Civitas Solutions' (CIVI) CEO Bruce Nardella on Q3 2016 Results - Earnings Call Transcript

| About: Civitas Solutions (CIVI)

Civitas Solutions, Inc. (NYSE:CIVI)

Q3 2016 Earnings Conference Call

August 9, 2016, 5:00 pm ET


Dwight Robson - Chief Public Strategy & Marketing Officer

Bruce Nardella - President & CEO

Denis Holler - CFO


Joanna Gajuk - Bank of America

A.J. Rice - UBS

Paula Torch - Avondale Partners


Good afternoon and welcome to the Civitas Third Quarter Fiscal Year 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Dwight Robson. Please go ahead.

Dwight Robson

Thank you, Austin. Good afternoon and welcome to Civitas Solutions, Inc.'s fiscal third quarter 2016 earnings conference call. I'm joined by Bruce Nardella, President and Chief Executive Officer; and Denis Holler, Chief Financial Officer.

Before we begin, if you do not already have a copy, our press release and Form 10-Q with financial statements can be found in the Investor Relations section of our website at Please be advised that today's discussion includes forward-looking statements including predictions, expectations, and estimates about our future financial performance, our investments and the impact of acquisitions, rate changes, and legislative initiatives and other information that should be considered forward-looking.

Throughout today's discussion, we will present some important factors relating to our business which could affect these forward-looking statements. The forward-looking statements are also subject to risk and uncertainties that may cause actual results to differ materially from the forward-looking statements we make today.

Risks and uncertainties that could cause actual results to differ materially from these forward-looking statements are described in our Form 10-K filed with the SEC on December 10, 2015, and our Form 10-Q filed with the SEC earlier today. We are not obligating ourselves to release any updates to these forward-looking statements in light of new information or future events. As a result, we caution you against placing undue reliance on these forward-looking statements and would encourage you to review our filings with the SEC for a discussion of these factors and other risks that may affect our future results for the market price of our stock.

We will be referring to certain non-GAAP financial measures such as adjusted EBITDA, adjusted EBITDA margins, and free cash flow because we believe such measures are appropriate ways to assess our financial performance and because management believes it provides a more transparent view of the company's underlying operating performance and operating trends.

However, please remember these are non-GAAP financial measures and should not be considered alternatives to other GAAP measures such as net income or income from operations. I refer you to our press release issued today detailing our third quarter fiscal 2016 results and reconciliations of certain GAAP and non-GAAP measures.

With that, I will turn the call over to Bruce.

Bruce Nardella

Thank you, Dwight, and thanks everyone for joining us on today's call to discuss our fiscal third quarter 2016 results. Denis is going to provide you more detail on our third quarter financial performance later in this call but first, I will take a few minutes to discuss some of the quarter's highlights.

Net revenue for the third fiscal quarter was $354 million or 6.5% higher over the same period last year, excluding the ARY divested operations. Third quarter net income was $4.8 million compared to net income of $0.6 million in the third quarter of fiscal 2015, while the third quarter adjusted EBITDA increased by 4% to $40.6 million.

Our third quarter growth reflects increases in volumes and stable or increasing rates in our two largest service lines I/DD and SRS. In addition our financial results in the quarter are highlighted by the continued accelerated investment in our new start initiatives, two additional acquisitions on top of the eight companies acquired in the first half of the year, rapid growth in our new Adult Day Health service line, and solid operating performance in many of our larger markets.

Before we provide more detail on the operational financial highlights of the quarter, I want to provide a brief update on the state budget and rate environment which remains very stable to positive in nearly all 35 of our states. Revenue collections for fiscal 2015 which ended in most states on June 30 exceeded or were in line with projections in most of our larger states. In Minnesota, our largest state, revenues for the fourth quarter are estimated to have exceeded the state’s February forecast which had pegged the states by annual budget surplus at above $900 million by another $230 million. State budgets for fiscal year 2017 which began July 1 in most states are now in place and the news has been fairly positive with regard to funding for the services we provide. Although mostly modest in scope in the range of probably 1% to 3% we received rate increases for certain services on July 1 in several states including Arizona, California, Florida, Georgia, Indiana, Maryland, Mississippi, Missouri, Nevada, and South Carolina.

