The Providence Service Corporation (PRSC) Management on Q3 2019 Results - Earnings Call Transcript

Nov. 09, 2019 8:53 PM ETModivCare Inc. (MODV)
SA Transcripts profile picture
SA Transcripts

The Providence Service Corporation (PRSC) Q3 2019 Results Conference Call November 7, 2019 8:00 AM ET

Company Participants

Suzanne Smith - Chief Accounting Officer

Carter Pate - Interim Chief Executive Officer

Kevin Dotts - Chief Financial Officer

Conference Call Participants

Bob Labick - CJS Securities


Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Providence Service Corporation earnings conference call [Operator instructions]. I would now like to turn the conference over to Ms. Suzanne Smith, chief accounting officer. Please go ahead, ma'am.

Suzanne Smith

Thank you, operator. Good morning, everyone. This is Suzanne 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 are Carter Pate, our interim chief executive officer and Kevin Dotts, who is 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 Event Calendar and in the current Form 8-K, which we furnished to the Securities and Exchange Commission yesterday. 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 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, or via the phone numbers listed within our press release. With that, I will turn the call over to our interim CEO, Carter Pate. Carter?

Carter Pate

Well, thank you, Suzanne, and good morning, everyone, and thank you for joining us today for Providence's third-quarter 2019 earnings call. Now before I jump into the financials, just a quick update on capital allocation, specifically our share repurchase program and a little bit about the ongoing CEO search. Now during the quarter, we purchased $6 million worth of shares and we were unable to be in the market for a period of time while we were conducting the contract re-pricing efforts, the Board remains very supportive of our share repurchase program, is a good use of capital deployment. Now the CEO search is progressing. And as planned, we are hopeful to make an announcement in late Q4 or possibly early Q1.

Now moving on to the financials. We had had a quarter of solid results with revenue of $393.4 million, representing a 14.4% year-over-year growth and adjusted EBITDA of $23.1 million. Our adjusted EPS for the quarter was $0.81. Now as disclosed a few weeks ago in our Form 8-K, we successfully renegotiated a total benefit of $17.7 million gross of tax from retroactive contract adjustments, which greatly helped these results.

Now as discussed in the past, we continue to look at all of our contracts in an effort to right-size pricing, particularly those that have been negatively impacted results so far this year. Now as I've mentioned before, these contract renegotiations take some real time to secure. But rest assured, we continue to work on re-pricing 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 had been what we described as the perfect storm and has negatively impacted our financial results this year. We're seeing external forces impact many of our markets, including increases in minimum wage and lower unemployment, both of which are driving higher wage rates as well as higher insurance rates. These external factors are driving our transportation costs higher as our transportation providers are demanding higher rates.

These industry challenges were compounded when we attempted to centralize operations at the beginning of the year and, unfortunately, lost the connection and oversight at the market level to quickly react to these industry changes. I must say, it was a difficult lesson for us to learn. Now since reinstating the local level operational structure to 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 made to date. So we continue to work on controlling what we can.

However, the external forces are difficult to overcome without passing these costs belong. As we are often asked about ride share, I would quickly note that we have a very strong and unique contractual relationship with Lyft. We believe we are one of largest partners in the U.S. and in certain markets, we leverage their services cost effectively for certain ambulatory rides. Now payers are becoming increasingly receptive of this new environment in which we are operating. Payers understand the importance of a healthy transportation network and the impact that it has on membership experience, quality and completed trips.

In a number of states, we have seen groups of transportation providers approach state and local officials to advocate for these improvements. In light of these continued headwinds, we expect margins for the year to end below 5% as we continue working with payers to re-price contracts to be consistent with industry-wide, higher transportation costs. Now let's move on to circulation. We just passed the one-year anniversary of the acquisition there. And as a reminder, the investment thesis at the time of the acquisition was a new pack and reservation system, which would drive increased productivity and lower costs across our contract carriers.

The front end of the platform aimed at improved membership experience. The interesting thing is that after a year, we're seeing significantly higher new customer demand for the technology platform than we anticipated. These new customers are interested in more data and reporting information offered by the platform. They seek to empower their members to take control of their personal health. As mentioned last quarter, we have secured multiple new Medicare Advantage pilots, where payers are much more focused on quality and member experience.

