief Financial Officer.

During this call members of the management team will be referencing the presentation that can be found on our investor website under the events calendar and in the current form 8-K, which we furnished to the Securities and Exchange Commission yesterday.

Well, 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 FCC.

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 included in our press release investor presentation and within our form 8-K.

Finally, we have arranged for a replay of this call which will be available approximately one hour. After today's call on our website, which is www dot P. R. S. C holdings dot com or via the phone numbers listed within our press release.

With that I will turn the call over to our interim CEO card or pay Carter.

Well, thank you Susan and good morning, everyone and thank you for joining us excited for competencies third quarter.

2019 earnings call.

Now before I jumped into the financials, just a quick update on capital allocation specifically.

Irks your repurchase program, a little bit about the ongoing see no sorry.

During the quarter, we purchased $6 billion there's.

No we were unable to be in the market for a period of time, while we were conducting the contract repricing efforts. The board remains very supportive of our share repurchase program.

Good use of capital deployment.

Now the CEO searches Nelson.

And as planned.

We are hopeful to make an announcement.

In late Q4 will possibly early Q1.

Now moving onto the financials.

We had a quarter of solid results with revenue of 393.4 million, representing a 14.4% year over year growth.

Adjusted EBITDA of 23.1 million.

Our adjusted D. P S for the quarter was 81 cents.

As disclosed a few weeks ago.

Okay, we successfully renegotiated a total benefit of 17.7 million.

Gross of tax retroactive contract adjustments, which greatly help these results.

No as discussed in the past we continue to look at all of our contracts in an effort to rightsize pricing.

Only those.

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Results for the Chief.

No as I've mentioned before these contract Weve negotiations take some real time to secure but rest assured we continue to work on repricing opportunities and expect to conclude even more in the fourth quarter and beyond.

Now moving on to transportation expense as I mentioned last quarter.

2019 to them what we described is the perfect storm.

It has negatively impacted our financial results.

We're seeing external forces impact many of our markets, including increased as a minimum wage.

And lower unemployment, both of which are driving higher wage rates as well as higher insurance like.

These external factors are driving our transportation cost higher who's our transportation providers are demanding higher rates.

These industry challenges warrants were compounded when we attempted to centralize operations at the beginning of the year and Unfortunately dwarfs, the connection and oversight that the market level to quickly react industry changes.

I must say it was a difficult lesson for us to learn.

No sense reinstate.

The local level operational structure.

Manage the transportation costs at the appropriate levels, we've seen positive signs, including some metrics around our average cost per trip, reducing for the first time all year.

I'm very much encouraged by some of the progress we have many today.

So we continue to work on controlling what we can however, the external forces are difficult overcome without passing these cost belong.

As we're often asked about rights there I would quickly note that weve <unk>, we have a very strong and unique contractual relationship with live.

We believe we are one of the largest partners in the U.S., but in certain markets, we leverage their services cost effectively for certain ambulatory rides.

No payers are becoming increasingly receptive that this new environment in which we are operating.

I understand the importance of a healthy transportation network and the impact that it has on membership externally.

Well the uncompleted trips.

In a number of studies, we have seen groups of transportation providers approach state and local officials advocate for these improvement.

In light of these continued headwinds we expect margins for the year Ian burn a person as we continue working with payers to reprice contracts to be consistent with industry wide higher transportation costs.

Now, let's move onto circulation.

We just passed the one year anniversary of the acquisition there.

As a reminder, the investment thesis at the time to be acquisition was a new.

And reservation system, which would drive increased productivity and lower cost.

Across our contract carriers, the front end to the platform aimed at improving membership experiments.

Let's just Uh huh.

Every year, we're seeing significantly higher meet customer demand.

For the technology platform than we anticipated.

New customers are interested in more data supporting information offered by the platform.

They seek to empower their members to take control their personal health.

As mentioned last quarter, we have secured multiple new Medicare advantage pilots.

We're payers are much more focused on quality and member experience.

Even within our core Medicaid market, we are changing the perception of Medicaid non emergency transportation, which many payers often think of it as a mandatory benefit.

One of our largest Medicaid state.

To launch the Medicaid carved out plan with local health care facilities to measure the value of non emergency transportation.

It's impacts on social determinants.

We're currently developing dip a compliant mobile application.

Which will greatly improve their lives from Brooklyn, a trip to the Doctor.

Now as a manager we do not burns circulation separately from Logisticare, but we operate is one business.

Likewise, we've learned that our customers or platform agnostic.

And we go to the market accordingly focused on a broad product that offering embedded in the existing logisticare and the newly acquired circulation technology.

We believe that the combined offering continues to stimulate interest from new customers and will accelerate growth lower operational cost structure in lead to improved margins in the future.

On the backend moving certain logisticare contracts to new platform.

We'll take longer than originally thought as we prioritize certain functional elements of the combined platform to bring to existing new customers.

The number a product demand.

State minimum requirements and the many different pricing structure require complex workflows.

Cowens platform migration.

Now we are encouraged however that the front end technology platform is an integrated technology feature about which new customers are inquiry.

We feel this an opportune to be a first same trends within key growth market. In addition.

As Mark has traditionally operate a much more accretive margins than the traditional Medicaid market.

We believe the faster growth and low cost of operators will lead to expand the bottom line margins.

Given the lead time, most large contracts is anywhere from.

Six months or plus.

We are excited about the groundwork we're still waiting right now.

So I'm, hoping we bought the matrix.

Which is one of our equity investments.

For the third quarter 2019, Proppants recorded a loss in equity earnings of 3.2 million related to its matrix equity investment.

The third quarter 2000 like.

Matrix revenue was 71.7 million and adjusted EBITDA was 10 million.

Matrix third quarter 2019 benefited from higher than expected home membership and visits.

Total membership and visits were inline with expectations. However volume was restricted.

So he can strength could have been sense mitigate.

Metric experience lower direct cost per visit and slightly higher indirect costs compared to the third quarter of 2008.

Compared to the second quarter of 2019.

Adjusted EBITDA decreased 3.7 million, reflecting make foods typical seasonality public stronger person.

Now with that I'll turn the call over to Kevin Kevin.

Thanks Carter.

Before I get started I just wanted to hit on the organizational consolidation that was completed last quarter, excluding corporate related add backs for purposes of adjusted EBITDA and the impact of cash settled equity awards corporate cost declined by $2.1 billion year over year now moving onto the financials for net service.

<unk> revenues increased $49.6 million are 14.4% in the third quarter compared to 393.4 million Dollarss and prior year as Carter mentioned earlier, we benefited from a $17.7 million pick up related to several rate adjustments included in this amount was 13.9 billion.

In dollars related to previous quarters, and the remaining $3.8 million benefit was for the inter quarter reimbursements.

We also saw revenue growth from the new Manish from New managed care organization contracts in Minnesota, and Louisiana, and a new state contract in West, Virginia, as well as higher revenue from our not Everest contracts.

These increases were partially offset by the impact of contracts, we no longer serve including a state contract in Rhode Island, and NCL contract in California.

Adjusted EBITDA was 23.1 million dollar for the quarter, which includes $3.3 million a certain corporate costs previously house within the holding company.

Excluding these holding company cost adjusted EBITDA was $26.4 million, which represents a 6.7% margin.

Our quarterly results continue to be impacted by higher transportation expense, excluding the onetime retroactive revenue impact experienced during the quarter transportation expense as a percentage of revenue. This quarter was 80.1% this past quarter versus 76.4% in Q3 of 2018.

As part of mention a confluence of industry headwinds is driving increased transportation rates across almost all of our markets to combat. This we have launched several market level operational initiatives aimed at driving down transportation expense.

Through a combination of building up network capacity and renegotiating rates at a at the market level.

