ModivCare Inc (MODV) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first-quarter 2008 Providence Service Corporation earnings call. My name is Carissa and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS)

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

Thank you. 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 first quarter ended March 31, 2008. You should have all received a copy of the press release last night. If you'd like to be added to our e-mail list please call Devin Rhoades at Cameron Associates 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 May 15. The replay number is 8882868010 with the pass code 82974931. The call is also being webcast with a live replay. To access the webcast, go to www.provcorp.com and look under the event calendar on the IR page.

Before we get started, I'd like to remind everyone of the Safe Harbor statement included in the press release and that the cautionary statements apply to today's conference call as well. 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 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, May 8, 2008. The Company may choose from time to time to update them and if they do, we will disseminate the updates to the investing public.

I would now like to turn the call over to Fletcher McCusker, Chairman and CEO. Go ahead, Fletcher.

Alison, thank you and good morning everyone. Here in Tucson today are Michael Deitch, our CFO; Craig Norris, our Chief Operating Officer. In Atlanta today is John Shermyen, CEO of our NET Division LogistiCare as well as Tom Oram, their CFO.

These are incredible and challenging times for us. Our revenue has nearly tripled. We now have over 1000 government contracts most all of them will cycle July 1. Our core social services client count is now over 80,000 clients. While much of our quarter-over-quarter growth can be attributed to the LogistiCare acquisition, we are also enjoying solid organic growth in our home-based services even in these very trying economic times.

In previous recessions we have flourished as states look to more to innovation and cost saving programs than they otherwise might without the consistent economic pressure. We continue to view our Company and its programs as part of the solution to these economic issues not part of the problem.

Most of the questions I get as I travel are related to the economy and its effect or probable effect on our payer organizations which remember are all local and state government. What we have stated and continue to say is that so long as state and local payers have discretion over the allocation of funds, we believe we will disproportionately benefit from these tight budgets. We will be better able to speak precisely to the impact of the current recession after our July 1 contract cycle date. As we sit here today, however, we fully expect to renew every one of our 1000 plus contracts. We only have one or two that have expressed any concern over rate or volume.

The demographic pressure placed on state government continues to exacerbate our payers. The executive budget office estimates that Medicaid will grow by over 2 million enrollees in 2008. We have seen some rumblings in a couple of states, namely California, where Governor Schwarzenegger has proposed a 10% across the board cut. This is the first time we've seen a gubernatorial proposal for an across the board remedy. Historically state leadership prefers to deal with deficit issues by prioritizing funds. The Governor's plan would impact a book of business for us in California but I will tell you that his plan is not going very well at the state legislature.

The programs that fund us through Proposition 63 are exempt from this plan. In fact, we have received a 10% increase in those funds. And at the same time California is proposing cuts, we are winning new business in the state at a level that would have more than offset any lost revenue. It's important to remember that California for us is also a cost plus state so if our $20 million book of business is cut by $2 million there, the contribution impact to us is only $140,000.

Likewise there are highly public issues in North Carolina that have frozen business growth there for us as the state sorts out its explosive unregulated growth in the outsourced sector. Last year North Carolina allowed any provider to open up a community-based program and their home-based budget grew 10 times. Of 300 audited providers, the state has asked for money back from 297 of them. We're pleased to say that we are not on the list.

North Carolina has consequently hired Mercer to review the situation but now public Mercer plans suggests that the state consolidate the provider market.

We won our second-largest contract recently announced in El Paso during the recession and have added over 5000 clients to our base business during the first quarter. We hear no congressional traction regarding Medicaid cuts. The CMS proposed rule change regarding the transportation benefit does not affect us. We have built-in buffers to rising fuel costs. I think all this to say that we like the way we are positioned for a recession. We will know precisely in a month or so our contract renewal rate but we expect to grow our business consistently with our 20% historical growth.

The most recent quarter is representative of what we believe we are capable of during an economic slowdown, continued organic growth, great collections, increased client volume from the reassignment of clients away from other providers and little or no margin pressure.

Except for about $350,000 of unanticipated audit costs primarily as the result of our acquisition of LogistiCare, we would have been ahead of our earnings plan. As you know, we are ahead of our plan on the revenue side.

We have moved to KPMG, that announcement for this quarter given the size and complexity of our international business derivative accounting and segment reporting. I would like to add that this is not a negative reflection on our friends at McGladrey. We enjoyed our relationship there and we like the people that we were involved with particular the Phoenix and Las Vegas staff. But I think the Company and our audit committee felt compelled to move to a Big 4 firm.

With that, Michael, I will let you walk through the quarterly results.

Thank you, Fletcher, and good morning everyone. In our first quarter of 2008, revenue totaled $173.7 million, up from $60 million for the first quarter of 2007, a 187% increase. Organic growth accounted for 9% of the increase with the remaining 178% increase due to companies we acquired in Oregon, Pennsylvania, Canada and LogistiCare which is headquartered in College Park Georgia since the first quarter of 2007. Excluding LogistiCare, we grew 9% organically and 20% through acquisition first quarter 2008 over first quarter 2007.

With respect to Providence's historic business for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007, home-based revenue grew 32%. We grew 10% organically and 22% through acquisitions. Foster care revenue grew 23%, 7% organically and 16% through acquisition. Management fee revenue grew 9.6% all organic. During our first quarter, LogistiCare contributed approximately $95.6 million in revenue.

First-quarter operating income totaled $10.9 million which was 6.3% of our revenue. This compares with $5.3 million and about 8.8% of revenue for the first quarter of last year. LogistiCare's operating income margin inclusive of depreciation and amortization was approximately 6.6%. Operating margin on Providence's historic business was approximately 6% which was inclusive of management bonuses and the majority of auditing and Sarbanes-Oxley costs for 2007. Excluding the bonuses and auditing costs, operating income margin for Providence's historic business was approximately 9%.

First-quarter net income totaled $3.7 million which was 2.1% of our revenue. This compares with $3.3 million and 5.5% of revenue for the first quarter of last year. First-quarter diluted earnings per share totaled $0.29 with approximately 12.45 million diluted shares outstanding compared with $0.28 and approximately 12 million diluted shares outstanding for the first quarter of last year. I anticipate that our second-quarter diluted share count will be similar to our first quarter.

