ModivCare Inc (MODV) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2004 Providence Service Corporation earnings conference call. My name is Raika, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press star, followed by 0, and a coordinator will be happy to assist you. As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Miss Alison Ziegler, from Cameron Associates. Please proceed, ma'am.

Thank you. Good morning everyone, and thank you for joining us this morning for Providence's conference call and webcast for its financial results for the fourth quarter and year ending December 31st, 2004. You should have all received a copy of the press release yesterday. If you did not, please call Sandra Spennato at Cameron Associates at 212-554-5461, and she will send one out and confirm your name on our fax or e-mail list. Before we begin, please note that we have arranged for a tape replay of this call which may be accessed by telephone. This replay will be available approximately 1 hour after the call's conclusion, and remain available until March 22nd. The replay number is 888-286-8010 with the pass code 97381677. This call is being webcast live with a replay available. To access the webcast, please 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 this 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 the first quarter and full year of 2005. 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 filings 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, March 15th 2005. The Company may choose from time to time to update them, and if they do, will disseminate the updates to the investing public. I would now like to turn the call over to Fletcher McCusker, Chairman and CEO. Go ahead, Fletcher.

Alison, thank you very much. Good morning and welcome, everyone. Today we will be going over our results for Q4, 2004, as well as the year end. We can tell you now that our 10-K was filed about an hour ago. So we are discussing audited results, and that also includes our auditors attestation to our Sarbanes-Oxley compliance report, which we are pleased to release today showing no material weakness in our internal control efforts, which I would expect that you know, is no small feat for a company our size and our age. With me today in Tucson is Michael Deitch, our CFO, and Craig Norris, our Chief Operating Officer. And all 3 of us will be available at the end of the call to answer your questions.

As you can tell from our release, the fourth quarter was very strong for us. Revenue was up 81 percent, profit up 112 percent. We are now producing record revenue of almost $30 million. For the year, our revenue grew 64 percent over 2003, to just over $97 million. Managed revenue for the year totaled 121 million, making us responsible at year end for around $220 million of a government sponsored social services. Our net income more than doubled in 2004 to over $7 million, or roughly $0.76 per share. Many of you have noticed that we had some year end adjustments that show up in our press release. There is more detail on that in the 10-K. I think you all know that we had a new auditor for the first time this year. That's part of the reason we are a little bit late with our announcement. But, also this is the first year we've gone through the Sarbanes-Oxley reporting requirements. You will notice we had a favorable tax calculation at year end that resulted in about a $300,000, or $0.03 pick up for us. Michael will also describe to you about $370,000 of expense adjustments that pretty much wash the gain we had from the tax rate benefit. So, all in all, the year-end adjustments had virtually no effect on our earnings per share.

A key driver for us, obviously, is census. We are now over 29,000 clients. That's up from a little over 13,000 a year ago, a 117 percent increase in census. We track and attempt to communicate to you as often as we can the megatrends that affect our business, particularly Medicaid enrollment and levels of poverty, other issues that drive categorically eligible clients to us. Medicaid enrollment, if you're watching, is now over 49 million people. In the President's budget, released a few weeks ago, they estimate that will soon be 50 million people eligible for Medicaid. Poverty level, again, has never been higher. Child Protective Service referrals have never been higher, 4.5 million kids referred last year to CPS. And adult corrections and parole has never been higher, now with 4.8 million adults on parole or probation. So the key drivers for us continue to escalate, in spite of any economic recovery we seem to be enjoying, we've seen no slowdown in the trends that drive our census and contracts to us. I'll have Michael walk you through the details of the quarter, and then Craig will discuss our operating results. And then I'll come back to discuss our 2005 guidance. Mike.

Thanks, Fletcher. First of all, I would like to communicate to our shareholders and analysts how incredibly proud I am of the Providence Accounting and Information Technology team for their efforts in complying with the Sarbanes-Oxley Act of 2002. Company management has determined that the Company's internal control over financial reporting is effective, and I am forever grateful for the long hours and hard work put in by Mindy, Bonnie, Tony, Christine, Angela, Roberta, Sara, Robert, Chris, Jeff, Jim, and 2 people named Mike, as well as the assistance we received from DeCasama (ph) and Company CPA, and Rotofor (ph) Moss Technology Group. . It was a lot of work for all of us.

