ModivCare Inc (MODV) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first quarter 2009 Providence Service Corporation earnings conference call. My name is Shirell and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards 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, Cameron Associates. Please proceed, ma'am.

Thanks. 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, 2009. You will have all received a copy of the press release last night. If you would like to be added to our e-mail list, please call Devon Rhodes at Cameron Associates at 212-554-5461.

Before we begin please note that we have arranged for a replay of the call. This replay will be available approximately one hour after the call's conclusion and will remain available until May 14. The replay number is 888-286-8010 with the pass code 62359874. This call is also being webcast live with a replay available. To access the webcast go to www.provcorp.com and look under the Event Calendar on the IR page.

Before we get started I would like to remind everyone of the Safe Harbor statement included in the press release and that the cautionary statements apply to today's conference call as well. During the course of this call, the Company will make projections or other forward-looking statements regarding future events or the Company's beliefs about its financial results for 2009.

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 Company's recent 10-K.

The Company's forecasts are dynamic and subject to change. Therefore, these forecasts speak only as of the date of this webcast May 7, 2009. 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 very much and good morning, everyone. Here in Tucson today is Michael Deitch, our CFO; Craig Norris, our Chief Operating Officer; along with John Shermyen, CEO of LogistiCare. John, welcome to Tucson.

As we have suggested in the past, we considered many of the external issues that seriously challenged the Company in the back half of 2008 to be somewhat temporary. State budgets were set in the spring of 2008 prior to the recession, credit and mortgage crisis, and resulting drops in state revenue that began to be forecast by us and others in late June. Given that states are required by law to balance their budgets, we saw a number of payers initiate immediate and unilateral decisions designed to cut expenses from hording of money [to] rationing of care to reducing rates to paying us more slowly.

In November the Company implemented a number of operational improvements in markets where productivity was a concern. In anticipation of a flat revenue year we also reduced certain expenses including reductions in total workforce; changes in our FTE models in some markets; reductions in sick, holiday, and vacation pay; a salary freeze; and the elimination of potential earnings-based executive bonuses.

Today Medicaid enrollment is creeping up positively affecting revenue along with positive results in rates combined with stable utilization and stable costs at LogistiCare. These efficiencies combined with record revenue created the record earnings we are reporting today.

Externally a number of events have occurred that have indeed changed the psychology of our state payers. Importantly the federal court has permanently enjoined California from making any cuts to the Medi-Cal program affirming in its ruling that only Congress can change the Medicaid program. This was an important and precedent-setting case that all of us and all of our gubernatorial friends were watching carefully.

At about the same time President-elect Obama indicated to a gathering of governors that he would immediately address Medicaid upon taking office and discussed at that time a possible $40 billion supplement to the Medicaid budget. The very first bill signed into law by President Obama was the SCHIP legislation vetoed several times by President Bush. This legislation will add four million children to the Medicaid roster and appropriated $44 billion, up from $25 billion in 2008.

This was immediately followed by an $87 billion stimulus for Medicaid, twice what the governors were expecting, in addition to increased funding for the Medicaid package. This also required states to maintain Medicaid eligibility at July 2008 levels. If changes had been made states, would have to unwind them in order to receive stimulus funds.

The stimulus bill also made the recently unemployed immediately eligible for Medicaid, adding over 600,000 people a quarter retroactive to October 2008. We have seen huge enrollment jumps in states like Georgia where Medicaid is up 26%, 11% in Florida, and many of our other states. Total Medicaid enrollment today is expected to be 59 million people, up two million from last year.

The Obama administration just last week terminated a number of the Bush proposed rules that would have tightened Medicaid eligibility. Most importantly, the congressional budget, which was passed just last week -- the President's budget takes Medicaid spending from $201 billion in 2008 to$259 billion in the current 2009 year that ends in September and $290 billion in 2010. Importantly and something we have been watching very carefully, post-stimulus the federal projections then reset the Medicaid budget at $274 billion.

