ModivCare Inc (MODV) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Providence Service Corporation's third-quarter conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded Tuesday, November 9, 2004. I would now like to turn the conference over to Ms. Susan Garland with financial relations board. Please go ahead.

Thank you, good morning everyone, thank you for joining us this morning for Providence's conference call and webcast for the financial results for the third quarter ending September 30, 2004. You should all received a copy of the press release yesterday; if not, please call Janet Jasmin (ph) with the financial relations board at 212-827-3777 and she will send one to you and confirm your name is on our email list. Before we begin please note we've arranged for a taped replay of the call which may be accessed by phone. This replay will be available approximately 1 hour after the calls' conclusion and will remain available until later. The replay number is 800-405-2236 with the pass code 11014198. This call is also being webcast live with a replay available. To access the webcast go to www.ProvCorp.com.

Before we get started, I would like to remind everyone of the Safe Harbor statement included in the press release and that the cautionary statements apply to today's conference call as well. During the course of the call the company will make projections or other forward-looking statements regarding future events or the company's beliefs about its revenues and earnings for 2004. We wish to caution you that such statements are just predictions and involve risks and uncertainties. Actual results may differ materially. Factors which may affect actual results are detailed in the company's form 10-Q and 10-K filed with the SEC. The company's forecasts are dynamic and subject to change; therefore these forecasts speak only as of the date of this webcast November 9, 2004. The Company may choose from time to time to update them and if they do we will disseminate the updates to the investing public. And with that, I would like to turn the call over to Fletcher McCusker our Chairman and CEO.

Susan thank you very much. Good morning everyone. Susan and I are actually together which is unusual. I am in New York today presenting later this afternoon at the SunTrust Robinson Humphrey business services conference, and in Tucson is Michael Deitch, our CFO and on his first call, Craig Norris, our Chief Operating Officer. Let us give you an update on the quarter and then Craig, Michael and I are all available to answer your questions. As you can see we are extremely pleased with our third-quarter performance, which is above expectations in spite of quadruple hurricanes this quarter in Florida.

Remember about 25 percent of our business is Florida-based, and we operated a traditional facility, or a facility-based business we would almost certainly be recording a quarter substantially below expectations. We believe our model of home-based and community-based social services really proved itself this quarter. Not only did we lose the roof off our Fort Myers office once, but we lost it twice. We had employees without homes, without power, without schools being open for their children. Many of our clients were displaced. Many lost homes and many were temporarily displaced in shelters or in many cases, on the street. We resolved in the first hurricane that we would become part of the relief process to make sure we could account for our employees and clients, and actually we only lost revenue there for the four actual days of the hurricanes. The rest of the quarter we were still seeing our clients wherever we could in shelters, under bridges, wherever.

We opened our own school as the public schools were without power and closed so our employees would have a place to drop off their kids so they could remain in the field. Our own employees through their leadership efforts of Boyd Dover, raised over $30,000 in cash that was directed at our clients and employees that needed immediate help for things like ice, food, shelter, flashlights, clothing, etc. One large hospital company recently announced they will miss the quarter by one-third and miss Q4, as well and miss all of 2005 because of the hurricanes.

We are pleased to say we will not suffer any earnings erosion as a result of the worst hurricane season in Florida's history. Elsewhere our business remains very much on track. Qs 3 and 4 are typically our best quarters; remember because the government's fiscal year is July first. This is where we typically see rate increases, which we did this year, which remain modest. They are in the 2 percent range. Census increases, which are significant, you will note that our census has more than doubled since this time last year and has grown organically about 16 percent since Q2. And new contracts; and we are pleased to report we now have over 300 government contracts. That's up dramatically year-over-year but also from Q2 when we recorded 252 government contracts. So this year -- this quarter is no exception, that we posted our best earnings per share for any quarter -- 22 cents per diluted share. I'll let Michael walk you through the financial highlights, then Craig can update you on our operational performance and deal integration and then we will welcome your questions. Michael, go ahead.

In our third quarter we set a record high in terms of revenue in net income. Revenue for the second quarter totaled 28 million, up from 21 million in Q2 and up from 15 million in Q3 of last year. Effective July first, we purchased the community services division of Aspen Education Group, which added 5.2 million in revenue during the quarter. Regarding our organic growth versus our acquired growth, for the 9 months ended September 30, 2004 as compared with the 9 months ended September 30, 2003 our home-based revenue was up 60 percent. We grew organically by 34 percent.

Current-year acquisition of Pottsville, Dockside and Aspen accounted for 26 percent of the home-based revenue growth. The foster care revenue was up 30 percent, all of which was from organic growth. Our management fees were up 79 percent. We grew organically by 50 percent. New relationships with not-for-profit entities we manage accounted for 29 percent of the management fee revenue growth. Q3 managed entity revenue grew to 35 million, up from 29 million in Q2 and up from 15 million in Q3 of last year.

Our third-quarter operating income totaled 3.6 million, which was 12.6 percent of our revenue, up from 12.1 percent last quarter. The Aspen acquisition added approximately $430,000 in contribution during Q3. This compares with operating income of 2.5 million in Q2 of this year and 1.7 million during Q3 of last year. In our third quarter net income totaled 2.1 million, which was 7.5 percent of our revenue. This translated into 22 cents per diluted share. At the end of the third-quarter our days sales outstanding from home-based foster care services was 87 days, up from 69 days at the end of Q2. The increase was primarily attributable to the Aspen acquisition. Excluding the effect of Aspen, our DSO would have been 72 days.

September 30, 2004 our management fees' DSO was 184 days. This is primarily the result of a growth in management fees over the last four quarters and the Company's decision to temporarily defer the collection of management fees from Care Development of Maine and FCP, Inc. in Massachusetts. At the end of our third quarter we had almost 12 million in cash. This is after we spent 2 million in cash on the Aspen acquisition transaction.

We also have a 10 billion working capital borrowing facility and a 10 million acquisition borrowing facility, both of which currently have nothing drawn on them. With that, I will turn the call over to Craig Norris, our Chief Operating Officer.

Thank you, Michael. First of all I like to echo the comments Fletcher made about our Florida operations. As you know, this was an extremely difficult summer of hurricanes in Florida. Because of the outstanding efforts of our clinical staff and our leadership team we were able to effectively manage the safety and needs of our clients. We have both a unique and important responsibility for our clients during natural disasters and our Florida staff performed admirably. Presently Providence has owned and managed entities combined to have over 27,000 clients in care across 153 sites, serving 301 contracts. Compared to a year ago this same quarter this represents a census increase of over 14,000 clients and increase in contracts by over 100.

(indiscernible) our operational priorities continues to be the integration of recent acquisitions and I am pleased to report these are all on track and integrated nicely under Providence. Let me touch base on 2 highlights. Dockside Inc. was our first acquisition in 2004. We are fully transitioned here and we have now expanded services into both Indiana and to new markets in both Indiana and Michigan. We are ahead of plan year-to-date and our momentum is strong.

As a result of our Pennsylvania acquisition back in April, our management team there is now seeing new opportunities for expansion, in part by cross selling existing products such as foster care and juvenile justice programs. We have very experienced leaders here and we are looking forward to our Pennsylvania development.

Our new managed entities in the northeast have integrated Providence's management services into their respective operations this quarter. We have now finished centralizing back office support into our Eastern regional headquarters out of Virginia. The recent acquisition of Aspen Community Services is moving ahead smoothly. We have now finished centralizing our back office functions and have integrated our management teams. We have very strong leadership in California, and we are now well positioned to develop the Pacific region.

Elsewhere we are continuing to see stability and growth in nearly all existing operations. In North Carolina as a result of winning a privatization contract, our census has nearly tripled from the previous quarter. We continue to track new privatization initiatives rolling out across North Carolina.

In Washington, D.C. which is our newest startup we have been able to fill a service gap in this system where we are seeing strong demand. As a result we have over 50 clients in our intensive in-home programs and we are profitable here ahead of schedule. We see census continuing to rise as the district seeks alternatives to add a home care. The Arizona operations had one of their strongest summers ever and keeping with our strategy of cross selling services we have expanded therapeutic foster care in response to rising demand statewide. Additionally we received a contract funding increase to enhance services for clients in Tucson.

In our Florida operation even with the four hurricanes we were able to end the quarter with strong results financially and programmatically and finally in Virginia, we see strong demand and we are continuing to diversify in the therapeutic foster care and school-based services. Overall I am very pleased with the operational performance of our management team and most importantly the efforts of our clinical staff across the country. Thank you and I will turn it back over to Fletcher.

Craig, thank you very much. We really are pleased with our operational results, our leadership, our programmatic integration and in particular the integration of our acquisitions and it is in a large part due to Craig and his leadership team. As you can see year-to-date as Michael mentioned we posted a little over $67 million of revenue and 50 cents a share EPS. We have previously forecast the year at $93 to $95 million of revenue and 71 to 73 cents of EPS. We are quite comfortable with the high-end of this earlier forecast. We will publish 2005 guidance probably in conjunction with the issuance of our Q4 results as we did last year.

And with that operator, we will open the line for questions.

(OPERATOR INSTRUCTIONS) Robert Labick. Please state your company name followed by your question.

This is actually Arnie Ursaner backing up Bob Labick, on the call, good morning, CJS Securities. Question to ask you if I can I want to clarify something that I think you said on Aspen and make sure I have got my number right. I think you indicated it had 430,000 of operating income in the quarter. Is that correct?

Yes.

The only question I have then is that the operating income margin contribution from that is much lower than on your core business, would be about 8 percent where your core business is 12. Is that correct?

That's correct. You will note that this is a cost-based environment. We knew that our margins in California are going to be lower going into this. And this is not unexpected.

In fact, Mike, I think it is a little better than expected. We paid off of the EBITDA which was traditionally a lower percentage than what we enjoy, but there are states where we operate in environments that make as little as 7, 8 percent and California is going to be one of those. Its going to be a low margin state primarily because of the government's tolerance of profitability there. But the revenue upside is really what we're after.

Following on the same vein if you could comment on your view of how Prop 63 in California could influence your business over the next year specifically at Aspen.

Good question. Proposition 63 for those people that do not follow this for the most part the elections were neutral to us. However, in California a proposition was introduced that I believe Bob called the Robin Hood tax, which amounts to a one percent surtax on everyone in California that makes over $1 million a year. And that money is earmarked for the counties to develop innovative behavioral health and human services programs that are targeted for wraparound or home-based models.

In fiscal year '04, which ends in June of '05, they estimate that will be approximately $250 million of new money. But in the full years going forward California estimates that to be $800 million of new money. And in a state where revenues have been flat, funding for these kinds of agencies have been flat. Instinctively you will remember that when we acquired Aspen we thought we were going into California at the right place at the right time and clearly we are seeing some windfall opportunities, as with the passage of this Bill and the further aggressiveness of California to reallocate clients away from institutional care.

As we understand the implementation of Prop 63, each county is forming a committee. They have to have their recommendations to the state by the end of this calendar year, by the end of December, in terms of how they intend to utilize the money and at what services they are directing the funds to. We actually are participating in every county where we currently provide services in those kinds of committee meetings. So we will know more probably in Q1 of next year but clearly we expect this to benefit our programs.

If I may one final conceptual question. Your growth rates are just extraordinary, and one of the questions I have is is the market or industry growing as fast as you are? Are you gaining share? And again I know you have had a competitive advantage in many states of being the first in going through the licensing process. Is that leading to more business for you, or are you seeing more people go through this process to be more competitive with you?

For the most part we are gaining share from the institutional type of providers. They have lost basically two-thirds of their business over the last couple of years in favor of community-based services. And we're not the only beneficiary of that obviously because you're talking about literally billions of dollars. We have been the beneficiary of a lot of the new initiatives that target these home-based or wraparound models, and the more we develop a truck record, the more successful we have been in states that are looking to new providers because they measure your experience substantially as they weigh your provider capability. So we continue to expect to see this kind of growth not only to us directly, but to the sector in general in terms of how states are going to utilize limited dollars and the movement away from institutional care. Our competitors still remain the local not-for-profit agencies, which make up the management fees and the management partners that have now compromised our management revenue.

Congratulations on the quarter.

Patrick Swindle.

Avondale Partners. Good morning. In looking at SG&A during the third quarter you certainly got excellent leverage. As you look into the fourth quarter with the continued integration and back office buildout for Aspen and with Sarbanes-Oxley, would you anticipate you would continue to get the same level of leverage on SG&A?

The big jump in SG&A in Q3 really came from Aspen. The rent there for the quarter was 400,000. You will note that our G&A went up about 770,000 from Q2 to Q3. We will continue to see some leverage as revenue grows. We're finished building out the back office of Aspen. All that is in place. Everybody is hired and that thing is running smoothly now. It will increase, but I don't see it increasing at the rate that it increased from Q2 to Q3.

Right, and I guess more directly my question as a percentage of revenue you just saw a pretty significant downtick, and I guess that is a function of increased leverage as a result of the higher Aspen revenues and more directly I guess what we anticipate as a percentage of revenues, we would continue to see our G&A tick down or basically remain in line with the third quarter?

I would say it would remain flat or tick down a little bit.

Okay. Then the next question, you mentioned that you deferred collections in Maine and Massachusetts on the management contract side. I was wondering if you could give some additional color behind their motivation for deferring collection and obviously that did have an impact on the DSO's at management contract segment.

As part of our marketing strategy new not-for-profit relationships we're pretty tolerant in the early months so that gives their independent board some comfort that we are just not coming in there and "taking them over" which we are not doing by any stretch.

And we will tighten up, Patrick, toward the -- and remember our policy is that we reserve a write-off any of these fees after they've reached a year old. So even at 180 days we are at no risk of doing that. And generally as Michael suggested we may be tolerant in the beginning of the contract we are very intolerant as these accounts age. And I think Michael correct me if I'm wrong, but to date I don't believe we have ever written off any of our management fee collectibles.

Fletcher, that is correct. We have not.

All right and in looking at the acquisition pipeline going forward can you give any color with regard to the number of targets that you might see out there, as well as any trends in acquisition multiples recently either positive or negative?

The multiple has been at the high end of our range when we went public a year ago we talked about our hope in acquisition multiples in the 4 to 5 times. You will notice that the ones we've done and announced have been at the high end of that 6 times. We expected to stay there, Patrick. We are seeing some private equity money come into our space. So a lot of the buyers are not strategic, but there is newfound private equity competition. So we are probably not going to get things at the 3 and 4 times consolidation rates that we thought we would. We've closed on one a quarter, and we fully expect we will continue that pace so long as Craig tells me we don't have any integration issues. The one thing that could slow us down there in that regard is if we were to acquire something and then have difficulty integrating it. We can ill afford to peave off one of these counties in a new relationship like that and we really can't afford to go in and have a failure in integration. So, so far so good. All the acquisitions we have done, the leadership has stayed. We have had very little turnover in staff. And they've been integrated very nicely and as long as that is the case, Patrick, we will continue to look to one a quarter.

And one final question. I will go back into the queue. I wanted to clarify, I think I know the answer, but on the 71 to 73 cent guidance for the year, that assumes no additional acquisitions?

That's correct. We, in our guidance model it makes no assumptions about unannounced or unawarded contracts, which we had otherwise called pipeline, nor does it make any assumptions about acquisitions. So what you see for Q3 is a pretty good run rate base for us. Remember all of our revenue is recurring. We have never lost a contract; that record stays intact. So our revenue just kind of leverages off of the prior base. So if you take that 28 million and just run that out, you can see that on a run rate basis we're at about a $110, $112 million of revenue, somewhere in the 90 cents range EPS. That assumes again no acquisitions, no organic or contractual growth, no rate increases, which that's part of what we're going to try to do Patrick when we guide for 2005.

Thank you, Fletcher, Michael.

Mark Hughes.

SunTrust. Good morning, nice quarter. The internal growth of the 9 months, it looks like that is an acceleration for the third quarter compared to the six-month number, I think you had shared perhaps 32 percent for the six months. Am I right in reading that is a bit of an acceleration this quarter?

That would be consistent with our contract cycle Mark in that July 1 people had opportunities to expand their business; many times they have to hold off until their new appropriations cycle. So our actual census growth from June 30th was 2880 clients. So yes, a big piece of that is going to favor this quarter.

I think you said census was up 16 percent sequentially on an internal basis. Is the year-over-year number materially different from that? Do you have that sort of June 30 compared to June 30 last year?

We will have to get that for you. The 2800 clients, the number I just gave you, if you look at the 27,734 clients that we announced this quarter 4,778 of those Mark are attributable to Aspen.

Right.

2700 -- I'm sorry -- 251 of those and 1,523 of those are attributable to the New England operations. So the difference there is pure organic, which is typically favors Q3. We can go back and see what that phenomenon was a year ago.

Chances are when you take that into account thought its probably a bit more than 16 percent, is that right?

It may have been; I don't know offhand.

Right. Then your guidance for the fourth quarter assumes EPS of slightly down to slightly up sequentially. In other words, you say you feel good about the high end of that, I think some of us had previously looked for a bit more of a sequential increase. Is the guidance here just kind of more of a recognition of the seasonality as you are seeing it? Is it conservatism, what should we think about it?

Its clearly conservative. We developed this guidance a year ago. If you look at where we are today at 50 cents basically we have the same quarter again in Q4, we are within our guidance range. We will say and we are comfortable saying, Mark, that Q4 is typically better than Q3. So from that one could assume that we would expect to have a better quarter in Q4 and be at the high end or a little better than our guidance.

Right, I wonder if you would refresh me on last year -- you went from a 16 cent number in 3Q, the 13 in 4Q, is that just dilution?

Yes, that was exactly right, Michael?

Yes, your net income was up.

And then any potential have you heard Prop 63 like court challenges or any legislative action that might influence that action? Have you heard anything like that?

We have not heard of anything. You know, it is a popular tax in that the poor people voted to tax the rich. So the challenge would have to come probably from the people that are being taxed, but we've not heard anything yet in that regard.

Right. Okay, thank you very much.

Andrew May.

Good morning. Curious about was very helpful to get the commentary from you, Michael, on the growth in the DSOs being principally attributable to Aspen. I was wondering what the DSOs are at Aspen and what is it about the way they do business there in California that makes them high?

It looks like they are about 30 days longer than our usual reimbursement cycle. We have to submit detailed cost reports over the -- they are scrutinized by everyone, they are scrutinized by the payor and then reimbursement is less. So it takes them a little longer.

We don't see any real reason we would speed that up, do we? I think that is just kind of the way they do business?

That's correct.

So that's going to -- all right, fair enough. And then just to make sure I understood, on the matter of deferring the fees in Maine and Massachusetts, I think you articulated this way before that some of these managed entities use your flexibility about fees as a way of funding growth working capital. So is that the way you would characterize what is going on there?

In this particular entities they were a little more troubled in that they did not have an independent credit facility. They had reimbursement and recoupment issues with the state. Part of our willingness and interest to do that was clearly in preference to their own cash flow. And our senior lender will grant credit to not-for-profits that we manage, but they have to be creditworthy in their own right. Because we are not a guarantor there, nor are we the borrower. So but by usually by deferring and subordinating our management fee we make them more creditworthy. So our intent there is for them to develop their own cash flow, improve their cash flow, get their own lines of credit and then stay as current with us as they can. And we've done that in many of these startup not-for-profit relationships.

But it was obvious to you that it was appropriate to book the whole management fee even though --

We would defer it again only, there is two reasons we would defer management fee income, and we go through this with our auditors on a quarterly basis. One is the age and as long as they are younger than 365 days we do not reserve for them and the other is the solvency of the management fee payor. To the extent that any of these were deemed to be insolvent or incapable of paying, then we would reserve the fee. And we have not come across that in any of our relationships yet.

All right, understood. Great quarter. Thanks.