In our fourth quarter, we set a record high in terms of revenue and net income. Revenue for the fourth quarter totaled almost 30 million, up from 28 million in Q3 of this year, and up from 16 million in Q4 of last year. For our 2004 year, revenue totaled 97 million, up from 59 million in 2003. For the 12 months ended December 31st, 2004, as compared with the 12 months ended December 31st, 2003, our home-based revenue was up 73 percent. We grew organically by 38 percent. Current year acquisitions of Pottsville, Dockside, and Aspen, accounted for 35 percent of the home-based revenue growth. Our foster care revenue was up 25 percent, all of which was from organic growth. Our management fees were up 65 percent. We grew organically by 41 percent. New long-term relationships with the not-for-profit entities we manage accounted for 24 percent of the management fees revenue growth. For the current year, managed entity revenue grew to 121 million, up from 63 million in the prior year.

Fourth quarter operating income totaled 3.6 million, which was 12.2 percent of revenue. This compares with operating income of 3.6 million in Q3 of this year, and operating income of 2 million in Q4 of last year. For the 12 months ended December 31st, 2004, operating income totaled 11.6 million, and 11.9 percent of revenue, up from operating income of 7 million, 11.6 percent of revenue in 2003. For the fourth quarter, net income to common shareholders totaled 2.4 million, up from 2.1 million in Q3 of this year, and up from 1.1 million in Q4 of last year. For the 12 months ended December 31st, 2004, net income to common shareholders totaled 7.1 million, up from a loss of 1.1 million in 2003. The 2003 results include certain nonrecurring charges related to our IPO. Diluted earnings per share for 2004 totaled $0.76, up from a loss of $0.25 in 2003. Our effective tax rate for 2004 was 37.4 percent of pretax income. This was lower than our previous 40 percent estimate by 2.6 percent. The tax rate benefit resulted from the valuation of our deferred tax assets and liabilities, relating to the differences in book and tax basis of our assets and liabilities.

For 2005, I expect our effective tax rate to be 40 percent. At December 31st, 2004, days sales outstanding from home-based and foster care services were 80 days, down from 87 days at the end of Q3. In December 31st, 2004, our management fees DSO was 184 days, unchanged from last quarter. At December 31st, 2004, we had almost 11 million in cash and nothing drawn on our 10 million working capital facility or our 10 million acquisition borrowing facility. With that, I will turn the call over to Craig Norris, our Chief Operating Officer.

Thanks, Michael. We ended 2004 between our owned and managed entities with a combined total of over 29,000 clients in care across 151 local sites, and 21 states and the District of Columbia. Compared to Q4 of 2003, this represents a census increase of over 15,000 clients. Combined, we have over 3,500 employees, servicing 312 contracts, with a staff to client ratio of approximately 8 to 1. This represents an increase of 1,800 employees, and an increase in contracts of 110 compared to Q4 of 2003. In response to the rising demand for community alternatives to institutional care, as well as state and privatization initiatives, we have seen an increase in organic revenue growth in over 75 percent of our owned state operations, and an organic census growth of over 4,000 clients, compared to Q4 of 2003. In addition, we have seen strong organic census growth of over 2,000 clients in our managed entities. In 2004 we successfully integrated 3 acquisitions, adding 3 new states and over 5,000 new clients into our owned operations. From these acquisitions, we have transitioned 28 new local offices and 410 employees into our operations. In 2004, we also added 3 large management contracts, which included 300 -- 3,800, excuse me, new clients, and the new state markets of Pennsylvania and Massachusetts. Our operations and finance teams have effectively demonstrated, time and time again, their abilities to integrate acquisitions into our service delivery model.

In order to continue our commitment to outcomes and quality of care for our clients, Providence has now partnered with Vanderbilt University for 5 years of National Institute of Mental Health grants, to study our clinical outcomes. We believe this unique partnership will enhance Providence's programs for future contracting opportunities. We have had no key turnover of operational management. We are very fortunate to have these experienced and dedicated leadership teams networked in nearly every region of the country. As we know, this is critical for our continued organic growth, quality of care, budget performance, as well as maintaining our effectiveness at integrating acquisitions nearly anywhere in the country. Overall, our operations are well prepared for a strong 2005. Thank you, and I will now turn the call back over to Fletcher.

