ModivCare Inc (MODV) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Providence Service Corporation earnings conference call. My name is Erica and I will be your coordinator for today. (Operator Instructions) We will facilitate a question-and-answer session towards the end of this conference.

I would now like to turn the presentation over to your host for today's call, Ms. Alison Ziegler. You may proceed, m'am.

Thank you, Erica. 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 fourth quarter and year ended December 31st, 2008. You should have all received a copy of the press release, Friday night. If you would like to be added to our e-mail list, please call Devon 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 April 6th. The replay number is 888-286-8010, with the pass code 43351992. This call is also being webcast live and a replay is available. To access the webcast go to www.provcorp.com., and look under the Event Calendar on the IR page.

Before we get started, I'd like to remind everyone of the Safe Harbor statement included in the press release and that the cautionary statements apply to today's conference call as well. 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 financial results for first quarter of 2009, and beyond. 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, including the 10-K filed this morning. The Company's forecasts are dynamic and subject to change. Therefore, these forecasts speak only as of the date of this webcast, March 30th, 2009. The Company may choose from time to time to update them, and if they do, we'll disseminate the update to the investing public.

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

Allison, thank you very much. Good morning, everyone, and welcome. In Tucson today, with me, is Michael Deitch, our CFO, Craig Norris, our Chief Operating Officer, and on the line in Atlanta to update you on the NET division is John Shermyen, CEO of LogistiCare.

Before we dive into the year-end and anticipated Q1 results, let me pause for a brief minute and express our gratitude to the multitude of people that have gone to bat for us over the last, very trying, six months, including our lenders, payers, attorneys, accountants, transportation providers, many shareholders. Most of all, let me express our appreciation to our nearly 11,000 employees, who in spite of incredible distractions, have delivered our best client services outcome in the Company's history. As measured by Vanderbilt University, recent client outcome data shows us at 97% client satisfaction, our highest ever, and 85% successful in stabilizing our clients. These are remarkable times, and lesser companies would have trouble standing, let alone striving for greatness in this environment.

In spite of the total economic meltdown, beginning in July 2008, we have kept our organization and its people together. We have not lost a key leader. We have resolved what many thought were irresolvable issues with our lenders. We're seeing our long-term status and summer diplomacy now pay off with our government payers. The world has not experienced what we have all gone through, collectively, in the summer and fall of 2008, since the Great Depression. In spite of total chaos with most states' budgets, we've actually been able to modestly grow EBITDA over 2007, after excluding our impairment and acceleration of vesting charges, something very few companies can actually say about 2008. In an environment where Hyundai has suggested flat is the new up, we were not only able to keep our base, but to actually grow it modestly.

We believe our financial issues, last year, were issues to forecast. In the fall 2007, in a very robust economy, coincidental to our acquisition of LogistiCare, we guided to significant growth. As the recession approached, most of our states flattened, procurements were postponed, some states attacked rate, others volume, some states hoarded money, anticipating cash shortfalls. As a result, we withdrew our guidance, missed forecast expectations for Q2 and Q3, and began hearing speculation about our imminence bankruptcy, as we watched our stock plummet.

As a result of the significant and continuing decline in our market value during the last half of the year, we were compelled to do an interim test of our good will at the end of Q3, in addition to our annual impairment testing at year end. Based upon the magnitude of the M&A market deterioration, during the last six months of 2008, and the erosion of market value for comparable companies, further exacerbated by the reconciliation required to a declining market cap, we faced a significant impairment issue as of these testing dates. The M&A environment has improved since 12/31, and our market cap has more than tripled, but these subsequent demands had no bearing on good will as of the date of the year-end testing.

We have made a lot of decisions recently since November, assuming a volatile market and continued state budget turmoil, so that we will be better positioned for 2009, including freezing all salaries, reducing holiday, sick, and vacation time, adjusting our fixed salary model in many markets, reducing our workforce and eliminating almost $3 million of management bonus and parody eligibility. We have elected to accelerate the vesting of our outstanding equity awards, reallocating to 2008 almost $6 million of future expense.