In our first quarter, we recognized almost $900,000 in auditing, accounting and Sarbanes-Oxley complaints costs, up from approximately $500,000 of expense in the first quarter of 2007 with $350,000 of the increase primarily related to acquisition activity including LogistiCare.

Our 2008 blended effective tax rate of 38.5% is comprised of an effective rate totaling 40.3% from Providence historic business, 39.6% from LogistiCare, and 32.2% for Canada.

At the end of our first quarter, our days sales outstanding was 41 days, down from 43 days from our fourth quarter of 2007. The acquisition of LogistiCare served to decrease DSO from historical levels primarily due to their prospective payments for the services they provide. Management fees days sales outstanding was 187 days at March 31, 2008, virtually unchanged from 186 days at the end of our fourth quarter of 2007.

At the end of our first quarter, we had $49 million in unrestricted cash resulting primarily from $12.2 million in cash provided by operating activities during the quarter. In Q2, we will be making an earnout payment for our 2006 Missouri acquisition totaling approximately $6.7 million and convertible net interest of approximately $2.3 million. Also in Q2, we are obligated to pay estimated tax payments for both Q1 and Q2 as well as our regular quarterly principal and interest payments on our term debt.

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

Thanks, Michael. For the quarter, we ended with a total combined census between our owned and managed entities of 80,628 clients. Compared to Q1 of 2007, this represents a total census increase of over 5000 clients. In addition, approximately 7 million individuals are eligible to receive services under our nonemergency transportation program through LogistiCare.

All clients are being served from 414 local offices in 36 states, the District of Columbia and Canada. We have added 95 new local offices since Q1 of 2007. Combined between our owned and managed entities, there are over 10,000 employees serving 1030 government contracts. This represents an increase of 125 contracts as compared to Q1 of 2007.

Overall we are continuing to see strong demand for our programs as well as success in cross-selling our various services such as the workforce development initiative in El Paso and the expansion of our tutoring services into California and Texas.

We will continue to focus on our organic development efforts and replicating our programs across hundreds of our local markets across the country. Combined with strong stable leadership teams within each state and the regional levels of our operations, we are in good position to continue our growth and manage the quality of our programs and outcomes. Our integration efforts with LogistiCare continue to evolve and I will let John address some of the progress thus far.

With that, I will hand off to John Shermyen, the Chief Executive of LogistiCare. John?

Thank you, Craig. I agree. I think we are off to great start primarily because the Providence management team has a lot of experience with acquisitions. Our focus has been primarily internal to make sure that we can deliver on the promise of 2008 in spite of a challenging business environment.

Integration is always a potential avenue to create positive synergies and reduce costs and we have begun by looking at IT-related elements primarily in the telco hardware and software purchasing areas. Those are our immediate ones with a longer-term project being the potential for adding many of the Providence business processes to our LCAT system to improve management reporting.

On the strategic side, we have established a senior level business development team which is looking at joint bidding opportunities and more importantly the development of new and approved service offerings for our shared clients. We see real potential in services that are designed to support seniors to have the high quality of life while remaining in an in-home setting.

We continue to respond to opportunities in both the government and managed care arenas that will have an impact primarily in our 2009 budget. Our experience is similar to that of Providence, tight budgets often focus agencies and payers on ways to deliver services in more efficient models. I would expect that we will have increased interest in our Non-Emergency Transportation Service offerings and our new service offerings which will help with constrained budgets in fiscal 2010.

Our senior management team is very engaged and working very hard and we continue to add operations management to support our new business development efforts. I'll look forward to answering specific questions during the Q&A segment of the call.

John, thank you very much. Finally, we would like to talk about our 2008 guidance and then we will take your questions. I think if you took note of Craig's statistics, you begin to understand our sense that not only are we recession proof but perhaps anti-cyclical, 414 locations, over 10,000 employees, over 80,000 clients, over 1000 government contracts. These are indeed increasing in spite of the current economic environment.

If you've known us for some time, you know that our guidance is pretty specific. We tend to resist the opportunity to speculate about revenue, our earnings and typically guide to what our payers have told us. Our original revenue projection for 2008 of $670 million was issued back in November. We've had one press release that affected that, the announcement in El Paso, where we guided to an additional $10 million of revenue and an additional $0.02 of earnings in the current year. Those projections are holding nicely. We do want to wait, however, until we are through the July renewal cycle so we can specifically address any issues as they relate to rate, volume or payer allocations to us.

Again, we expect no issues there but we want to be perfectly clear when we guide that we are not speculating about what our state payers have told us. We are comfortable, as Craig said and John echoed, with the integration process at LogistiCare. Our public commitment was to quiet our little tuck-in acquisition strategy until we could review the integration progress. We are now reengaging our pipeline and fully expect to close traditional small deals in Q3 and/or Q4. We expect Q2 to look a lot like Q1 without the executive compensation or management bonuses.

And with that, operator, I think we are ready to take questions.

(OPERATOR INSTRUCTIONS) Bob Labick, CJS Securities.

Good morning. First question I wanted to ask. On the last call we discussed how LogistiCare does not have any direct fuel impact. But obviously in the continuing rising fuel environment it's still on people's minds. Could you just discuss the feedback from I guess the subcontractors and any systems in place over time if fuel continues at current levels or to escalate or how that may impact LogistiCare down the road?

Let me remind you of what I said and then I will the John address the question specifically. Because we asked this question a lot during the due diligence process before the acquisition. Because LogistiCare is not a fleet operator but a broker, they do not have a direct cause and effect relationship between the cost of fuel and the cost of doing business. It is indeed passed on to the driver subcontractors. To the extent they feel pinched by the ever increasing cost of fuel, it does put pressure on us, Bob, regarding our driver network.

And you may have picked up a couple of articles in communities where LogistiCare operates that we have some disgruntled drivers concerned about our ability to pass on these increases to them. In that situation, LogistiCare management can and does go back to their state payers to put the same kind of pressure on them regarding their rates. And so far so good.