Craig, thank you very much. We've also released today our 2005 guidance. A quick reminder about how we develop guidance. What you've seen today is basically the same budget that we presented to our board. It includes the compilation of our 150 locations budgets, their census rate and revenue projections that are done in conjunction with their government payer base , and their authorized FTE levels. Remember, 75 percent or so of our expenses are FT&E related. So basically, our business is as simple as identifying our revenue, and staffing up to accommodate it. You'll notice that we've eliminated the range that we guided to in last year. Again, we feel pretty comfortable with the precise guidance we're giving to you today, of approximately $130 million of GAAP revenue for next year. We would expect that our managed entities would generate revenue in the neighborhood of $150 million. And we are forecasting earnings per share next year of $0.96. This is based on what we know today. This includes a small cost of living increase, that we historical enjoy in July. It does not include any acquisition activity. It has been our tendency not to guide you to acquisition accretion. We have done 3 deals, as Michael and Craig have discussed, in 2004. We remain dedicated to that purpose, but we are not going to close a deal just for the sake of closing a deal.

We will tell you that we have walked from our first deal since going public in 2003, in that in Q4 we had a company under letter of intent, that in the due diligence process we identified some issues, and elected not to close on that transaction. In the quarter, there is about $40,000 of busted deal expenses as a result of that. The good news about that, because our legal work is internal, and our due diligence is internal, when we do break up a deal, we don't have significant busted deal expenses. It is also the reason that we will continue to avoid announcing to you letters of intent. Had we announced this deal under LOI and had people speculating in it about our stock, we would only had to announce we couldn't close it. So, again, we remain busy in our pipeline. There is a number of companies, from million dollars of revenue to $15 million of revenue, that we are in conversations with. And we will announce those only as we close them. None of our guidance speaks to that activity.

Included in our guidance, is about $600,000 of stock option expense as a result of the new rules. We've also identified the Sarbanes-Oxley expenses going forward. I will tell you today, that we spent roughly $1 million complying with Sarbanes-Oxley. About half of that was in 2004. And as you'll note from our release, we will book a significant amount of that in Q1 of 2005. Our current Sarbanes-Oxley costs are indeed running about twice what our GAAP audit costs run. I don't know what other companies are doing in that regard, but it is a significant expense. It will diminish somewhat going forward, because we will not have the consulting and readiness expense that we had in '05. But all said and done, we spent roughly $1 million complying with Sarbanes-Oxley.

The first quarter guidance, you will notice that we are expecting about 32 million in revenue, and then earnings per share of $0.21. This is down a little bit from Q4, which is almost entirely because we had been advised by our accountants to book all of our audit and SOX-related fees in Q1, rather than to amortize them over the 12 months. So you'll notice that is expended in Q1. So you have got a $0.21 quarter that we're guiding to for Q1, and a $0.96 year. So basically, you have $0.75 spread out over the remaining 3 quarters. Remember, we have always said that Q3 is typically our best quarter, because that is the quarter immediately after any rate increases or cost of living increases that we would enjoy from our government payer base.

I have been asked a number of questions regarding the President's budget. We're happy to comment on that and take your questions on that. I think it is important to note that Congress, ultimately, will determine how these proposal's play out. But you will notice 2 very favorable proposals to us in the President's Medicaid budget, which 1 would be to introduce a home-based demonstration project to test the effectiveness of home and community-based alternatives to residential treatment for children enrolled in the Medicaid program. The President's budget also called for what he calls a rebalancing program, that encourages Medicaid to transition clients from institutions to the community, and would also provide that the Federal government would pay the cost of that home-based care entirely for the full year, without requiring any state match. We recognize that the actual budget pass may differ significantly from the President's proposal, but we are working hard with our Congress and others to try and preserve those demonstration projects. And would anyone so interested also to communicate that to your government representatives. And I think with that, Raika, we're ready to open the line for questions.

(OPERATOR INSTRUCTIONS) Bob Labick, CJS Securities.

First question is, you alluded to some 1 time costs that offset the tax benefit. Could you give us a little more color on those costs, and were those costs in the margin line, in the client cost line? Or where did they come in on the income statement.

