CorVel Corp (CRVL) 2005 Q1 法說會逐字稿

Thank you for standing by. 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 the future financial performances of the Company. CorVel wishes to caution you that these statements are only predictions and that actual events or results may differ materially. CorVel refers you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's last Form 10-K and 10-Q files for the most recent fiscal year and 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.

At this time, all participants are in a listen-only mode. A question-and-answer session will be conducted later in the call, with instructions being given at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Gordon Clemons. Please go ahead, sir.

Thank you, Deborah, and welcome to CorVel's June quarter conference call.

In summary, in the quarter, we began two business expansion initiatives as well as the rebalancing of our expansions -- our expenses during the soft market conditions that continue to exist. Four profit improvement projects continue to be our priorities and I'll talk about those more later.

In the quarter, we had revenues of 76.3 million, essentially flat with last year. Earnings per share was 32 cents, down from last year but up from the immediately preceding quarter. In the quarter, in addition to the progress we made expanding our product line in two important areas, we also continued the expansion of our document management capabilities.

As I discussed last quarter, I'd like to cover four important factors that are driving our results. First, the Company's market has been set back by a cyclically soft labor market. Comp claims remain down perhaps 10 percent or more year-over-year. Second, we are rebalancing our expenses and responding to this market. Third, we are adjusting to regulatory changes in a couple of states and a couple of municipal customer changes, or one rather really that hit us, and these are continuing but continue to depress our year-over-year comparisons. Fourth, our business model remains solid and our product innovation continues. I think we have a lot to talk about in that regard.

During the quarter, we made progress in each of our key projects and yet, I would say we have a lot more to do. Now covering these in a little more detail and speaking first to the market, the soft labor market has caused reduced claims volumes and as we've discussed before, perhaps they are down 10 to 12 or more percent. The lower claims trends are out of sync with insurance premiums, which is confusing to lay people. Premiums have moved up sharply over the last three years. At this point, insurance prices appear to have peaked and may be softening a bit. Claims volumes, on the other hand, appear to be picking up as we would expect as the labor market improves.

Another aspect of our market that impacts CorVel's growth is our move to retail more of our service directly to employers. The major payor segment of our market is typical of the large buyer segment in almost any market. That is, in return for the large volumes involved in those kinds of accounts, they want very low prices and unfortunately, they also want and are pretty good at demanding real high levels of customer service. This is a very awkward combination.

To capitalize on CorVel's growing brand awareness in the Workers' Comp market, as well as some new product expansions that I will talk more about, we've begun to seek an increase in our retail sales, that is sales directly to employers. The large buyers in what I would call the wholesale portion of the market provide substantial volume when you win a new account but just simply have gotten to where they consume too much of our internal resources, given the pricing in that sector.

For many years, we and our largest direct competitors have tried using low prices with these large payors to push for revenue growth. It's tempting because it's a nice way to grow the business, at least at the top line. This conditioned the large payors to demand low prices and low prices for all forms of claims services. TPAs services, insurance products of all kinds have, for many decades, been a major impediment. That is, the low prices for those products have really hurt quality in the insurance industry. This soft labor market has caused the large payor sector to be particularly price-sensitive and rendering it really just a much less attractive market segment.

Now, speaking to our operations and first to our patient-management activities -- and this is where we're I think struggling the most -- our revenues annually were off 6 percent, sequentially off almost 3 percent, so that has continued to be a soft area. Profits were down year-over-year 31 percent in that sector and sequentially about 7/10 of a percent or just a little bit as our cost reductions begin to kind of catch up a little bit with what's going on in that market.

The volume in case-management reflects the soft labor market. The large carriers have also put a lot of pressure on pricing, as I mentioned a minute ago, so that selling traditional case-management in that sector is no longer an attractive business. We plan to further rebalance expenses as we continue efforts in that area during the year. We will be reducing field-management expenses and closing some unproductive offices. We've always been a leader kind of in local offices and I think we need to back off from that where they aren't producing additional sales.

Pricing rationality is a fiscal necessity and we're seeking improved pricing in this sector. However, longer-term, we plan to introduce a second generation product at a higher price point and reposition the current service as a commodity-support service and as I mentioned, back away from those customers that really aren't looking for a quality product in that market.

On the network services side of our business, revenues were up 6 percent annually and a little over 1 percent sequentially. Profits were up about the same percent annually at 6.5 percent, but sequentially up 13, a little over 13 percent, as some of our efforts began to take effect there. This is the more attractive and more technology-based portion of our business.

The network services are impacted to some degree on a lagged basis by the slower and softer labor markets, but the trends there are not as directly connected to labor as they are in the case-management side. In this product line, we are expanding the breadth of our medical review services, both those conducted by our first-review artificial intelligence system and those involving more manual reviews. In addition, we are focused on the launch of our new MedCheck QL product I'll talk more about later.