However, none of us can anticipate what the environment would look like if gas goes to $4 or above $4 a gallon. So I think we are comfortable in the present environment in terms of our ability to manage and buffer these issues. We've never seen the kind of strain it could put on us if it continues to increase. How did I do, John?

Pretty well, Fletcher. I think directionally, Fletcher is absolutely correct and what I think it would be naive of us to say is that these increases in fuel are not impacting us, every one of us every day is impacted by this fuel. So that we -- our employees are wanting to carpool more, there are two areas that the fuel potentially is a challenge to us and Fletcher is correct. We do not have a contractual obligation to our subcontracted transportation network to bill them a CPI or anything in the rates but clearly as we are not a transportation company, we have to have a robust network to do what we do which is deliver transportation services.

So we are impacted in one way which is those Medicaid members who rightfully use a friend or a relative to go to the doctor with the increased fuel they may opt not to and that could impact our utilization. And in terms of the actual increase of fuel and the majority of the contracts that we have, we have a mechanism, our contracts are reviewed by actuaries. It is happening this time of year to reset our rates for the following fiscal year which I remind you begins July 1. And obviously we are looking at a transportation CPI index which incorporates fuel so that we are -- that is one of the mechanisms that protects us. In a few of our discrete contracts, we've actually prenegotiated a fuel surcharge and that was based on the cost of fuel in the local market at the time we signed the contract and that is a direct pass-through to our provider base.

So I would say that where this impacts LogistiCare potentially is clearly there is a lag as an actuary is by nature and training someone who is not going to believe you unless you show them the number. So as we have said before, we have to essentially feel some of the pain demonstrated and then that is baked into our following year actuaries. And in -- we have not seen it enough to really quantify it but our expectation is that there will be some uptick in utilization by some of our episodic riders. The positive is that may be offset by the increase in enrollment from riders that typically would not use our service.

I think that is the offset, Bob, to some extent that we see on both sides of the business. Medicaid enrollment is indeed up. That increases volume that allows LogistiCare to increase driver contractor volume so we have some trade-offs that we can make to the network in terms of shortening the distance of their route, increasing the number of people in their territory and that is working. I think we are just careful not to say we can do that at $5 a gallon.

Greet, that is a very helpful answer. Just shifting over to the July procurement cycle. When should we typically start hearing of the contract for both LogistiCare and on the Providence side? And what are the range of opportunities that you are bidding on?

We've already begun to hear. What we don't have of course is any official word which is the reason we are holding off on guidance. The downside to our guidance of course is someone would have to fire us. They would have to terminate a contract, fail to renew a contract or reduce our rate. As of the middle of May, we've not heard anything like that on either side of the business regarding any catastrophic implications for the '09 fiscal year. That is July 1, '08 to June 30, '09.

Likewise we've not heard a lot about cost of living increases, volume increases, new territory or geography that otherwise might come to us through these routines cycles. And as John mentioned, they are negotiating rate with many of their providers. And it is just too early to be able to be able to tell you definitively what the impact of all that is going to be.

So on our side, we typically know in the middle of June pretty much where everybody is. We have seen it drag out a little bit into the summer and I expect the same is pretty typical for LogistiCare.

All that being said, we will know more, we are comfortable with what we have shown as a forecast subject to these kind of renegotiated contract and recycled events.

As it relates to the pipeline, I think it's important first of all we clarify the use of the word pipeline. In many businesses and I know many analysts view pipeline as business backlog that the only thing that has to occur before that business is achieved is time and that is clearly not the case when we discuss pipeline. For us, it is basically a business opportunity, competitive contracts, public announcements that have been made regarding our payers' intentions. And in that regard, that number still remains very large, well north of $100 million for LogistiCare, something approximating $50 million or so on the Providence core business side.

We do expect, Bob, some of that to slide given that it is May already and you haven't heard on some of those awards, we expect that you may see some delays. We were pleased to see the Connecticut announcement yesterday and it may be that the log jam will break on some of these other potential awards. None of that of course is in our guidance and as John has consistently cautioned us, that even upon an award like yesterday's, don't pencil that into our numbers until the contract is in fact signed because it could be protested and delayed or a number of other things could prevent it from starting July 1.

So, we are comfortable with the size, scale and scope of the activity. We are optimistic about our renewal situation. We are just being conservative in terms of converting that into guidance.

If I could just add one point. At LogistiCare, it's a little bit different than the Providence core business in that our contracts when we respond on RFP are multiple years so that in your traditional description, Fletcher, of a pipeline or a backlog, that is in a sense a feature of our business so that what we are really waiting for in our core contract is the outcome of the actuarial adjustments to our rates. And clearly those always are a positive upward adjustment.

And then in terms of new business which would be new states or new opportunities, Fletcher is correct that -- and I think we have always said this, our revenue recognition tends to be a little lumpy because we don't drive necessarily when the state needs to make a decision. But the good news for everyone on the call is there has been no business awarded that LogistiCare hasn't got at least our fair share or more of.

So there has not been any business that has been awarded. There has not been any business that has been lost. And so the volume of potential business is the same or slightly increasing when we get awarded and when it actually impacts our revenue probably has slipped by a few months or potentially a quarter. But to reiterate Fletcher's earlier point, that was never in our numbers.

So this is a bit of a waiting game but it is not in any way a negative and to the extent that Medicaid enrollment continues to increase, those contracts will grow in value organically or naturally because of the enrollment and the nature of our business.

Great. Thank you very much.

Mark Hughes, SunTrust Bank.

Thank you very. Michael, could you talk about the cashflow outlook for this year? Obviously very strong Q1, you mentioned some Q2 issues. Where do think we are going to shake out in terms of free cashflow for the year?

I really don't project cash flow for the year. We do it quarterly for our needs. Obviously we had a great Q1, best ever, helped of course by LogistiCare and also our collection efforts on the Providence side. Our DSOs are down a couple days. So all that contributed to a great Q1.

Q2 historically every year has been a challenge because the income tax payments double up in that quarter. So I don't foresee anything out of the ordinary for 3 and 4, there is nothing that I know that is coming extraordinary now. Next year we have another earnout for WCG and what not but nothing out of the ordinary for this year, Mark.

Okay.

