ModivCare Inc (MODV) 2005 Q2 法說會逐字稿

Ladies and gentlemen,thank you for standing by. Welcome to the second quarter 2005 Providence Service Corp. earnings conference call. At this time all participants are in a listen only mode. We will however be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to your host for today's presentation, Miss Alison Ziegler with Cameron Associates. Please go ahead, 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 second quarter ending June 30, 2005. You should have all received a copy of the press release yesterday. If you did not, please call Susan Kim (ph) at Cameron Associates 212-554-5461 and she will send one out and confirm your name on our factor email list.

Before we begin, please note that we have arranged for a taped replay of this call which may be accessed by telephone. This replay will be available approximately one hour after the call's conclusions and will remain available until August 17th. The replay number is 888-286-8010 with a pass code 12259899. This call is also being webcast live with the replay available. To access the webcast go to www.provcorp.com and look under the Event Calendar on the IR page.

Before we get started, I'd 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. Through the course of this call the Company will make projections or other forward-looking statements regarding future events for the Company beliefs about its revenue and earnings for 2005.

We wish to caution you that such statements are just predictions and involve risk and uncertainties. Actual results may differ materially. Factors which may affect actual results are detailed in the Company's filing 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 August 10, 2005.

The Company may choose from time to time to update them and if they do, we 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.

Good morning, everyone. Welcome to our second quarter 2005 call. I am currently in D.C., traveling and presenting later this week at the Money Show; and in Tucson also on the call is Michael Deitch, our CFO, and Craig Norris, our Chief Operating Officer. After our comments we will be happy to answer your questions.

Having completed our IPO 2 years ago this month, we are headed now into our third year as a public company. We are proud that each of our 8 quarters since our IPO has shown dramatic growth not only quarter over quarter but as well, sequentially. This quarter is no exception.

For Q2 2005, our revenue grew 70% and our government contracts are now at 331. This is up from 252 contracts a year ago and up from 320 contracts a quarter ago. With managed revenue now at over $37 million in the quarter, we are currently responsible for over $280 million a year of government purchasing -- almost 3 times our base when we went public.

To date, our contract renewal rate for summer 2005 is 99.7%; of 331 contracts we had 1 contract outstanding in El Paso, Texas, where we have been informed that that may be awarded to a minority-owned business. They receive preferential treatment in these small government contracts. It's a very small contract for us -- about 20 clients.

You also noticed that sequentially our direct contracts are down a little bit from quarter 1 to 2 and that is a phenomenon of quarter 2 where our school based contracts term out at the end of the school year to be renewed at the beginning of the school year in September in Q3.

So as of today of our 331 historical contracts, we only have the 1 that is currently not renewed.

Our client census has grown 75% to 31,961 now. That is up from 18,299 a year ago and is up substantially from 13,000 at our IPO 2 years ago. This continues to be driven by continued increases in Medicaid enrollment, now approaching 50 million eligible people. Continued increases in poverty, probation, and parole, child abuse referrals, children admitted into foster care, and the continued shift of Social Service dollars away from institutional care to community-based delivery systems.

With that I will let Michael give you the specifics for the quarter. Michael.

Thanks Fletcher. Our second quarter revenues totaled 35.2 million, up from 20.7 million for the second quarter of 2004 -- a 70% increase. 38% of this increase was from organic growth. 32% of the increase was from the Aspen and Children's Behavioral Health acquisitions. On June 13 we acquired 100% of the outstanding stock of Children's Behavioral Health located in Pennsylvania. This transaction added $329,000 in home-based revenue in our second quarter.

Comparing the second quarter 2005 to the second quarter of 2004, home-based review grew 96%. 51% was from organic growth to 45% from the acquisition of Aspen in July of 2004 and Children's Behavioral Health in June 2005.

Foster Care grew 8%, all of which was from organic growth. Management Fees grew 4%, all of which was from organic growth. Second quarter operating income totaled 4 million, which was 11.5% of our revenue. This compares with operating income of 2.5 million and about 12% of revenue for the second quarter last year.

