CorVel Corp (CRVL) 2005 Q4 法說會逐字稿

Welcome to the CorVel Corporation annual earnings release conference call. During the course of this conference call CorVel Corporation may make projections or 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 the 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 filed 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, and welcome to CorVel's March quarter analyst call. Revenues for the quarter of 73 million showed some improvement sequentially, profits reflected a reduction in field expenses offset by some corporate expense increases. Although we beat analyst expectations, our EPS was not what we had expected internally. However, the quarter was stronger than is perhaps visible on the surface. Cash flow for the quarter was improved. For the year we had all-time record dollar repurchases of our stock without any reduction in cash. So that is a reflection of the underlying strength of our business. For the quarter, net income plus depreciation adjusted for working capital changes was 5.5 million up from 3.2 in the same quarter the prior year but not at our record levels.

Before we go further today I would like to thank a couple of groups whose choices have been critical to the beginning of our recovery. CorVel is unlike most public companies. We have only a few investors who actually own most of the Company. We know our large investors personally. Chief amongst these is our founding investor, the Michael Family. After our December quarter results, if a couple of our investors had lost confidence in CorVel's future and had chosen to get out this last quarter our thinly traded stock would have seen the kind of lows that would have put us in the hands of speculators. And we would have spent this last quarter working on things other than our business. We know you will each make your investments based upon what is best for you and based upon the numbers. For CorVel, though, having strong and thoughtful investors has been a big advantage.

We are fortunate to have investors who are among the most successful anywhere. We have had access to your counsel. And it has always been appreciated. More importantly, nothing motivates us more than working with people who believe in us. You have each been able to remember that college professor, parent, or grandparent, perhaps, who believed in us, we never wanted to let that person down. Our investors have stood by us and I assure you that nothing drives us any more than their choice to continue to invest in us. In the toughest of times, sometimes all that stops the tide is that we have the will to refuse to lose. I'm reminded of our beginning when we lost money every month. Heck, we lost more money every month. During this period, our owner Jim Michael and his son Jeff hired some hot-shot finance guys to help them with their investments in Minneapolis. These finance guys took a look at CorVel and told the Michaels to stop throwing good money down the drain. They had already put six or seven million into CorVel and it wasn't going anywhere. In fact it was going south. We were told to look for new capital venture sources.

As things only worsened over the months, Jim Michael called me to let me know he wanted to come out and see me. I knew what this meant. Investors and board members don't pull you aside to congratulate you. When he landed we drove out to visit a tiny CorVel office. We had only one building there, it was working part-time. Our office was conveniently located next door to a dog kennel and smelled like wet dogs. 20 minutes later Jim told me he wanted me to drive him back to the airport. We talked about CorVel's future and growth. So, only a few hours after he landed Jim was on his way back to Minnesota. It was obvious we had nothing to justify ongoing investments. In a few days one of the new finance hot shots called and we knew what that meant. However, he told us to tell the venture sources, we had rounded up that the Michaels were no longer interested in getting a second investor.

At that moment Jim not only owned most of CorVel, he had our commitment to succeed. Twenty months later we began our IPO and the Michaels got their investment back plus a 50% stake in CorVel. Which was well over 100 million later. At one point I asked Jim why he had decided to continue investing. He told me that all he wanted to get from his visit was to know that we were still committed. He said that in his experience all management teams ran into problems but those that remained committed worked their way through those and went on to success. Jim's investment in CorVel was important but we could have found other capital sources. His respect for us was priceless and made it possible or rather impossible to let him down. That commitment was not to achieve a flippant IPO. It does not have an expiration date.

I'd also like to thank CorVel's management team. This has been a particularly difficult time and every company in our industry has either been acquired or faded away or has had significant management changes. CorVel is the lone remaining public Company and independent Company in the industry at a national level. In spite of the severity of this cycle our management team has stayed together. In spite of the difficulties involved and the combination declining volumes and manic regulatory burdens our team has had a very good year of accomplishment. It's my privilege and certainly a joy to work with them.

Now I would like to go over the results in several areas. We'll talk about market position, our position in the market, the status of our key projects and our financial results. The market remains depressed I would say. It has flattened out as we had hoped it would in the March quarter and looks like could it improve. The labor market continues to strengthen, better conditions would seem to be coming. The regulatory environment is difficult with the combination of 404 audits, HIPAA, SAS 70 audits and the Attorney General's investigation. The investigation into the insurance industry could lead to a more open marketplace, though. However that certainly remains to be seen.