It should be pretty stable.

Right. How about the update on the Maricopa County situation?

Nothing new there, Mark, that we've heard. We expect some news in Q3 or Q4 of this year. I think we've indicated publicly that any opportunity there is is probably an '09 opportunity. It's pretty much the status quo in Phoenix as we understand.

Got you. Great, thank you very much.

Greg Williams, Sidoti & Company.

Good morning, everyone. On the script I think you mentioned or the press release maybe it was, you mentioned integration synergies with LogistiCare, collocation synergies etc. which I don't leave is in your guidance. So can we treat that as an outside to your guidance or is it really too small and unquantifiable at this point?

It's anecdotal. We've not put a number to it, Greg, you are exactly right. I think it's culturally very positive. Any time you put companies of the size together, you worry about the impact to the people and I think our first four or five months together was really focused on the cultural aspects of the two organizations and we are thrilled I think in terms of the response. All the management is still with us which is sometimes challenging in a merger of this size. But I think the organizations really like each other which has been an important part of our coming together process.

So we are seeing voluntary, if you will, synergy with -- a lot of corporate mandates where field based organizations are looking for opportunities. We have yet to appreciate the economics of that but it is upside as opposed to downside.

Okay. And on that note, I think there was a $40 million earnout for the LogistiCare acquisition. Are they then on pace to get those earnouts?

So far through Q1, yes. But part of the audit expense that was a little over budget is not only did we have to audit year end for LogistiCare, we had to provide a stub period audit as of the date of the acquisition. We also have to provide a baseline audit of the EBITDA, Greg, for the earnout base. So we have that number now and LogistiCare is on track to achieve their earnout.

Okay. And just switching gears, Michael, and talking about the tax rate, I guess I was using 41% and going forward but it looks like if LogistiCare is in the mid 30s in Canada in the low 30s, is 41 still a good number?

No. LogistiCare was 39.6 based on their state mix. Canada is a growing business for us and quite a bit of earnings is attributed to them and they have a lower rate, provincial rate. So I would use -- I am using 38.5 going forward. We also have Deloitte & Touche doing these calculations for us. They spend a lot of time getting it perfect. And so I have great confidence in that number.

Okay. Just a couple of questions. I am still hung up on the bonus management compensation. You were recalibrating to the industry I believe you were saying last quarter. Are you recalibrated? I'm just wondering, are we going to anticipate another bonus next year or did you increase your salaries where there is no more true up?

The only bonus, Greg, we've seen in 12 years so I would point on another on in 11 years. We don't expect one, we haven't forecast one. That was part of the comp committee's catch up to us and they used the interest rate savings as the opportunity to do that without really impacting operational performance.

So our salaries have been increased per the Mercer study and we don't foresee any unforeseen bonuses now. If you look at our proxies, you'll notice that we do have an in-place bonus plan but it is driven by a plan. So we would have to achieve planned results so there wouldn't be any additional expense to any bonus related to our current package.

Got you. And just final question. Just any updates in talking to the Board on your shelf registration? Any plans there?

No plans at all. We filed that to be opportunistic. I believe I can say that we did receive a no review letter from the SEC in that regard. Part of what we were doing strategically is to get that piece of it done and we thought we might be reviewed given the size of the LogistiCare acquisition. If you do the math at the current stock price, it makes no sense for us to offer any equity to pay down our debt. It only becomes attractive if the stock is in the high 30s.

So we have no need to raise cash, as Michael suggested, we have almost $50 million in cash. And we've got an untapped line of credit in that regard. So, no plans currently, Greg, to do anything on the equity side.

Okay, great. Thanks, guys.

Richard Close, Jefferies.

Yes, thank you. Just a quick question on the guidance, I guess you guys are just being really conservative or are you foreshadowing maybe the loss of the some contracts? If you annualize what you did in the fourth quarter on the revenue side, you are getting almost $700 million in revenue versus keeping your $673 million. So if you can just help me out on the delta there what is causing you to really keep that revenue estimate button down?

We are being conservative, we just want to be precise. We agree with you in terms of run rate, it's approaching $700 million. That will hold. If indeed we do not have any renewal issues, contract terminations, rate reductions, anything that will penalize us. The good news in that regard is this is a short-term anxiety. We would know precisely where we are in four to six weeks so we -- didn't want to issue a number and then miss it. Nor did we want to issue a number that would be lower than what we might enjoy. The first quarter indicates to us that the recession is indeed driving business to us. And if that continues through Q2, we would expect to see some volume increases in our renewals.

So we just want to get through the cycle and then guide you precisely to what our payers have told us. And we will do that as soon as we can.

With respect to -- mentioned in the first quarter driving business to you. I guess the out performance versus my expectations was primarily from LogistiCare and the Providence business fell a little bit short. I was wondering how did Providence match up versus your internal projections?

Richard, nothing way out of the ordinary. It's pretty much as expected.

Our plan -- our close to plan -- our business is generated by client volume. Enrollment doesn't necessarily affect us. Increased enrollment would immediately impact LogistiCare so that we will see if there is pressure on our payers, we will see that in our contract renewal, Richard, as opposed to immediately because most of our contracts, as you remember, do not exceed contracts. So that's again, we'll know more about that in the July cycle.

And then with respect to I guess the delays or slippage, John had mentioned. Is that -- I mean are you getting any indication whether that is due to potential changes on the Medicaid flexibility for states or anything like that? Or is that just there is nothing you can really tie to those delays?

No, this is John Shermyen. It is really status quo for our industry. Those states obviously that currently contract with us are looking at actuaries doing their work and looking at their budget and negotiating our rate for the following year. Those states that are looking at how do they continue to provide these services, remember in the state budget there is what we call the big budget and the supplemental budget. And basically what they do is in the early part of the legislative session they look at what their current forecasted revenues are and they adjust the budget to take care of any shortfalls or problems that they may have and what they've already committed.

Then they look at the big budget which is the budget that would dictate the rates for the following fiscal year, July 1 through June 30. And what we are finding the positive is many states are saying we have some real fiscal pressure, we need to do something innovative and they are exploring our model and other models to contain costs.