Second quarter net income totaled almost 2.4 million which was 6.7% of our revenue. This compares with net income of 1.5 million and 7% of revenue for the second quarter of last year.

Second quarter diluted earnings per share totaled $0.24 compared with $0.15 for the second quarter last year. At the end of our second quarter our day sales outstanding from home- and community-based services and Foster Care Services was 64 days, down from 75 days at the end of our first quarter. Our management fees day sales outstanding was 180 days at June 30, 2005, up from 177 days at the end of our first quarter.

I continue to be comfortable with the Management Fees DSO of around 180 days.

Cash provided by operating activity for the 6 months ended June 30, 2005 totaled 4.7 million. This was up from approximately 977,000 for the first 6 months of last year. At the end of our second quarter we had 13 million in cash with 10 million drawn on our acquisition borrowing facility which partially funded the Children's Behavioral Health acquisition. Nothing was drawn on our working capital facility. With that, I'll turn the call over to Craig Norris, our COO.

As Fletcher mentioned we ended Q2 with a total combined census of 31,961 clients. These clients are being served from 167 local sites in 21 states in the District of Columbia. Compared to Q2 of 2004, this represents a total census increase of 13,662 clients.

In this same period, we have added over 50 new local sites which further enhances our geographic reach across many regions for the country. We are continuing to see strong demands for our services and combined between our owned and managed entities, we have over 4000 employees serving 331 government contracts.

This represents an increase of 79 contracts and over 1200 employees compared to Q2 of 2004.

In June of course, we announced the acquisition of Children's Behavioral Health in Pennsylvania. I'm pleased to update you that our transition has been smooth and as we stand today, we are fully integrated operationally and we have already begun to expand our development efforts into other counties. Our presence in Pennsylvania now increases to 13 counties across the state. By adding Children's Behavioral Health, Pennsylvania now represents one of our broadest continuums of adult and youth services and really serves as a model of diversification in our community-based approach.

This expanded region of the country has very strong leadership and we look forward to continuing our growth in Pennsylvania and the surrounding states. Thank you and I'll turn the call back to Fletcher.

With our strong performance this quarter we are reaffirming our 2005 guidance, now of $0.99 a share. This is up slightly as a result of our recent acquisition in Pennsylvania. Through the first half of 2005, we've reported earnings of $0.46 a share; so we are expecting $0.53 in the second half, $0.03 of that coming from the acquisition. Other significant developments this quarter include the new announcement of our updated corporate governance quotient from Institutional Shareholders Services. That now stands at 93% meaning that we outperform over 93% of companies in the universe related to best practices and corporate governance.

We were indexed July 1st into the Russell 3000 as well as the Russell 1000; and we also announced the closing of a new $50 million debt facility earmarked for strategic acquisitions.

We are very grateful to our employees, payors, and shareholders for the strong loyalty provided to our delivery model; and we will continue to be a company focused on doing good while doing well. With that, we will now take your questions.

(OPERATOR INSTRUCTIONS) Bob Labick.

Congratulations on the quarter. First question, you just alluded to your new facility. Does the larger size of the $50 million facility suggest that there may be bigger acquisitions out there? Or is it just you are taking advantage of the opportunity there and you are going to continue to have acquisitions the same size you have in the past?

Yes, you really shouldn't read anything into that. I think we've said publicly and continue to reiterate that our acquisition activity continues to look like it is going to be pretty small. Our pipeline and staff remain very busy, Bob. For the most part, our deal size is similar to what we have shown in Pennsylvania and other past deals. They are typically 5 to 10 million revenue kind of thing and we have not really seen anything of scale in that regard.

So this is primarily consistent with the messages I think we've given our shareholders regarding our interest in using leverage to continue to fuel our acquisitions as opposed to some sort of equity offering. So this should give us dry powder, if you will, for a good several acquisitions.

Great. and could you just upgrade us a little on the pipeline -- is the potentially 1 a quarter still a goal for you? And how has competition for acquisitions been?