Even within our core Medicaid market, we are changing the perception of Medicaid nonemergency transportation, which many payers often think of as a mandatory benefit. In one of our largest Medicaid states, we're about to launch a Medicaid carve-out plan with local healthcare facilities to measure the value of nonemergency transportation and its impacts on social determinants. We are currently developing a HIPAA compliant mobile application, which will greatly improve the barriers for booking a trip to the doctor.

Now as a reminder, we do not run circulation separately from LogistiCare, but we operate as one business. Likewise, we've learned that our customers are platform agnostic. And we go to the market accordingly focused on a broad product set 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 and lead to improved margins in the future.

On the back-end, moving certain LogistiCare contracts to a new platform will take longer than originally thought as we prioritize certain functional elements of the combined platform to bring to existing and new customers. The number of product demand, state and MCO requirements in the many different pricing structures require complex workflow, which challenge platform migration. Now we are encouraged, however, that the front-end technology platform is an integrated technology feature about which new customers are inquiring. We feel this is an opportunity to be a first entrant within key growth markets.

In addition, these markets traditionally operate at much more accretive margins than the traditional Medicaid market. We believe the faster growth and low cost of operators will lead to expanded bottom line margins. Given the lead time for most large contracts is anywhere from around six months or plus, we are excited about the groundwork we're still laying right now. So I'm going to move on to Matrix, which is one of our equity investments.

Now for the third quarter of 2019, Providence recorded a loss in equity earnings of $3.2 million related to its Matrix equity investment. For the third quarter of 2019, 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. Mobile membership and visits were in line with expectations. However, volume was restricted by our capacity constraints that have been since mitigated. Matrix experienced lower direct cost per visit and slightly higher indirect costs compared to the third quarter of 2018. Compared to the second quarter of 2019, adjusted EBITDA decreased $3.7 million, reflecting Matrix' typical seasonality of a stronger first half.

Now with that, I'm going to turn the call over to Kevin now. Kevin?

Kevin Dotts

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 costs declined by $2.1 million year over year.

Now moving on to the financials for NET Services. Revenues increased $49.6 million or 14.4% in the third quarter compared to $393.4 million in the prior year. As Carter mentioned earlier, we benefited from a $17.7 million pickup related to several rate adjustments. Included in this amount was $13.9 million related to previous quarters, and the remaining $3.8 million benefit was for the inter-quarter reimbursements.

We also saw revenue growth 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 at-risk contracts. These increases were partially offset by the impact of contracts we no longer see, a state contract in Rhode Island and an MCO contract in California.

Adjusted EBITDA was $23.1 million for the quarter, which includes $3.3 million of certain corporate costs, creating the holding company. Excluding these holding company costs, 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 Carter mentioned, 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 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 million of our common stock. While the Board remains 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 re-pricing efforts. We ended the quarter with $40.6 million of cash. We expect working capital to decrease over the fourth quarter and expect that we will generate positive operating cash flow. With that, I'll turn the call back over to Carter. Carter?

Carter Pate

Okay. Thanks so much. At this point, operator, I think we're going to entertain some questions if we have any.

Question-and-Answer Session


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

Bob Labick

So first, congratulations on the re-pricing 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 re-pricing efforts that you have under way. Is there much more in the bucket? And where are you in terms of like the percent of contracts that you have re-priced versus the percent you believe you can re-price? And how long might that take?

Carter Pate

Well, Kevin, I guess I'll kick off and try to start here. Bob, we talked quite a bit on these calls about this perfect storm of an environment that we got into this year, the state wage mandatory increases, minimum wage, the unemployment an all-time low in many of the states that we operate in, and then this insurance issue that many of our providers have faced. That has coupled with the, our own self-inflicted

That has coupled with our own self-inflicted issues that we talked extensively on the last call. And I would tell you that methodically, we have gone and pulled every single contract to see what we can and cannot do.

The tremendous response we've got that from these relationships, that's one of the things that is the solid strength of this company is our relationships with our clients. To directly answer your question, as I recall, we probably have six to eight more contracts that are currently in the pipeline for -- regarding some type of revenue adjustment, that a rate increase that we had to pull the facts together and get to them. 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 too quickly in a fiscal year and going back and asking for a rate increase is probably not the smart place. So we let this usually play out, see it settle down, we accumulate the facts and then we go for our meeting with the clients. So hopefully, that gives you an idea of the lifting that will go on and has already begun for this quarter also just like last quarter. Kevin, would you add anything else to Bob's question there?