What has slowed things down is that same bureaucrat, if you will, is in a difficult budget cycle and they are not focused on running their business to be frank with you so that putting out the request for proposals and really working through that has been we are finding kicked to the end of the budget cycle which basically means pushing it out a quarter. But none of the areas that we were expecting RFPs to come out have any indication they are not coming out. As a matter of fact, when we look at certain state budgets they have already -- which we love -- they have already baked in, if you will, the potential savings for making these kinds of changes which pretty much forces their hand to then move forward because they've already built a budget around the change.

So it is really normal in our business to see pressure which creates demand and an opportunity but it takes time for them to engage on the opportunity and then putt it out for bid. This has been our history for ten years.

And then, John, as a follow-up, with states that you are currently operating in, if you don't get a renewal or the renewal process gets delayed, there is no risk that -- you will still continue to provide the service --?

Oh, absolutely. The best way to think about it is I'm debtor in possession. So in may states, I would say at least one-third of our state contracts traditionally have been extended six months and in some cases two or three years because it is difficult to put out a procurement. They don't really want to see the change, they are very happy with the status quo. And said that is of no concern to ours. Remember ours are multi-year contracts and we are in that process right now where a couple of our payers are not getting their "act" together and will be extending it.

John, for this year, I think you had three renewals, Oklahoma, Missouri, Connecticut, right? So you have heard on two?

We actually had more than that and we've heard on most of them and I'm sure that our expectation is by the end of this month we will have heard on all of them. They will -- our expectation is all positive answers.

And then, Fletcher, just my final question here. I guess on the Prop 63, how is the funding there? If I'm not mistaken the funding in California on Prop 63 was related to people making over $1 million or something like that. Obviously bonuses are down and stuff like that across the board. Does Prop 63 funding, is it not solely tied to the $1 million number or if you can just walk me through that.

It's an excise tax, a special tax approved by referendum It is a 1.0 percentage tax on everyone in California that makes over $1 million. It is allocated to the counties, Richard, on a population basis and distributed by the counties. So it is outside of the governor's budget, it is outside of legislative purview. It is the mandated program.

What they did in January of this year is rather than to competitively procure additional business, they just gave everyone that was in that program a 10% increase across the board. So we have already received that and enjoy that for this current year. So any impact that you are suggesting millionaires moving to Nevada or people's incomes dropping and that tax base dropping, we would see that in '09.

Okay, thank you very much.

Jason Gold, Aurarian.

Good morning, guys. You mentioned in the prepared remarks that you didn't think that the CMS proposal to make it optional for nonemergency medical transportation would have any impact on you. Yet it seems as though reading some websites there are some folks quoted suggesting that they are worried that it would have some impact. Can you talk about why you think it would have no impact to you? And if there has been any change in the budgeting cycle as people try to figure out what impact this will have on the industry as a hole?

I would be more than happy to. Every state in which we have a nonemergency -- NET broker contract went to the waiver to get this way of doing the business and they have no interest in going to a benchmark plan. Keep in mind that the clients that LogistiCare serves and Providence Service are probably almost 99% exempt from -- they are not the population that a state can move into the benchmark plan, these are people that have a guaranteed benefit which includes NET. So even if a state did move into a benchmark plan, it would have de minimus -- frankly such a small impact that we couldn't calculate it because we really couldn't find the people who might not have the NET benefit.

In our looking at CMS and reviewing back of the past few years, any state that had asked for a benchmark, the only state that even mentioned NET was the state of Idaho who was going through the waiver program to frankly put in a nonemergency transportation broker model and get permission to do that. So we are very, very confident that it is going nowhere.

And the other point is remember this is merely a proposed rule. It has not become a rule and a rule is just an option and an opportunity. It is not a mandate. So we don't expect -- we would be surprised frankly to see the rule even adopted and we don't expect that it's going to happen under this administration because there is going to be a change in Washington and these are the kinds of rules that typically take a long time to work their way through.

Now the e-mail traffic and the blogging that you are seeing is really coming from the public transit and the community transportation groups who are very concerned because the NET program is a significant portion of their funding and how they pay their bills and their providers. So they quickly made their presence known and I think that is frankly that is a positive, puts additional pressure on this rule probably not happening.

Jason, I'm going to give you a website here in a minute I think that is kind of a definitive source on this. But I had kind of the same reaction; a lot of the first readers did to this because we are just not familiar with the jargon, terminology these benchmark plans that John talked about. But the rumor mill I think has contributed to this by suggesting that Medicaid was somehow trying to dismantle the transportation benefit. And when you go back and look at the history of this, in 2006, Medicaid allowed the states to develop what John called these benchmark plans. And they were designed to be an HMO like product that the states could offer commercially to Medicaid beneficiaries to entice them into a different benefit package.

Only six states in two years have actually implemented these plans. So there are very few states that have actually followed the government incentive to develop these plans. So the proposed rule was only designed to affect the benchmark plan which is kind of the Cadillac, if you will, of the Medicaid menu. It exempts virtually every needy person. It in fact, does not even allows states to have the TANF families, the medically needy, the medically fragile. They are not even allowed to enroll in these benchmark plans.

So the definitive source for this and I will do this slowly enough so that people on the call can copy it is www.CMS.HHS.gov/deficitreductionact/21_benefits.ASP. And that is the Medicaid site that talks about the benefit, this rule change the states that are involved in it and we can assure you as well having done the research that this rule change even if it in fact is passed has no impact on the Company.

That is very helpful. Just one other question about that and we certainly will read this. You mentioned that your population is 99% exempt. Is there some literature that I could read that the investor community could get their hands on that would give us some comfort about that?

If you will read -- and its a slog -- but if you will read through what the documents on the website that Fletcher just referred you to, it basically walks you through what a benchmark plan is and who you can operate a benchmark plan to. And it is a long list but if you will keep careful note of all the exclusions when you add all those up, we could not find any of our members that weren't on that excluded list. And keep in mind that at the beginning of every month typically, we are getting an eligibility file from our payers be they state payers or managed care payers. And in that is some demographic information about which program they come from and when we look at our downloads, we don't find any lives that are coded in one of those classes of Medicaid members who could be excluded from the NET program even under benchmark program.