This combination of events has materially changed the outlook for the Company. Our payer environment is stabilizing. We believe a more favorable psychology exists in the minds of our payers who are now operating under the assumptions there will be additional federal assistance available to help them underwrite services for the [indigent]. I will let Michael give you the details for the quarter.

Thanks, Fletcher. In our first quarter of 2009 revenue totaled $186.7 million, up from $173.7 million for the first quarter of 2008, a 7.5% increase. Organic growth accounted for 3.8% of the increase with the remaining 3.7% increase due to operations we acquired in Georgia, Illinois, and Indiana since the first quarter of 2008.

For the three months ended March 31, 2009, as compared to the three months ended March 31, 2008, home-based revenue grew 10.3%, grew 5% organically, and 5.3% through acquisition. Excluding Canadian home-based operations, domestic home-based operations grew 13.8% organically quarter over quarter.

Foster care revenue grew (technical difficulty). Organic revenue declined by 12.8% due to the Company exiting foster care operations in one state that was minimally profitable. The decline was offset by acquired foster care operations in Indiana and Illinois where we formally managed those operations and accounted for 41.5% increase in foster care revenue.

Management fee revenue declined approximately $1.7 million due to the renegotiation of a management contract as well as the foster care acquisition activity previously described. First quarter operating income totaled $15 million, which was 8.1% of our revenue. This compares with $10.9 million and about 6.3% of revenue for the first quarter of last year.

What is interesting about our current operating margins is that in many of our large social services anchor states as well as our LogistiCare non-emergency transportation management operation [they had] operating margins in Q1 of 2009 that exceeded the operating margin in Q1 of 2008 and Q4 of 2008. Operating margin improvement also occurred in many of our smaller states social services operations.

The point I am making is that our operations staff have done an outstanding job improving our operating margins across numerous states and across our various product lines within these states.

First-quarter net income [totaled] almost $5.9 million, which was 3.1% of our revenue. This compares with $3.7 million and 2.1% of revenue for the first quarter of last year. First-quarter diluted earnings per share totaled $0.44 with approximately 14.9 million diluted shares outstanding. This compares with $0.29 and approximately 12.7 million diluted shares outstanding from the first quarter of last year.

I have received some questions regarding the Q1 2009 diluted earnings per share computation (technical difficulty) the diluted earnings per share amount of $0.44 is not readily computed from the income statement. The computation results from the effect of accounting for our convertible debt under Statement of Financial Accounting Standards No. 128 earnings per share. And I would like to direct you to footnote 11 in our Form 10-Q which discloses the details of the earnings per share computations.

At the end of our first quarter our days sales outstanding was 44 days and management fees days sales outstanding was 150 days.

At the end of our first quarter we had $32 million in unrestricted cash. Cash provided by operating activities totaled approximately $7.8 million in the quarter. We saw good cash collections in Q1 and that trend is continuing through today. I am not aware of any state payers materially slowing down payments to us and as of today we have not needed to draw any funds from our operating -- revolving line of credit to fund ongoing operations.

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

Thank you, Michael. For the quarter our direct client census was approximately 60,000 at March 31, up from approximately 55,000 clients at March 31, 2008. We also had over six million individuals eligible to receive services under our transportation division. The Company had 726 direct clients at March 31, 2009, up from 705 contracts a year ago.

We have a total combined census between our owned and managed entities of over 81,000 clients. All clients are being served from 426 local offices in 42 states, the District of Columbia, and Canada. Combined between our owned and managed entities there are over 10,000 employees serving 1,019 government contracts.

On the social services side we saw a strong quarter across the board due to a number of adjustments we have made to certain operations since last year's challenges. But also in large part due to a number of other markets that have remained strong and productive. Nearly all of our reporting units were at or ahead of internal expectations for the quarter. In particular, Pennsylvania, North Carolina, and Canada were all significantly ahead of plan and as you know these markets were very challenged last year.

As Fletcher mentioned the external environment has improved and it's important to continue to stay close to our payers as we did in 2008. States are still working through budget issues and determining program priorities. Although 2008 had many challenges, our service quality and our payer relationships remain very strong and that will again be key for us moving forward.