I think we addressed competition a little bit in the last call. We have seen some people enter our space. ResCare announced an acquisition last quarter. We've seen Maximus, Cornell, Mentor -- others like that -- operating in our space. For the most part, the ones that we deal with we are typically the chosen acquiror and, generally, don't have competitive issues. If it gets too competitive, we will usually step aside.

We have seen some private equity come into the market as well; but we have continued to reaffirm our range in the 5 to 6 times trailing EBITDA and believe there is still plenty of us to do in that space. We are not having to get pricier than that.

If you look at these acquisitions a year later, we have been able to do as well as three times forward earnings because they usually give us a base in which we can grow the business. That continues to be the focus of our acquisition activity is through new geography, new territory, strategic kind of acquisitions that give us incumbency, typically, in a new market. So we don't expect that to change.

Regarding your growth in '06 and beyond, obviously, organic growth is off the charts I guess. 38% this quarter. Could you update us on the privatization trends in California, Texas, Pennsylvania and other places you are expecting to see strong growth going forward?

The trends continue to favor us. We would have expected some leveling off particularly in an economic recovery. We have not seen any evidence of that. To the contrary as Craig suggested, we continue to have more demands placed on us quarter to quarter, regarding new census, new contracts, new opportunities. Texas -- I think we talked about -- has new legislation that will aggressively privatize their services in 2006. The California proposition rollout continues to be projected for approximately $800 million of new money in 2006. It is too early for us to project how those will affect the Company directly.

Clearly the major trends that we watch and we encourage everybody to watch -- Medicaid enrollment, specifically, poverty levels, child abuse referrals, adults on probation and parole. All of the kind of drivers to our business, Bob, continue to go up.

So there is nothing demographically that indicates any slowdown in the pressure on the states nor is there anything happening legislatively anywhere that would affect the drivers to our business and there are still states that are -- more and more of them are coming to our model as an alternative to institutional care.

We don't -- we are not projecting any slowdown. We don't give specific '06 guidance and we won't for some time. But, generally, I think you can have some comfort in the fact that the major things that affect our trends have not changed. In fact, continue to increase and encourage our business model.

Mark Hughes from SunTrust.

Any update you can give us on the July (indiscernible) with the change in the new fiscal year? Any thoughts in terms of how you've done this year?

We won't will release that, Mark, until the end of the quarter. We actually talked to our attorneys about that because we don't give current census data. We believe we have some disclosure issues there. Last year we had a significant increase in the July recontracting period. We are expecting a similar phenomenon. We have talked about the contract numerically, because we have a historical basis for doing that.

So if you just look at our renewal history, again, with nearly 100% renewal what we have seen historically is that virtually all of those contracts come to us with census increases in the renewal period. Last year, that represented about a 16% (ph) growth in our census in this quarter. We are expecting that to be similar in this year. But we won't officially release that until the end of the quarter.

So that was 16% sequentially?

Right. Exactly.

I know last quarter you chose not to give us specific pipeline numbers but I think your comment then was you are seeing a large number of smaller opportunities because of census impact it sounds like, even though we don't have a pipeline should be similar. Is that what you're saying?

Yes. I think you can make some assumptions in your model off of historical trends even though we are being a little guarded about how we specifically address that. But, again, we don't' see anything that would indicate anything less than what we've experienced historically. The pipeline that continues to be robust and that's the word the lawyers like me to use. We have got 2 people now, dedicated to M&A activity. We -- Bob asked if we were comfortable with 1 1/4. We have always kind of allowed operations to dictate our trend in that regard; and I think you heard Craig mention that he is very pleased with the integration of the Pennsylvania acquisition.

So having said that, I think you can assume we continue to be eager to attract and acquire these like-minded businesses. We've encouraged you and others not to model that into your model because we don't want to get cornered into making an acquisition. But, generally, I think we've stated publicly that is our intent and we will continue to seek out those kind of acquisitions until somebody tells me that they're having trouble with integrating one and then we might slow it down.