We have structured CorVel to compete in a more open marketplace. We have low corporate and executive expenses, we invest in technology and we believe that, as they say, "low do I walk through the valley of evil I fear no evil, so I'm the meanest blank in the valley." I think in these kinds of times it helps to be focused on the street. I certainly think our team is ready to commit. We're ready for tomorrow and we aren't going nowhere. The quarter seems to us to reflect a flattening of the claims declines over the last three years. But as I said I don't think we can see a lot of strength yet. We did get a really good jobs market report last Friday. The labor market continues to strengthen and ultimately that's the driver for our business.

Now to CorVel's position in the market. This down cycle had impacted all companies. Changes in management and acquisitions have occurred and the landscape is constantly changing. I think that has played to our advantage as we've been able to maintain a steady presence. Large employers are becoming more aware of the performance differences among leading companies as CorVel's technology advances over the last few years have allowed us to demonstrate outcomes for employers that are superior to those of our competitors. CorVel is positioned as a technology leader and we have continued the pace of our investments. In spite of the difficult conditions this last year we actually accelerated our investments in new document management capabilities.

At this time we are carrying the launch expenses for that project without offsetting benefits but we expect that to change during the year. Importantly, we are attempting to present ourselves to employers without involving as many frictional losses to middlemen as has typified the market. If the current rationalization continues our position should be very strong. It the ways of the past persist we will continue to swim upstream.

Now on to the projects for this last year and certainly continuing in the coming year. Our first has been the implementation of new versions of our MedCheck technology. We have had a high level of effort devoted over the last two years to the implementation of newer versions of our medical bill review software. The software is included rapidly expanding use of artificial intelligence, and aspects of our development that have been particularly successful. The software offers a number of different forms of ASP services to customers, it can accept a range of incoming media sources and intelligently routes work to centers of excellence. The bottom line is that is achieves savings superior to any in the marketplace. It is very easy implement. At this time we are still incurring more incremental expenses than economies but we expect that to be reversed during the year. Investing in the dramatic change in our business during this very difficult market, has hurt our profits in the short term but continued our policy of always investing for the long term. Already it has positioned with us superior outcomes and a dynamic ASP capability.

The second major project, which has been ongoing for about a year now is the expansion of our specialty bill review programs in what we call network solutions. With the foundation of our new technology increasingly implemented; our second project is the expansion of production of sale of these specialty forms of medical review. These services improve outcomes for customers and have good margins. During the last year we invested in the development of software platform to support this product line. Our original expectations for this product line remain intact. A third project is a little more kind of day to day, I would say, and that's the improving of the margins in our case management services. It's been a very difficult and somewhat commoditized part of the industry. We have had some margin improvement but have quite a ways to go. We have had ongoing headcount reductions. So, we continue to expect that we'll persevere and have better margins as we go through the year.

On the financial results side; revenues have been recovering from the Colorado and California law changes. These two markets remain depressed, although the new California law may help us. We will need to see a strengthening of the claims market, though, before revenues gain much momentum. Our margins improved despite the high levels of expenses involved in some of the regulatory compliance issues. We remain unhappy with the margins in each of our businesses. I think we'll certainly be persisting in trying to get those improved during the year.

Now I'd like to report some of the product line numbers that we normally do for this. The margins in case management for the quarter improved from 4.7% in December to 9% in March with revenues improving from 31 million to almost 33 million. On the provider program side revenues moved up from 38.7 to approximately 40 million with margins improving slightly from 19.3 to 20.5. Our balance sheet remains strong with no debt. Our ability to have purchased 17 million of our stock over the last year for one and a half times our equity in CorVel without incurring any debt - - excuse me that 17 was the inception to date. We didn't quite purchase that much this. But would be our inception to date stock repurchase number. We've been able to accomplish that without incurring any debt. I think that's strong evidence of the underlying economic dynamics here. Although Graham and Dodd love book value modern companies with strong economies can operate with very little capitalized assets.

The accounts receivable for the quarter were up a little bit and I think that was an area of disappointment for us. We have 55 days in AR and we've picked up 3 million in the quarter in AR, which we would hope to work back down. Cash remains flat with the year ago at 9 million despite the $17 million stock repurchase during the year. In the quarter we spent about 6.5 million on stock repurchases, bought 306,000 shares to bring the stock repurchase to 6.4 million. Hard shares have dipped, in the current quarter, to just under 10 million for the first time in awhile. Although we've been there for before. And diluted shares were 10.27 million in the EPS calculation. That brings me to the end my prepared comments and I'd be glad to turn this over to questions. Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question is from Joe Michael.

Just a couple quick questions for you. The revenue growth you mentioned in the patient management side of the business is that related to the price increases that you had talked about trying to get on the last conference call or are you seeing a pick up in volume?

Well, I think in fairness to the revenue increases in the quarter were largely due to the fact that there were a couple more work days in the March quarter than in the December quarter. I'd say the case management market remains fairly flat and on the soft side. We have been getting some price increases. It will take us awhile to get some of our contractual relationships through their renewal dates and on to higher prices. So I would say that revenue in the case management business is; I'd say relatively flat on an underlying basis.

Got it. Okay. And just for bookkeeping purposes what was depreciation and amortization in the quarter?

I don't have that right in front of me and maybe somebody listening on our side can get it the me and I'll give it to you in a couple of minutes. I don't think there was anything unusual about it but I'll get it for you in just a second.

I guess I was just trying to figure out what was your level of free cash generation in the quarter? I didn't see a statement of cash flows.

The balance sheet is out publicly at this time. And you can pick it up off that but I'll see if I can get somebody to get a number for me. Here comes a courier right as we speak. Just a second here. We can figure out - - depreciation was 2.87 million in the quarter, and we've reported some cash flow numbers before. I'd say EBITDA was 6.8 million, net income plus depreciation was 5.3, as I reported, net income plus depreciation minus working capital changes was 5.5, and net income plus depreciation less working capital changes and capital expenditures was 3.1. I suppose if you're looking for free cash flow I think that latter number is a little bit closer to the number you're looking for.

Thank you very much.

Your next question is from Mitra Ramgopal.

I don't know if you can give us a sense in terms of looking at Colorado and California what percentage of you business those two states account for?

I don't know that we normally disclose that. I would say that we lost about 10 million in revenue in California that was the law change in the auto market. Particularly unfortunate for us we had worked pretty hard for five or six years to displace a kind of a monopoly leader in the marketplace there. And we had just gotten going and then the law was upset us. In California the revenue impact was about 5 million but it was concentrated relatively higher margin services, which is - - of course, impact by CorVel and all of our competitors.

Okay. And now, I don't know if you've seen any change at the so far in this quarter in terms of the trends you were seeing in March?

I would say we - - obviously it's a little early for us to comment on that. We haven't really even taken a close look at April. But we do think, or I think that the market is firming a little bit. I think it's premature to say too much about that. The nice thing, and I've said this before to investors, I think you can kind of see things coming for us with a little bit of lead time so it's pretty easy to get positioned. The labor market improvements, which are being reported every month, are the strongest indicator of where the market's going. Ultimately that will be reflected in demand for our business I think.

Okay. And also you touched on, in the release, with regards to employee headcount reductions. How far along are you in that process?

We have come from I think over 3,450 employees, roughly, down to - - we were at 2,980 at the end of the quarter and we're at 204, I think, 1 last reported in this quarter. We- - obviously we'd love to see our business pick up to where we weren't reducing headcount, but we have a couple of areas where we do believe we should make headcount progress during the year. I think there might be another couple hundred people that we hope to be able to reduce due to efficiency improvements but obviously as I said we'd love to see demand put that off.

I don't know if roughly you can give us a sense of how many locations you have right now?

We have 145 locations.

And the plan in terms of the headcount, is it being tied into closing locations or just pretty much trimming what you have?

We've had some locations reduction. I think that's more due to the change in the business. The technology in our business allows us to have a little more concentration of some of our technology assets and people involved. However, from a sales development perspective we would like to have a lot of locations. So what's really happened is our offices have become more important as sales locations and some of them less important as complete processing centers. But our goal is to remain a Company that is local and close to customers.

Okay. Thank you.

Your next question is from Ed Kroll.