On that, I'd say that the new QL product is a high-speed processing engine that also includes a number of operations improvement concepts. Its implementation is expected to improve operating efficiencies and the implementation is scheduled to continue throughout the coming year. QL is also designed to integrate with document management processes. We expect it will be of interest to customers implementing office-automation projects.

In addition, we remain enthusiastic about our directed care networks. This is a small part of our current business but an area where we plan to continue expanding into what is really a second generation PPO product.

On the expense side in the field, we have two efforts that have been ongoing. The first is this QL implementation I just talked about. The newest version of that software has been introduced in some field operations but the implementation will be ongoing for a while here. We really don't have a lot of momentum yet. It's going to be picking up primarily in the fall quarter; I would say in October, November and December.

The second area is rebalancing the case-management expenses. We're looking for both price increases and, as I mentioned, some cost reductions. During the quarter, we did continue reducing our direct labor and our labor in total is off -- is now down 10 percent from where it was a year ago. We still have a ways to go there, but the largest part of the reduction is behind us although the benefits have not yet really cut in.

We are focusing product development on the highest priorities, and that has been a discipline we've had to pick up on. We have reduced corporate expenses selectively but in the quarter, they were higher than we would like and we have some work to do there. We are consolidating offices and implementing data processing techniques that will further reduce office expense in the coming year.

On the product development side, I'd like to cover the two most important initiatives. The first is the network services area; that is the ongoing expansion of our line of medical-review services and their sale in both Workers' Comp and the group health market. The expansions include an increase in or use of artificial intelligence, an area where we've had really good results and are quite enthused about our ongoing progress. We are looking to lower the threshold for qualified bills that will increase the volume of bills in that service, increasing the amount of fee negotiation we do and establishing this product in the group health market. So, those areas offer opportunities for us to expand our business volume. The current product development efforts are focused in the artificial intelligence area and in that area to both improving processing speeds and better managing workflow.

The other initiative we refer to as enterprise comp -- and this is a product which expands the breadth of our services and allows us to offer a more complete line of Workers' Compensation solutions -- we are continuing to launch Enterprise Comp in the claims automation area. I had commented on this in the last quarter when our services being delivered under the project name "Advocate Services", but it has been repositioned and we're now beginning the marketing of this to both large payors, regional and more local payors as well as directly to employers. Enterprise Comp extends our services to include automation tools for payors and is designed to improve the effectiveness of claims management. Using artificial intelligence techniques, we have found that we've been able to meaningfully impact the amount of claims that move on into lost time and therefore more costly claims. We have been able to reduce those and I think we have an excellent story in that area. Our artificial intelligence initiatives are really beginning to differentiate us in the market and I think that we are certainly seeing that our savings exceed those of our competition.

On the MedCheck QL side, our primary focus at this time is to add Web processing to that. It does bring new technologies in that area that speed processing times and speeds -- it will help us reduce the direct labor in that market. We are putting quite a bit of effort into adding document management capabilities that will further add sophistication to our medical review processes. Artificial intelligence tools have proven to be particularly well-suited to medical bill review and we have a strong position in that area with about five years of product development behind us at this point.

Care MC continues to be one of the lead products for us, and we had to work in the quarter improving the reporting in that product. We are focused on launching it to include, rather, enterprise comp products and expanded reporting, as well as the AI capabilities I talked about earlier and of course, document management. So there is quite a bit there and we have a product that is really exciting for customers to look at.

On the cash flow, we've reported on this in the past and I would say the quarter was particularly strong in that regard. EBITDA was up from the prior quarter at 8.3 million. Net income plus depreciation was 6.2 million, and then picking up or taking out fixed asset additions in working capital, we still had a cash flow improvement of 4.6 million, which is up meaningfully from the prior quarters. As a result, cash moved up from 8 million to 12 million in the quarter.

In addition, Accounts Receivable Days Outstanding dropped from 54 to 53. For those of you who have been with us a while, this is a long way from the days when we were in the '70s on Days Outstanding, so we've continued to improve both our accounting control in that area and some of our customers' recognition that we shouldn't be financing them.

On the stock purchase side, we did purchase $2 million worth of stock in the quarter, taking the inception-to-date number to about 98 million. Hard shares were down to 10.5 million, 10.532 to be exact, and diluted shares were down to 10.704. We plan to continue our stock purchase plan, although we have been trying to keep that very steady in this market.

That really concludes the comments that I have prepared in advance, and we would like to turn this now over to questions from participants. Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Arnold Ursaner.

Good afternoon, gentlemen. This is actually (indiscernible) Michaels -- (technical difficulty) -- Arnold Ursaner. Just a couple of quick questions for you. As you talk about getting closer to the retail market, can you sort of explain the steps that you are taking -- (technical difficulty) -- that are going to be involved in doing that?