To be clear, there was no repricing involved, and no individual benefited exclusively from this acceleration. The strike prices remain the same, most of them over $20. Under the stock comp rules, we expense equity awards over the life of their vesting period, not on the day when they were granted. However, the expense chargeable to the Company is set at the date of the grant, based upon the stock price at the award date. We had numerous options awarded at $28, that would continue to be expensed at $28 had we not accelerated divesting. Analysts and shareholders, we hope, will now look ahead to 2009 earnings, now improved by reallocating our stock compensation expense to 2008.

After excluding the impairment charge and accelerated stock comp, we produced nearly $40 million of EBITDA in 2008, $12.5 million of cash, and we expect these numbers to grow in 2009. We are pleased to say we are Sarbanes-Oxley compliant for our fifth year in a row and we continue to pursue our stated objective of de-levering the Company, as the credit market remains incredibly volatile, and the cost of debt has risen and continues to rise. We reset our 2009 covenants, and went ahead and paid for an amended credit agreement rather than to just negotiate a waiver, pending the sale of assets, in order to provide ourselves with maximum flexibility.

In addition, our payer mood is much improved. We are picking up off-season business with census up by about 14,000 clients, three off-season contract wins, and our January and February results are ahead of plan for the first time in three-quarters. We are seeing pressure on the providers of more expensive care, like institutional care, to discharge clients in favor of community based care, something we did not see in Q2 and Q3, but expected with the passage of time. Our Vanderbilt results continue to demonstrate both the outcome and economic success derived from our model.

The Medicaid stimulus and SCHIP passage indicate the Federal Government is finally willing to add support to our system of care, although at this juncture, we do not know how, nor when, we will see the impact of these legislative changes. Rather than wait for our ship to come in, we have set out, in the fall, to reshape the Company, expecting continuing flatness from our payers. Our new profitability is coming from a retooled operation with reduced costs, reduced overhead, and reduced employee benefits. We have also had a boost from unanticipated volume increases and off-season contract wins. Michael will walk you through the quarter and the year-end. Mike.

Thanks, Fletcher. Good morning, everyone. Revenue for the fourth quarter totaled $178 million, up from $98.7 million for the fourth quarter of 2007. For the 2008 calendar year, revenue totaled $691.7 million, up from $285.2 million in 2007. The acquisition of LogistiCare in December 2007, is the primary reason for the dramatic increase in revenue for the quarter and calendar year. For the three months ended December 31st, 2008, as compared to the three months ended December 31st, 2007, home based revenue grew organically by 1%, on a net basis. The Company's domestic home based revenue grew organically by 9%, quarter-over-quarter. However, this growth was reduced by an offsetting revenue decrease from our Canadian operations. Foster care revenue grew organically by 5.7%, quarter-over-quarter.

For the year ended December 31st, 2008, as compared to the year ended December 31st, 2007, home based revenue grew organically by 10.1%, and foster care revenue grew organically by 8%. The point of providing this organic growth information is to demonstrate that the overall demand for the Company's social services products has not diminished, even in the difficult economic environment experienced in 2008. Overall, including acquisitions, total social services revenue gained 7.4% for the quarter, and 18.4% for the year. Our 2008 fourth quarter operating loss totaled $32.3 million. Included in that operating loss is a non-cash asset impairment charge totaling $28.9 million. The operating loss also includes almost $6.7 million of stock compensation expense for the quarter, mostly due to our Board of Director's decision to accelerate the vesting of all outstanding unvested equity awards, as of December 31st, 2008.

For the 2008 year, operating loss totaled $149.3 million. Included in that operating loss is a non-cash asset impairment charge of almost $170 million. The operating loss also includes approximately $8.8 million of stock compensation expense for the year. For the 2008 year, net loss totaled $155.6 million, resulting in a loss per share of $12.42.

Before I go any further, I would like to take a moment and comment on the non-cash impairment charge we recorded for 2008. The accounting guidance related to impairments is multifaceted and complex. The accounting literature we consulted included statements of Financial Accounting Standards 109, 141, 142, 144, and 157. We also consulted Emerging Issues Task Force Standard 02-13. Further, we referenced guidance provided by the Securities and Exchange Commission staff in October 2008, and again in December 2008. In the course of our impairment analysis, we referenced examples of comment letters issued by the SEC regarding impairment charges. We also utilized the services of an independent, internationally known valuation consultant, whose name and services we have committed, in writing, to keep confidential.