Hi, Bob. Michael Deitch here. Let me go through the costs, first of all. In consultation with our auditors, we -- where have increasing rents, with rent escalations over from year to year, GAAP requires that those escalating rents be accumulated and amortized on a straight line basis over the life of the lease. We adjusted for that in Q4, and that was a total of $60,000 for a catch up for all prior years to convert to straight line rent. This was all reported in G&A costs, by the way.

Okay.

We deferred $160,000 of revenue under our CPSA contract, for what we call encounters. It's really -- we have a contractual obligation to demonstrate to our payer, a set portion of what we call encounters, service values, and our calculations show that we were short about 160,000, or thereabouts. And so we deferred that revenue in Q4. We are looking to amend our contract in Q1 of this year, and hopefully that will reverse. That is our plan. As Fletcher alluded to, we had busted deal costs for a failed acquisition. That was was about $40,000, which totaled 260,000. Also in Q4, we had about 300,000 of SOX costs. So if you take all that into account, although SOX was not 1 time, and tax effect it, you get approximately the amount of the tax.

On a just straight adjustment basis, Bob, the tax impact I think was about 300 to the good, and the expense adjustments were about 260,000 to the negative. So it is -- by the time you round it, it is pretty much a wash at the EPS level.

Got it. That's very helpful, thank you. And then just shifting gears, could give us an update on Florida, the state of Florida, Jerry Rigeur's (ph) resignation last year? How have things proceeded for you ? And just where are we on new counties up for bid, I guess, in this upcoming procurement cycle? Or just give us an overall update on the state?

Sure. Happy to do that. I'd also suggest that for those of you that are interested, we posted an article that was released in Saturday's Naples newspaper, that basically was a 1 year anniversary story of the Camelot award in that region, that's district 8, Florida, which identified even some news to us, that that region is considered to be the second most effective in the state, Bob. And they identified that as the most successful transition to privatization. So all and all, I think we are very pleased with our precedence in Florida. 2 of the larger counties, Miami-Dade and others, have restrained from their bidding activity, I think watching these privatization projects rollout. There was a significant failure of a not-for-profit organization that was the lead agency in the Fort Lauderdale area, that basically had serious programmatic problems, and even more serious financial problems. And ultimately was terminated and basically bankrupt in that state. So there has been some negative momentum, as it relates to the failure of some other providers in other regions. We believe ultimately that the privatization will succeed or fail on a regional basis. In other words, it is only as good as the provider that has the contract. So I think you are seeing the cream rise to the crop, if you will, and we are doing very well in that regard.

Great. And then, last question. In the past you have given us, I guess a range for the potential RFPs in the procurement cycle. Will you be doing that, or when should we get an update on what we should expect mid-year, or could expect mid-year, in terms of the July cycle.

What we've identified as pipeline in the past, is business that we view is not included in our guidance activities. That would be new contract wins, unannounced contracts, or sole source types of agreement. And we have also elected, Bob, that we don't announce any contract under $2 million. We would be writing a press release a day if we were to do that. You'll notice that in this quarter, our contracts grew to 312, versus 200 a year ago. So our bread and butter contract is still the $1 million, $0.5 million kind of county contract. So we usually don't include that kind of activity in pipeline. As the -- we get closer to the July procurement cycle, to the extent we believe that we have a contract in play, or we are negotiating where we believe we have a high degree of probability that we would win that contract, we would identify then that as pipeline business, and track that for you. Most of what we know, in terms of our contract growth in contract renewals and census growth, is included in the guidance we published today. We had no pipeline activity in the January cycle, Bob. Last year, most of that was all Florida related. I think this year all of our contracts will cycle July 1, except for the Florida contract.

Terrific. I will get back in queue. Thank you.

Patrick Swindle, Avondale Partners.

First question, on the client services line. The cost, as a percentage of overall revenues, ticked up a bit sequentially, and then year-over-year. Considering the 1 time events during the quarter, it still seemed to be a bit higher than we would have anticipated. Could you address what factors may have been driving that? And then, is that expense level what we should expect going through 2005?

