ModivCare Inc (MODV) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2007 Providence Service Corporation earnings conference call. My name is Michelle, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Alison Ziegler from Cameron Associates. Please proceed.

Thanks, Michelle. 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 ended June 30, 2007. You should have all received a copy of the press release last night. If you did not, please call Devin Rhoades at Cameron Associates at 212-554-5461, and she will send one out and confirm your name on our email list.

Before we begin, please note that we have arranged for a taped replay of this call which may be accessed by telephone. Replay will be available approximately one hour after the call's conclusion and will remain available until August 16th. The replay number is 888-286-8010, with the passcode 51820572.

This call is also being webcast live with a replay available. To access the webcast, go to www.provcorp.com and look under the event calendar on the IR page, or alternatively www.earnings.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 2007. 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 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 9, 2007. 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. Fletcher.

Thank you very much, Alison, and good morning, everyone. Today we are actually at our FPS Virginia operations center in Fredericksburg. Once a year we ask our Board to travel to one of our operations, and this year we chose Fredericksburg, Virginia, ten years after our initial acquisition of these programs in 1997.

This is an incredible story in its own right. When we bought FPS ten years ago, it was a $3.1 million book of business. Today it is approaching $30 million of annual business, and has been a springboard for us into North Carolina, South Carolina, Florida and West Virginia, and as far north as Maine. We are pleased that our Board could see this operation firsthand. With me today in Virginia is Michael Deitch, our CFO, and Craig Norris, our COO. As Michelle indicated, we will be available for your questions immediately after our remarks.

At the beginning of this year, we publicly stated that we believed 2007 would be our best year ever. We are pleased to say that after the first two quarters, we are tracking to record revenue and record earnings. And we have now broadened our services into international markets with our recent acquisition of WCG in Canada. $62 million of revenue for the quarter is slightly ahead of our forecasts, as was our earnings. Therefore, EPS was at the high end of our guidance range. We have a number of operations now that are achieving record results, and have for the 11th cycle in a row, 11th annual cycle, renewed all of our July cycling contracts without a single termination.

I will let Michael give you the quarter's highlights.

Thanks, Fletcher. In our second quarter 2007, revenue totaled $62.3 million, up from $45.8 million for the second quarter of 2006, a 36% increase. 24% of the increase was from organic growth; 12% of the increase was from companies we acquired in Oregon, Pennsylvania, and Georgia since the second quarter of 2006.

For the three months ended June 30, 2007, as compared to the three months ended June 30, 2006, home-based revenue grew 45%. We grew 30% organically and 15% from acquisitions. Sponsor care revenue grew $316,000. Organically, there was a net decrease of about $198,000 due primarily to decreases in foster care in Arizona where medical necessity criteria did not support foster care level of care. Such reductions actually help us economically under our block purchase contract in Tucson, Arizona.

This organic foster care decrease was offset by a $514,000 foster care increase for Maple Star Oregon, a not-for-profit company we began to consolidate as of May 1, 2007 for financial reporting purposes.

Management fee revenue for the three months ended June 30, 2007 grew 3.5%, all organically. Second-quarter operating income totaled approximately $6 million, which was 9.7% of our revenue. This compares with approximately $5.3 million and 11.6% of revenue for the second quarter of last year, and an improvement from 8.8% of revenue from the first quarter this year.

Second-quarter net income totaled almost $3.6 million, which was 5.7% of our revenue. This compares with $3.3 million and 7.3% of revenue for the second quarter of last year. Second-quarter diluted earnings per share totaled $0.30 or nearly 11.8 million diluted shares outstanding compared with $0.28 for the second quarter of last year when we had almost 12 million diluted shares outstanding.

At the end of our second quarter, our days sales outstanding from home and community-based services and foster care services was 74 days, down from 81 days at the end of our first quarter of this year. Our management fee days sales outstanding was 162 days at June 30, 2007, up from 156 days last quarter, yet still below our 180-day benchmark.

During our second quarter, we experienced a net increase to general and administrative expense of approximately $341,000 over the first quarter. This increase was due to a health care insurance true-up at the end of our June 30th medical plan year, increased expenses for printing our annual report, and the final payments on amounts due pursuant the Texas privatization bid. These increases were offset by a reduction in accounting and auditing expenses from Q1 to 2Q.

Our cash provided from operations totaled approximately $272,000 in Q2. At June 30th, we had approximately $3 million cash in our lender lockboxes, which was classified as other receivables on our balance sheet rather than as cash, which was paid to us in early July. During the quarter we paid approximately $4.7 million in estimated tax payments for Q1 and Q2. This double estimated tax payment occurs in the second quarter of every year.