The point of all the professional standards referenced, and pains-taking work performed, was to insure that we took each and every step we considered necessary to accurately measure, and fairly state, the amount of the impairment loss in accordance with professional accounting and professional valuation standards. In the end, the primary factor in determining the magnitude of our impairment charge was our obligation to have the values of all our subsidiary reporting units equate to the total Company market capitalization, plus a reasonable control premium, as of year end. Because our stock price had fallen so dramatically as of December 31st, 2008, and for purposes of our impairment analysis, we estimated the fair value of our total Company equity to be approximately $30 million, as of year end. All our subsidiary reporting units fair values, including good will, had to equate to the total Company fair value amount. This despite the fact that our market capitalization has recovered to over $70 million, as of late.

In order to gain a more complete understanding of the impairment charge, I urge you to refer to our Form 10-K, which was filed today. In the Critical Accounting Policies and Estimates section, under Accounting for Business Combinations, Good Will, and Other Intangible Assets, you will find a thorough explanation of the impairment charges in Q3 and Q4.

At the end of our fourth quarter, our receivable days of sales outstanding improved to 40 days, from 42 days, last quarter. During 2008, we generated approximately $12.4 million in cash provided by operations. On March 11th, 2009, we amended our credit and guarantee agreement with our lending syndicate. The amendment modified our covenants for the fourth quarter of 2008, and quarterly for 2009. The amendment also increased our LIBOR based interest rate spread from 350 basis points to 650 basis points. This will have the effect of increasing our pretax interest expense for 2009 by approximately $4 million.

At the end of our fourth quarter, we had approximately $29.4 million in cash, with nothing drawn on our revolving line of credit facility. As of today, we have not drawn on our revolver. We have funded both our operational and debt service requirements from our operations, including our normal billing and collection activities.

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

Thank you, Michael. For the quarter, we ended with a total combined census between our owned and managed entities of over 87,000 clients. Compared to Q4 of 2007, this represents a total census increase of over 11,000 clients. In addition, over 6.3 million individuals are eligible to receive services under our non-emergency transportation division. All clients are being served from 438 local offices and 43 states, the District of Columbia and Canada. We have added 20 new local offices since Q4 of 2007. Combined between our owned and managed entities, there are over 10,000 employees, serving over 1,000 government contracts. This represents an increase of about 81 contracts, as compared to Q4 of 2007.

On the social services side, we are starting to see our business stabilize, as Fletcher mentioned. We are tracking ahead of plan, both in January and February. We have initiated a Company wide wage freeze. We have retooled our benefit programs, as well as made some adjustments to our fixed salary models in favor of increased hourly personnel. In particular, the operations that struggled in 2008, we are seeing improving performance combined with increased efficiencies. In Canada, of course, we have recently announced our largest contract award, to date, since this acquisition.

Although we expect 2009 to continue to see some challenges due to payer visibility, we also expect that client demand will likely increase. We saw our census increase toward the end of 2008. I do expect this will continue as Medicaid enrollments grow. The transition period of our recent acquisition in Georgia in the fall of 2008 is now complete. This entity is performing ahead of plan and their census is stable.

Clearly 2008 was challenging. We learned some lessons. We regrouped. We restructured. We stayed close to our payers while maintaining the highest standards of client care and program outcomes. In 2008, we are staying very integrated with the states regarding the opportunity the stimulus package may bring. At the present time, it's too early to tell what the impact might be, but I do believe it's helping the states stabilize. Their mood appears to be improving, compared to 2008.

Thank you. I will turn it over to John Shermyen.

Thank you, Craig. 2008, as this is a recurring theme, was a challenging year for LogistiCare as record high fuel prices in the first half, then the economic downturn in the latter part of the year, created increased utilization of our non-emergent transportation services across all of our markets. These unprecedented volume spikes in our base operations translated into higher transportation costs, and therefore, lower margins compared to 2007. Unfortunately, we also didn't get the benefit in 2008 of winning any new contracts, as our most significant contract awards were slowed down by economic uncertainty, delayed procurements and protests.

During our last call, we discussed a prolonged rate negotiation with a state payer that we expected to resolve in a fashion that would positively impact both 2008 and our 2009 fiscal year. I am pleased to report that negotiations have been favorably concluded and that we're in the final phases of completing the contract amendment process with that client. Additionally, it's critical to note that in that spite of the highly publicized budget situations in all of the states in which we do business, the client noted earlier is the only, "slow pay incident" that we have, and we have experienced no rate cuts. In fact, in several of our contracts, we have successfully negotiated rate increases to offset the increased utilization that we experienced in 2008.