Patrick, Michael Deitch here. It's a good observation on your part. 2 things were going on in Q4. First of all, as you know, we are under cost reporting criteria in California, where we can allocate costs appropriately -- direct costs to those contracts. What we did in Q4 to comply even better with our California contracts, is reallocate from general and administrative expense to client service expense. 3 or 4 individuals who were previously in G&A expense that really worked a lot, and worked day in and day out on these California contracts. And so about 200,000 was reclassed from G&A to client service expense in Q4. The remainder of the increase was to support the growth in the home-based revenue line.

Patrick, for '05, we are showing our client service expense to be right at 75 percent. So we are still forecasting to 12.2, 12.3 percent operating income. So, we see that relatively stable. It is really a function, again, of people and hiring, and you shouldn't have the movement between SG&A and client services that you had in the fourth quarter.

All right. And my next question is on the cash flow side. Prepaid expenses and then accrued expenses were uses of cash to a greater magnitude than we had anticipated during the fourth quarter. As we look out over '05, would we anticipate that free cash flow would track more closely with earnings? And can you address maybe what was driving the expense increases during the -- I'm sorry, the cash flow increase during the fourth quarter?

Patrick, this was kind of a change in philosophy, believe it or not, between us and our auditors. In the past, when we made a payroll on say January 1st, we deposit with ADP, our payroll service, funds to cover that payroll. We deposit -- make those deposits on the 31st, and they use the money on the 1st to make our first of the month payroll. In prior years, that -- those funds were classified as cash on our books. In consultation with our auditors, they felt it was better classified as a current asset in the line other than cash.

As payroll expense.

Well, it was kind of on deposit.

Right.

And that was 1.5 million at December 31st. So we reclassified from cash to prepaid expenses, our 1.5 million money on deposit with ADP at December 31st.

Okay. Then my last question relates to the acquisition pipeline. I believe, Fletcher, you had indicated a number of potential candidates, between 1 and 15 million in annualized run rate revenues. Can you talk a little bit about the environment that you are seeing, in terms of competition for the acquisitions? And then any changes in the relative multiple that you are seeing in the market as well?

Our multiple ranges still tend to be at the high end of our announced range. We've announced multiple interest in the 4 to 6 times trailing EBITDA, Patrick. We have done most of our deals at the high end of that, 6 times, and that seems to be kind of where the market is, going forward. We have seen some private equity money involved in competitive situations that have bid that up to as much as 8 times trailing. We have seen other companies, like Res-Care and Cornell and some of the public companies that have new infusions of cash, also in the marketplace. So, yes, there is a more competitive landscape for acquisitions. We have found that with most of our smaller providers, providers that we call kind of legacy businesses, we are still the preferred choice for them, regardless of pricing. Because many of them want to make certain that their creation they have spent their lifetime building, survives some big corporate merger. And we tend to do better with these family-run businesses where we are exiting 1 member of the family and others may want to stay involved, or partners may go, or partners may come. So, while we have seen some increase, we have not had to directly increase our pricing so far as a result.

Do you still think there is the potential that you may be able to close 1 acquisition per quarter or so?

We won't close 1 in 1 unless some miracle happens in the next couple of weeks. But as Craig indicated, we clearly had done very nicely integrating the acquisitions that we have done. I have always told him that he has veto authority over our acquisition strategy, if we felt we were struggling with the integration side of this. The indications from operations are that we are not. So we clearly would expect to see activity in 2, 3, and 4.

Thank you. Excellent year.

Mark Hughes, SunTrust.

The 4,000 number that you gave for organic census growth, does that include both the direct and the managed client census?

No, Mark. The 4,000 census growth that was for the owned entities.

Right. So, your direct clients?

Yes, our direct clients.

Right. And then, do you have any sort of same contract organic census growth. If you exclude the new contracts you picked up, if you just look at your existing contracts, any sense of what the census growth has been on those?

I can probably get that number for you, Mark. I don't have that right off the top of my head.

And if it is an approximate number, that would be fine too. Fletcher, which state is most promising now? You've had a -- obviously a nice lift from Florida. Another state or 2 taking similar actions would be real exciting, as well. What do you think are the chances of something like that really shaking in the next year or 2 are?