Also, during the second quarter we have repurchased 22,621 shares of our common stock for approximately $585,000. Year-to-date, we have repurchased 462,500 shares of the one million shares our Board has authorized for repurchase. For the six months ended June 30, 2007, stock compensation expense totaled approximately $1,017,000. For the six months ended June 30, 2006, stock compensation expense totaled approximately $49,000.

At the end of our second quarter, we had about $30 million in cash and had notes payable totaling $8.1 million, all related to acquisitions. On August 2, 2007, we closed the WCG acquisition in Canada and borrowed an additional $11,250,000 from our acquisition term credit facility to close that transaction.

And with that, I will turn the floor over to Craig Norris, our Chief Operating Officer.

Thanks, Michael. For the second quarter, we ended with a total combined census between our owned and managed entities of 70,992 clients. These clients are being served from 318 local offices in 35 states and the District of Columbia. Compared to Q2 of 2006, this represents a total census increase of over 27,000 clients.

We have also added 78 new local offices during this same period. Combined between our owned and managed entities, we have over 7400 employees serving 838 government contracts. This represents an increase of 238 contracts as compared to Q2 of 2006.

As Fletcher mentioned, the July contract cycle we renewed all existing contracts. Our programmatic efforts that ultimately end up with these successful renewals is a credit to our clinical staff and our leadership teams.

In Delaware, we announced the selection through competitive procurement of educational and counseling services for six schools in New Castle County, Delaware. This is a unique contract bringing our services into the educational system. Also, in Florida we continue to expand our child welfare programs with the recent contract award to provide case management services in Sarasota and DeSoto counties.

Recently, of course, we announced the WCG acquisition in Canada, and we have begun our transition process. We are excited about this opportunity and look forward to the potential of cross-selling our services in Canada. The leadership team in Canada is strong, and we look forward to working together.

Overall, this was a good quarter for us operationally with strong performances across all regions of the organization and from a variety of services, including home-based workforce development and job training, school-based programs and tutoring. We are grateful to our some 318 local directors spread across nine operating regions who are charged with the day-to-day management of our programs, and ultimately, our budget performance. As Fletcher mentioned, we are visiting our Eastern operations in Virginia.

I would be remiss if I didn't thank all the hard-working and dedicated staff here. We are truly grateful for all of their efforts. Fletcher.

Thank you very much. Let me say a few words about our expansion into Canada. We will discuss for a moment our 2007 updated guidance and then take your questions. Canada, as you probably know, is a socialized system with liberal benefits for welfare and unemployment. In fact, lifetime benefits, we've discovered. They also enjoy a robust economy with hundreds of thousands of unfilled jobs.

In B.C. alone, we were told they currently have 84,000 job openings that they cannot fill. As a result, Canada has a number of initiatives in place to identify, train and place people, particularly the indigent and developmentally disabled and aboriginal populations, into meaningful employment. WCG has led this effort in British Columbia and just signed several new six-year term agreements to continue to be B.C.'s preferred provider for workforce initiatives. This is a fee-for-service business not unlike what we do in Missouri and Pennsylvania.

We have guided to $25 million of revenue for them in 2008, and $0.05 of earnings. We consider this to be their base business and does not consider them maximizing their earnout target which potentially could double EPS in 2008. This also includes servicing the debt on the $11 million cash borrowed, as Michael described, from our CIT line and the amortization of the intangible value associated with this organization's contract.

We continue to have acquisition activity, which as demonstrated here we will only announce when we sign, close and fund an acquisition. We have issued total 2007 guidance now, addressing our increased seasonality due to the expanding success of our educational services. These are businesses that go totally dormant over the summer. Educational revenue for Q2 was about $7 million. We will lose the benefit of that business over the summer and expect to pick it all back up in the fall.

Consequently, our Q3 revenue guidance is a range of 60 to $61 million, with about $3.6 million of that coming from Canada. So our base revenue is more like $57 million for the quarter, reflecting the seasonality of education but also when picking up the new contracts, rate and volume from our July cycle.

Our organic July growth is about $8 million annualized, or about 4% of our July cycled business. We, therefore, expect earnings to be $0.26 to $0.27 per share in Q3. In Q4 with the benefit of our educational services coming back online and the ramp-up of these new awards, we are forecasting 68 to $69 million of revenue and $0.33 to $0.34 of earnings.

Total year for us looks to be approximately $250 million of revenue, up from $245 million, and earnings per share of $1.17 to $1.19, consistent with our past forecast, and a new share count of 12,200,000 shares. As usual, our guidance does not include any unannounced material contracts nor any acquisition activity.

With that, Michelle, we will open the line now for questions.

(OPERATOR INSTRUCTIONS) Bob Labick, CJS Securities.

Good morning. Congratulations on a strong quarter. A couple questions. First, could you give us a little background to the Canadian acquisition and maybe expand on the opportunities there? Is there additional ability for more acquisitions in Canada, or are there programs that you run to move up there? How do you view that going forward?

We met this organization nine or ten months ago; initially, began talking about strategic initiatives that would allow both organizations to cross the border. The more we got to know them, the more we liked and believed their organization was a very nice cultural fit with ours. We began discussing the potential, and opportunities of a merged environment which culminated in this acquisition.

They currently provide services, Bob, only in British Columbia. So indeed, there are other provincial opportunities, particularly I think as we can demonstrate the success of these contracts. The nice thing about working in Canada is that these are long-term agreements, six-year contracts. So we've got a lot of opportunity to demonstrate our success to other provincial governments.

We do expect and have been invited to come to Canada and present other services that we provide in the States. We know, for example, they have serious issues with their children's services and there are few, if any, home-based providers, particularly in Western Canada, for those services. So we are excited about the new market opportunity.

As Craig mentioned, we are excited about, like and have a great cultural fit with this leadership team. And we would hope to be able to grow this Canadian business line, not only in terms of the British Columbia base of business, but the potential to move into other provinces.

Great. And looking at other opportunities, could you update us on the potential outsourcing contracts in Phoenix and then just update on the mental health initiatives in Texas and tell us where those new potential RFPs stand?

Sure. The news that is public in Phoenix is that the Magellan Award has been protested by both of the other two bidders, Value Options and Centene. So there has not been a lot of activity as the state works through those protested issues. So it is hard for us to indicate at this point the timing of that or when they may begin to look to subcontractors. So it will probably be pretty quiet, Bob, until the state announces how they have dealt with the protest.

So that may -- they were originally designed to be effective September 1st. That may push the effectiveness of that contract back conceivably to even the beginning of '08. The privatization or outsourcing of the Texas County mental health system, we have seen limited activity yet, none of which has generated into a request for proposal at this date.

So at this point, we would not expect any 2007 impact. We would be surprised to see any 2007 impact from those initiatives, but that is more likely to evolve in 2008.

And then I noticed in the cash flow statement, you had a sizable earnout payment in the quarter. Could you remind us from which acquisition that came from and, obviously, it must have been successful to get the earnout, if you'd just update us on that?

It was W.D. transaction, Bob, and you will see where we had that accrued for in prior quarters, it really just flopped over to notes payable on balance sheet.

And it does represent their maximizing their budget potential, which indeed was good news.

Terrific. Thank you very much. We look forward to seeing you at the conference next week.

Mark Hughes, SunTrust.

The stock comp expense in the second quarter, could you give me that year-over-year comparison again?

Sure, Mark. For this year in the quarter, $563,000; same quarter last year, $48,000.

If you remember, Mark, we had indicated that was going to be about a 100 basis point swing in margin for us. Indeed, that has represented some of the decline in our operating income and net income margins.

Right, exactly. Can you talk about the opportunity for January cycle gains? I think you had mentioned in a number of the states that there may be new business opportunities. What should we think about for January?

We would hope to see procurement activity in at least three states in the January cycle, discounting what may happen in Phoenix and what may happen in Texas. California is on a January cycle. The business that we won there last year, we would expect to see procurement activity in the late fall from California. Likewise, North Carolina we would hope would cycle some business in January, and we would hope to see Pennsylvania business cycle in January.

Now, if you'll remember, last January was a very successful procurement cycle for us in the neighborhood of 45, $50 million of new wins. We would be thrilled to do that this January. However, at this point, we have no way to really indicate what to expect in terms of a January cycle. So you've got those three states. You've got Texas [whining], and then you've got the Phoenix opportunity whenever that eventually evolves.

Any way to bracket the timing for these sorts of protests? How quickly do they normally get resolved if you can say there is a norm?

There isn't a norm. It can take a week or it can take six months. If they drag out, then we've seen a couple of scenarios where either the state will extend the contract of the incumbent provider, or the state on other occasions in other states has stepped in to operate the entity themselves until the protests have been resolved.

So no one really knows the nature of these protests nor the manner in which the state is responding to them. So we really can't say today how long that will take.

Thank you.

Richard Close, Jefferies.

Michael, can you go over the cash flow aspect again? You had mentioned the lockbox -- and just go over that.

Sure, Richard. Well, Q1 we had about $1.5 million in the lockbox. Q2 we had about $3 million, so it grew substantially there. That was really the major change, other than to say the AP and accrued expenses changed during the quarter, taxes payable, accrued accounting and auditing, accrued payroll change. So those were the most significant items in the cash flow.

The way that lockbox works, Richard, is that all of our payers remit their payments in explanation of benefits to three regional lock boxes. We don't consider that cash ours until it is swept through the CIT line and replied and then remitted to us. So even though we had received it, we don't show it as cash received for a few days. And this incurs to us on the last day of every quarter, in that there is typically a substantial amount of money in transit. This particular quarter it was higher than usual at $3 million.

You guys have given revenue and I guess earnings guidance for the year. What would you sort of guide us to, or what are you targeting in terms of cash flow for the year?

Richard, I don't forecast balance sheet, nor do I really forecast cash flow. But if you will look back to prior -- well, last year, you will see that Q3 and Q4 were our highest quarters.

And should we expect the same this year?

Yes, you should, and if you also remember back to last year, as I do so vividly, Q2 was our worst cash flow year last year. So it is consistent year-to-year.

Okay, and then with respect to your press release, you said the guidance for the remainder of '07 reflects approximately 6 to $8 million of incremental contract business from the most current procurement cycle. Can you sort of elaborate a little bit in terms of where that came from, that 6 to $8 million? Is it just general across all contracts where you are getting increased census as you rolled those contracts over, or is one type of contract? Maybe a little bit more clarity there.

That is an aggregated number in small bites, Richard, rather than coming from any single major source. It is representative of cost of living increases, increased census volume as you suggested. So we can identify and predict our revenue pretty clearly, but it is from a variety of small sources as opposed to any large single source.

Okay. And Mark had asked about the January, I guess, procurement cycle. Is there anything that you guys see between now and January that might come to fruition in terms of RFP bids that are outstanding or anything that might move quicker than a January procurement?

There are two things that are on our radar that we can't time for you. Phoenix, of course, is one of those. If the protest is resolved sooner rather than later, Magellan's published intent is to procure subcontractors. They would have to do that relatively quickly, we believe, so that could occur in 2007.

Some of the Texas counties do have conversations going on, drafts of proposals, Richard. It would be a matter of whether someone actually publishes that and requests responses to that. It is unlikely, however, they would start in '07, but it is possible they might procure in '07. And then, again, we really can't control our handicapped Phoenix timing.

So those two things could indeed occur earlier in the fall. Other than that, we may see a one-off contract here or there, but generally our procurement will go quiet until the January stocks.

Great. Thank you very much.

Kevin Campbell, Avondale Partners.

Good morning. Wanted to ask you a couple of quick questions. First, could you comment -- and you may have said this and I might have missed it -- but just the sort of general price increases you saw from the July renewal cycles, what do you experience there?

We have consistently said that our kind of same-store growth, which is legislatively appropriated to us, is a single digit number; someplace between 4 and 7%. So this would be kind of consistent with historical increases, Kevin, in that regard. It's what we typically see year-in, year-out. We don't have a lot of opportunity in our rate.

We typically don't try and increase our rates, but we enjoy kind of appropriated increases, not unlike a state employee would or fireman or police or anyone that gets paid out of government appropriations. So we enjoyed small cost of living increases consistent with what we've seen historically that allow us to pick up somewhere in the neighborhood of $8 million of revenue in '08.

Okay, so that 4 to 7% then includes sort of new clients and then also the cost of living adjustment?

Yes.

Can you comment on -- back to the California, North Carolina, and Pennsylvania potential contracts, could you remind us about how those are sort of structured presently? Are they with the states, are they with local counties? What are the types of margins we might expect on these larger contracts?

They are all county driven. In California, we currently contract with five counties. They are benefiting from the Proposition 63 of two years ago that earmarks the percentage of the millionaire tax to social services. That budget is ramping up dramatically from '07 to '08, and they will reprocure.

Now, there are two scenarios that could happen. One is they could just allocate new money to existing providers. They could issue competitive proposals to existing providers. Then that is handled at the county level. So we would expect to see activity in all five of our California counties.

Likewise, North Carolina is county driven. It will be based upon, I think, the other counties' receptiveness to the work that is being done in the current outsourced market, which is relatively new. We would expect to see some additional activity there. It is voluntary, however, as opposed to the mandate that we see in California.

Pennsylvania I think it's safe to describe as enlightened. They are procuring and growing into developing alternative programs rapidly, which are not necessarily mandated but philosophical. So you may see additional activity again at the county level. So all of this would be county-driven proposals that we would respond to in those given states.

And the margins on these type of business?

California is cost reported margin, so it may be less than what we enjoy in other states. There are some margin issues with our North Carolina business, and we do not have margin issues in Pennsylvania. So it could affect the mix, depending on the proportion of revenue won in those states.

And on North Carolina, what do you mean? Can you clarify it when you say you have some margin issues on North Carolina?

It is one of our lower-margin states, as is California. The business that we cycled January of last year was part of the reason we've lost about 100 basis points of margin.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Greg Williams, Sidoti & Company.

Good morning. A couple questions on 2008, just feeding off of some other previous conversations you guys already had. On the Magellan opportunity in Arizona, assuming that the value option protest is resolved, do you guys have an existing relationship with Magellan on other behavioral health contracts, or is this your first encounter?

We do. We contract with them currently in Florida. We have an existing relationship with them. We are known to them in this service delivery system. One of the Florida directors has been transferred to Phoenix. So the Phoenix Magellan staff indeed are aware of us, along with the million other providers who are going to have their hand out in terms of this opportunity.

So I'm not sure that gives us any advantage or edge. These are often very parochial decisions that reflect local politics as opposed to any relationship we might have with them in another region. But yes, they know us and have been familiar with and pleased with our work.

Okay, great. One other question. On the WCG deal in Canada, if I run the math, $25 million in revenue and you are giving $0.05 EPS of '08 accretion. That gives them operating margins around 4 to 5%, which is obviously lower than your companywide margins. You mentioned there's plenty of upside if they reach the earnout, etc. But is it safe to say that $0.05 then is conservative, or said another way, below your companywide margins?

You may be missing some things there as you do the math, and we can't give you non-GAAP numbers. But as you think about that, its operating income margin is indeed consistent with ours. However, you have to include the debt service on the cash in there, which our cost of money, Michael, now is --?

LIBOR plus 4, 4.5.

Yes, so 9 percentage off of that $10 million, you may be missing that piece. We have to amortize the intangible values, which for us usually run about 40% of the acquisition value. Of course, you've got to tax it. So I think if you go through those three steps, you'll find that the margins are in fact consistent with the rest of our base.

It is, in response to your question, conservative in that it is the current base of business. It does not include them maximizing their earnout. You'll notice in the release in the 8-K of that acquisition when it comes out, they have an earnout opportunity of about $10 million, which represents dramatically improved earnings, which we have not guided to.

Okay, that's very helpful. Thanks, guys. No other questions.

Ben Joseph, Rice, Voelker.

Fletcher, I just had a -- wanted to get a clarification on the Phoenix contract. I was under the impression that Value Options had actually withdrawn their protest, based on a press release from July 18th. Is that not the case?

I think we can confirm that. It's not really our position to confirm or deny what they are doing, but we have heard the same thing, is that they have struck a deal with the state and with Magellan that involves the leasing of their equipment and buildings, etc., and in exchange for that, withdrawing their protest. Now, I don't know if that has actually been accepted or is official or formal, but we've heard the same thing.

There is a release out, so I guess then the only hiccup would still be with Centene if they were filing a protest.

Right, and we've not heard anything that they intend to withdraw.

All right. Thank you very much.

(OPERATOR INSTRUCTIONS) Chris Beach, Bayshore Capital Management.

Could you tell us were there any non-recurring revenues included in the management fees because of consulting or bonuses? And also, could you give us a little more color on -- I'm not sure what you call it -- the acquisition of Maple Star Oregon in the quarter, and was there any impact other than on the top line?

Good questions. No, there is no unusual revenue other than our percentage of revenue, management fees, no bonuses, no consulting agreements. This is pretty much a straight management agreement where we charge a percentage of revenue as our fee. Maple Star Oregon is an unusual not-for-profit in that it is not tax-exempt, so in those situations where we can exercise consolidating type control, we prefer to.

We made that decision with their Board in May. It may improve. It will improve revenue, certainly, because we now consolidate revenue, and it may improve earnings a little bit because their earnings have been a little better than our management fee. But it is not material.

Thank you.

As you have no further questions at that time, I will turn it back to management for closing remarks.

Thank you, everyone. And as Bob Labick mentioned, I am on my way to New York from here for the CJS conference. We are out of town, but either Michael and I are reachable. If you have follow-up questions, please call our office and we will get back to do. We look forward to seeing you in the fall. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.