Patrick Swindle, Avondale Partners.

In looking at the organic growth would you say that the organic growth is relatively broad-based across all of your markets? Or is it more confined to certain markets that are driving the overall census growth trends?

I will ask Craig to confirm this but my hunch is that overall it is clearly, mostly, in our home-based services. I think you heard Michael mention the growth in that compared to Foster Care in our Management Fee side, Patrick. So our forte and our core product remains our home-based delivery system and then it's typically what attracts payers to us and is usually our entree into a new market.

I think that fuels organic growth more than the other 2 product lines which tend to be a byproduct of our strength in home-based delivery services. Craig, would you -- ?

That's correct, Fletcher.

And if I may chime in, Fletcher. The biggest changes year to year for quarter were in Arizona, Virginia, Florida and North Carolina and D.C. and (indiscernible) so it was rather broad-based. Patrick.

Can you talk about the growth trends you are seeing on the drug court side vs. the home- and community-based counseling and can you remind me at what point Aspen will be coming into the revenue-based for organic growth and calculation purposes?

Michael when do you say Aspen as organic as opposed to acquire?

In matching Q3 of this year with Q3 of last year, that will be organic.

So next quarter, Patrick, to that. And we have seen some moderate RFP activity. The drug court side. We have not seen an aggressive challenge to us in terms of, really, cross selling or adding those services. We may pick up a few -- a couple of drug court opportunities in the coming year. But it is not going to represent a major piece of our business.

My last question, in looking at the revenue guidance for the full year, if you were to run rate the second quarter it would get you closer to 140 million. And then putting that in context of a 16% census increase projected potentially if that were to occur in the third quarter it would seem to indicate that may be a little conservative on the revenue side. Is it just conservatism or is there anything that we are missing in terms of looking out at the back half of this year?

We pass on as our guidance basically what our county payors tell us. So we try not to overguide because they -- this is money, again, that is appropriated to us. It's a pretty scientific process and I think we've proven our reliability over the years in terms of communicating what is told us and that turns out to be a pretty accurate picture.

I believe you can safely say, Patrick, that the counties are conservative when they give their estimates to us which we pass along to the street. I think current trend clearly indicate that we are doing very well. Last year, you'll remember we amended our guidance upward several times. So even though we start out with basically a county base, we have seen phenomenal events where they have asked us to take additional census or additional workload or even signed one off contracts with us out of season and those trends to continue. So I -- we feel comfortable with our guidance but we don't have any compelling reason to increase it because we are again still communicating to you what the counties have told us.

So to the point of my question, there's nothing to indicate to you that there is any change in trend in the back half of the year. It is just a function of conservatism based on your buildup that you did initially with the county payors.

That's exactly right.

There would be a deterioration in business during the second half.

Clearly we -- the only thing that would affect that would be a contract termination, which we discussed and announced. The upside to our guidance is contracts that we don't announce. Acquisitions that we don't announce. The downside to our guidance is contract termination and as long as the contracts remain renewed you can be pretty comfortable that what the counties have told us at the beginning of the year will pan out for the remainder of the year.

So the thing to really watch there is what we've discussed in terms of contract renewals and it's virtually 100%.

Thank you. Excellent quarter.

Richard Close.

Congratulations. Quick question. If you could talk a little bit about the Foster Care unit. Do you ever see this in that unit revenue growth accelerating somewhat from the current levels? Or maybe just a little bit more details on the trends in that unit?

I will ask Craig again to chime in.

Foster Care to us has really been a byproduct of our home-based delivery services. We have found family after family, child after child that is in danger of abuse -- either sexually, physically, or emotionally. For the most part Foster Care programs in this country remain very custodial. What we've really tried to do, Richard, is to professionalize Foster Care. We recruit ministers and cops and teachers and social workers and school counselors. We have recently begun to add medical coverage for our foster families as we do to our employees; and I think the interest they have with us is not in the custodial type of foster care but in this kind of higher level Foster Care.