Contrary to most business news, we anticipate positive trends in 2009. We expect an increase in Medicaid membership as more folks lose their jobless benefits and are covered under the program. This is a positive trend to revenue that should continue throughout 2009. As these newest eligibles are generally not acute patients, we should also experience reduced, relative demand for service, and thereby, margin improvement.

In January, we began to operate several new contracts with managed care plans, and our new contract in South Carolina finally got started, although this is a very slow ramping program, and I might point out that it is a fee for service contract, not our standard per member, per month capitation. One more hurdle in the New Jersey contract protest process has been put behind us, and I anticipate a late Q2, early Q3 start for that contract. In essence, the South Carolina and New Jersey contracts, which we had expected to implement in 2008, will begin to deliver positive results approximately a year behind schedule. We also had several additional managed care opportunities that are being negotiated, which we hope will keep our contract implementation team very busy over the next few months.

Further, as state legislatures face continued revenue shortfalls, we are observing a renewed interest in the managed NET model and a thawing of our government based, new business pipeline. I'm pleased to report that both our January and February performance exceeded budget, which is a real credit to the hard work and focus that our dedicated operations team bring to their work.

At this point, I would like to turn the call back over to Fletcher, and I look forward to responding to your questions during the Q&A segment.

Thank you, John. Let me make a few comments about our guidance, and then, we'll open the line for questions. We have had a good strong January and February, so we're confident that our profitability in Q1 will return to more historic levels and will result in EPS expectation in the mid $0.20 range, including about $0.08 of one-time costs associated with our consent solicitation and our amended credit agreement. State budgets will not be set until June or July, so we are not providing any further guidance at this time. We are relieved that we have an amended credit agreement with our lenders, and have returned to profitability. We are seeing very visible signs of momentum, given our dependence on government payers.

And with that, operator, we'll go ahead and open the line for questions.

Yes, sir. (Operator Instructions) And your first question comes from the line of Bob Labick from CJS Securities. You may proceed.

Good morning.

Good morning, Bob.

First question I wanted to ask is, could you address the gross profit or gross margins from the social services side in Q4 specifically, if there was any other components in there or one times? It was obviously down year-over-year, no matter how you look at it, and it appears to have recovered in Q 1, based on your guidance. So if you could just walk us through the differences between the gross profit in Q4 and the changes or improvements you're seeing in Q1, please.

Hey, Bob, this is Michael Deitch. Let's go from Q3 to Q4. Maybe that will help you.

Okay.

The differences were increases were in salaries and related costs from our acquisitions, American work and Camelot, A to Z business coming back on line, Pennsylvania new business, also had stock compensation in there, $1.9 million of that, additional foster care payments from the acquisition of Camelot. So if will you back out, if you will, the stock compensation expense, you'll see that the margins are more normalized.

Okay, has there been any change starting January 1? Did you get changes in rates, or utilization, or anything to those extent?

Most of the margin improvement, Bob, you're going to see is on the expense side. If will you remember the things that impacted us in 2008, did affect rate and volume, primarily as states began to ration care, and we were unable to react quickly enough on the FTE side to address what we thought were temporary issues. As Craig suggested, in some of our markets where we had margin issues, we've adjusted our model to reduce commitments to full-time equivalent employees. So, we've not yet seen any real rate improvements. We do expect rate adjustments for the July 1 season.

The Medicaid stimulus package is basically a 7% across the board increase to the federal match. We would expect some of that would play out to the providers in the terms of rate, but we've not yet seen any rate increases. We have not seen any further pressure on our rates. So our business is relatively stabilized since Q3, and the margin improvement is on the expense side.

Okay. That's terrific. I don't know if you can answer this at all. Can you give us an update on the potential divestiture process or timing, or what the likely next steps would be there?

There's not a lot we can say about that other than what we said publicly, regarding our engagement of UBS. They are involved in the process that has a number of rounds to it, Bob. There's an indication of interest round, then those numbers are culled to a smaller group, then due diligence, then offers, then best and final offers. We do hope to conclude that process sometime in Q2. So, we said we would not update that until we had something definitive to say.

