CorVel Corp (CRVL) 2004 Q3 法說會逐字稿

Welcome to the CorVel Corporation quarterly earnings release conference call. During the course of this conference call, CorVel Corporation may make projections or other forward-looking statements regarding future events or future financial performances of the company. CorVel wishes to caution you that the statements are only predictions and those actual events or results may differ materially.

CorVel refers you to the document, the company files from time to time with the SEC, specifically the company's last Form 10-K and 10-Q files for the most recent fiscal year end quarter. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to our host, Mr. Gordon Clemons. Please go ahead, sir.

Thank you, Amanda and welcome to CorVel's December quarter conference call. In summary we're working through softer claims market and continuing to expand our product lines. I will summarize the quarter's results and then go into more detail in each sector.

For the quarter, revenues of 75.6 million were up 3.4% from last year EPS at 38 cents were flat with last year and included some benefit from a tax rate reduction in the quarter. During the quarter, we continued working through this period of declining claims volume. We began launching a new workflow product, which automates, the management in early stage disability claims and we completed testing of our high-speed medical review product.

From a market perspective the summary, which goes follows the soft claims market and seasonal holidays did impact our revenues and profits, although certainly the seasonal holidays repeat themselves, at least they have so far. Although insurance prices were high, claims volumes are low and out of sync with insurance pricing.

I'll talk more about that later. Balancing expenses to revenues will need to be readdressed given the softness of the claims volumes we experienced in the last quarter. We continue rolling out new software in our operations. We are, for example, 80% converted to our newest MedCheck product.

Our investments in growth continue in spite of the soft market. We are launching our new advocate services line that claims automation programs, which we completed testing on in the quarter and will begin operations in the current quarter. Our newest version of MedCheck medical bill review is being introduced as MedCheck QL. QL is a second generation version of the web based versions of MedCheck we've been introducing in the last year and will be rolled out over the next several quarters.

It focuses primarily on efficiencies in automation and higher speeds of production. Document management applications are also expanding. Now, to return to these areas and go into a little more detail, the workers' comp premiums market is as high as I'm sure most of you are aware. On the other hand, the claims volumes in the market are quite low and down from last year.

We estimate between 12 and 15%. The insurance industry had very low pricing, especially in our market in the late '90s due to some reinsurance issues that were helping carriers. Inevitably though, those low prices led to losses and by the beginning of this decade, premiums were moving up. And then the disaster in 9/11 and the market tightened up on the premium side.

However, the underlying claims market is driven largely by the economy, unemployment rates and capacity utilization. These factors have combined to create soft claims volumes. These volumes currently as I mentioned are running as much as 10% to 15% below those of last year, lost time claims, the more severe claims which generate most of our business appear to be down the most.

The economy began a slow recovery a year ago although, as you're aware the labor market has not really firmed up a lot over that period. However, recently the recovery accelerated and it appears that November and December were particularly strong months in the economy. We expect that our industry is likely to follow a same pattern over the come year.

Just to give you a little more detail on that in terms of the lags in our business and we've been through this before and I think it's important now. Capacity utilization really needs to move up first because we're dealing with work-related injuries. Following that, employment begins to recover and of course the politicians are in a lot of discussion about this at the present time because the labor market does lag the economy and some things don't perk up as much in unemployment as everyone would look.

Following the pickups of employment, which can lag 6 to 9 months I would say, injuries begin to move up and within a short time, products like diagnostic imaging and early efforts at managing claims begin to move up. Case management volumes don't recover for perhaps 15 months after the earliest pickups in employment and injuries. A lot of this is because some of the more intense case management activities really don't begin until people have been out of work as much as a year.

Medical bill review volumes will for new claims move up within three to four months after the pickup of injuries. However, the reality is that the blend of business and bill review includes about 65% processing volume for prior years. So at any point in time, the mix of medical bills coming through the bill review business is a blend of current and prior year's volumes and for that reason the pickup in medical bill review volume can be confusing at times and I would say can lag even the case management business depending on one's mix of prior year claims.

Another factor in our business at this time is somewhat of a slowdown I would say in the rate of inflation of healthcare. That inflation rate has helped us certainly in the past and I think tends to help us, you know, every year, but the rates of inflation right in here are a little lower than they have been.