And that generally is a slow sales cycle. So we don't ever see us attracting the kind of 40, 50% growth that we see in the home base because it's just a harder product. It's more expensive; it's more long-term and, generally, states have to be dissatisfied with their current foster care providers to really come to us.

But it is growing. It certainly hasn't diminished by any means and we continue to expect it to increase. But much more moderately than the home-based side of our business.

With respect to the home-based side when you are talking about organic growth, is it -- how much of it do you think is cross selling new services rather than maybe just ramping up census?

It is almost entirely census-related. It's existing contracts, existing locations coming to us with increased census demand. This is particular crucial in the in-migration states. Remember you do not have to be a state resident to be eligible for our services. So if you move from Detroit today to California tomorrow, you are immediately eligible in California.

That has presented a huge problem in California, Arizona, and Nevada, Oklahoma, Florida -- the kind of in-migration states. That's where we see the biggest demand on our census is states where this population has migrated to.

Maybe a question for Michael. With respect to the margins in your dialogue, you did mention that they decreased year-over-year. Maybe if you can give some details what the margin compression was year-over-year?

(inaudible) mix where you are seeing more growth in the home-based services where the margins are lower (indiscernible) in the management fee line.

With respect to G&A, I mean I guess on the contribution margins you noticed a pretty sizable decline but, obviously, it was made up on leverage on the G&A. Do you see the current G&A as a good run rate on a go forward basis? What kind of leverage do you expect there going forward?

In the past you really won't get a whole lot of leverage there. It is going to continue to moderately increase as we add, especially, not-for-profits and as we continue to slowly build our corporate office. Also (technical difficulty) facilities cost go into that line. So -- .

So should we be looking at it as a 12% level or -- ?

I would think between 11 1/2, the%.

That's pretty much what we managed to, Richard. We target a 12% operating income target. We really don't want it to exceed that and we get uncomfortable if it's a little bit below that. But it won't move. As Michael said, it shouldn't move between 11.5, 11.7 and 12%.

Maybe on a workforce -- obviously the economy is improving and all that but you are able to hire individuals that have not seemed to have a problem yet on that front. Can you talk a little bit about workforce development? What you are seeing out there? Do you feel comfortable with your expansion plans and being able to higher quality people?

Our shareholders will remember in our most recent proxy statement we ask for another .5 million shares of options. I think it is important for people to remember we have been very generous to our line staff and management staff. I think -- Michael, correct me -- but we have issued a million, a million 1 shares of stock to these people. It is probably the only place in America, Richard, where a social worker can get a legitimate piece of a public company.

So we continue to have an employer's market in that regard. Our recruitment is good. Our employee retention is good. At the executive level we have 0% turnover. In state directors and management and corporate leadership, we have not lost a single individual. And I think that kind of loyalty, we believe, comes from 2 things. One is, people in our business like to be attracted to innovative kinds of systems. They want to make a difference. They want to be involved in programs that are making a difference and if you look to our outcome data, anecdotal data we are changing people's lives every day.

In addition to that, we issue stock. And, again, it's probably the only place where a social worker can appreciate both an innovative business and an opportunity to have equity. Most of our recruitment in fact comes from our current employee base. They are inviting their friends and colleagues to come to work for us.

So knocking on wood for the moment we continue to enjoy an employer's market. Very low turnover, high number of applicants for every job that we post.

What about reimbursement rates? Obviously that has come and gone for the current year. But are you hearing any discussions on where rates are going?

Unlike the institutional side of our business we had no rate pressures in any of our contracts. Craig, correct me if I'm wrong but I don't think we had a single contract renew at the same rate or a reduced rate. We typically get very small and very modest kind of cost of living increases. They are 1%, 1.5%, 2%. They are akin to what the state employees might negotiate in their Appropriations line items.

So we are not under any rate pressure but on the other hand, there is not a dramatic upside to our rate. We are not going to be able to increase rates 10% a year, 15% a year. So we don't see any downward pressure but there is not a lot of upside opportunity. Our story is really a volume story. It is really driven by the census more than it is driven by the reimbursement.