Good morning, Gordon.

Hi.

I'm wondering, if can you tell us year-over-year what the claims flow for lack of a better term was, what you're seeing as far as the actual Workers' Comp claims flow? I think it was down 10% or 15% in the December quarter.

Yes. We're thinking that it's kind of in that same range right now. But I would want to caution everyone that the numbers to support that are hard to dig up out there. It appears to us, looking at other companies that have business tied to claims volume that the claims remain down year-over-year. They felt to us, I think, like they were a little more flat, let's say, sequentially in the March quarter. We had originally thought they might start trending up. I don't think I could say we see that a lot. One leading indicator that I find some encouragement in; is also Concentra's clinic business. Those companies that are involved in treating Workers' Compensation patients are seeing increases in their patient volume. And I think that's another indicator that the market may have found a bottom.

Okay. Thanks for that. And then on the - - you mentioned that you're still in a - - you're not reaping any benefits from some of the cost reduction initiatives. But I think at least on the last call I think you said ultimately you'd get roughly 2.5 million or so benefit on a quarterly basis once those - - once you start to realize the benefits. Is that still the right number? And when do you think you might start to realize at least part of those cost savings?

Well, there are, as I mentioned in the call, there are three projects. The third one is really in the case management area is focused on just headcount reductions and maybe a little rationalization of our field operations to the size of the case management market. We've gotten some benefit from that at this time. And I would say roughly half of what we expect to get. However, the other two projects, the implementation of MedCheck's newer versions and the network solutions project have neither developed any savings for us at this point. The - - worse yet, the cost implications of our technology expansion on the scanning side has raised our expenses something on the order of 700,000 a quarter from where they were a year ago. We expect that to be reversed and then to pick up perhaps a like number or a little more on the other side. So I wouldn't say 2 million a quarter on that project alone but something on the order of 1.5 million from where we are now a quarter.

We do think we're close to a time when that should start happening. A lot of that has been dependent upon our field operations getting adjusted to the new work flows involved in that software. We have continued to advance the software. And so it's been a bit of a moving target for our field people. I think it's been a very challenging conversion for them. And they're doing a good job but we've been putting them through an awful lot of change. I think it really positions us for the future. The network solutions project is really more introducing new services that have good margins. And it probably has the most potential of the three. But it has been kind of pushed back in the sense that we had to get some software in place first. We've largely concluded that and implemented that - - or are implementing that towards the end of the March quarter. So I would expect to see some sequential gain from those three combined each quarter as we go forward here.

Okay. Great. Final question. For this quarter that we're in now, the June quarter, your fiscal first quarter is there any seasonality to this quarter? It seems like you had a little bit of help from seasonality in the March quarter. Just wondering, how does June compare seasonally to the March quarter?

I think that's a good question, and I'd like to be sure investors understand that. I think that we want to have our numbers be as transparent as possible in that regard. The March quarter did have two more days than the December quarter. I would say one more day than the average quarter and the June quarter is similar. So we would expect to have one extra day in the June quarter and then be a little softer later in the year on a seasonal basis. In addition, for reasons we don't fully understand, the June quarter has been in more recent years also strong seasonally for other reasons. Perhaps it's that there aren't any real vacations going on at that time and there aren't too many holidays in the quarter. But it's normally a fairly firm quarter. And so we'll get a little push from that. But on the other hand we have to make gains in our projects during the quarter in order to continue those trends into the rest the year when the seasonality is not as much in our favor.

Thanks very much.

You bet, Ed.

Are there any further questions? Your next question is from Mitra Ramgopal.

Yes hi. I just wanted to follow up. How many shares you have on repurchase program that you can actually go into the market for?

We've - - I think we've expanded the repurchase authorization by 1 million shares in the middle of the last quarter. We've already purchased couple hundred thousand of those so we probably have 800,000 left in that authorization.

Okay. Thanks.

We also, I would say, our policy, though has been to be a steady dribble buyer and not to be buying in blocks as we go along, although we have that ability.

Okay. Thank you.

There are no further questions. Mr. Clemons, do you have any further comments?

No. I'd like to thank everyone for joining us and I hope this is the last of these more difficult discussions. I'm hoping we'll have a little more fun in the coming quarters. Look forward to talking to you then. Thank you.

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