On the positive side, the high premium rates coupled with low claims are returning insurers to financial health. This is improving their ability to budget new projects. They are interested in improving their operations efficiency. They see the coming move towards a transaction-processing environment especially in the healthcare segments of the insurance industry and they are undertaking office automation and document management projects.

These projects or interests of theirs certainly favor the kinds of services CorVel delivers. Moving to the business side, our patient management activities in the quarter were up 2% annually on the revenue side but down 3.3% sequentially. Profits were down 9% annually in the quarter and 21% sequentially. These volumes reflect the soft labor market and certainly the seasonal period from late November through Christmas and New Year's. November and December are always difficult months for that reason. We should have managed better than we did through those periods.

The soft market for these services combined with the holidays created a situation to which we did not adequately respond. The current quarter will be stronger from a seasonal perspective. In addition, we will rebalance expenses by reducing field management expenses as well as some selected corporate expenses. Pricing rationality is a fiscal necessity in this kind of market and we will seek improved pricing.

On the provider program side, revenues were up 4.5% annually and about flat sequentially. They were down 1% on the profit side annually and flat sequentially. So that market or that service area, which had been the engine of a lot of our profit growth has been soft as well or at least flat. The soft labor market on a lag basis slowed these product lines.

We are focused on the launch of new services as well as on the implementation of new technologies that will improve productivity. As I mentioned earlier, the new MedCheck QL is high-speed processing engine that includes a number of production improvement time steps. It will be implemented during the next six months and we completed testing on that product in the December quarter. QL is also designed to integrate with document management processes. We expect it to be of interest to customers implementing office automation projects. We see good interest also in our new directed care networks and expect to continue our expansion there.

On the expense management side, given the results of the December quarter, we will seek further operating efficiencies. We did well in this area in the September quarter but really lost some of the control that we wanted in the December quarter. So we'll be working a little harder on that in the current quarter. We need to address some management weak spots where we had results in the prior quarter that kind of undressed us a little bit.

We're focusing product development on the highest priorities and trying to pull back a little bit in areas that don't have as much impact. Corporate expenses will be selectively reduced as I mentioned. The launch of our new claims management automation products expands our target and we will compliment our existing patient management and provider programs. We're going to continue with that expansion.

On the strategic side, we have been working on two initiatives given the soft market; we will focus on the most synergy one. This is the new Advic's (ph) services claims automation line I referenced earlier. We will continue, though to emphasize technology investments and feel that is still, a real core strength for the company. We are going to focus our expansion resources on the claims automation opportunity. As we discussed last quarter, although we don't have anything really in the pipeline right now, or close to completion, we will look a little more at acquisitions than we have in the past.

On the business and product development side, I'd like to talk a little bit about scan 1 which is the document management operation we acquired about a year ago. During the quarter, we continued to expand the volume of scanning being integrated with our medical bill review services. CorVel's processes allow us to scan documents either in central hubs as some customers prefer, or in any number of remote sites which reflects the nature of the workers' compensation market.

This ability to operate in decentralized mode is unique in the marketplace and offers us that we think a substantial market advantage. Scan 1 includes unique technology, which allows us to capture documents remotely and yet operate from high-speed centralized and automated bill processing hubs. This capability is unique. Implementing these capabilities led to higher costs in the quarter both in our field operations and corporately. The complexities involved in these advances are meaningful and have kept us very busy. We are conducting expanded training programs as we work our way through these transitions.

On the MedCheck side as we discussed we are involved in a launch of MedCheck QL, which represents a big step for the in productivity. It is designed to fit with our document management initiatives. QL increases processing speeds substantially and we expect that to be reflected in our operating numbers over the coming year.

QL helps us extend our services to the claims floor as well. The QL product is intended to continue the transition of our processing from the insurance industry practices of the last decade into the high-speed transaction-processing environment we expect to evolve in the insurance industry later in this decade. QL allows us to capture documents from a number of sources in remote locations and yet to bring all of that input together at a high-speed increasingly automated processing environment.

Transitioning our field operations and our customers from the last generation of systems into this next generation is and ongoing process. During the last year, the transition added to our costs and to the complexity of our operations. At this time, as I have mentioned earlier, we have completed about 80% of that transition. By next summer, we expect to see our variable costs for medical bill review begin to reflect the efficiencies in the MedCheck QL product.

On the KMC site, which is our Web site for transacting healthcare activities, scaling continued as we moved to higher and higher volumes. We had bumps along the road. During the quarter, we had expenses and activities related to bringing our business continuity site up. This is a step forward into a much more serious configuration for the company where we provide a completely separate and dynamically load balanced backup site.

The technologies involved in that are not trivial and we have had certainly expenses as we've moved through that. We are continuing to invest in being HIPAA compliant and offering those kind of solutions to our customers that we feel differentiates us in the marketplace, even though HIPAA is not totally mandated in workers' comp. There's a lot left to do in that and in document management will fit well into the continuing expansion in CareMC. The projects in CareMC includes launching advocate services, the new line of claims automation services, expanding our reporting, expanding the artificial intelligence and document related to that and working on some production QA processes.

During the quarter, we had slightly lower EBITDA on a sequential basis and on the other hand our cash flow was strong nonetheless. Our AR is running about flat with a year ago at 52.8 days. Cash finished the quarter at 6.2 million, which is flat with the last quarter. Stock repurchases total 3.2 million for a total for 85 million at this point. Diluted shares moved down to 10.794. So and through that, we picked up I think almost 2% in impact for the year-over-year results. That concludes my comments on the prepared side. And I'd like to turn this over to open it up to questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Joe Michael (ph) with CJS.

Hello gentlemen, could you just review the general factors that you attribute to [inaudible].

Joe, I'm not hearing you very well on my end.

Let me try again. Would you just go back and review the general factors that you attributed to the revenues slow down?

Yes, I'd be glad to do that. And it cuts different ways and I think there are several factors involved. The bottom line is really that first of all, overall our growth rate had slowed somewhat on an internal basis, I would say. In addition -- and in there we look to being a little more aggressive than we have been in the past 2 or 3 years at product introductions.

And I referenced the advocate services line that we're rolling out in the early part of this year. Secondly, and I think importantly, the industry claims volume has actually retracted. It normally might grow at 3% at best, I would say in the long-term. And yet in this fairly strong recession, the claims volume has dropped off somewhere between 10 and 15%. So that had a big impact. But in fairness, we do try to grow in spite of that. And we just weren't able to accomplish that at this particular point in the economic cycle.

And then seasonally, we were impacted by both the holidays and the loss of a production day in the quarter. The December quarter had one less workday than the September quarter. I don't like to point to that as reasons for inadequate performance. But it is a part of the total picture. We run about a million two in revenues a day right now.

So losing a day takes a million two out of the quarter. In the good times we grow enough where we have quarters we're not as happy with but they still look good to investors in a time when revenues are being impacted by the 10 to 15% drop in claims volume in addition to losing a production day is particularly difficult.

I didn't really talk about that as much in the prepared comments, because it's sort of something we really should just live with. But it was a factor in the quarter. I think the issue in the quarter overall was that all three of those kinds of variables came together to create the softest quarter we've certainly had in the last 10 years.

Because you do trail the general economy, where do you think you are in the cycle and what sort of claims and growth rates (inaudible).

I would say we lag the economy by at least a year. And it varies a little bit. I think we're still a small enough company that any piece of new business can also help with that. But just looking to the economy, we're about a year behind. So I think we're not good forecasters and don't provide guidance, but in general we feel we're where the economy was a year ago.

So we expect kind of a not very impressive recovery in terms of volumes over the next 6 to 9 months, and then some acceleration. We were very encouraged in the December quarter to see the general economy appeared to pick up pretty substantially. People I've talked to in the industrial world feel a lot better about it today than they did even a quarter ago.

All right. Just another quick question for you. Margins have been (inaudible).

Joe, I'm again not hearing you.

I'm sorry. I'll try again. The gross margins have been trending down the last few quarters. Do you attribute that to a mix in revenue?

Yes. The -- well, there's been some pressure on margins as the claims volumes have been soft. We've tried to offset that where we can, but it does put a little pressure on us. There's been some pressure in the PPO business on margins just due to pricing pressure as that business has consolidated somewhat. But I think that most of it has been a mix shift for us.