Although we expect 2009 to see some challenges due to state budget issues, we also expect that client demand and enrollment will likely increase. Lastly, I cannot say enough about our dedicated workforce, both on the social services side as well as the transportation division. All of our staff, including finance, IT, direct care, administrative staff, all work tirelessly on behalf of those who need us most in our society and we appreciate their efforts very much.

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

Thank you, Craig. I am pleased with our financial performance in the first quarter, but I would remind everyone that our first quarter is often our best performer. The impact of holidays and inclement weather are difficult to predict and they require extra vigilance and flexibility to deliver quality service in the face of unusual operating circumstances.

The first [quarter] reflected the impact of our rate increases, utilization that was somewhat depressed due to seasonal impacts in key markets, and transportation costs that were within our expectations. We have also seen a modest increase in enrollment in a few of our markets.

We met or exceeded our operational performance in all of our markets and as Craig has said before that is a real credit to our dedicated team members and our transportation provider network suppliers. New members who were introduced to the NET benefit for the first time last year have continued to use the service as a direct result of their positive experience.

Our continuing focus on cost containment in the areas of travel and purchase supplies has helped our performance and is due to the ongoing dedication of our purchasing group. Even with the fiscal stimulus most state governments are continuing to cut budgets and expenditures in order to balance their ongoing shortfall in tax revenues.

I am cautiously optimistic about the outlook for the 2010 fiscal year. We continue to assume some revenue growth in key markets that we have not yet experienced. Implementation of our New Jersey NET contract has begun and we look forward to an on-time start on the first of July.

The balance of our year will be dedicated to bringing on the significant volume of new business that we have secured. Now I will turn the call back over to Fletcher.

John, thank you very much. I would like to echo Craig's comments both on behalf of the social services but also to Herman Schwartz and the operating staff at LogistiCare; it was a remarkable quarter.

We are cautioning investors not to annualize this quarter. Clearly the second half of 2008 and changes in enrollment drivers have created some pent up demand. We are seeing our services prioritized as a program of choice. As Craig mentioned, state budgets are being reset now for July 1; many states are still facing serious deficit issues. The Feds are going to challenge them, obviously, with the dramatic increase in federal Medicaid funding available to them.

We are pleased to see the improvement in our stock and remain committed to looking at options to reduce debt. You will notice that we suspended the sale of assets. With our current performance and favorable wins we believe the scale will benefit us. We also believe our services will be prioritized in this current environment.

With Shirell will open the line for questions.

(Operator Instructions) Bob Labick, CJS Securities.

Good morning, congratulations on a great quarter. First question I wanted to ask relates to this pent-up demand you just discussed. Your original guidance (technical difficulty) gave only a few months ago for the quarter for social services was more in the lines of $70 million to $75 million and you had a very strong $85 million in social services.

Can we think about that $10 million to $15 million difference as some of the pent up demand? And could you describe how it flows through and where it really came from?

In a brief summary answer to that we are seeing -- I think I will ask Craig to confirm this -- some improvement in census in virtually every market. So you are seeing what I describe, Bob, as the psychology of our state payers change so that referral volume and census volume has indeed improved. But as Michael suggested, most of the impact to our current quarter is on the expense side in terms of margin improvement rather than on the revenue side.

The total revenue q-to-q is up about $9 million, so this is not totally an uptick in revenue story. We are seeing improved enrollment. We expect to see enrollment relatively stable for Q2. And then I think it's up to how these states address and deal with the stimulus funds available to them in concert with their own state deficits in terms of how we predict enrollment for the back half of 2009.

Okay. Then as it relates to the tailwinds, particularly from the President's Medicaid budget, could you talk about your expected use of cash flow? Are you likely to have very strong free cash flow this year? Will it be used to pay down debt or any other balance sheet plans in the works? Are there opportunities for tuck-in acquisitions? What would you be using the cash flow for?

Primarily debt reduction would be our preference; operating cash. We have been able to stay away from the credit line, as Michael said, and that would be our continued plan.