The increase in California will have the most substantial impact on revenue although we expect that we will be required to pass on 85% to 90% to increase the wages of our direct caregivers which is something we are happy to do. We are still awaiting official rate letters in California that will detail how the rates for specific services will be adjusted and what the wage pass-through requirements will be. But we understand we will receive their rate increases which could average above 5% retroactive to July 1.

We are also pleased that Mississippi substantially increased rates for I/DD residential and periodic services. Although Mississippi is our smallest state we established a Beachhead there in 2014 anticipating that state officials would pursue a policy of the institutionalization and an expansion of community based services for individuals with intellectual and developmental visibilities. Thus far, our team in Mississippi has been well received and is doing a terrific job serving approximately 130 individuals more than 100 of whom are supported in non-residential base services. These increases are a step in the right direction towards the establishment of appropriate rates and another sign that the state is truly serious about strengthening the private provider network.

But we are still waiting the final approval and implementation of an entirely new rate methodology for I/DD services which has been submitted by the state to CMS before we pursue a significant potential expansion of residential services. But we do remain optimistic about our future in Mississippi and the opportunity there to help more individuals with I/DD reach their full potential in community settings.

The biggest concern however for us with regard to state revenues and policy is the state of West Virginia. While most states continue to enjoy the benefits of the period of economic expansion that will likely soon stretch into its eighth year, West Virginia continues to face significant economic and fiscal problems due to low energy prices and the decline in the coal industry.

For fiscal 2016, which concluded on June 30, the state took in 7.5% less revenue than in fiscal 2015, 5% less than projected at the start of the year-end, and surprisingly 1% less than they did eight years ago. Against this backdrop late in the state fiscal year 2015, state officials began implementing a redesign of the state's I/DD waiver program. As we informed the market last December, we projected that the changes could have a negative $7 million to $8 million revenue impact this fiscal year with a disproportionate impact on our bottom-line. Although the impact was worse than expected during the first half of our fiscal 2016, we have expected that the worse would be behind us after Q2 and the one year anniversary of the new waiver design when the plans and the budgets for each of the individuals we support would have been adjusted in accordance with the new waiver.

Unfortunately the budgets for those we support were further reduced during the third quarter. This is new information. We now project that our West Virginia revenue will decline this fiscal year by $11.8 million to $12.3 million and that the impact on our income from operations and adjusted EBITDA will be in the range of $5.8 million to $6.8 million. Given the historical stability of our revenues and the protected nature of the services we provide, our experience in West Virginia this year has been surprising, the impact of which is virtually without President in our 36-year history.

On a positive note, however, we were pleased that during deliberations regarding the state's fiscal year 2017 budget the legislature and the Governor made the difficult decision to raise taxes to avert additional budget cuts, and that effective July 1, they eliminated the severance tax for behavioral health providers including our operations.

As I noted earlier, during the fiscal third quarter, we closed two acquisitions one in I/DD and another in SRS bringing the total number of companies acquired during the first nine months of fiscal 2016 to 10. These 10 companies have total annual revenues of approximately $45.2 million. Moving forward, our M&A pipeline remains very strong with attractive opportunities in our I/DD, SRS, and ADH service lines.

During the third quarter, we continue to invest more in new start initiatives in response to an increased number of organic growth opportunities. During the third quarter, we invested approximately $800,000 more in new starts as compared to Q3 of last year. We remain on track to invest an additional $2 million to $2.5 million in new starts this fiscal year compared to fiscal year 2015 which would bring our investment total for fiscal 2016 to a range of $7.7 million to $8.2 million. At this level, our level of new start investment would be in line with the record level of investment in fiscal years 2012 and 2013 when we invested an average of $8 million per year.

Thus far we are pleased with the progress of the class of new start investments which includes development initiatives in all four of our service lines. Highlights of our current new starts include 65 new beds in a new day treatment center in our neurorestorative SRS operations in the states of Maine, Massachusetts, Pennsylvania, North Carolina, Nevada, and Texas. I/DD day in residential program initiatives in several states including our first supported living and day program new starts in the state of Missouri.

Three new ARY specialty residential programs in New Jersey and a significant ARY periodic family preservation program in Los Angeles County. And finally two new ADH centers in Massachusetts both of which we hope will open during the fourth quarter pending the completion of the licensure process.