If you do get a rate -- a 1% or cost of living adjustment and all that -- how much do you get to keep or is that pretty much a 50% gets passed on to employees?

If we get a 2% cost of living increase, we will usually do a 2% cost of living increase to our employees. The majority of that gets passed on which is why you don't see a lot of leverage in our model. So remember, 75% of our costs are employee-related. So 2%, we get 2%. We get to keep a quarter of that 2%. So we typically pass it on and that is usually all that we do pass on.

One final question. I apologize. If you could talk a little bit more about Texas and this -- maybe the specifics in terms of what they're talking about in terms of privatization. I know you were hesitant to say how much you could possibly benefit from that. But if you could just give some sort of -- obviously you are plugged in down there. I would assume, just details on what exactly they are talk about privatizing? Maybe the time line and timeframe they are talking about it?

It's legislation that was passed in the last session. It is designed to be effective in calendar 2006 and it basically privatizes the heretofore government-owned MHMR regions that are currently controlled by government entities. Basically what the state has said is that you -- we want the private sector involved. We want to encourage privatization. We want those contracts bid out to the private sector and for those MHMR regions, Richard, that have been in the direct services, they are going to have to make a decision. They can either be an administrative entity or a direct provider. They are no longer going to be able to do both. What we are seeing is that most of these bureaucratic entities tend to remain bureaucratic and subcontract out our privatized (indiscernible) service delivery system. So that is going to happen in every county in Texas over the next couple of years.

Now there are hundreds, thousands of providers participating in the system but second to Florida and third to Kansas, it's the first state to really legislate -- aggressively legislate privatization. It's a part of a continuing trend that pegs (ph) our business and you're right, we are in a number of Texas locations and we expect our fair share of that. We really can't communicate what that means to us until our county payors sit down with us and say, this is what this is going to mean for you.

But, it does favor us. We are in the midst of that. It was part of the reason we went to Texas and in anticipation of this kind of momentum, it will affect us positively, I would say.

Do you envision it more as anything like Florida where it's a management type deal -- ?

Most of this will be probably through wholly-owned subsidiaries -- everything we operate in Texas is on the owned side currently. Florida favors the not-for-profit sector. Texas does not necessarily favor the not-for-profit sector. So it should bubble up as owned business. We may -- as we have demonstrated in the past -- choose to partner with a dominant not-for-profit in a particular city or region, if that is useful for both of us. But for the most part it should be owned revenue (ph).

(OPERATOR INSTRUCTIONS) Mark Hughes.

Fletcher, you talked about a 16% -- or theoretically a 16% sequential increase if it was comparable to last year. Last year, I assume you had more Florida included in that 16% gain and my guess would be this year you don't have as much incremental gain from Florida. Is that fair?

That's a safe assumption, Mark. I think there was some piece of that. Now the Florida contracts were affected January, remember, but they did ramp up over the following quarter. So it would not all be Florida but, clearly, Florida would have impacted that to some extent that we are not going to enjoy this (inaudible).

So in fact if you take out Florida, it would be a broader-based stronger sequential increase, assuming we got that kind of number?

Yes and again, it's 31,000 clients as opposed to 18,000 clients. So we are not trying to be coy here but we just -- until the quarter is over we don't discuss current census (inaudible).

So, now you are coy but later you can talk about the robust census.

Well the robust pipeline, yes, we can talk about the robust pipeline but (MULTIPLE SPEAKERS) -- trying to be careful.

(OPERATOR INSTRUCTIONS) Gentlemen, you have no further questions. I'll turn it back to you for closing remarks.

Thank you. Thank you, again, for participating in the call. If we did not get to your question, please feel free to call Michael or myself at any time. We will continue to watch and report the megatrends that affect our business. We will continue to target and identify acquisition opportunities; and I think we've discussed we had numerous opportunities to help manage the not-for-profit sector.

So we look forward to talking to all of you next quarter and, again, call us if you need anything. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation.