ModivCare Inc (MODV) 2007 Q3 法說會逐字稿

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

I would now like to turn the call over to Alison Ziegler. Please proceed, ma'am.

Thank you, Carol. Good morning, everyone, and thank you for joining us this morning for Providence's conference call and webcast to discuss its financial results for the third-quarter ended September 30, 2007, as well as its acquisition of LogistiCare. You should have all received a copy of the press releases last night. If you would like to be added to our e-mail list, please call Devin Rhoades at Cameron at 212-554-5461.

Before we begin, please note that we have arranged for a replay of this call. The replay will be available approximately one hour after the call's conclusion and will remain available until November 14th. The replay number is 888-286-8010 with the passcode 25466512. 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.

I would also like to point out that the slides that correspond to the convertible offering and the LogistiCare acquisition are also on Providence IR homepage, just look down under the profile. It is titled Transaction Presentation.

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 and 2008. 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, November 7, 2007. The Company may choose from time to time to update them, and if they do, we will disseminate the updates to the investment public.

I'd now like to turn the call over to Fletcher McCusker, Chairman and CEO. Fletcher?

Alison, thank you very much. Good morning, everyone. We actually have the pleasure of being in Alison's good company in New York. With me here is John Shermyen, who we're pleased to introduce today as the CEO of LogistiCare. John is also the founder of LogistiCare. He will make some remarks and be available for questions.

In Tucson is Michael Deitch, our CFO, and Craig Norris, our Chief Operating Officer. Also with us today in Atlanta is Tom Oram, the CFO for LogistiCare. We are thrilled to be able to welcome LogistiCare to the Providence family. I believe we caught a lot of people by surprise. It has not been our nature to acquire $300 million companies, but I think as you hear the story, you will be as compelled about the logic of what we have done as we were the first time we met the company.

This is an unusual call, obviously, because it is not just a routine quarter. We are going to talk both about the acquisition, Providence as the stand-alone company, the combination of these two companies, and the synergy and excitement that we think it creates. So we are prepared to address your questions either as it relates to our stand-alone core business or as it relates to LogistiCare and our integration, or LogistiCare and its past model, which is why both John and Tom have joined us today.

So we will conclude our remarks and then open the line for your questions, and both John and I are in New York and will be available both this week and next week to meet with accounts. I am going to the SunTrust Robinson Humphrey Conference which begins tomorrow in New York, spending an extra day seeing accounts in New York. Then I am back in the city on Tuesday for the Avondale Conference, spending another day here and then a day in Boston.

So we do want to get out and meet investors and be able to answer questions, and have you meet the staff of this combined organization as quickly as we can.

As it relates to our own business, we're pleased to have a very good quarter; revenue up 35%. We are thrilled for our 11th consecutive annual procurement cycle to inform you that we have yet to lose a government contract. It is a remarkable record in privatization, I believe unmatched by any other public company now or before, and continues to astonish us in terms of our ability to renew literally every agreement that we have consistently year in, year out.

As you know, we also have entered Canadian outsourcing through the British -- province of British Columbia. We are excited to be in B.C. We have been very enthusiastically welcomed there and have got off to a great start with our acquisition with WCG. We will have Craig talk more about the integration there, but we have had no real integration challenges.

We have been very pleased with the response of being an American company, really the first American company to privatize social services in Canada. And, of course, we expect that if we do well in one province, obviously it will open up opportunities for us in others.

Our earnings, you'll remember from Q2 we've guided down for Q3 as a result of our educational seasonality, and it's pretty much as we expected. When that revenue when quiet at the end of Q2 and those contracts actually go dormant over the summer and then kick back in for Q4. So we are a little ahead of our revenue guidance, in line with our EPS guidance.

As a consequence of the acquisition we announced recently in Pennsylvania, we are going to guide up revenue for the rest of the year on a stand-alone basis. And we expect to be reaffirming our EPS guidance probably at the higher end of that range.

With the LogistiCare acquisition, most of the questions I have had are gee, you know, $0.10 of accretion, $250 million of debt; we're not sure that is a good match. And I think when you see what is behind this acquisition and our willingness to leverage the company to achieve it, you will see that we have a lot more here than a $0.10 opportunity. LogistiCare is a kindred spirit of ours, about the same age, 10 years old; dedicated to the same clients in that their mission has been to provide what we believe is probably the most basic of transportation requirements for our Medicaid population.

Under the Medicaid benefit, transportation is a free service to eligible clients. It has historically been one of the most abused, unmonitored, difficult to control pieces of the Medicaid benefit. Before LogistiCare and John's programs, most states just issued vouchers to the Medicaid beneficiary and allowed them to use them at their will, hopefully for authorized services. But they really had no way to know what the clients were doing with those vouchers, where they were being used, how often. Many states, in fact, couldn't tell you what their overall transportation expense was.

We know as being kind of the front line of the Medicaid system now, calling on people in their homes, that often transportation is a key piece of a client becoming productive and self-actualized. And for us, it was incredibly logical to look at a combination of a company that was dedicated to transportation of the Medicaid beneficiary and our kind of front-line counseling, case management services, for the same population.

LogistiCare is different to the extent that they typically bid on large contracts and have exclusivity in states. They are in 18 states now, and through the years and that process, I believe there has only been one time when LogistiCare was not the successful bidder when states have begun to procure for this transportation assistance. The LogistiCare model is really a case management model. Once they contract with a region or a state government geography, all of the Medicaid beneficiaries within that catchment area are assigned a LogistiCare phone number.

And the only way they're going to get transportation assistance is to inbound a call to their call center where LogistiCare staff can look at a screen, determine the eligibility of the beneficiary, the authorization of the ride destination, coordinate that transportation and then dispatch a subcontracted driver to that beneficiary.

What we really liked about LogistiCare when we met them is like us, they are asset free. They do not own a fleet of vehicles. They have chosen (technical difficulty). They are not a bricks and mortar business, which is very consistent of course with the way we run our business. We saw immediately it was a great match in terms of (technical difficulty) used people rather than assets to affect the front end of the Medicaid delivery system.

Again, we think that there are synergies between the two companies. What we are pleased to present to you is a financial model that is not dependent upon that in order for us to make this work. What we have shown you and forecast is basically our run rate business and their run rate business consolidated for presentation purposes. But we have not given any economic credit to the synergies that we expect to occur, nor to the pipeline that either of us enjoy.

This is pretty much contracted business for both of us, ramping up very quickly for them and consistent with our kind of 20% growth pattern over the last several years. The timing of this was very important to us, because LogistiCare is growing very dramatically in a time where this service is probably the most topical it has ever been. They have gone from $250 million of revenue in '06 to $319 million trailing to forecast $360 million.

A lot of that is the result of a very successful procurement cycle in last July where they won about $120 million of new business and have pointed us to a significant pipeline of states that will be bidding for this service in 2008. So it fits into our being in the right place at the right time part of our story. And again, we've been able to kind of indicate our capabilities here without having to economically dismantle the company to create synergies.

Both of these companies are growing and robust. It is not our intention to whack up either one of them. It would be foolish for us to try and create corporate or staff kind of consolidation. That is one of the reasons we wanted to demonstrate to our lenders and our investors that we can manage the cash flow, continue to create free cash flow, and at the same time do it without having to dismantle the corporate office of either organization. Indeed, we believe there are synergies. We expect them to come naturally.

There are opportunities for us. We are in 16 -- or 15 of the same states. We have an office; they have an office. Clearly, there are going to be opportunities to put our counselors together with case managers and dispatchers, but we haven't budgeted for any of that, nor have we budgeted for any of the pipeline activity that clearly both of us have very high win rate in that regard.

The deleveraging aspect of this are quite dramatic. For every $10 million of this debt we pay down, we create $0.03 a share of earnings per share. So the company has kind of got a built-in $0.25, $0.30 of accretion over the next several years just by amortizing the debt.

In addition to that, we have committed to CIT that 75% if any of our free cash flow will indeed go down to pay the debt down, and any equity that we do, we are obligated to use that to pay the CIT debt down. So this has been a company that has been debt adverse. We are leveraged now at about four times. We're comfortable with that. LogistiCare is venture capital owned. They have been leveraged all of their lives, so they have operated under debt comfortably.

They are prospectively paid. Unlike us where we bill after the fact and then chase money, LogistiCare enjoys a very good environment in terms of days sales outstanding, in that most of their contracts they are prospectively paid. So their DSO is about 20 days versus our 80 days. So we have immediate cash flow from the acquisition and very little capital requirements to continue to grow the business.

So we want to be able to address your questions. So, Michael, I'll go ahead and turn it over to you to kind of go through the quarter. We will come back around and then open the line for questions. Michael, go ahead.

Thanks, Fletcher, and good morning, everyone. In our third quarter of 2007, revenue totaled $63.7 million, up from $47 million for the third quarter of 2006, a 35% increase. 18% of this increase was from organic growth; 17% of the increase was from companies we acquired in Georgia, Pennsylvania and Canada since the third quarter of 2006.

For the three months ended September 30, 2007, as compared to the three months ended September 30, 2006, Home Based revenue grew 39%. We grew 19% organically and 20% from acquisitions. Foster Care revenue grew 20%, 6% organically and 14% from Maple Star Oregon, a tax paying not-for-profit organization we now consolidate for financial reporting purposes.

Management Fee revenue grew 22%, all organically. Our third-quarter operating income totaled almost $5.5 million, which was 8.6% of our revenue. This compares with almost $4.3 million and 9.1% of revenue for the third quarter of last year.

Third-quarter net income totaled almost $3.2 million, which was 5% of our revenue. This compares with $2.7 million and 5.8% of revenue for the third quarter of last year. Third-quarter diluted earnings per share totaled $0.27 on approximately 12 million diluted shares outstanding, compared with $0.22 for the third quarter of last year on approximately 12.3 million diluted shares outstanding at that time.

At the end of our third quarter, our days sales outstanding from home and community-based services and foster care services was 76 days, up from 74 days at the end of our second quarter of this year, and down from 89 days at the end of the third quarter of last year. Our target DSO continues to be between 75 and 80 days.

Management fee DSO was 177 days at September 30, 2007, up from 162 days at June 30, 2007. Although still under our 180-day target, we will be concentrating on reducing management fees receivable and its DSO by December 31st. During the third quarter, we generated approximately $5.5 million in cash provided by operations. At the end of our third quarter, we had $37.7 million in cash. However, in early October we paid $8.2 million to the seller of Family & Children's Services in Pennsylvania to purchase the assets of that business.

With that, I will turn the call over to Craig Norris, our Chief Operating Officer.

Thank you, Michael. Good morning. For the quarter, we ended with a total combined census between our owned and managed entities of just over 70,000 clients. These clients are being served from 346 local offices in 35 states and the District of Columbia, as well as Canada. Compared to Q3 of 2006, this represents a total census increase of just over 25,000 clients. We have also added 92 local offices during this same period.

Combined between our owned and managed entities, we have over 7800 employees serving 773 government contracts. This represents an increase of 132 contracts compared to Q3 of 2006. On August 2nd, we entered the Canadian market with our acquisition of WCG International in British Columbia. Our transition has been successful, and we are beginning to introduce Providence programs into the Canadian organization. This expansion into Canada has been very positive, and we are being very warmly received.

We also recently announced the acquisition of Family & Children's Services in Pennsylvania. This further expands our child and adolescent programs into new geographic territories across Pennsylvania. While we are still in our transition period, the process is moving along smoothly.

Finally, I'd also like to welcome the LogistiCare team. We are eager to begin identifying opportunities to work together in our various markets across the country. LogistiCare has a strong experienced management team, as well as committed staff, and we are fortunate to have them a part of the Providence family.

With that, I will turn it over to John Shermyen, the CEO for LogistiCare. John?

Thank you, Craig. LogistiCare is also very excited about this opportunity. As the founder of LogistiCare, we have been following the trends in Medicaid and the services provided to the indigent population, and Providence represents a unique opportunity to add more services and a combined sense to serve that population.

Our entire team is so excited about this opportunity that we have actually rolled 100% of our vested equity into this deal, and we think that is a very positive representation of how important and how committed we are to this deal. LogistiCare is an access management company. We are not a transportation company.

Our primary focus really is the nonemergent transportation benefit. This is a benefit that is unique to the Medicaid population. These are trips to doctors, facilities; these are all prearranged, prescheduled trips. This does not include 911, ambulance. These are prescheduled, standing-order access trips for healthcare.

Under most states, the Medicaid waiver program's transportation is a feature. As a matter of fact, it is a required benefit; it is not an optional benefit. The broker model, which is the model that we have for providing NET services, covers by definition large populations within a state or region. And our payment methodology is a PMPM or per member per month fee.

We pioneered that, and the first brokered PMPM management of the NET benefit really began in Connecticut working with managed care organizations who had recently taken on the Medicaid population. And then the first statewide procurement for these services was in Georgia in 1997. As you can see, there has been a rapid adoption of this model. There are approximately 20 states that are using this model today, and we are in 18 of those states, and we see a significant move in that direction in 2008 and in the future.

Our current revenue comes from 75 contracts in those 18 states. Unlike Providence, we are a bit of a whale hunting game. We have multiple contracts with multiple payers, but they are typically larger in size than those of Providence. Our reimbursement is very stable. Our revenue is very visible. Our typical contracts lengths are 3 plus 2, or 5 years, and in some cases as long as 7 years.

These contracts, though, represent only about 1% of the total Medicaid spend, so they're often viewed as an ancillary service and don't necessarily get the attention that larger programs within Medicaid budget do.

We are part of the growing outsource market that we think is the forefront of privatization of Medicaid services. Providence has been a real pioneer in the non-facility based side of that equation, and we feel we have been pioneers in the access management side. Mobility and access challenges for the indigent, the disabled and the elderly population are clearly services that are all best served in the home and community settings, and the Providence/LogistiCare combination is probably the best way to deliver and manage those challenges.

The total market for the transportation piece to provide services to those populations currently is $11 billion. Our focus has been on the Medicaid NET portion, and that is $2 billion plus today, with about 20% of that market having adopted the outsource market. Currently, Medicare that does not cover the NET benefit is piloting it, this benefit, in a couple of programs throughout the United States. And LogistiCare is very pleased to be the provider for those services under those Medicare pilot programs.

Our model is built on a comprehensive IT and personnel management systems. We cover, by definition, large geography and large populations. We are a volume-driven model. We have a network of credential transportation providers who actually deliver the on-the-street service, which means we don't have to be in the transportation business; we don't have to have assets. But also, most importantly, it makes it very easy for us to leverage not only our IT management infrastructure but also our network infrastructure to add incremental business to our model.

This is how LogistiCare has grown over the years. We are a total organic growth play. We typically go after HMO or state contracts, which allow us to anchor ourselves in a community, pay for the infrastructure, develop the credential network, and then we add business to that. And you can see throughout our history in every state in which we worked, we have grown the business from our initial anchor contract.

I am very fortunate to have a deep and experienced management team. Fletcher and I are both founders, and when you found a company, you have an idea about how you would like it to be and a vision for the future. But frankly, you don't know all the skills sets that you're going to need as you grow the business.

We have identified the key ones that we have needed, and over time we have very strong IT resources, operations resources, financial resources and training resources, because we, just like Providence, are invested in our people, not assets. Fletcher and I are going to be on the road, as Fletcher said. Unfortunately -- or fortunately, he is going to get to go solo some next week, because I actually, as does Fletcher and Craig and Michael and Tom, have a business to run. So I'm going to be on the road as well, but both of us are looking forward to having a chance to meet with you individually and tell what we think is a very compelling story.

With that, I would like to introduce you to Tom Oram, who is our CFO. Tom has been with LogistiCare, he probably feels like a lifetime, but it has actually only been about a year, year and a half. He has got more than 20 years experience working with both private and publicly-traded companies. He has almost ten years of experience working in the senior finance positions, but most importantly for us, he had eight years as a CFO working in a capitated per-member per-month methodology providing services to Medicaid beneficiaries. And as those are key elements to our business model, we are very fortunate to get Tom to join us. Tom?

Thanks, John. I'm just going to hit on a couple of highlights of our business model, most of which I think John and Fletcher have already hit on. But as was said before, revenue for 2006 was about $252 million, and we are projecting full-year 2007 at around $335 million. We are clearly benefiting from an increasing number of new states that are gravitating toward the outsourced model, which explains the projected revenue growth of almost 33% for 2007.

Fletcher alluded to this earlier, but we are looking at '08 at about $360 million of revenue. That does not include the pipeline that was discussed. So, like Providence, our revenue is highly predictable due to the long-term nature of the contracts that John pointed out earlier.

Our purchase service costs are similar to Providence, client service expense, but clearly they consist primarily of payments to subcontracted drivers who we contract with, predominantly on a fee-for-service basis. Our purchase service expense tends to run about 78% to 80% of our revenue, with our total administrative costs running at about 93%. That leaves us an operating income of about 7% to 7.5%. It is a little less than Providence's, but we feel it is equally predictable.

Like the Providence model, as has been alluded to earlier, we are asset-lite. We do have strong cash flow dynamics in the business. We are a negative networking capital business. Our DSOs are approximately 20 days, and from a CapEx standpoint we are traditionally no more than 1.5% of revenue.

So with that, I do look forward to introducing all of you to our model in more detail, and I will turn it back over to Fletcher.

Tom, thank you very much. I would like to echo Craig's comments welcoming the LogistiCare management team whom we have come to know over the last nine months as great people, quality people, our kind of people. We are pleased to say that all of them are indeed staying, have agreed to employment contracts; and as John indicated, rolled over 100% of their equity into our equity. They also have agreed to lockup agreements in that regard, and it just worked out really well for everybody.

We have integrated 15 companies since we have been a consolidator. We are pleased to say that our retention of that employee base is very high, not only at the manager level but all the way through the organization. Our staff turnover last year companywide was 2%. I thought it was a typo when I saw it, but indeed we have a stellar reputation of being an organization that is employee focused first, and we believe, therefore, our employees take care of our clients. So that is to somewhat help put the 1000 LogistiCare staff, John, that are probably on the phone at ease.

This is not your typical big company merger where we are looking to pay our debt down by laying off half of the workforce. If you've ever had the opportunity to -- and I know some of the people on the call have known me this long -- the business plan that I wrote in January of 1997 viewed privatization as a horizontal field. I had participated in vertical privatization most of my career, and heard over and over again from state governments that commonality of the client, the issues that ran from jurisdiction to jurisdiction, the need for somebody to dedicate themselves to the front end of the Medicaid payment structure. Because most of the privatization stories, as you well know, are at the back end; the psychiatric hospitals, treatment centers, prisons, group homes, whatever.

So when the Company was started, we saw a multi-jurisdictional opportunity. And indeed today, we contract in every government jurisdiction; corrections, welfare, TANF, juvenile justice, Child Protective Services, foster care, and now transportation. It was not a leap for me nor our Board to see the logic of including this diversification into our business.

We have been diversification friendly, as long as the believe it is consistent with our preventative nature. We diversified very successfully into workforce development. That has created huge opportunities for us and ultimately let us to Canada. We have diversified into educational tutoring, which is now about a $12 million book of business for us. We have diversified into foster care and are being recognized as one of the few foster care organizations in the country that is professionalizing this level of care.

We diversified into child welfare privatization. We have diversified into management services. All of this, we believe, is consistent with our theme that government outsourcing indeed is horizontal, and it is quite sustainable if you stay out of the bricks and mortar business. Our legacy privatization colleagues build buildings, and they would spend a lot of money building a very fancy, beautiful building. And when the payer changed their mind, they had a $6 million library.

Both of us have dedicated to our companies to stay light-footed, asset- free, so as the government money ebbed and flowed, we indeed could follow it. We have been blessed with 100% retention of our contracts in the same time period LogistiCare has only lost one contract. So you have got organizations that are clearly very compatible with and very loyal to our payer base.

We look forward to a number of exciting years. We think our payers will be thrilled with this combination. Everyone we've presented it to on the investor side through the convert process, through the lending process, has immediately seen the wisdom of what we are doing.

With that, Carol, I think we are ready to take questions.

(OPERATOR INSTRUCTIONS) Bob Labick, CJS Securities.

Good morning. Congratulations on an attractive acquisition.

Robert, thank you very much.

First question, before I ask about LogistiCare, I'd like to ask just on the core business. During the quarter, gross profit was lower than expected and SG&A was also lower than expected. I was wondering if there was any kind of offset or what trends were developing, and how we should look at it going forward?

Michael, do you want to address that?

Yes. Hi, Bob, good morning. Our margin decreased a little bit, primarily because of the school-based programs. You'll note that our model, we have full-time staff. So when that business decreases during Q3, our staff still remains. Historically, we have also -- and we've said this before -- our stock comp is about one point in our California business, which comes with lower margins, is about one point. So if you look back historically and make those adjustments, you will see we are right in line.

On the general and admin expense decrease from Q2 to Q3, a couple things going on there, Robert. We did not have some of the expenses that we had in Q2 such as the printing fees, lawyer fees, and whatnot for our annual meeting, our 10-K and those types of things. That was about 100,000 to 150,000. The rest, Bob, had to do with our healthcare claims. We went over our insurance limit, and thus have a receivable back of about $400,000 or so, $450,000, back from the insurance company, and we booked that in Q3.

Great, that is very helpful, thanks. To LogistiCare, you gave a terrific overview. I was just wondering if you could just take a little step back and give us a little more information on the revenue trends. In your slide presentation, revenues were flat '05 to '06, and then obviously, there has been substantial growth from that time period. Could you discuss the trends there and a little with their growth history?

That is a great question, Bob. Let me address how we viewed it in due diligence and then, Tom, you may want to speak specifically to it. But two things occurred between '05 and '06, and then you look at the incredible procurement activity they had last year. The Georgia contracts were competitively procured. LogistiCare had enjoyed those since inception. There was a lower bidder in that environment, so indeed that is the one time -- I mentioned earlier in my comments -- that LogistiCare did not have a contract renewed competitively. Tom, I think that was maybe a 40 or $45 million book of business?

I think in total, that was about right, Fletcher, yes.

And then, Bob, they voluntarily exited a Washington D.C. contract that was primarily for the disabled, which was not really profitable. So one of those was, I think, a smart decision as the contract turned out not to renew. The other was a competitive situation that we believe will bear fruit for LogistiCare as that low provider, low-bid provider, is not going to be able to provide the services.

We believe as we work through this due diligence issue with them in the long-term, and we wouldn't be surprised to see that contract eventually be available. So I think LogistiCare now has some competitive threat in terms of people trying to encroach upon their business. Most states are able to see through someone presenting a lowball bid, and it hasn't really happened to them before. And most states are pretty disciplined, as in our environment, that a low bidder is just not going to be able to come in and steal our business. But those are the two things that affected that in the last year.

Just one other point on the Washington program. The RFP as it came out, unfortunately Fletcher mentioned it wasn't a high-margin contract for us, but the client loved us so much they made us stick it out through every single option year. So it was six years, but it did require us in the rebid to acquire 420 pieces of equipment or vehicles, and that is clearly not the model that we want. And it was a fee-for-service contract, so it seemed to be the appropriate time to exit.

And Georgia certainly bothered us. It is not the kind of thing you like to see happen, but one of the points that Fletcher made; with very few exceptions, our newer rounds of contract RFP process require actuarially sound rates to be submitted. And unfortunately, the Georgia one did not, and that is how someone was able to come in and significantly underprice the market. We do still operate in Georgia; we just don't have as many contracts as we started with. So we have never exited a state, and Georgia is the only one where we haven't actually improved our position on a rebid.

Great. Then just last question and I will get back in queue. You discussed the 7% to 7.5% EBIT margin. Are there opportunities for leverage with that, at least on the corporate level, or how do you view that in pricing in the future? I guess maybe just to tie the two in, could you quantify potentially the synergies for the two companies, maybe year two or year three, as you combine and integrate the companies?

You probably know how we're going to answer the first part of that question, because we get asked a lot and we typically don't enjoy SG&A leverage. I do think you have some unique opportunities here that we don't intend to force, Bob, but I do think you will see situations here because you have two companies of about the same size that do have IT departments, accounting departments, corporate departments, HR, etc. And there is going to be synergy there that we're not going to try and force, not really quantify.

The other synergy opportunities are in cost savings of potentially rent and collocating offices together in the states that we share. The other opportunity, of course, is to cross-sell. Providence's client population is much smaller than theirs, as Craig said in his comments. I think we have about 75,000 clients. They literally are providing one million rides a month, so they are dealing with a huge volume of Medicaid clients. 35% of those, Bob, we learned in our due diligence are behavioral health riders that are being transported to a traditional behavior health practitioner.

So it is subtle, and it is not anything again we've tried to put a number to, but our mission has been able to provide a home-based service to prevent those kind of clients from having to seek services out of home and ultimately in institutional type care. So there are some clearly obvious synergies.

We have done no work to date to try to quantify those, and I think as the next couple of quarters go by, we will be in a better position to start identifying the economics of it.

I would agree with Fletcher, that the focus is probably more on additional revenue opportunities to the same clients that we both enjoy as the way to ultimately grow the business and maybe improve the bottom line. That is probably the place we will be focusing.

The one place that this combination does give us some capacity, Bob, that we have never really thought we had the infrastructure before is that every state, every community, has a subcontracted provider and outsource provider for crisis intervention. And these are typically 24-hour organizations. They have to have inbound call capability; they have to be ready and able to deal telephonically with a distressed Medicaid beneficiary. And between their logistical infrastructure and capacity and our social workers, we do think there are opportunities for us to joint bid on those kind of crisis intervention contracts.

And that is a huge piece of the Medicaid budget, which is an area we have ignored because we just didn't see the way to build up the infrastructure to respond to those kind of bids. And they have not necessarily gone after this business, because they don't view themselves as social workers or treatment focused. So this marriage does create opportunities in that space.

Great, thank you very much.

Greg Williams, Sidoti & Company.

Good morning, fellows. How much of the $40 million earnout that was in the press release is assumed in the $0.06 to $0.10 accretive guidance that you gave?

I think it's 25.

That is where I was going to go. The earnout is designed, Greg, to trigger at 110% of '07 actual EBITDA. So we have built in kind of a 10% growth factor, which we believe was part of the initial valuation. The challenge, of course, with the sellers in a rapidly ramping business in the kind of '08 opportunities they had there, they obviously wanted some valuation credit for that business.

We have to finance these kind of transactions on trailing EBITDA, so that was the genesis of the earnout. If they hit their budget, they can earnout about half of that. So indeed, they would have to perform above what we have forecast for them to maximize that earnout opportunity. I think John indicated to me that clearly that is their intent, is to maximize the earnout.

That upside is not budgeted, the additional couple of million dollars, Michael, I think it would be, right, if they achieved the entire earnout?

That is correct. We would have to go 2 to $2.5 million north of the budget that we have provided.

Does that help, Greg?

Yes, that's great. So if they make the $40 million in earnouts, we're looking for accretion of more than $0.10 then.

Absolutely. It would be another $2 million of op income. You know, tax that, you're talking about $1.2 million or 14.5 million share count.

Okay. Switching gears here, just how did the merger really come about? Who approached who here? Just trying to get a sense of the genesis of the integration.

I get to preempt Fletcher on this one. Michael and I met more than a year and a half ago. We both looked at each other's companies, and LogistiCare as a company and from our investors, we were not in the market. This was not an auction. We had no interest. Clearly, we had positioned our company with coming off a very good bid year to be looking in the market probably in mid, late 2008. But thanks to Michael and Fletcher coming to us early with a compelling story, the fact that we as a management team want to stay and wanted to work with somebody we like, they were really able to convince the Board that they should have a shot at a basically unsolicited opportunity, which they were able to pull off somehow in a tough market.

Okay. I know you said you didn't quantify any synergy opportunities, but you mentioned the collocations. Can you just give me a sense of maybe how many collocations would be overlapped, or is that too early to really tell at this point?

I would say it is too early. We have -- most of our business is outsource. We have 75 contracts. We don't have -- we have significantly fewer physical locations than Providence. Providence has some, but they are very small. And I don't think for either business rent is a significant number, but it is one of several different things we're going to look at. But I would not say that collapsing our physical space would be a significant contributor to synergy down the road.

It would be more in terms of the IT infrastructure, telephony, the support services. Clearly, to the extent you can get more people in one location, there might be some savings there.

Greg, given our decentralized nature, we don't send a memo out to our Nashville office and say, you guys are moving down the street. So those things have to occur at the local level, they have to make sense; the payers have to buy into this. You have got to kind of see what you are doing other than just changing physical addresses. So again, most of that is not corporately directed in our organization.

And typically, in my experience, when you have those kind of corporately directed cost containment efforts, you do nothing but create resentment amongst your field staff. And John and I have lived through a couple of those downward-driven mergers, and we just didn't want to go there with this.

This is about attracting new business, creating new revenue, creating new opportunities. The synergies will come. What we didn't have to do was forecast them to pay the debt. So we wanted to demonstrate to our investors that we can cash flow. There's some $22 million worth of debt here. We are forecasting about $5 million of excess cash flow even in the first year, so without any synergy, the deal works. Then anything we can do together is just going to be gravy to the mob.

Okay, great. Last question. I guess, John, the question is from the payer source; how much of it is Medicaid versus HMO/commercial?

Well, HMO, it is significantly -- I would say 90% of it is Medicaid, because this nonemergent transportation benefit is a Medicaid benefit. So a lot of it is state-direct contracted. Then there is a piece that is Medicaid HMO, and then there is a relatively small piece which is the Medicare pilot and the commercial side. I would say that the non-Medicaid is probably at or around 10% of our total -- it's at 90%?

Yes. It is just a little higher; you're right, John. We are at like 85% to 86% state contracts, and then the residual being your HMO commercial book.

And John, the two Medicaid pilots, where are they at?

They are in several -- actually, they're in several different states.

Medicare, you mean, don't you?

Medicare, right. They are a little bit in the senior demographic areas, so we have a little bit in Florida and we have some out in California, potentially have some in the Midwest, and we have some in Pennsylvania.

And the point of that demonstration project is to see if you can obviously save money on the higher end Medicaid services by including a transportation benefit to this population.

I think everyone has identified that whatever you can do from a Medicare or Medicaid is keep people out of an institution, be it a nursing home or anything. So the real focus in Medicare at the moment is what are the supportive services that you can do to keep people in their home environment. And they have now noted that this transportation benefit and some of the social benefits that you all provide help people stay active and out of nursing homes. That is really what these pilots are.

They originally came out of a movement that used to be called the SHMO, Social HMO, so it is a derivative of that. And CMS is looking at this very carefully. I think they're going to find that it is very successful and it is something that we expect to go nationwide very quickly.

When will that pilot end?

The pilot ends this year, which basically means they will ask for permission to expand the service offering to Medicare beneficiaries.

Okay. Thanks, guys.

(OPERATOR INSTRUCTIONS) Kevin Campbell, Avondale.

Thanks for taking my questions. Before I ask some questions about LogistiCare, I just wanted to get you to comment on your guidance for next year. Can you give us an idea what your margin expectations are? Our revenues relative to what you guided for was about in line, but our EPS was a little high. So I'm just trying to get a sense of whether that is -- where the margins are expected to contract there?

Michael, chime in here, I think, but I think our operating income margin model is about 9.5%.

That is correct.

Okay, great. Thank you. On LogistiCare, I just got a couple of questions about sort of how it all works. Are you guys contracting with local county boards or is it with the state specifically, and who puts out the RFP again; is it a state or the counties? Do you have any particularly large customers that represent more than 5% to 10% of your business?

A very simple answer, our model is typically either a managed care organization, and that is not an RFP process, but sometimes it could be one. But from a state perspective, these are state procurements. They are with the state Medicaid agency. In smaller states, for example, say Delaware, Nevada, they are winner-take-all, so it will be a single procurement to cover every life in the whole state. In other large states like, for example, Virginia, Georgia, they may be broken into regions which correspond with their public health administrative regions.

So it's a state procurement. It is per-member per-month capitated typically, and the lengths are usually 3 plus 2 or 5 years. In a few states that are allowed to on a rebid, they contract for as long a period as 7 years, and they are very "high profile", fairly large government procurements.

Virginia stands out as a contract which represents a little bit more than 10% of our revenue, but it is actually made up of multiple contracts. We just happened to win every single region in the state. So if you really wanted to drill down from a risk perspective on rebid, we might not once again win 7 out of 7. But it is not a single $60 million contract. It is $60 million worth of revenue broken up between 7 state contracts and some HMO contracts as well.

Then my recollection is they fall off pretty dramatically from there, right? Most of the rest are 25 or 30.

Most of the rest -- a few in the '20s, some in the teens, and then they drop down to single-digit.

Okay. Why do you feel like you guys have been successful? Are you generally a lower bidder in the process and you're able to leverage off of your existing infrastructure?

No. We are almost never -- we're never the lowest bidder. We are almost never the lower bidder. We actually started this model, so we are the guys that began this business. We have a purpose-built infrastructure and training program that was designed to deliver these services, and it is a fairly simple business model in one sense, but pretty complex if you think that we are delivering around 1.2 million trips every month to roughly 6 million eligible folks in terms of the people that could call us in a particular market.

Typically, low price or price ranges between 25% and 40% of the ultimate scoring in terms of the quality of the bid, technical score, and references and experience are more heavily weighted in price. And as a company even in those procurements where we haven't ended up at the end of the day winning, we have never lost on a technical score because we have more experience; we have the systems. So it gives us a fairly significant competitive advantage in a new procurement in a state, and also a competitive advantage in rebids in states because our model is a platform model.

Most states in which we work, the Medicaid services are still on a fee-for-service basis, and we represent the infrastructure that delivers all of those folks to all of those services so all those other providers can bill. So we become a very important element in that whole system.

We share a lot of similarities in that regard, Kevin, in that clearly in the procurement process, your track record, the efficacy of your proposal, your experience in other states is heavily weighted. There is a slide in the investor presentation that shows you the dramatic results they have had in some states, literally in year one saving states millions and millions of dollars. So that carries a lot of weight going from one state to another in terms of their capabilities in prior states.

So we don't bid in the low bid environment. Typically, neither do they, but we are both accessible because of the history we have and kind of these pioneering programmatic aspects.

I will ask one quick question and then jump back in the queue. It looks like from the presentation with EBITDA of $21 million and revenue of $319 million in the last 12 months that the margins there were about 6.5%, 6.6%. Can you give us an idea of historically what those margins have been in the prior two or three years so we can see how that trend has been, and perhaps what your expectations are for next year?

Tom, do you want to do that one?

That one's yours, Tom.

Yes, sure, that's fine. I think it has historically been in around the low 6% to 6.5%, going up towards the 7% range in the last couple of years. For next year, I think as we said, we are looking at sort of a 7% to a 7.5% margin.

And what is driving that increase next year?

It is some of the new contracts we have brought on. It is some successful rate negotiations we have had with our clients. It is good control on the transportation expense management. It is items like that.

One other just quick note since you asked from a historical perspective. High-growth years for LogistiCare means slightly lower margins, because when we are bringing on a lot of business, it typically doesn't meet its mature margin expectation in the first few quarters. So 2008, much of the new business that we brought on in the very end of '06 or in '07 will be essentially hitting its stride in '08.

Okay. So it sounds like historically, you haven't necessarily seen margins compressing from higher levels. They have been pretty steady at that 6% to 6.5%.

That's correct. And it's a blend of more than one contract. Some contracts are double-digit and some are single-digit, but the blend has been in that historical range.

All right, thank you very much.

When we looked, Kevin, we were obviously looking in due diligence for issues regarding rate or rate pressure. And they have enjoyed the same kind of environment that we have, is that the rate pressure is typically on the higher end Medicaid services, and they have not really had rate pressure or renewal pressure or increasing services for the same amount of rate kind of in these preventative sides of the business.

So we agree with John's assessment that the margin and the margin forecast are a result of, one, a rapid ramp-up year. They have enjoyed a lot of rate increases. I think one of the things that we like about their model is in a PMPM environment, they have a very narrow band of deliverables. They don't have to escalate to an ambulance. They don't have to provide emergency first-aid. Their job is to transport clients to and from authorized services. So they don't have the kind of exposure that you would see in many managed care type contracts.

Furthermore, most of their contracts have some trigger that allow them to go back to the payer and negotiate a rate increase. One of those clearly that we were concerned about is the cost of fuel. And in almost all of their contracts, the rising cost of fuel allows them to go in and demonstrate the pain they are enjoying as a result of that and renegotiate the rate. And they were successful in doing a lot of that, as Tom indicated, in the most recent procurement.

All right, thank you very much.

Mark Hughes with SunTrust.

Thank you very much. Along those lines, any variability in utilization that influences, I guess, since you are operating on a capitated basis, especially when you bring on a new contract; is there some uncertainty there?

You really asked two good questions. One, do we have some variability? We do have seasonality in our business, much like Providence does. We actually also have schoolchildren and school programs.

Ours is the reverse; when school is out those people who got the social psycho service at the school now require transportation. So whereas their revenue goes down in the summer, our costs go up a little bit in the summer, because we are having to provide some transportation services. So there is a little seasonality.

Our whole business is built around service days, so that short service day months, clearly we do better on the bottom line because our revenue is fixed by the number of eligibles we have. Not to be too flippant about it, but we love big nor'easters, we love snowstorms, the occasional hurricane. All of those kinds of things that will potentially depress utilization are positives for us.

So utilization does not change really very much. It is really reflected in service days for the most part.

Right. Are there any decision points upcoming on some of these Medicare pilots?

Yes, the CMS is evaluating their efficacy beginning now, and it would mean that Medicare providers would be looking at making a benefit change, talking to CMS Fall of 2008 for probably programs that would come out in 2009. There is about an 18-month lead through the CMS Medicare program in terms of changing the benefit.

Those go into the Federal Register, Mark. You will be able to track any kind of momentum that is created as a result of a successful pilot, because they would indicate that, through their disclosure process, that they're entertaining nationalizing this benefit. So that will be clearly visible.

In our experience these are slow cycles, so don't rush to pencil in anything for a Medicare opportunity. But if a pilot is successful, probably '09, and you would begin to see that carved into the Medicare benefit.

Right, then I have not seen the slide show or I don't know if you touched on this earlier. But the free cash flow for the LogistiCare business in '08, did you share the forecast for that?

We have shared a combined forecast that's, I think, Michael -- our debt service, Mark, is about $22 million of new debt. On an after-tax basis we are showing about 30 to $35 million of free cash flow in '08.

Got you. Then, finally, the January contracting cycle, any interesting opportunities for the core Providence business? Any update you can provide on Arizona? Thanks.

Sure, the protests are over in Phoenix, and Magellan is the clear winner. We don't see any immediate '07 opportunities there. But we would be hopeful we would participate in that process in calendar '08.

The last conversation we had with California is that it appears that their intent with the new money for '08 is to distribute that to existing providers, Mark, which is a windfall for us. Rather than to have to compete, they may just increase all the existing providers' budgets.

We don't have any economic indication of that, yet. They are still processing that internally. That is one of the reasons we haven't seen any RFPs generate out of that cycle. So it may not be a competitive cycle; it may just be kind of an automatic rate increase and client increase. We will now more about that probably here shortly.

Thank you.

(OPERATOR INSTRUCTIONS) Richard Close with Jefferies & Company.

This is [Dmitri Rosanov] in for Richard Close. Most of my questions were answered, I just have a couple of quick ones. The first one is on the LogistiCare side. What is the win rate in that business for new bids, new contracts?

It is north of 80%, maybe low 90%. As Fletcher had said, in the history of the Company there has only been one procurement that we didn't -- were not awarded a contract out of. As it turns out, a year later, the winner kind of blew up, and they put it back out for bid, and we won it on the rebid. But, so it's a very -- we have a very high hit rate.

Great. Also this is for, I guess, Michael. What is the stock comp expense in the quarter?

If you look on the cash flow -- well, for the quarter I will answer your question, $456,000.

Okay, great. Thank you.

Kevin Campbell with Avondale Partners.

Thanks, I wanted to get an idea for the number of your contracts that you have that are going to be out for bid next year and perhaps the size of those.

Then, as sort of a follow-on to that, how many RFPs do you expect to come out next year that would be potentially new business?

That is a LogistiCare question?

Yes.

Of our total annual run rate or our contracted group, we have about -- if you figure our average contract is five years, we have close to a $1 billion backlog. We have approximately $60 million that will be -- are actually in the RFP process or will be potentially up for bid.

Remember, we are a state contracting period, so our contracts run from July 1 through June 30. So in the worst case, never happened, but we lost everything, we would still have a half-year impact in 2008.

In terms of our pipeline, on the state contracting side there is approximately $150-plus-million of state opportunities that are in the cycle right now. A couple of them are literally on the street and we are responding to, so we really can't give you any details about them. But that is roughly what is in the pipeline.

Historically, LogistiCare has responded to and been awarded in normal years, in quotes, about 50 to $60 million of new contract revenue. We would enjoy about $25 million of that actually in the year of award, based on when they -- they typically start in the late third quarter.

If we are responding to a little bit bigger pipeline, we might enjoy a bigger pop. But once again, 2008 numbers you are looking at show no impact of any new contracts.

Okay. Just logistically for you guys, how do you capture a new user, a new Medicaid recipient? Is it driven by the healthcare provider? Who reaches out to them to let them know your services are available?

In that respect, we are very different than Providence. When we sign the contract, we get a monthly or even more frequent upload of every single one of our -- I'll call eligible members. That is what drives our revenue.

In terms of distributing the 800 number, that is done with an HMO through their member services or through an education campaign if it is a state government. They're our 800 numbers, but there are unique 800 numbers for each of the states and each of the contracts and each of the elements of the contract.

So the states, as trying to cut their costs and encourage usage, will have a marketing campaign to encourage use?

Unfortunately, we actually -- sometimes we even have to pay for the postage. But yes, we have to have an active education campaign. But frankly, we think that is a good thing. What we do and what Fletcher does helps significantly save dollars in the whole overall Medicare/Medicaid spend. And our programs, even though we typically save 20% the first year from what they spent the year before, we are very proud of the fact that access or utilization typically goes up. So more people get the services they need after we manage it at lower cost, which is why it's such a popular model for our payers. Better predictability and more stuff.

John, if I can just add to that, I think it is a critically important factor, because like our business on the Providence side, if individuals aren't accessing care or accessing rights to care, they end up somewhere else in the system, typically. Emergency rooms, institutions. So all this front-end activity really is encouraged to keep this population integrated with their resources.

Okay. Have there been for LogistiCare any acquisitions that you guys have made historically to grow, or has it all been--?

This is 100 -- I'm a founder, geographer, I don't know how to buy stuff. So this is a 100% organic growth play. It is homegrown.

Great. Are there any big barriers to entry in the business? What you see as sort of the key risks?

I would say there are very significant barriers to entry. Since we started 10 years ago, we have had about 11 competitors who have made runs at us. Eight of those have exited the business.

We currently -- our competitors are either asset-heavy transportation companies, or government-outsource IT companies. This is a unique blend of logistics, technology, call centers, and case management. That is one barrier to entry.

Once we are in, providing these services in a community, every healthcare provider in a state has our 800 number. Their fax machine is programmed with our number. Their case manager is used to talking to my case managers. They like using my Web access. They know my 800 number.

We have nursing homes, facilities that know and depend on LogistiCare. Then we have a cohort of local small businesses who are transportation providers who like the fact that we help manage them and help their cash flow. And then we have bureaucrats that like the fact that we save them money.

So this is a big stakeholder, big constituent group, that once they go through their paradigm shift of moving to our model, it's very, very difficult to take us out of the middle of that model. It is a very disruptive change. So those, I would say are the two significant barriers to entry.

Frankly, this is a reference and experience model. We have more references and more experience. There is not a single -- we have one other competitor that has done business in three states. Most of our competitors do not even have a single state contract. So we are sort of an order of magnitude more experienced than the rest of the guys.

The risk question, we obviously looked at in the acquisition. They have much bigger contracts, obviously, much more concentration.

They have indeed never -- the downside risk, I think, to our model, our forecast, someone would have to fire them. They would have to disrupt a contract, terminate the contract. And it just -- it never happened. Given the quality of care that we saw, we don't anticipate anything like that happening.

So government-outsourced contractors indeed have been fired, but it's typically because they are inept and they are just not providing the service that they contracted to provide. Or the other issue which we have talked about for five years, they are too profitable. They are greedy, they are flashy, they misappropriate government money. Well, that is certainly not the case here.

Look at our margins.

Yes, (multiple speakers) 7% margin. So indeed they are endeared, I think, to the same tolerable issues that we identified when we started our company; that in order to sustain longevity in this government-outsourced sector, it is not a big margin business.

So a lot of the risk that we would see with the big-volume contractors, LogistiCare has taken the same kind of mindset to their payers that we have with ours.

Outside of, say, lost contracts, what would be a key operational risk that would sort of maybe perhaps drive utilization upwards, and therefore you would make a little bit less? What type of event could happen or has happened in the past that has put pressure on margins?

There are two. If we had a spike in utilization, we gave you an example of the summer school, which was demand that increased. When demand goes up, we have a limited capacity in our contracted credentialed vehicle network, which means we have to go out of network, which means we have higher cost. So that is one way a particular spike for a very short period can raise our cost of purchased transportation services.

Another real factor that we have dealt with recently is the cost of fuel. We were negatively impacted when the hurricanes hit. As Fletcher pointed out, in most of our contracts we do have an opportunity to do a rate negotiation. Some of them have an actual fuel surcharge built in that is tied to the level that fuel was when we signed the contract.

But as Fletcher also pointed out, and you all need to be aware of, with government payers, you have to feel the pain, you have to demonstrate you're having the pain, before you can go back in and meet with an actuary and solve a problem.

So our history is very good about solving problems and having them stay solved on a forward-looking basis. But it is rare for states to totally make you whole on a look-back.

The most obvious risk is probably an automobile accident. You have got thousands of vans, hundreds of thousands of passengers. What we like about the model is that these are not LogistiCare drivers. These are not LogistiCare vehicles. These belong, Kevin, to the subcontractors.

So they have an indemnification level there; they have some contractual agreement. So if someone is an accident, they are obligated to care their own insurance. They would go to them first. So they have dealt with the risk that a lot of the big vehicle companies have, which makes it a very hard for them to get insurance because just of the mathematical impact of putting thousands of vehicles on the street with thousands of drivers.

Their model kind of moves that risk to the subcontractor, which is part of what we really like. That is the thing we identified was probably the most risky, was some sort of vehicular accident, or pattern or trend of vehicular accident.

Great, thank you very much for your time.

Thank you. I think that is our last question, Alison, so thank you very much. As we indicated, we will be out on the road. If we didn't get to something today, please call Kate in our office.

We are going to be in New York, Boston, over the next couple weeks. If you're interested in seeing us, make sure that either Alison or Kate know. We are happy to get out and about and tell our story.

I think that you began to hear today that we believe it is very compelling in terms of not only how our investors perceive it, but how Medicaid will perceive it, the opportunities as states move to this model, the opportunities in Medicare, the opportunity for us as a collective to really focus on what is the biggest issue within Medicaid today; and that is the movement toward front-end services.

We are blessed with the ever-increasing Medicaid enrollment that is now almost 58 million people. This is a good congressional year for us under the Democratic Congress. They are proposing a 7% increase in the Medicaid budget.

You are following probably the SCHIP controversy between Congress and the President. That is not about cuts, mind you; that is about how big the increase is going to be for that population. The President has proposed a $5 billion increase. Congress is asking for a $35 billion increase. Whatever happens at the end of the day, more children and families are going to be eligible for both of our kinds of services.

So as states remain under huge demographic pressure to deal with this population, the ACLU is hovering out there, ready to file a class-action lawsuit against any state that tries to ration this care or deny this care. And these two Companies are really the only two in America that have focused on the front-end delivery system. The low-margin side of the delivery model. We have done it for 10 years, it is sustainable. We're going to do it for another 10.

So if you want to see us or have any more questions, please follow up with our office. We will see you out and about or talk to you all next quarter.

And also -- sorry. Visit the LogistiCare website, too. There is probably a lot of information there, www.logisticare.com.

Thank you very much.

Thank you for joining in today's conference. You may now disconnect and have a great day.