Obviously, we are carefully watching the California initiatives to roll out of that proposition. That is still at the conversation level, Mark, where counties are prioritizing how they intend to use this money. Those plans ultimately have to be approved by the state. That still represents some $800 million of new funds that's specifically earmarked for programs like ours. We have included no windfall from that activity in our '05 guidance. So that is still upside for us, and obviously something we should all watch pretty carefully. D.C., we still believe will be a huge market for us. We are doing incredibly well there. We have a very small contract that will be up for evaluation and renewal in July. We have not speculated in our '05 guidance what they may ask us to do, in terms of client increases. But they've identified some 10,000 eligible families there, and we barely serve a handful of those currently. Pennsylvania, when we went in there, we identified that as a market we saw evolving. The governor has a number of initiatives that favor community-based programs. They have closed a couple of state facilities, and we are beginning to see some of that momentum not yet quantifiable in Pennsylvania.

North Carolina for us, historically has been a state where we were involved in pilot or demonstration projects, not unlike the President has proposed in his budget. The evaluations of those projects have been favorable, and other counties in North Carolina in '05 will begin to adopt the model of care that supports our home and community-based services. We have not been able to quantify the upside value of that. So, there are a number of states still that could positively impact our performance. We'll have to wait and see where that goes. Texas, also I think as you know, Mark, you have done extensive research in this area, has indicated very aggressive plans to privatize. We have yet to see the fruit of that. But we would hope that sometime in 2005, their efforts get more quantifiable. And, again, we have not chosen to speculate about any of that in our growth guidance.

Right. So, presumably if 1 or 2 of these things hit, then obviously things would be better?

Yes, that should be up. So the downside in our guidance, is that we would have to have contracts terminated. We would have to lose business. Referrals would have to dry up. The upside to our guidance is, as we discussed, those states that we can't quantify, acquisition activity, these kind of sole source contracts that have come to us in the past.

Okay. Fletcher, you had mentioned maybe some extra amortization expense related to treatment on government contracts. Is that -- did that also effect expenses in the quarter?

It clearly did. Michael can tell you the exact number. But what we've been challenged to do there, Mark, is as we acquire companies that have management contracts, like the Maine and Massachusetts acquisitions that we've done, and others, the SEC has provided that the customer has some value there. This is not goodwill, nor is it really contractual value, which we see as negligible. But there is some value that has to be ascribed to the customer. And in working with our auditors now, we have identified our customer life, if you will, as 15 years. So even though our contracts are renewed annually, if we acquire a business in Maine for $3 million, some portion of that, Mark, has to be ascribed to these customer relationships. And then that will be amortized going forward over 15 year. And Michael, for '04 and Q4, that was how much?

Well, for the last 6 months, it was about $220,000. You will see the jump, Mark, from Q2 to Q3, as we went into Maine and Massachusetts, as Fletcher described.

Right. Was that from a treatment you had not expected, or -- ?

We didn't budget for that. We didn't expect that. It was a reinterpretation of, I think, how you value these business combinations. So we've gone along with the advice of our auditors in that regard, and will amortize now these customer values, and that is included in our '05 guidance.

Right. Thank you very much.

(OPERATOR INSTRUCTIONS) Matt Oggner, Columbus Capital Management.

Most of my questions have actually been taken care of at this point. But, as I look at the G&A line in particular, I would have expected something more like, something like 600,000 higher. It looks like the run rate has come down pretty substantially. It sounds like you reallocated some expenses on an ongoing basis. Where should we be looking for that going forward? How should we be expecting that to turn up as we go through '05?

If you look at our guidance formula, it's 75 percent of our expenses are client service related. And we've produced 12 or 12.2 percent operating income margin. Remember, we have virtually no D&A, a point D&A. So, G&A is running for us right around 12 percent and should continue in that vein.

Okay. So you're just not comfortable showing anything higher than that?

Well, we're exactly -- that's exactly right. We have -- I think we've talked a lot about this to our shareholders. We are very careful about our profitability. And while we believe we could push our pricing a little bit, Matt, or we could cut some staffing corners here or there, we believe those to be very short lived strategies. And while it might produce 1 or 2 quarters of 15 plus percent margins, when our payers recognize - and they read these Ks and Qs, too - that we have become that profitable, you would expect to see rate pressure in subsequent contract periods. So we have developed this kind of formula to establish a tolerance level, if you will, in terms of what we are comfortable with, what we believe you should be comfortable with, and ultimately what our payers will tolerate. And it is right in the ranges that we've forecast.