We are seeing the kind of traditional tuck-in acquisitions that we have done available to us. Our priority in the last couple of quarters has been to focus on our internal operations, make the changes we thought we had to make anticipating what was going to be a very difficult revenue year. And we are enjoying the benefit of making those changes at the same time experiencing an increase rather than flatness in our revenue base.

So this is more business as usual for us. You may see a tuck-in acquisition or two. Clearly, we would intend to continue to pay down debt given that we have not elected to sell any assets to delever the Company.

Okay, great. Last question, [I will get in] queue. Could you just help us understand when we should expect to learn about the state's fiscal 2010 budgets? What is the best way to track the progress there and when you will give us a further update, I guess, on the second half as it relates to that?

In every state today legislatures are still in session. This is a particularly challenging year for state governments. Unlike last year, set their budgets at much higher revenue expectations only then to have the budget fall apart post session, after the sessions had adjourned. That made that the governors' and the administrations' problem to deal with.

By law every state has to produce a balanced budget, so no budget will pass a state legislature that does not match revenue and expenses. So you are seeing states, Bob, grapple with increased taxes, sin taxes, casino taxes, sales tax, revenue side of the equation. At the same time you are seeing states struggle with how to cut costs in order to submit a balanced budget.

So the outcome of this, when it does occur, should create some predictability for the states fiscal year [that is] July 1, 2009, to June 30, 2010. We don't expect that to occur probably, literally, until late June. Last year some states -- California notably -- went in well into the new fiscal year before they had a budget. So we are not expecting to hear anything soon given that most states are still dealing with the revenue side of the equation in terms of how they create additional tax revenue.

The good news is that the federal budget is done so the states will have the benefit as they deliver on what the state money or what the federal money is available to the states. So we would expect that will continue to occur probably all the way through June.

Great. Thank you very much.

Mark Hughes, SunTrust.

Thank you. I think, Craig, you had suggested -- do you think client demand and enrollment will increase? Fletcher, you talked about the increasing federal Medicaid budget. It seems like Medicaid enrollments overall should increase. Is the fear just that the states dial back their spending and don't pursue those Medicaid matching funds and that impact your business? Is that the issue?

One of the reasons we are hedging, not to try and be vague, is unlike Medicare Medicaid is delivered and executed on a state-by-state basis. So the federal budget is set; the federal matching dollars are identified. But states still have a lot of optionality in terms of how they achieve their on individual state goals, which could include leaving some federal money on the table.

You have heard at least one state, Texas, suggest that they may in fact do that because they don't know how they would manage the system post the stimulus. A lot of that we attribute to political rhetoric, but you are seeing some states still struggle with how do they utilize the money, how do they take care of the ever-increasing population, and balance their state budget. So it is entirely as we sit today unpredictable in terms of how states deal with this ultimately.

We like to think that as states struggle with this our particular services will be prioritized. The transportation benefit is crucial in this environment and the home-based nature of our social services we believe is the product of choice. So our hunch is we will benefit significantly from that.

The reason we have not guided you, Mark, is we have at this juncture no idea how or when the states will finalize their budgets. So our typical guidance is based upon what our state payers tell us and as of this date in May we have very little visibility into what the states' intentions are for their next fiscal year.

Right. Is it your political instinct, though, that if there is money on the table and it's matching dollars greater than 1 to 1 it seems like the states would be very eager to take advantage of that?

Having served in those capacities and from the colleagues we know that are at Cabinet level positions, the federal government has made it incredibly challenging to bypass these federal dollars. If the enrollment is up and the unemployed are immediately eligible, these plans have to be executed at the state level. States are obligated as the federal court demonstrated in California to provide benefits to these beneficiaries.

So it is next to impossible, in my opinion, for a state to decline federal dollars. So instinctively, as you suggested, we believe the states will chase the federal money. But, again, what last year proved to us is that sometimes our instincts are not exactly correct and this is still a [very] unusual time as states are obligated under the law to pass a balanced budget.

Right. So I will take from your language -- 'next to impossible,' 'incredibly difficult' -- that the odds are quite good that things will continue at pace, but we don't want to set it in stone just yet.