I don't think to put you guys on the spot but we did a little bit of work on this topic because we were concerned about the exact same thing. It seems as though the primary exclusions are people with significant handicaps, pregnant women, mental deficits, so on and so forth. And so yes there are several of them. But we couldn't find anywhere in LogistiCare's website or materials and frankly we called LogistiCare, we couldn't find anyone there who said, 99% of our population are these people. Rather they told us our population sort of spans the whole group of folks. So I'm just trying to reconcile that 99% exempt number.

You are not going to get it from us and you are not because not every state that we have passes on some of that information that you are requesting is HIPAA information and some of it we frankly can't give you. What you -- what we can say is we've talked to our payers and we've looked at the population and we've done absolutely everything we can do to scrub the numbers.

And when you mentioned age, blind and disabled, chronic, crossovers, TANF populations, single moms, pregnant moms, prenatal moms, kids, that is the Medicaid population. There really is no one else that is covered by Medicaid who is not in that group that you just laid out.

The biggest exclusion there which is hard to see, Jason, it took some while for me to even understand it, I've been in the business for 35 years, is the exclusion around TANF enrollees and that basically is welfare. It says anyone that is in the welfare system is exempt from these benchmark plans. And if you think about the logic of the transportation benefit, the people that need rides are the people who are the poorest.

So again, as John suggested, we have no concern about this rule and its impact upon us. If you read the rule itself, which is available online through the Federal register, it also speaks to this exempt population. And virtually everyone that we are currently providing transportation to, as John suggested, is in one of those exempt categories.

It's difficult to do the math and I apologize that I can't tease out the potential one or two people who are currently on our rolls that fall into one of the excluding categories. Like I said, if you read through the exempt categories, it is very, very difficult to find anyone who could fall outside of our benefit.

Now don't confuse the Medicaid lives that we serve. There could be -- there is something called plans that are designed for children or other groups that are 225% of the poverty level in some states, add those in, Medicaid becomes optional. Some of this states those people do have the NET benefits and some states they don't. But that is not the core Medicaid population that we are talking about.

John, of these six states that have implemented the benchmark plans, I think the states that contract with us there is only a couple of them even where we have an agreement, right? Do you know?

Right. There is -- there is no -- at this moment there aren't any really that impact us.

So, Jason, go through that -- the rule making. If you have any further questions I think it is true for anyone on the call because this has kind of developed a life of its own. Please give us a call.

Thank you.

Kevin Campbell, Avondale Partners.

Great, thanks for taking my questions. Just real quickly on LogistiCare. I know you said there is still he couple of contracts that are out for rebid. Can you give us an idea of the dollar size of those contracts that are still out for rebid? And then the new potential bid that you are bidding on in this current cycle, is that -- do those two sum to 100 million or is that new business -- that $100 million you mentioned in your press release all new potential business?

No, the $100 million is not -- remember the way we view the business we have same-store recurring and then new business. So the $100 million is not our rewinning our core business, if you will. I would say today based on what we know that there is really a very less than a $10 million question mark on where we are in rebids. I can't be any more specific than that because we are in the process.

In terms of new business that we are in the process of responding to with the RFPs that are in process now, we are responding to a potential between $65 million and about $80 million that we will be -- we are physically writing the RFPs right now. And those would be hopefully decisions that we would hear about within the next 60 to 90 days.

Okay, great. And Fletcher, looking at your pipeline I think you said it was around $50 million. I think if I recall back to the last conference call -- that's a little bit lower after adjusting for the -- I guess we thought the pipeline would be closer to $75 million and that includes taking out that Texas contract that you won. So was there some other contracts where decisions were made or was some of it pushed back say in North Carolina? Because I know you were thinking there might be some opportunities there.

Well, we lost the proposal in Florida, that was $40 million of that number, Kevin. So we won one and lost one so far of announced pipeline business. The major piece of that remaining of course is Maricopa County in terms of these large volume contracts. Our traditional garden variety contract we don't track as pipeline business. We will win $500,000 contract here and you can tell that from our numbers our contracts are up by over 100 but they were all small enough under our materiality threshold that they were not announcable. So nothing like that is included in that number. We are looking basically at three or four large contracts and two of those we now know won one, lost one,

So the Florida contract then -- I was under the impression that the size of that contract was -- it was a managed -- would have been a managed revenue contract and so I was thinking that would have been closer to a $5 million -- or a $4 million or $5 million opportunity versus $40 million. So I guess that is the difference from my expectations.

We include the revenue number when we talk about pipeline not necessarily it's contribution impact to us.

Okay. Looking at the organic growth on the core business. I think, Michael, did you say that was 9%?

Yes.

Okay. And that number, if I recall, seems to be coming down a little bit here over the last couple of quarters from sort of the mid to upper teens now to below 10%. Is there anything that is driving that? And should we expect that to reaccelerate perhaps going forward or should it remain around a 9% to 11% sort of range?

We would expect it would be higher in Qs 1 -- or Qs 3 and 4 because the spike would occur after the contract cycle. So I think this is pretty typical if you go back and look at past years where the organic growth occurs in the payers Qs 1 and 2, ours 3 and 4, then it slows down to the cycle. Does that makes sense, Craig?

Yes, I think that is correct.

Okay. And if I look at your guidance for 2Q, and I look at what you did in 1Q and the onetime costs, it seems like your guidance there may be conservative. Are there some extra costs there that we are not maybe I'm not thinking of for instance when Texas ramp up there? Or I think last year maybe you had some additional costs with your annual report in the second quarter. So are there-- are the costs going to be a little bit higher in 2Q?

No, we pretty much took the quarter and added back the management bonuses. I think we've got it to a range but that is really all the work we did.

We will have some printing costs, you know $50,000, $100,000 in there --

Nothing is going to move the needle.

Okay so and maybe my math is wrong then, on the audit cost I thought that was about $0.015, and the bonus then was about $0.08 so it's about $0.095 which would get us up to [38.5] for the second quarter. Is there something wrong in my math there?

You are rounding up. We are rounding down and we just guided to a range, that is the only difference.