Great. That's helpful still. And then finally, then I will get back in queue. On the LogistiCare side, obviously the spike in utilization, I think, has been the biggest impact, among many others that you noted, in '08. Are there any changes that you can or have put in place to avoid such an occurrence in '09, either in the contracts, or in the timing of resetting contracts, and what's the outlook for '09, and can the '08 margin pressure be avoided?

This is John Shermyen. I think the two fundamental things you should focus on, one is that 2009 and beyond, we are not assuming that utilization spike was a one-time. We are budgeting as if it will always be with us. We have managed by purchasing transportation from public transit and other lower costs modes of transportation. We've managed to stay pretty close to our budget in terms of our unit costs. Utilization is not something that we can actively manage, but it is an element of the formula that's used on a going forward basis in rate negotiations with our payers.

So, I think we have some things that will mitigate what we had in 2008. One, we're budgeting and expecting it, so we're, if you will, on the look-out for it. We're also talking with our payers actuaries about the fact that utilization has increased. The only silver lining is that there is an expectation during a recessionary period that enrollment will increase, and with that, we effectively lower our utilization.

And will you remember, Bob, there is a lag in the transportation model regarding rate and rate adjustments. So we've had the benefit of time passing in that regard. We have had a lot of good rate renegotiations on the transportation side, not only in the one state that we've identified, but in many of our markets where we had utilization pressure, cost pressure, we've been able to go back and improve those rates. So, you experienced the kind of typical, two-quarter lag that results in LogistiCare's negotiations from an increase, or a spike, or a change in their model and the opportunity to renegotiate a rate.

Great, thank you very much.

Your next question comes from the line of Mark Hughes from SunTrust. You may proceed.

Thank you very much. Would you anticipate that the organic growth should accelerate in the Q1 based on what you have seen in January and February?

Yes. Medicaid enrollment is expected to go up by some nine million people, Mark. It's a huge increase. The stimulus package provides for a number of new eligibles, and, of course, the SCHIP program has a huge enrollment feature to it. They've added nearly four million children to the Medicaid rolls, through the legislative changes in SCHIP.

So, we are seeing enrollment increase for the first time in six or seven months. We are seeing, and you are seeing some of the out of home providers talk about this. They're seeing some pressure on those institutional providers to discharge early and move clients to community based care. So, our census increases are coincidental to that, and we would expect to see volume increases throughout, especially during early 2009, as the features of the stimulus and the features of the SCHIP bill become more known to our state payers.

Was there any shift of anything to discontinued operations in the first quarter that helped profitability?

No, we didn't disc-ops anything. There's no pickup of revenues. There's no unusual gains in the Q. That's all contracted rates and volume.

I think John had mentioned the thawing in the NET pipeline. Could you elaborate on that a little bit?

You'll remember, as far back as November of '07, we identified something in the neighborhood of a $200 million pipeline on the transportation side. And as John mentioned, we didn't really pick up any of that business in calendar 2008. Most of our states tabled or postponed their procurement activity during the chaos of the early recession. The wins in Carolina and New Jersey were contracts that we had identified as far back as November of '07, and they were delayed, and awarded in 2009. Other features of the pipeline, basically, have just been pushed back a year now, Mark. So most of the activity we anticipate in 2008, is now occurring in 2009.

Right. And then, final question. How much of the option acceleration do you benefit from in 2009?

About have half of that amount, about $3 million of that would have been '09 expense, the other half in '10.

Okay, great, thank you.

Your next question comes from the line of Kevin Campbell from Avondale Partners. You may proceed.

Good morning. Could you comment, just briefly, on the contribution you expect South Carolina and New Jersey to have to the bottom line for this year? I know you're not giving guidance, but how should we think about in terms of the ramp schedule and the start-up costs, and how that plays out? Just so we have a better idea how meaningful that can be for results in 2009.

I would say that because of the delayed nature of the New Jersey contract and the slow ramp of South Carolina, we are showing fairly de minimis actual direct contribution in calendar 2009. We're expecting them to be contributors, net contributors, and have a very low number penciled in for them because there's still a little uncertainty about exactly when the start is. So 2009, in our budgeting process, shows very little positive impact of those two contracts in particular.