Although we continue to make progress during the third quarter towards the achievement of many of our strategic goals, relative to our expectations, our performance in the quarter was a little short frankly, affected primarily by continued weakness in West Virginia which I just noted, as well as higher than expected healthcare cost. Due to recent developments and just as was the case in the third quarter, we expect these two factors will also be a headwind on our growth during the fourth quarter.

As a result, as Denis will detail in his remarks, we are revising our fiscal year 2016 adjusted EBITDA guidance to account for the projected impact. Although somewhat masked by these challenges, many of our larger operations, as I also noted earlier, continued to produce solid operating results.

Ohio, for example, is a state we highlighted last August as one where we thought there was significant growth opportunity for I/DD services. And year-to-date net revenue was up better than 13% all of which is organic. Furthermore our normalized growth rates of fiscal 2016 year-to-date for revenue and adjusted EBITDA, adjusted for the ARY divestitures, and the one-time out of period true-up we highlighted for investors back in Q1 of fiscal 2015, and if we held our new start investments flat, are 6.8% and 11.6% respectively. These rates of growth obviously would have been better without the decline in West Virginia.

However it is also true that independent of these factors our growth has moderated slightly due to underperformance in some markets. We attribute this in part to the increasingly competitive labor market; the pressure we are experiencing is uneven though across our 35 states. In fact for the year-to-date period our aggregate caregiver turnover rate is essentially flat compared to last year, though over time costs have increased. However there are markets where we are experiencing significantly more turnover that we believe is impeding our growth.

Our management team remains focused on strategies to attract and keep committed staff particularly with regard to retaining new staff in their first three to six months with our company, this is where we experienced most of our turnover.

As we build our fiscal 2017 plan, we will also identify just as we do every year, those markets where we need to increase wages to support high quality services and growth.

Before I wrap up my remarks, and turn the call over to Denis, I want to provide some additional context with regard to our health insurance plan and its cost. We recorded a negative true-up adjustment of approximately $1.3 million for the third quarter fiscal 2016 primarily due to the fact that recent trend show that we are providing health insurance for significantly more individuals than projected. This stands in stark contrast to our experience in fiscal 2015 when our strong operating results were further bolstered by underutilization of our health plan and as a result lower than expected cost.

As investors are aware, we responded immediately last year by significantly increasing the company's contribution to employee health savings accounts, and for calendar 2016, we invested more in insurance premiums in order to reduce or hold stable employee share of the cost.

We cut these steps to improve the affordability of our still relatively new high deductible consumer driven health plan, which we believe, was the right thing to do for employees and would help us address some of the labor pressure we have been experiencing. As a result, we are now providing health insurance for a greater number of employees and family members. And while that is certainly a positive development, it comes at a somewhat unexpected cost. For fiscal year, 2016 we had expected to spend an additional $2 million for healthcare but we now project we will spend $2 million more on top of that bringing the projected year-over-year increase to $4 million.

Moving to a high deductible consumer driven plan in a private health exchange were big changes for us. As we review our plan and consider how to modify it for plan year 2017 which begins on January 1, 2017, one of our goals for the next couple of years is to utilize the more significant experience we now have with this type of plan to stabilize the programs usage and its cost in an effort to avoid future large unexpected swings in our health expense.

In closing, we remain confident in our ability to continue to expand high quality services in existing and new markets through acquisition opportunities and new start initiatives. We will continue to drive free cash flow and create long-term value for our stockholders. As always, I'm grateful to our outstanding workforce and thank them for their continued hard work and dedication to our mission and the individuals we are proud to support. And I would like to thank all of our stockholders; I look forward to keeping you updated on the Civitas story as we move forward.

At this point, I will turn the call over to Denis Holler, our Chief Financial Officer, to discuss our financial results in more detail. Denis?

Denis Holler

Thanks, Bruce. Looking first at our cost structure, both our direct labor cost and our general and administrative expenses were constant as a percent of revenue with the prior period quarter. However occupancy cost continued their recent trend increasing as a percent of revenue. Although healthcare expenses were flat quarter-over-quarter, we do see an increase in our cost projections which resulted in a negative true-up of $1.3 million during the quarter.

All-in, we were able to increase our EBITDA margin by 20 basis points. Free cash flow was challenged down quarter-over-quarter as we experienced a significant uptick in our accounts receivable balances. The good news is that this has largely been driven by one-time events and our acquisition activity rather than a systemic change in payer behavior.