Kevin Dotts

No, no. I think that's right, Carter. 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 quarter if they're concluded successfully. The others will be more of a 2020 event. And so there will be several more that will probably also be picked up based on some recent margin reviews and things of that nature. So I think that's correct. We'll have some fourth quarter impact, and some will be in 2020.

Bob Labick

And then just talking about the -- could you talk about the preliminary view for growth for next year in drivers? I know over the longer term, we've talked about the 5% to 7% growth opportunity. Where do you see top line trending next year? And what are some of the drivers behind that?

Kevin Dotts

So I would say, Bob that we're looking at right now. We've actually have already penned, 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 million to $40 million that we've already penned, somewhat will be based on when the installs actually occur. So we're working through that cycle as we go through our budget process. I would say, we feel pretty bullish right now on the growth for next year given the fact that we've already penned these ones and have several more kind of in the pipeline that will be penned here throughout the quarter.

Carter Pate

I would just pile on here, Bob, and tell you that Ari 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 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 team members that are just amazing people that have got a new sense of urgency and purpose here with the integrated platform. So we're feeling pretty good. And we like those wins that have come in here recently. And I think we're in good shape on the sales growth side.

Bob Labick

And you've obviously highlighted some of the industry-wide changes in transportation costs and the action you've taken or are taking to address those. Can we talk a little bit about thoughts on margins for next year? I think on prior calls, we've talked about potentially getting back to like the 6%, potentially 6% plus at the core LogistiCare level. Is that still a reasonable margin target for 2020, given the actions you're taking and the kind of industry transportation costs?

Kevin Dotts

So Bob, I would say it this way. I think that we are seeing for all the transportation efforts, we're seeing things like cost overrides come down. Sometimes, it's a little bit offset 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 cost beginning to trend favorably. That'll be a positive event for next year. And I think we're in the hunt next year for 6%.

Bob Labick

And then just longer term...

Carter Pate

It's clearly a focus. It's clearly a focus, Bob. You hit to the right to the heart of the question, overcoming the headwinds and some of the changes that leadership team made this year are all designed to get that refocus on that margin. So it's not something we take lightly. And a lot of these negotiations are tough as we demand to recover these transport costs. The growth is going to help us. We've got the strongest balance sheet, bar none in the industry, the best cash position. And we've got some weak competitors right now that are well-known issues that we have had that are well known to the rest of the industry. But I like our position and our ability to recover, and we take that margin high ground next year. Sorry to interrupt you, though.

Bob Labick

And then maybe last one for me. Just sticking, taking a little longer term. Obviously, you talked about the integration of circulation and how it's like one offering that you're putting out to the market now. And I think initially, the expectation was to get margins maybe north of 8% or $25 million in savings over time. I know the back-end on some of it may be taking a little longer, but taking the time horizon out of it for a minute, do you still believe in 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?

Carter Pate

Kevin, do you want to take that, and then I'll?

Kevin Dotts

I think we believe that we can get to the, those sustainable margin rates that we talked about, the 8.5%. 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 seeing, and it kind of ties back to the previous question, Bob, on growth. We are seeing a lot of interest in, now that we have the circulation platform, it kind of gets us out of poor kind of Medicaid kind of player and we are getting, we've got probably, I would say, better than $130 million worth of business already in 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 with that sustained growth coming in at really with less, call it, cost structure. And then we will see, what I call, free leverage drop to the bottom line, expanding our margin of bottom line. So I think we will get to those 8% margin rates, it may be a little bit longer, but it's going to come from, I think, more growth as well as, call it, less cost structure coming with that growth as we go forward.

Carter Pate

I think Kevin said it well.


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

Carter Pate

Thank you, shareholders. I would tell you that this is most likely with the progress we've made on looking for a new CEO. We're actively trying to bring that to a conclusion in the coming months. This is most likely my last call.

I've enjoyed the two years I've been here as your interim. And I hope you saw a lot of hard work that our team pulled together in order to reestablish the margin progress in the third quarter. Thanks so much for your support and look forward to talking to you in the coming days. Bye-bye.


Ladies and gentleman this concludes today's conference call. Thank you for participating. You may now disconnect.

Recommended For You


To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.