Yes, we like the way we are positioned. We like the mood of our payer environment. We like the fact that they seem relaxed, given that there is federal money available. We don't have the panic kind of sense that we had in the back half of 2008 where nobody knew how they were going to come up with any money, how they were going to improve our rates, how they were going to address this ever increasing enrollment. So indeed the environment is different, our tone is different, our payers tone is dramatically improved.

What we can't do, Mark, is quantify that for you. That is the nature of our hedge.

Mark, this is Craig. If I can also add that many times, even when enrollment begins to creep up, our programs on the social service side somewhat of a lagging indicator because they don't automatically right away enter into the behavior health system. That does take awhile.

Generally as enrollment creeps up for those consumers who then do enter in to our services. So it's not a one-to-one relationship even when enrollment begins to rise.

All right. Just the idea that there is some catch up in the quarter, looking at your revenue growth it was not that inconsistent with recent quarters. Was there really any catch up so to speak or was it just --?

It's probably more of a return to normalization as you have suggested. We saw a lot of referral freezes. We saw a lot of rationing of care in the back half of '08. Normally we would see retaining referral engagement and that is more of what we saw -- most states have yet to see a single stimulus dollar. So while the stimulus is available and acknowledged it is yet to produce any hard dollars to our state payers, so most of them are anticipating that.

The psychology has improved. Where there was a referral freeze that might have been lifted, but they are not lining up at the door, Mark, 1,000 deep. We do expect enrollment to increase. We expect it to increase more than it has increased historically, but it's not going to be a double kind of thing. The government is going to continue to be disciplined about how it prioritizes services to the Medicaid population.

Right, okay. Well, that helps. Thank you.

(Operator Instructions) Kevin Campbell, Avondale Partners.

Good morning. This is Wes Huffman speaking for Kevin. I know you briefly touched on this earlier in regards to foster care revenues and management fee revenues, it looks like they were down sequentially. I was wondering if you could just briefly talk about that just a little bit more.

Wes, we previously managed the operations in Illinois and Indiana. Then in the fourth quarter of 2008 we were able to purchase those assets from those not-for-profit organizations and those were mostly foster care operations, assets. So that is why you are seeing the foster care and we get 100% of those revenue dollars.

The foster care revenues increase and the corresponding management fees decrease quarter to quarter.

Okay, all right. Secondly, in regards to the one time item of $2.1 million, what exactly -- what line item does that flow to?

Mostly that is in G&A.

Okay. That is what I was thinking. All right. Now that the sale of LogistiCare has been postponed is that going to affect your credit agreement at all going forward?

Wes, thanks for the question. One of the things that I think we are very smart about when we negotiated that credit agreement was to build flexibility into it and able to make this decision. We were careful to avoid any kind of requirement that the credit agreement was conditioned upon as sale.

So the direct answer to your question is, no, it does not affect our current credit agreement amendment. The amendment and the ratios, if you go back and look at that, were set as if the companies stayed together. We are good on the covenant calculations, good on the credit agreement amendment through the end of calendar '09.

Okay, great. Thank you. The margins with LogistiCare this quarter, I think they appear to be around 11.5%. Can you talk a little bit more about the driver for the growth there in the margins and is that sustainable going forward?

I think there were really two things that were happening. We do have some new books of business that we have been bringing on board -- the managed care area -- that by the nature of the services we provide have slightly higher margins. So most of what you are seeing is a differential in the blend between our state, government, and our smaller specialty books of business on the managed care side.

And as often happens in the first quarter of the year, as we mentioned, we do have more holidays, we have some oftentimes inclement weather, and that does in a few markets on an episodic basis depress utilization a little bit. And that has a small contribution to that margin improvement.

You would expect your margins to return to normal?

We would expect -- (multiple speakers). Correct. We would look at it on a gross margin basis and we would expect it to come back down a little bit to more what we have experienced in the past, more normalized.

Okay, thank you. One final question, I think we have kind of touched on this here and there already, but with regards to direct client census. Going forward in the second quarter can you talk about how things have been in April? Have they been up, down, flat?