Moving to the results for the quarter, net revenues grew by $8 million or 2.3% over the third quarter of the prior year. Excluding the ARY divestitures which resulted in a decrease in net revenue of $13.5 million, net revenue increased by $21.5 million or 6.5% of which $12.1 million was from acquisitions and $9.4 million was from organic growth.

Excluding the ARY divested operations, our human services segment which represents 79.2% of our revenue increased by 5.9% over the prior quarter. Our SRS segment which represents 20.8% of our revenue increased 8.7% over the prior quarter.

Moving to service line growth, this quarter I/DD gross revenues grew by 4.3% with about half of that organic or about 2%. Excluding West Virginia, I/DD gross revenue would have grown by 6.6% with 4.2% of that organic. Our SRS gross revenues grew at a rate of 7.3% with more than half of that organic or 5%.

Our Adult Day Health business continued to see very strong growth as gross revenue increased from $5.1 million in the prior quarter to $11.4 million this quarter. Lastly, gross revenues in our continuing ARY operations were about flat with the prior quarter.

Organic growth came primarily from the maturation of new starts. New starts initiated from fiscal 2012 through this quarter contributed $7.6 million of our growth in revenue. Our level of investment in new starts increased during the quarter a trend we expect to see continue throughout the remainder of fiscal 2016. New start losses were $2.2 million during the current quarter, up from $1.4 million in the same quarter of the prior year.

As I said earlier, our adjusted EBITDA margin improved by 20 basis points to 11.5% as compared to the prior quarter, most notably direct labor costs were about flat with the prior quarter as a percent of revenue, on a net basis, if we exclude the one-time benefit from the ARY divestitures. Although workers compensation cost and over time increased as a percent of revenue, these costs were completely mitigated by other positive leveraging.

As I said, occupancy costs have continued to be drag on margin this quarter by about 60 basis points. Cost as a percent of revenue increased across the system due to rent and utility increases as well as some lower utilization. Another contributing factor is a 2% excess capacity that we are carrying at our ICF caused in part by state initiatives to transition consumers from the ICF model to waiver group homes.

The increase in occupancy combined with an overall 80 basis points improvement in margin related to shedding the low margin ARY businesses resulted in the margin improvement of 20 basis points.

Not yet driving increased costs quarter-over-quarter but likely to impact our year-end results is the very recent trend of increased enrolment in our employee health plan. We are covering more individuals than we expected and we are experiencing less attrition in membership after the open enrolment period than we had in prior periods.

Unburdened by the prior quarter impairment charge associated with the disposal of our ARY operations, net income for the quarter increased significantly to $4.8 million compared to $600,000 for the third quarter of the prior year. Net income per common share from continuing operations increased to $0.13 per share compared to $0.04 per share for the same period of the prior year.

For the quarter, we generated free cash flows of $16.1 million compared to $24.7 million in the third quarter of fiscal 2015. However, our free cash flow year-to-date increased by $8.6 million over last year from $20.4 million to $29 million showing the positive impact of the post IPO capital structure changes.

The reduction in the free cash flows for the quarter is almost entirely due to an increase in days sales outstanding on our accounts receivable or DSO. This increase was 2.1 days over the third quarter of last year and 2.6 days over our March quarter. This increase was driven by few states undergoing managed care organization or MCO transitions and for the recent acquisitions in our neuro and ADH businesses where we are waiting for Medicaid billing numbers to be issued. Although we would expect DSO to moderate back down to historical levels over time, this situation has significantly impacted our free cash flow for the quarter and will likely continue to do so for the remainder of the fiscal year.

Also impacting free cash flow for the quarter was our spending for capital expenditures which came in at $12.6 million or 3.6% of revenue. This represented an increase of $2.7 million over the second quarter of this year and $2 million over the third quarter of the prior year.

Notwithstanding this increase we are projecting slightly less spending for the fiscal year and we are lowering our modeling guideline for capital expenditures to be between 3.1% and 3.3% of revenue.

The use of free cash flow for new start investments and acquisitions has continued to decrease our net debt leverage. Our current net leverage calculated using our LTM adjusted EBITDA of $156.1 million is 3.7 times and that's down from 3.9 times in the third quarter of last year and 3.8 times in our March quarter.