Okay. In looking at South Carolina, how long do you think that will take to ramp up to the full revenue run rate? Is it over the course of two quarters? Is it six? Just so we have a better idea. And likewise for New Jersey, the delayed nature there. How long, from the date that they sort of start, do you think it will be up and fully running?

They're two very different contracts. South Carolina contract is a fee for service contract.

Right.

There are no guarantees about the volume. It's driven by the demand within the social service agencies. It's essentially a welfare to work training program.

Right.

And so we, at this point, don't know if the contract will even ramp to the level that they had put in the RFP. So, there nor guarantees around that. I would say, we will know better, probably by the summer, about what I would say the steady state demand is going to be, and then, we could probably project forward if it's going to come in at maybe half of what the state had thought it would be spending on this during the contracting process. So, I would say we'll have a lot more visibility by the summer.

In terms of New Jersey, New Jersey, remember is a capitated program, so we will be being paid prospectively, based on the number of eligibles at the beginning of the contract. There, it is more about when we're able to actually begin to manage the network. So I would say in the New Jersey contract, we're really not going to know what our full margin is going to be, probably, until early 2010.

Okay. That's helpful. Thank you. Fletcher, just looking at the social services business, obviously last year was difficult because of the state budget environment and how that continued to sort of worsen from what was originally expected. Why do you feel comfortable that '09 is going to be different? When you look at projections for state budgets, they look like the budget deficits are going to worse from 2008 to 2009, and so, why do you feel more comfortable this time around that you won't experience the same sort of pressures, either on the payer side or on the cost side, that you experienced last year?

Two reasons, Kevin. Specifically, the stimulus package is directed at this population. It can't be reallocated dollars. One of the strings that's attached to the federal stimulus is states that tinker with Medicaid eligibility or change the plan, are ineligible for the federal dollars. Arizona is one of those states, for example, that is facing that very situation. Over the summer, in reaction to the recession, they tightened up on Medicaid eligibility. Their share of the stimulus is $1.7 billion. In order for them to receive that money, they have to revert back to their original eligibility standards.

So, the stimulus is a major driver for us in terms of stabilizing the state budget components that affected our business. Without that federal assistance, I think we would remain quite pessimistic about how states prioritize their decision making, how they dealt with social service cuts, how they managed across the board kind of cuts. So, federal intervention has created a priority for states to utilize and maximize these federal dollars.

Of course, the other component of that that's huge is the SCHIP enrollment. President Bush vetoed that twice in 2008. That's a $35 billion appropriation. It will increase children in Medicaid. Remember, about half of our population is kids. Increase that eligibility by a third. So we see volume being driven by Federal Government. We see rate and other eligibility issues being driven by the Federal Government. So every governor, to a person, in the fall of 2008, pleaded with the Federal Government to intervene.

You heard during the election and as early as immediately after the election, the Obama administration talk about a stimulus. That stimulus is passed and now in place. So that's the sort of most of our optimism, and it plays out amongst our state payers, who as Craig described, and you heard me mention in my remarks, the mood is just dramatically different. They see light at the end of the tunnel. They understand they may have money to complete their programs. You are seeing more rational thinking return to the environment as they prioritize community service organizations, like ours. over the very expensive hospital and institutional type care.

These were the drivers that started the company in 1995, and they were sorely absent from about July 2008 to about December 2008. It was just more of a deer in the headlight phenomenon that made it impossible for us to react to. So, we do see certainty returning to the environment. As Craig suggested, we don't know that we're totally out of the woods. California is still struggling with initiatives that attack our budget line items. The governor has asked for a referendum that in state to over turn Proposition 63 and allow the governor discretion over those funds. They have been sacrosanct through this recession.

So there still are some challenges, but enrollment drives our business. We expect that to go up quite dramatically. And, the Federal Government now has intervened in what many states create incentives and very tight strings attached to the federal dollars. So, that seems to be what's playing out in Q1, Kevin, and what gives us the sense of optimism we have today about 2009.

Two quick questions. Could you comment on the provision for doubtful accounts? It looked like you had an increase of just under $3 million in the quarter, based on the cash flow statement. Could you provide some additional color on that? Then lastly, you saw some good growth in foster care revenues from 3Q to 4Q. I think that's related to an acquisition. I just want to get confirmation of that as well.