Yes, I would say that it has required us to back away from signing agreements with large customers that might preclude us from being involved in the employer marketplace, so there is some transition discomfiture in this and we've been involved in that is for about three years now. We began not signing those kinds of agreements with primarily claims administrators. That segment of our market looks to reprice our business and take essentially a sales commission in the process. Over the years, we've balked at that and that was a preparation for our being able to work directly with large employers. So, there's been definitely an impact on our growth caused by us backing away from some segments of the market.

The other effort has to come later and I think we wanted to be in very good kind of grounds in that regard; we wanted to be sure that those customers that -- those former customers that were going to be impacted by our being directly involved in the market would be aware of it, so we've lost business in the large payors segment as a result of that. Now, we are beginning to establish ourselves, both through brokers and directly with large employers, in the sale of our services. This is really, I would say ,a fledgling effort at this point, but we have a very differentiated product and we are quite excited about getting out an being more aware of it.

At the same time, those larger payors that like our services and especially our claims automation services continue to work with us. We consider the tools that we've developed to be things that they can use in their business to improve their claims processing. There are some large payors that like to do that and do outsource and that kind of technology, and there are others that tend to have a culture where they like to develop things in-house, so we have some segments of the market where our efforts hurt us and others where we remain a valued technology partner of large payors.

Thank you. When you mentioned the patient-management business having fallen off a little and you talk about closing some of the underperforming facilities, should we expect to see charges in the upcoming quarters related to those?

No, I don't think so. We've never done that and I would say that perhaps that stretches out our transition a little bit. There is definitely a longer tail on leases and things like that than there is on other kinds of expenses. But our field operations are somewhat organic in their nature, in the sense that I think there's always a transition going on, and we have some dislocation in any part of the market. I think the nice thing about any more robust market is the good news tends to cover a lot of stumps, as we say; high water covers a lot of stumps. In these kinds of markets, it's a little harder to make those transitions but we're making them as a part of our business, ongoing business operations. I would say that the trailing expenses tend to be severance for people where we are forced to do layoffs. We really haven't had those except where state law changes sort of precipitously and catches us with operations that we can't support. Normally, the normal turnover in our business allows us to gradually transition. I think we expect to make steady progress on getting rebalanced over the next three or four quarters.

It's actually Arnie Ursaner for the next question, if I can? Relative to our model, most of the line items were relatively consistent with one major exception, which is SG&A. You were nearly $1 million more than we had modeled. I know you're talking a lot about cost-cutting, but it's not being reflected in the numbers yet. Can you expand a little bit about when we will see it reflected in the numbers?

I would share your observation. I think that that was SG&A at the corporate level. We have made some progress in the field but I think our cuts in the quarter turned out to come more in the reduction of direct labor where the business volumes didn't support it, and we made less progress with both field overhead and corporate. But the corporate overhead reflected some one-time charges for sales efforts in the quarter. We had a major conference that run some expense.

In a prior year, in all prior years, we had similar expenses; they were just easier to absorb. We have had -- in the quarter, I think our systems-development expenses ran higher than we wanted them to and we're trying to work on that, but I would share your feeling that that SG&A number was meaningfully above what we had expected. I guess it seems like we ought to be in tighter control than that but we have projects that we really -- I think one of the things we've done as a company is we've been hesitant to back away from things that we felt were appropriate investments in our business. It has made things a little bumpier at times than people would like, but I feel that if a public company runs itself just to make things look smooth on the surface, the disadvantage is that it can't really compete aggressively.

So, we are having really sort of unexpected success with our AI efforts and we've just been hesitant to back off there but we're going to try to bring that number back down. We used to think we could hang around 8 percent for corporate overhead and we were in the high 9s this last quarter, which I would guess might be our highest quarter since the early business launch days back in the late '80s and early '90s. So it was a disappointment to us and we do expect to make some progress on that but we don't really manage it in a way that -- you know, we don't simply just force the number by just laying people off, so at times, we just bumped into some things that we can't avoid. I think we've had some depreciation in there for software that we worked on, and it's going to require an effort for us to bring that back down into the 8s.

Okay, thank you.

(OPERATOR INSTRUCTIONS). There are no further questions. Mr. Clemons, do you have any further comments?

Well, not a whole lot at this point. We covered most of the detail. I would be glad to speak with any of you that have further questions on detail, although I did cover, in my remarks ,the segment breakouts. I guess I could go over them briefly just in case they weren't covered in a way that helps you particularly or makes it easier. I don't know that I covered the specific numbers.

Revenues in patient management were 33.1 million in the quarter. The margins there were 8.8 percent. In the provider programs, our network services area, we were at 43.1 million with field margins of 23 percent, up from 20.7 percent in the preceding quarter. That was the I would say the strength in the business. Then the SG&A, which was just referred to, was 7.3 million -- or 7.4 actually -- up from 6.7 in the prior quarter. So, that would be the breakout that I would add, and we have covered that in the past.

If there are no other questions, then I would conclude the call at this point and thank you for participating.

This includes our conference call for today. Thank you for your participation. Please disconnect at this time.