However, we expect the only way to move the needle in the near term on transportation cost as a percentage of revenue is through continued renegotiations with payers.

Capital allocation balance sheet moving on to capital allocation as Carter mentioned, we repurchased $6 billion of our common stock while the board remain supportive of the share repurchase program. We were unable to be in the market for a period of time, while we were concluding the contract repricing efforts, we ended the quarter with $40.6 billion cash.

We expect working capital continues to decrease over the fourth quarter and expect that we will generate positive operating cash flow.

With that ill turn the call back over to Carter Carter.

[noise] okay. Thanks, so much at this point operator, I think we're going to see.

I mean, some questions if we got it.

As a reminder, ladies and gentlemen to ask a question you need to press Star then one or your telephone towards draw your question press the pound.

Please standby, we compile because when a roster.

We have a question or comment from the line of Bob Labick from CJS Securities. Your line is open.

Good morning.

Hi, I'm. So first congratulations on the repricing efforts so far it obviously speaks to the very strong relationships that you have with your customers.

I was hoping you could expand a little bit more on what you've said earlier today just on the repricing efforts that you have underway is there much more in the bucket and where are you in terms of like the percent of contracts that you have repriced versus the percent. You believe you can reprice and how long might that take.

So Kevin I guess I'll kick off and try to start here.

We talked quite a bit on these calls about this perfect storm of a number that.

We got into this year.

The state wage mandatory increases minimum wage.

Unemployment at all time low in many many of the states that we operate.

This concerns.

Many of our providers of phase.

That.

Has couple.

With the our own self inflicted.

Issues that we talked extensively on the last call.

I would tell you that methodically we have gone.

And pulled every single contract to see what we can and cannot do.

Tremendous response, we got from these relationships. That's one of the things that is the solid strength of this company.

Our relationships with our clients.

Directly answer your question.

As I recall, we probably have six to eight more contracts that are currently in the pipeline.

Or regarding some type of revenue adjustment.

Okay and rate increase that we had to pull the facts together and get Tom for those that are brand new to this call. Many of you know that you normally just get one bite at the Apple when you do this so overreacting to quickly in a fiscal year.

And going back and asking for a rate increase is probably not smart play. So we let this usually play out see it settled down we accumulate the facts and then we go for our meeting with the clients. So hopefully that give you an idea of the lifting that will go on.

Has already begun for this quarter also just like last quarter, Kevin would you had anything else to Bob's question there.

No no I think that's that's right part I think right now I would say there's definitely.

Contract negotiations that we are finishing up here in the quarter I'd say about five or six of those will impact the fourth will impact the fourth quarter concluded successfully the others will be more of a 2020 event. So and so there will be several more all that will probably also be picked up.

Based on some recent no margin reviews and things of that nature. So I think that's a that's correct, we'll have some fourth quarter impact and some will be in 2020.

Okay, Great. That's really helpful. And then just talking about the could you talk about the preliminary view for growth for next year and drivers I know over the longer term, we've talked about the 5% to 7% growth opportunity, where do you see topline.

You know trending next year and.

You know what are some of the drivers behind that.

Go ahead Kevin.

Sure, Yes, so I would say Bob that where we're looking at right now we've actually it's already and.

I'd say $30 million to $40 million worth of business that will be new for next year, that's not the total growth number.

I would only caution that 30 to 40 million that we've already panda somewhat will.

It will be based on when when the installs actually occur. So we're working through the that cycle as we sit for a budget process.

I would say, we feel pretty bullish right now on a on the growth for next year, given the fact that we've already attendees ones since I have several more kind of in the pipeline that will be pentair tourettes quarter.

You know I would just pile on here, Bob and tell you that EFI, who came in and joined US about four months ago, along with a terrific sales organization.

There's just been a renewed effort in energy and some of the wins that Kevin just talked about we've seen a significant uptick in activity here and wins coming in and renewed interest.

I'm feeling really good about the sales organization at this point and what are some of the.

Actions that have occurred in the last three months four months that she's been here she's literally everywhere.

In the United States and she's got some core keep members that are just amazing people that have.

Got to you sense of urgency and purpose here with the.

Great. It platform. So we're feeling pretty good in 'em, we like those wins that have come in here recently.

And I think we're in good shape on the sales growth side.

Got it okay, great and you've obviously highlighted some of the.

Industrywide changes and transportation costs and the action you've taken or are taking to address those.

We talk a little bit about.

Thoughts on margins for next year I think on prior calls we've talked about potentially getting back it is like the 6%.

Yeah, potentially 6% loss at the core Logisticare level I mean, that's still a reasonable margin target for 2020, given the actions you're taking on the kind of an industry transportation costs.

So.

Bob I would say it this way I think that.

We are seeing.

For all the transportation efforts were seeing things like cost overrides come down sometimes it's a little bit offset by by mileage so not to get too far into the details, but we are seeing our what we think is going to be the ultimate costs, beginning a trend favorably that'll be a positive then for next year and I think we're in a hunting.

Last year for.

6%.

Got it okay, great and then just it's clearly a focus.

It's clearly a focus probably you know you get to the.

Right to the hard to the question overcoming the headwinds and some of the changes that.

Leadership team made this year or all designed to get that refocus on that margins. So it's it's not something we take lightly and a lot of these negotiations are tough as we demand to recover these transport cost growth is going to help us we've got the strongest balance sheet bar, none in the industry.

The best Cask cash position and we've got some weak competitors right now that are well known issues that we've had that are well known to the rest of the industry, but I like our position in our ability to recover and re take that margin ground next year.

Sorry to interrupt.

Oh no no. Thank you appreciate the color and then maybe last one for me just sticking with you're taking a little longer term, obviously, you talked about the integration circulation and how it's like one.

Offering that you're putting out to the market now and I think you know initially the expectation was to get margins, maybe north of 8% or $25 million in savings over time.

I know the backend on some of it maybe taking a little longer but taking the time horizon out of it for a minute do you still believe in a you know the opportunity set to materially grow margins over the next few years and.

Potentially get to those $20 million to $30 million in cost savings.

Kevin do you want to take that and then I'll I'm sure.

Yes, no happy to I think we believe that we can get to the you know those sustainable.

Margin rates that we talked about the eight have.

It may take a little bit longer I think it's going to get there more from the perspective of we think that and what we're saying it kind of ties back to the previous question Bob on growth.

We are seeing a lot of interest in and now we have the circulation platform.

Kind of gets us out of up for kind of Medicaid kind of player and we are getting yeah. We've got probably I would say bad and $130 million worth of business already and Medicare advantage.

And there's been some growth in that this year.

So I think what will happen going forward is we're going to see sustained growth and would that sustained growth coming in at really.

Let's call it cost structure, and then we will see what I call free leveraged drop that a bottom line expanding our margin on bottom line. So I think we will get to those.

A 8%.

Margin rates, it maybe a little bit longer, but it's going to come from I think more growth as well as you know call at less cost structure coming with that growth is as we go forward.

Okay, I think Kevin said well.

Perfect Super that's that's great. Appreciate those are my question for today. So thank you very much and then again, great job getting the recoveries and good luck anymore.

Thanks.

No I appreciate it Bob.

Thank you I'm showing no additional questions in the queue at this time I'd like to turn the conference back over to Mr. Carter pay for any closing remarks.

No. Thank you shareholders I would tell you that the this is most likely with the progress we've made on.

Yes, Joe were.

We're actively trying to bring that to a conclusion in the coming months.

This is most likely my last call of in the two years I've been years, your interim and I Hope you saw a lot of hard work that our team pull together in order to.

Reestablish the margin progress in the third quarter. Thanks, So much for your support and look forward to talking in the coming days Bubba.

Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.

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