Okay. Two other quick questions just one for the model. I think you said the tax rate would be 38.5 and the share count you said was going to be the same in the second quarter. Where might we expect that to be in the back half of the year?

Typically we issue about 250,000 shares of options in January. We didn't have the opportunity to do that this year, Kevin, because we had maxed our plan with the LogistiCare management staff. If you look at our proxy, we've asked for 1 million shares -- options under that plan. If that would passed, our shareholder meetings in mid-May -- the third week at May -- we would expect to issue some stock in the back half of the year consistently with what we've done in the past. So I think that number would go up by 250,000 or 300,000 shares.

Okay. And then lastly on the audit cost. Was that something that happened, came to you obviously toward the end of March something -- can you sort of walk through how that process played out?

It is pretty simple, you get a bid and you get a bill. And they were different. We guided based on what the estimates were. We expensed on what the actuals were and I think there was just some unforeseen challenges in the multiple audit environment we were running in the quarter. All of the -- even though the work is for 2007, we post the expenses as we receive the invoices. So all of the expenses associated with that audit came to us in Q1.

And GAAP says when the work is done is when we expense it.

Okay, so presumably then you got that bigger bill I guess toward the end of the -- when you put out the K I guess or was it after that?

It was -- yes, just as we were closing the books because they tend to come in after the work is done.

Okay. All right, thank you very much.

Kevin Ellich, RBC Capital Markets.

Hi, guys. I jumped on the call really late and I missed a lot of your prepared remarks so maybe I can follow up with you guys off-line. But I did have the question about -- and I don't know if you talked about this -- but I was just wondering how the relationship with OptumHealth or United is going and if you guys have any update on that?

We can give you a brief update. We have a high-level meeting with them coming up here. We are seeing incremental business from them, it is not significant, maybe 100 clients. We have targeted specific geographic areas to help them introduce our products and we are very encouraged in terms of the companies response to us, their interest in what we are capable of and the geographic opportunities. So it is nothing but upside for us at this point and we are very pleased with the nature of the cooperation. But it probably won't mean anything until next year significantly.

Just from LogistiCare, we also enjoy a national vendor relationship with United and have several additional states that we are anticipating rolling out with them this year primarily in their Medicaid productline and to a lesser extent in their Medicare productline. As you know, they as all managed care organizations have multiple local names of the different plans but we have a similar relationship to that which Providence has and I think Fletcher is absolutely correct that it is a wonderful opportunity but there is a significant ramp period as you work and sell into their multiple markets. But they are a market leader in multiple states so it's a very good relationship to have.

Do you think are other commercial insurance opportunities -- are you having any of those sessions yet with other HMOs?

Our relationship with them is on behalf of their public sector clients. So it is still a government outsourced population. We don't enjoy a relationship with the traditional commercial side. United has about 1.2 million covered lives, covered Medicaid lives and clearly there are other managed care entities in that space, most of which we contract with, Centene, Magellan, Value Options, you know the traditional cast of characters. Most of those relationships, however, are negotiated at the local level in response to a specific contract opportunity.

The conversations and agreement with United was on behalf of their entire productline nationwide. I think that is the unique feature of this relationship is we've really been invited to ride their coat tails every place they operate in. They don't have a provider like us typically in their system. So it has more of a national reach than the local agreements we traditionally sign. But we are involved with all of them currently.

Excellent. Thanks, guys, and I will follow up.

[Tony Lisa], [Vanrossi Capital Management].

John, I was wondering if I could just follow-up on the CMS recommendation or issue one other time. Having had some experience with logistic businesses if all of the clients are chronic, there's ultimately not a lot of profitability in a business like that where they are repeatable because the knowledge the ability, the software that you write it loses its value so to speak. And I was wondering if you could I guess address that comment relative to if what you are saying is right, that none of your clients or all of your clients are in those exempted groups, I would take that to say that all of your clients are making regular visits, then it's easy to predict and it will be a very competitive business over time.

I can understand where you might lead to that conclusion based on your experience in the logistics business. But, no, we cover the wide range of the Medicaid population. And keep in mind that in every contract and in every state we are bidding a typically a different cap rate or a blended cap rate that represents the utilization and the level of service for each element of the covered population.

So, no, we do get to blend the casual user with the chronic user and certainly if we know which that population is we factor the level of service and the utilization into how we price it. So that is not a concerned of ours.

Okay. Is it possible that -- because my understanding from CMS is that they have gotten the state's recommendations in and they are going to publish something here in the near future. Is it possible that this slow sales cycle is down at all?

Not for us, not if you are talking about the benchmark in close plans that really has no impact on us. Remember a benchmark plan is just giving the state for a -- call it the very healthy population that typically looks a lot more like a commercial population, they have the opportunity to develop a plan that benchmarks that is why they use the term, against a local commercial plan. But it would have no impact on their speed of adoption certainly of our product.

Right. Okay.

Tony, those lifecycle issues you addressed were enlightening to us I think as we came to know LogistiCare as well. I think you are right, if you are running a fleet based business and particularly in a fee-for-service environment, you are going to send your most expensive vehicle because that is where your best margin opportunity is. LogistiCare is really the inverse of that. They are looking for the cheapest alternative so they can authorize a bus pass or a subway token or a next-door neighbor to give someone a ride.

So the whole point of a LogistiCare system is more about reducing the fraud and abuse that was in the Medicaid transportation benefit as opposed to just providing the logistics of getting someone from point A to point B. So the model and what we appreciate about it more is what they are really doing is to a single person.

Now remember in every one of those states where they operate, the only way you are going to get a ride is to make an inbound phone call to a LogistiCare operator and the only place they are going to take you is to a Medicaid authorized benefit and then back. So what it has done and if you look at the savings that it has created in the states where LogistiCare operates, it reduces the unauthorized rides, the unnecessary rides, the frivolous rides, the trips that the state can't control, and that's really the beauty out of their model.

And they have an edge I think over the asset-based companies in that they don't own any vehicles so they are not incented to send their most expensive ambulance to take somebody up to the dialysis clinic.

You know what might be ultimately helpful because it seems to be an issue that people are caught on. But I'm sure that CMS has an eligibility expert who could actually put some numbers behind who may be affected or addressed or whatever and hopefully support the comments that you guys have made and that might -- getting your hands on that and publishing that might be a way to just kind of get beyond this issue in the short run.