We've been introducing quite a bit of service in the directed care market. It isn't real large yet but does have lower margins than the regular business so it had some impact. We'd like to see that. Certainly internally we'd like to hold the pre-tax profit margins, you know, in the 10% rage. We've been as high as 11. We're in the-- I think 9% range perhaps now. I would like to think that we would -- the mix of our business would take us back toward 10.

That's I would say an internal plan as opposed to a forecast our direction for a financial analyst. But I think service businesses get more difficult as you get down to the lower numbers. But we don't avoid low margin businesses just because they are low margin. The way we judge them, I would say, is how much capital is required to operate them. If the capital can be kept to low levels, weak accept lower margins.

We're looking for return on investment. And at times that creates some awkwardness in our numbers. But we feel like we understand the variables involved. So what we really would avoid would be businesses where our customers don't pay us promptly and yet where the margins are low. And that can be problematic. The insurance industry is very much accustomed to stretching out anyone to whom they have to pay money.

And I think directionally the industry is headed towards lower levels of reserves for carriers, much more automated processing and payments. But certainly, I can't dictate to them in those terms. But we have one particular product where we actually do take customers off the service, if they are not paying promptly. So I would say our discipline about that has been pretty good. And I think our cash flow numbers reflect that.

Just one last question and I'll get out of the way. Can you comment on the lower tax rate and what may have caused it?

Yes. And I think we want to be clear that the EPS would have been about 3 cents lower without that. So we're not -- certainly don't want to be ducking that. I think we felt that we had some excess reserve there and so it is an awkward place to adjust balance sheet numbers because it does impact the income statement in a way not pleasing to financial analysts. So it's never comfortable to make a change there. But we felt that at this time we would draw that reserve down somewhat and balance it a little bit with our current business conditions.

Al right and thank you.

Your next question comes from Stewart Hayden with Tour Asset Management (ph).

This is more of a long-term shareholder value question. Given your company's history of strong free cash flow generation, have you ever considered paying a dividend?

Yes, I think -- and I think it's a very fair question. We've had investors who were primarily focused on our rate of growth. And I'd say that from a personality perspective that's where we are internally. We've built a management team that is excited about investing in the business and I think different from one that is may be a little more operationally focused and is comfortable kind of just managing along. So as a group, we really would like to -- we feel best about growth and we're excited by the opportunities in our industry. So we've wanted to husband capital as much as possible. I think the challenge with a dividend policy is that it's not so hard to put in place, but it's probably pretty hard to pull back out. So.

I was going to say you buy-back a lot of stock and now that you've got the difference in the tax law, you know, why not just return some of that cash back to shareholders in the form of a dividend instead of buying all the stock back?

We felt that the stock buy-back was a form of dividend as it does raise the value of the underlying shares that are not repurchased. In my case, I'm a meaningful shareholder so I tend to look at the company through a shareholder's eyes and I've not been involved in a compensation basis as rewarding as it might be in most companies.

I've wanted to have my interests aligned with shareholders. I think they are. I felt there was some lack of flexibility in the dividend approach. But we do look at it and I agree with you, as the tax laws change, inevitably, they go to dividend policy when they have growth opportunities have been reduced and they don't see the opportunity to grow the company as they might like.

We're small enough that it's a challenge for us to compete with the large entities that exist in our industry. The direct competitors of CorVel are not that large, but as the industry changes, there are companies of substantial size that from time to time feel there are opportunities in our market. And we think that becoming larger is important to CorVel. So I think if anything, recently we've felted perhaps we haven't been as aggressive looking at acquisitions or mergers as we perhaps should have been and we're trying to be a little more open-minded about that.

But I hear what you're saying. And I would certainly agree that it is a constant concern of the company to be fair to its shareholders. I like to think that we do have multiple constituencies. Our first goal is to produce a good return for our shareholders as we reach certain thresholds there we try to make sure we're investing in the business because certainly a strong constituency for the company is its customers.

OK, Very well. Thank you.

Are there any further questions? Again, are there any further questions? There are no further questions, Mr. Clemons. Do you have any further comments?

Well, I guess not at this time. I think I went through -- we normally goes through the splits of our product line revenue and profit but I did that in the regular text. Which - a sort of a re eliminates some of the questions we normally get on that, we're certainly available to discuss these issues again with people during the day, as we often do. And I appreciate your attendance on the call. We look forward to a brighter March quarter. Thank you very much.