Moving to guidance, as Bruce indicated, we are revising the annual guidance for our fiscal year provided in earlier quarters. We are adjusting our current guidance range for net revenue to between $1.400 billion and $1.415 billion. We are adjusting our guidance range for adjusted EBITDA for the fiscal year to between $158 million and $161 million.

And with that I will turn it back to Bruce.

Bruce Nardella

Okay. Thank you very much, Denis. Austin, we can now open the lines for Q&A.

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. [Operator Instructions].

And our first question is from Kevin Fischbeck with Bank of America. Please go ahead.

Joanna Gajuk

Thank you. This is actually Joanna Gajuk filling in for Kevin today. Thanks for taking the question here. So, on the labor cost expenses that they are expected to be higher strategically. I appreciate the comment about the higher cost of insurance for employees but it also seems like may be the sort of the pressure that you kind of alluded on Q1 that's spreading out to more states, is that also happening. And then I guess I recall also few months ago you talked about special offense from the California rate increase which I guess you're saying that it might be about 5% now. So should we read into it as implying that's not going to be enough given the pressure in that market?

Bruce Nardella

Joanna, this is Bruce, I will and try answer most of those questions. As far as our labor of the percent of labor to revenue has actually been remarkably consistent and was pretty flat quarter-over-quarter. Now our over time portion of that did increase and that is reflective of I think turnover in certain markets. So by all-in our labor costs have remained fairly consistent flat quarter-over-quarter.

Now health insurance costs though are going to have in the third quarter, as Denis just detailed, and will true-up a greater portion of our cost structure at least through this fiscal year and you saw that manifest itself in the third quarter and that will do so again in the fourth quarter.

As far as the rate in California we have been in constant conversation with our payers there, it is a very sort of detailed proposal that has been approved by the legislature and the governor and they are working out the details we have been told, it's in the neighborhood of 5% but and it will be retroactive to July 1. So it will have an impact on our fourth quarter. But we expect as traditionally is the case in California that we will be required to pass 75% to 85% of that onto our employees, that's the reason why they are increasing those rates.

And frankly in a market like California particularly that it still has great growth potential and it has been a consistent grower, we are glad to do just that, so it will have an impact on the top-line but we will pass most of that through onto our employees. I'm not sure of what other question might have been wrapped up in there.

Joanna Gajuk

Yes if there is any sort of challenge in terms of I think the spread out so to speak of the issues that you mentioned you already had on the three months ago or so around some over time pressure in some states. So is it still same states or you're seeing there is kind of more pressure in additional states?

Bruce Nardella

No, I think it's about the same. In the aggregate turnovers remarkably consistent with last year but there are some states both last -- quarter two of this year and quarter three that are particularly hard hit. And although our labor costs have in general been relatively flat, we have seen a spike up in some of those states with increased over time.

Joanna Gajuk

Great. And I guess on staying on the topic in your Q, you talked about trying to estimate the potential impact from the over time rule that takes effect December 1, I know it's not going to impact this fiscal year but next year-end, you quantify it as $7 million to $9 million impact annually. But then you kind of suggested there might be some ways to try to offset that. So can you flush it out in terms of your ideas of what potentially could be down to offset this headwind?

Bruce Nardella

Yes, well based on our current analysis we know that we will have to make some compensation adjustments including increase in number of employees that are eligible for over time that's part of the law; it gets to the heart of it. In the overtime for existing hourly employees is redistributing and selective salary increases will probably be given to certain people in certain positions. And frankly in some ways that could help us mitigate the impact of this over time.

But it's very difficult to project because we're talking about people that have been salaried employees therefore we have not tracked in detailed there hours worked historically because they are salaried employees. So we're doing a lot of planning for this. We estimate that it's $7 million to $9 million, we are hopeful that it could be less but frankly it could be little bit more, it's just nature of our business in any time you are dealing with an employee workforce that is so large and distributed, it's hard to nail down precisely.

We believe our analysis is comprehensive but we have 35 employees that are spread across 35 states and we have to make certain assumptions as we would try to gauge the increased cost but at this point, it's in exact although comprehensive science right now.

Joanna Gajuk

Great, thank you. I will get back in the queue. Thanks.


And our next question is from A.J. Rice with UBS. Please go ahead.

