PRSC
#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 <UNK> <UNK>, Interim Chief Executive Officer; Bill <UNK>, Interim Chief Financial Officer; and <UNK> Shackleton, Chief Transformation Officer.
Just to remind you that during this call, Mr.
<UNK>, Mr.
<UNK> and Mr.
<UNK> 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, <UNK> <UNK>.
<UNK>.
Well, thank you, <UNK>, 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 <UNK> 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 <UNK> 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 <UNK> to take you through Matrix results as well as to say a few words on the organizational consolidation plan we recently announced.
<UNK>.
Okay.
Thanks, <UNK>.
Let me now introduce Bill <UNK> who took over from <UNK> 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, <UNK>.
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 <UNK> 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.
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, <UNK> 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.
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.
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.
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.