Okay.

So, the bad news is, we don't have a lot of SG&A leverage. As this Company gets bigger, even if we were to double, you are not going to see us pick up a point, or 2, or 3 points is SG&A.

Got it. The state of Kansas had been looking at expanding their services in your industry. Any -- what is the outlook?

We are still talking to people involved in that state. For the most part, the contract conversations are with parochial providers. We are not Kansas-based, and we have always in the past, viewed that to a detriment to our ability to contract in the state. It's 1 of the reasons we don't bid in distant states, where we don't have a physical presence. We are optimistic that we can still contract for something in Kansas. We've included so suppositions along those lines in our guidance. But it is 1 of a number of states that has moved a privatization agenda forward, that we are in a regular dialogue with, that we hope will pan out at some future date. But at this point, I wouldn't count on anything, other than a pleasant surprise from Kansas.

Sure. And have they already started awarding contracts?

They have, indeed they have. To locally-based, Kansas-based providers.

Got it. Is that a place you are looking for acquisitions?

That would be a natural thought to look at acquiring some incumbency in that state. And that has been -- if you look at our acquisitions in the past, that has been a lot of what's attracted us. It's how we got into Pennsylvania. It's how we got into California.

Got it. Okay. Thanks.

Trey Cowen, Jefferies.

Good morning, gentlemen. Great year and quarter. Richard sends his best. Sorry he couldn't be on the call. With respect to the growing Medicaid enrollment rolls, what's you all's perspective on that? Where do you see the political environment heading on that? Do you think that there might be some pruning in the future? And if so, how does that play out for you guys?

We have always been the beneficiary, Trey, of the reallocation of Medicaid dollars. For the most part, Medicaid has been a tradition benefit, with as much as two-thirds of those purchasing dollars going toward traditional institutional care. The recession has been our friend in that regard, in that states who have had budget crises, have looked at reallocating their Medicaid dollars to favor us. And we definitely see that trend continuing. We would have expected by now to see some leveling off, or reductions, in the Medicaid enrollment. We are quite surprised, in fact, that you are not seeing that. You continue to see poverty levels increase, you continue to see Medicaid enrollment increase. Medicaid respects about 25 percent of our business. So, as long as the Medicaid trends remain favorable, that sector of our business should follow suit. If the Federal government were to mandate some of the programs that are in the President's budget, it would be a huge windfall, not only to us, but to virtually every community-based provider in the country. So, we're very optimistic that we've at least made it to the President's desk. We don't know ultimately, as we've said, what Congress will do with these proposals. But the fact the OMB and the President are aware that there are opportunities to better utilize their Medicaid dollars that favor our model of care, is really a testament, I think, to what we've done over the last 8 years.

(OPERATOR INSTRUCTIONS) Josh Stewart, Sidoti & Company.

My question was just that I noticed there was a small incremental decrease in the foster care and managed entity revenue segments. And I was wondering what caused that. Is it some sort of seasonality, or could you just give me some color on that?

Yes, to a large extent, a lot of that is related to Tennessee, where we are voluntarily reducing levels of care for our foster children placed there, into less expensive lower levels. And you'll see that basically create a mix issue with revenue, as opposed to a census issue.

Okay. On the managed entity line there was a slight decrease, too. Is there anything going on there you could comment on?

In Q3, Josh, we had a couple of short-term consulting agreements that were -- created revenue only in that quarter. Ultimately, in '05 they were converted to longer term, management type contracts. But we didn't enjoy them in Q4.

Ladies and gentlemen, this concludes your question-and-answer session for today. I would now like to turn the conference over to Mr. Fletcher McCusker, Chairman and CEO. Please proceed, sir.

Thank you. And again, thank you, everyone. If we didn't get to your question, please call Craig, Michael, or I, offline. We are happy to answer anything we didn't get to today. We obviously are thrilled with where we are. We are particularly very proud of being a SOX compliant Company. We believe we are in the minority in that regard. Certainly, companies our size and our age, and again, we can't say enough about the staff that have helped us get there. And we look forward to a prosperous 2005. And we'll see you all next quarter. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.