Kevin, the provision, most of that, not all, but most of it, was directed toward North Carolina, where according to our policy, we reserve for accounts over a year old. We have not written those off. We've provided for them, based on our policy, and it will take Craig and I are working on this weekly. We expect that to turn around during 2009. We don't expect it to the happen really quickly, for a number of reasons I can talk to you off-line about, if the you would like. But, we do expect to ultimately collect most or all of that money. The foster care increase in revenue, yes, was a result of the Camelot acquisition in Illinois and Indiana. And you will also see management fees decrease from Q3 to Q4, based on the same phenomenon.

Okay, thank you very much.

Your next question comes from the line of Mark Hughes from SunTrust. You may proceed.

Thank you. Any plans of hedging fuel costs going forward, now that we're in a little more favorable environment? Anything we could do to avoid the risks of a spike going forward?

No, I don't think at this point we are looking at fuel hedge as a weapon or a tool that we can use. We are not assuming that fuel is going to stay at its current favorable levels, and that's why we've not baked in savings, but it's very difficult to predict how fuel impacts our model. What we're finding is it really manifests itself more in increased utilization. But no, at this time, we're not looking at any hedging operation.

Michael, could you sketch out the key covenants for the renegotiated agreement?

Be happy to. We have four covenants. Senior leverage ratio, total leverage ratio, fixed charge coverage ratio, and a monthly EBITDA amount. For Q1 of '09, and the agreement and the ratios are on file, so I'm not going to spend a lot of time with them unless you want to call me afterwards, we'll spend whatever time you want. The agreement for the senior leverage ratio is about 4.8 in Q1, 6.7 for the total leverage ratio, and 1.1 ratio for the minimum consolidated fixed charge coverage. And I'll be happy to spend time with you, individually, on how all that is calculated.

Okay, thank you. And then, let me ask you this question. Fletcher, you had mentioned that the stimulus has tight strings attached. Are there any strings in terms of rate?

No, Medicaid, again, is a funding mechanism that's different state by state by state, Mark, so each state has discretion over how they utilize their Medicaid funds, what providers they contract with, how they direct those dollars. So, the stimulus doesn't say that here's a 7% increase, you have to pass it on to the providers. So, one of the things we're watching as each of these states receive and amend their own plans, is how that money does, in fact, impact us is not yet known. The stimulus, simply stated, is an increase in the federal match.

So, it's about a 7.5% increase of federal dollars made available to the states for the same level of state spending. So it's additional money, and there are some strings in terms of how the money is utilized, what changes can be made in the system. So, states would be foolish not to utilize it. It does prohibit them from allocating it outside of Medicaid eligibility, so these are truly Medicaid funds. But we've yet to hear from a single state on what that means for us, directly, in terms of rate and our volume changes in the fiscal year that starts July 1st.

Right. I guess I was interested to hear you say that they can't tinker with eligibility. I was wondering if there was a similar restriction in terms of rate. Sounds like not. Okay. And then DSOs, Michael, any plan that you can share in terms of expected cash flow? How much you might anticipate paying down debt for 2009?

Well, we have our scheduled debt payments, I think it's about principal 3, 3.2, have to check, per quarter, up a little bit from quarterly in '08. I've been pleasantly surprised at the strong cash flow here recently. We've not had to go to our revolver, as I mentioned earlier. Our combined DSO, 40, is tracking very nice from the social services side and the transportation side. DSO LogistiCare at 23 days, Providence at 61 days, that's very good for us.

In the new year, Michael, we're not really seeing any deliberate slowdowns or strategies to hoard money, or any of the kind of things that we were concerned about last year.

We heard some rumblings around, but they have not come to fruition. California, Virginia, but none of that has happened to us yet, and the payers continue to pay normally.

Okay, thank you.

Mr. McCusker, please go ahead with your closing comments.

Thank you very much. Thank you, everyone. We are doing a lot of travel over April and May. If you would like to see us, please call Alison at Cameron and Associates. I will be at a CIT conference in New York, in April. We do have informational road show contemplated, both to the east coast and west coast. We'd be happy to meet with you, if you are so inclined. Of course, we're only about five weeks away from our Q1 earnings call, which we expect to be a very good quarter. So if we did not get to your question today, as always, please call us directly, and we will see you out and about, or talk to you in a few weeks. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. And, have a wonderful day.