Jeff Vesser. (ph)

Manchester Management. Just to go into these DSOs one more time so we can understand what the cash flow is going to look like on a go forward basis, can you give us any sense as to when you anticipate swinging to a positive cash flow?

Our cash flow is positive everywhere. The decision to defer in New England was part of the contract negotiations with those entities, and there we agreed that we would defer our management fee for no more than six months, about half of what we would be at risk for in terms of writing that off. So we would expect them to begin to pay their fees in Q1 of next year. And we fully expect that our own DSO which Michael I think is right around 70 days will probably stay there. Our management entity DSO has ranged between 150 to 180 days. And we would expect that it would stay pretty high. Our management entity DSO is never going to match our own DSO because we tend to be more lenient with our not-for-profit partners.

One more thing. When I'm calculating that number I am using four quarter's historical. On a management DSO if you took the last two quarters and just annualized them it would be 167 days. So it kind of falls right into the middle between last quarter and this quarter. But I've not changed my calculation methodology. I keep them consistent from quarter to quarter.

Terrific. Thanks.

(OPERATOR INSTRUCTIONS)Robert Labick.

This is Arnie Ursaner again. Can you give us a feel for upcoming contract awards that you are targeting or any specific any help you can give us about future opportunities that are part of what I would call your pipeline?

We will announce a contract pipeline, Arnie, when we believe there is some probability that we will win. And as right now we do not have any contracts upcoming that we believe we are that significantly probable. I think you know that Kansas, the state of Kansas announced our managed entity Camelot as one of 8 bidders for for 5 contracts. We don't even consider that yet to be pipeline because we could fail. So the last thing we want you to do or investors to do is to rely on pipeline data that may or may not be there.

Our typical cycle is July first. Almost all of our business cycles in July, these contracts that come in January are usually one off contracts because they also means the state has to appropriate a half a year and they normally don't like doing that. So short of Kansas right now we don't see any other January activity develop.

And are there other major RFPs out there? It sounds like there are not.

Not that that we are aware of and not that we are bidding on.

Okay. Thank you.

Mark Vanderklein. (ph)

Good morning, gentlemen, Holton Gold (ph) Partners. just a couple quick questions for you here and congratulations on the quarter. In regards to the management fees, how much of the contract awards that are reserved, what portion of that is it of the total? That have been deferred?

In the quarter just from care development and FDC that we referenced there, Mark, $343,000.

Okay, and with regards to Prop 63 can you just give me a little bit of color roughly on the timeline when we might expect something of this nature to come through, maybe fair positive effect for you guys?

As we understand it the counties are obligated to present their plan to the state by the end of this calendar year. They believe that through the remainder of the fiscal year which would end June 30, of '05 that Prop 63 will raise somewhere in the neighborhood of 250 million dollars to be utilized for California-based providers. So some 250 million will be spent in the first half of next year. Then following July first, they estimate that the tax base is a 1 percent surcharge base, will produce somewhere around $800 million a year. So you can see these are significant opportunities, and we should know to what extent we are participating in that by Q2 of '05.

(OPERATOR INSTRUCTIONS) At this time we have no further questions. I would like to turn the conference back over.

Thank you. Thank you everyone for participating. We're very grateful to our shareholders for their continued faith in us as you can see we are extremely pleased with our results, particularly our performance in Florida. We had never experienced anything like it, nor had we ever found ourselves in a position to really support our model to the extent that we have. We are very grateful to our staff and our leadership nationwide and everyone is incredibly blessed with the work that we did in Florida in the last quarter. So we continue on or above pace. We continue to be the beneficiary of difficult times for state governments that look to alternative providers, and we fully expect a very good year in '05. And as always, Michael and I and now Craig are available if you would like to speed to any of us directly, please call us. Again, thank you very much.

Thank you. Ladies and gentlemen, this concludes the Providence Service Corporation's third-quarter conference call. If you would like to listen to a replay of today's conference please dial 303-590-3000 or 1-800-405-2236 and you'll need to enter the access code of 11014198 followed by the # sign. Thank you for participating in today's conference. At this time you may now disconnect.