A.J. Rice

Thanks, hello everybody. Just may be first on the changing guidance. So on the EBITDA line, it looks like the mid-point is going down by about $3.5 million, if I'm calculating that right, you're talking about the $2 million increase in insurance cost, health insurance cost, you have got, I think you said the drag in West Virginia is $5.8 million to $6.8 million, I don’t know what was previously baked into guidance. But can you just give us a sense of some of the puts and takes to end up at 5. -- $3.5 million adjustment at the mid-point, there must be some positives as well as negatives I guess.

Bruce Nardella

Yes, it looks like A.J., West Virginia is still little bit of moving target because as I said, it is new information that was still getting adjustments downward as people come up to their anniversary of the new waiver design. But essentially the big pieces are $2 million in healthcare costs more than we have anticipated. And it could be $1.5 million to $2.5 million more in West Virginia more than we had anticipated as compared for example last quarter where we reaffirmed our guidance. So those are the two major pieces right there. In between in some of the states there were some puts and takes but those are the major drivers that got us to this.

A.J. Rice

Okay. And then on the California piece, so do you have anything in there for the fourth quarter, do you have the 5% increase minus 75% to 85% getting paid to employees or do you have anything?

Bruce Nardella

Yes, in that guidance we are anticipating, we have averaged it at 5%, so you will see a bump up in the revenue generated in California but we are also anticipating probably passing 85% to 90% of that through.

A.J. Rice

Okay. And that's not only the portion for the current quarter but the portion for the fourth quarter, but the portion for the third quarter as well you're thinking you have to retroactively give that back to people as well?

Bruce Nardella

No it's retroactive to July 1 of just this past July, so it won't go beyond that. So you'll the entire impact in our fiscal fourth quarter.

A.J. Rice

I got it, got it. And then there was a comment about the cash flows getting impacted little bit by MCO transitions. Can you maybe elaborate a little bit on what's going on there and is MCO transitions only impacting the DSOs or is it having any impact on the business itself either positive or negative?

Denis Holler

Yes, A.J. this is Denis. We don't see any impact on the business going forward really from MCOs. The big impact is as they come in and establish their systems and when they first come into a state, that's where you have kind of an interruption as the authorization systems get reset and we are experiencing that in a couple of states. And so that's the issue we are -- I was referring to.

A.J. Rice

Got it. Okay. I think well let me just ask lastly on West Virginia. So with where we are at this point, is that business profitable for you and is there any thought about whether you want to stay in the state long-term for the I/DD?

Bruce Nardella

A.J. this is Bruce. Yes it is profitable and we do want to stay in the state at this stage. However as I said during my remarks, I'm surprised that how far down that has gone. So we're going to have our eyes wide open as this business continues to unfold. But right now it is profitable and I'm hopeful that because of some things that we've seen in the state, for example, the severance tax move that was a big thing for the state. The other thing is the state of West Virginia which is now heavily dominated on the Republican side of the Isle passed a substantial tobacco tax to I think staunch some of the problems in the state budgets.

So there is some things that have happened now that I'm hopeful provide some support particularly to the people that are in most need of state government assistant in that state. So right now we are okay but we are going to be looking at it very, very carefully.


[Operator Instructions].

Our next question comes from Paula Torch with Avondale Partners. Please go ahead.

Paula Torch

Great, thanks everybody. Can you hear me?

Bruce Nardella


Paula Torch

Great. Let me start off with the question on labor coming out from a different angle, I'm just curious if you could tell us what percent of your markets are experiencing the higher direct labor turnover and has that increased or has it remained flat as you have suggested in your previous comments. And I'm wondering if you could talk more about your strategies there and what have you done in the past may be that has been a success and how should we think about the implementations there to try and lessen the attrition in the first three to six months?

Bruce Nardella

Yes, it's probably a handful of markets where may be six or eight markets of our 36 states overall, Paula, some of them are major markets, for example, state of Wisconsin is a big market for us. They had an increase in turnover whereas the aggregate is pretty flat. So I will probably come up with a more precise number by the time I'm done with these comments but six or eight or so.

In as far as what we are trying to do the most important part of the employee experience in this kind of work is people acquiring a confidence in their ability to do this work because it is hard and it is stressful. So what we are trying to do to build that confidence earlier on in their employment experience is to get the good training and orientation to them very early, which I think we do a good job. But more importantly have more face time, personal time contact with their direct supervisor because those are the people that will help them through the difficult situations that people often find themselves in when they are taking care of people that have some intense at times behavioral or other physical needs.

So that's the primary effort and I'm hopeful that with real intense focus on this three to six month timeframe we can make a difference. It's a little early yet to see the impact of our results. We have been at this for few months now targeting certain -- one of those markets, targeting the worst markets that we are talking about but I'm hopeful that that is going to have a significant impact.

And I think what happens if people don't have their personal contact, there are other opportunities out there to go and access employment. And people if they don't have the confidence and if they don't have that relationship with a direct supervisor they are more likely to leave us quicker if they don't have that tie. So we want to strengthen those ties with the direct supervisor.

Paula Torch

Okay. Makes sense. Thank you, Bruce. And in terms of West Virginia, can you may be you did share with us and I missed it, but what was the revenue and EBITDA impact actually from West Virginia in the third quarter?

Bruce Nardella

Yes, I'll get that for you in just one second. So we're hopeful that this doesn't continue but I think at this stage we're sort of planning for the worst, but I think it was couple million dollars, about $3.5 million worse than we had anticipated in terms of revenue and about $1.5 million worse that we had anticipated in terms of EBITDA.

Paula Torch

Okay. And I just would like to go through this in a little bit more detail, because I'm not sure if I really understand. I know you say that the budgets were recently further reduced. But I thought we were going to see some anniversarying because I know that they were all these changes didn't happen all at once. So does that just impact the fourth quarter, or are we going to be able -- are we going to be seeing budgets reduce that will impact 2017 or is it really just too soon to tell at this point?

Bruce Nardella

It is too soon to tell, but I'm concerned but let me just try to explain it a little more clearly. You're absolutely right. We thought we were going to see stabilization of this problem in the back half of 2016, because everyone all of our consumers and we're talking about probably 700 to 800 people would have cycled through and cycled through their anniversary date. What we have begun to see in June, and in July, as people come up on their second anniversary date, they are being adjusted downward further. And we did not anticipate that.

Now what remains in question is does that continue to occur as the balance of the 700 to 800 people cycle through for their second anniversary date, that's the question. And if it does, that will have an impact on 2017 but it's too early to tell.

Paula Torch

Okay. And just on the over time thresholds, I'm wondering if, I know that you talked about $7 million to $9 million of potential impact in 2017. But when are you going to implement those changes and I know that there was the ability to see that delayed a couple of years. So are you planning on going full force in December and is it going to be your markets, may be how many employers or what percent of the employers are currently being paid under that new threshold and sort of may be talk a little bit more from a financial perspective on the mitigation, if you can?

Bruce Nardella

Yes, we're going to implement this, as we're going to comply with the DOL regulations, because we believe we have to and frankly I think the two-year delay that you're referring to is simply a non-enforcement sort of policy by the DOL specific to community based services for people with disabilities. Essentially DOL is saying that they're not going to forward and enforce this for actually over a two-year period of time until well into 2019.

But all that does is protect an organization from DOL enforcement, it does not protect them or isolate or alleviate the risk of private lawsuit by any employee. So we are going to comply with this. Not to mention the fact that it would have, I think a bad effect on our competitive nature. I just told you one of the reasons why our turnover has increased in certain markets is because people have more opportunity to go elsewhere for employment, if they know that over time is being paid in other service industries, whether it's the restaurant industry, retail, et cetera and they're getting over time there and not with us that would be a competitive advantage.

So that's the way we're looking at it. We will have this in place effective December 1. We are working very hard now. As I just mentioned on planning for the consequences, beginning the communication and the training of this because we're going to be tracking hours of a whole new class of employees, I'm not quite sure on the exact number right now, I know we have that. I will get that to you. But we're planning full enforcement across the company beginning December 1.

Paula Torch

Okay. And just one follow-up on that -- on the actual numbers, is that for the 10 months of 2017 or should we be thinking about that from a 12-months perspective that is $7 million to $9 million headwind potentially?

Bruce Nardella

That's, right now that looks like an annualized cost to us. But again I caution you that.


This concludes our question-and-answer session. I would like to turn the conference back over to Bruce Nardella for any closing remarks.

Bruce Nardella

Okay, thank you, Austin. We appreciate everyone being on the call today and we look forward to speaking with you in December at the conclusion of our fourth quarter. Thank you.


The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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