I think you'll see a lot of that on the website we directed you to. Remember again, there are only six states that currently even have these benchmark plans. So if the rule is in fact passed, there are only six states that immediately it impacts. So the current population that we contract with, those states have indicated they have no intent to change the NET benefit.

So I think the website will answer some of those questions. I think people in this market look for negative energy and this is something that people have seemed to circle around and we will do some additional work, Tony, to make sure that we get the word out there. But it is hard to put a precise number to other than say it's not going to impact us.

All right. And if I can ask a follow-up question on a completely different issue. Someone had asked a question earlier about earnouts for LogistiCare. I'm wondering if you have optioned those employees so that actually when their earnout period is over and they have executed on that, which I fully believe them to do, that they are still around to help grow opera the business beyond the short run, so to speak?

Well, more impressive I think to us than that is the LogistiCare management to a person rolled over all of their stock, Tony, in LogistiCare to Providence stock. In fact, John Shermyen is the largest single individual shareholder in the company today. And it was incredibly impressive to us. One of the reasons our Board was so eager to approve the transaction.

All of them could have cashed out instead they all elected to convert their stock to Providence stock so that they were issued about 500,000 shares of our stock at the time the deal closed. Indeed as part of their normal compensation, they do have the opportunity for equity grants but they won't hold a candle to the risk that they've taken and the reward that they will enjoy if they're successful by being such large shareholders.

So that should give you even greater comfort than a vested option plan that we could put on the table. They converted everything immediately to Providence stock.

Right, right. Okay, thanks.

Richard Close, Jefferies.

Just a follow-up on the transportation. I guess I just would like to hear your comments. We came across an article in South Carolina that had a LogistiCare individual quoted and it pretty much said if the law passes in South Carolina, we go bankrupt. If you could provide some clarity I guess around that comment? And then maybe the comments that you guys -- I assume Providence sent in some commentary to the CMS during the comment period and maybe what the context of those comments?

I should probably -- this is John Shermyen -- take that on. The first thing is we've got the guys tongue out now. Just kidding. Our policy is typically communications are managed at the corporate level and unfortunately we had an employee who was kind of blindsided but the context of that comment and the question from the reporter which of course never makes it into the newspaper, the local South Carolina Transit Properties who run traditionally had this business and our significant providers to us, they had gone to the news media and said if this rule passes, we are out of business, we are bankrupt. And so that is where this came from.

It was about the community transportation entities, the transit entities who rely on us to pass through essentially the Medicaid dollars that we use to manage the state of South Carolina. Unfortunately the part that didn't get in the media was the follow-up from the state which said we have no intention of doing a benchmark plan or taking advantage of this or getting rid of the NET program because we just put LogistiCare in the broker model in.

So it was an unfortunate and inappropriate series of comments from our employee but it was really in the context of not us being bankrupt but the transportation folks in South Carolina and many states who actually Medicaid NET program ends up being more than half of the funding source for local rural transit. But like I said, that didn't get in and I can see why you would be concerned because it was making it sound like we were going to be out of business and bankrupt.

In terms of our response to CMS, we were primarily focusing on if the rule passed and it was widely applied, we are very supportive of our public sector transportation resources. And so most of the testimony was either from the transportation assets about this particular issue or from the healthcare folks and people like LogistiCare about the policy, the positive medical loss ratio benefit of having access to healthcare.

I think if you go to the website, they may have posted the rulemaking responses because they were due some time ago. So I would direct you probably just to go read the responses there.

And then just one final, John, and that was extremely helpful. If you could -- if you know this -- I believe South Carolina is a benchmark state and so you are doing business there and things are continuing and also I believe Kentucky is a benchmark state and you are doing work there and continue to do work there, correct?

Absolutely. But just so everyone is clear. When the DRA went in, they put the rule in and benchmark doesn't necessarily mean that they impact this particular program. In South Carolina, for example, Governor Sanford was very aggressive and he is one of those governors that is very conservative and feels that individuals should have individual responsibility and choice. So he was one of the leaders trying to get the rule changed to loosen things up in South Carolina to allow Medicaid recipients essentially to have a medical savings plan.

And so that's sort of how they got into it and they went to CMS and got the waiver originally to go into the NET program and then it took them three years to actually get to the point of getting it in place. So today they wouldn't have needed the waiver to get in the NET program. But when they originally put it in they did.

Kentucky, I'm not really sure how they are using their benchmark plan, but, yes, we are in Kentucky, have been in their for quite some time. I think Idaho is on the benchmark list and as I mentioned earlier, the only things they have looked at was getting the waiver to actually to get into a predation transportation program --

And again, remember, Richard, even if you have a benchmark plan, you cannot enroll the kind of people that we work with typically in it. So I think to your initial question, I had a similar reaction to the local guy in South Carolina when this rumor started. We would get calls from analysts or investors and the question was something like oh my God, Medicaid is going to do away with the NET transportation benefits. And if that is the way the question is posed, any of us would have a catastrophic reaction which is why we are really trying to get people to do the work. Because if you look at what really is being proposed here, it applies only to the benchmark states, it applies only to the benchmark plans and it excludes the populations that we typically serve. So at the end of the day, again, and we can't keep saying it, this plan even if passed has zero impact on this company.

Well that was the point of saying South Carolina and Kentucky have benchmarks and that you are still operating.

Absolutely. For the rest of you on the call, after this transaction I somehow ended up being I think the largest single shareholder in the company. And I haven't sold a share of stock. So if I was worried that we were going to be out of business, I probably would have.

Thank you.

Richard, thanks.

At this time, I'd like to turn the call back over to Mr. Fletcher McCusker for closing remarks.

Thank you very much. Thank you everyone. We are traveling this summer, if you are interested, please give Kate Blute in my office or Alison a call. We expect to be in New York mid June, Boston probably Baltimore as well and a West Coast trip all non deal kind of informational conversations. So please give us at call. If you didn't get your question answered or you have some follow-up, please call us directly. We will see everybody on the road soon. Thanks again.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Good day.