I don't know if we have it with us. Do we? We would have to probably get back to you with it.

Okay.

Rick D'Auteuil, Columbia Management.

Just a follow-up on the last line of questioning as it relates to the banks. I hear what you are saying that you were careful not to write language in that required the sale, but I assume there is a constant communication. So what is the reaction of the bank, I guess, to your decision not to sell, but also to the stronger numbers that you put out? Can you share that with us?

It's a 10-member syndicate, Rick, so it's hard to answer that unanimously but I would say the substantial majority of the syndicate have congratulated us on the quarter, would rather that we earn our way out of debt than to sell an asset, particularly at a depressed time. So generally I think the feedback I have gotten is congratulatory.

There are different agendas with a couple of the different lenders that I think would expect -- expected a liquid event. I think they are less than thrilled with the news, but overall the majority of the feedback I have gotten from lenders is good.

They see it as a blowout quarter. They appreciate the fact we have additional cash and of course what this kind of performance does is really enhance our options to delever without having to sell anything. When we made the decision at the end of '08 that really the only option we had for our lenders to reduce our debt was to probably sell something. And I think generally now they perceive, as do we, that our options have improved dramatically in terms of dealing with our senior debt. So overall I am pleased with the lender response to the quarter.

Can you talk about what your goals are as far as debt reductions for 2009?

I can talk kind of what our options are. We have made no decisions in terms of what directions we might proceed under. But obviously we are in a position now that we were not in, in November, to look at equity opportunities, to look at recapitalization opportunities, refinancing opportunities. So there are options available to us, Rick, none of which we have committed to today.

You will notice I think, if you are following our SEC filings, that we refreshed our shelf just to make available to us equity if that is the route we choose to pursue. So without giving a specific answer I think we just like the fact that we have dramatically improved the optionality for the Company in terms of dealing with its senior debt.

Our original plan in November of '07 was that we would pay the debt down with excess cash and at some point look at ways to reduce the debt. And I think that is pretty much the plan we are communicating today, is we will pay it down with excess cash and look to other ways to enhance the Company's ability to delever.

Just as a longtime long-term shareholder here, I understand the stock has bounced off some really depressed levels. But it is also still a fraction of where it had been and what we thought was fair value. So I wouldn't be running around in strong support of dilution if in fact the strong cash flow is there to pay down debt from internal sources.

Rick, that is consistent with what I have heard from other shareholders, particularly (technical difficulty). And I can assure you it is not our intent to do anything dilutive. We have time to look at our options, and we understand and appreciate the feedback. That is very consistent with what I have heard from most of our other -- particularly the larger shareholders.

Right, okay. Utilization, particularly on the LogistiCare side of the equation, that came and bit us a little bit last year. This year, well this quarter you mentioned issues like holidays and weather that accrue to your benefit. But have we've fixed the issues, have we adjusted the rates actuarially to what the contracts say or what is the status of that?

What I can say is when we looked at our performance and our expectations for 2009 we did not assume that the utilization spike we saw in 2008 was going to go away. So we built our models around that same level of increased utilization through out the year. In those contracts where we do have an opportunity to look at the performance and make those actuarial adjustments we have done that.

Our only caution is, as we said earlier, states still have a fairly significant revenue shortfall. Even though we are very pleased with the fact that we have been able to get rate increases in each one of our markets where we have had an opportunity to, those rate increases may or may not be to a level that we feel kind of makes us whole when we look at the risk on a going forward basis.

We are going into our two most challenging quarters and our expectation is utilization will be at those higher levels. And that (technical difficulty) have made some operational changes to stay on top of that. We did not assume that they would come back down and that 2008 was an anomaly. We think 2008 is a new reality in the way we forecast.

One of the (technical difficulty) things we are benefiting from, Rick, is as enrollment increases the 2009 new enrollees are not as desperate as the back half of the 2008 enrollees were. So there should be some benefit from enrollment to that does not constantly pressure the benefit side of the Medicaid program.

And that is mostly the recently unemployed who under the stimulus legislation are now immediately eligible but are generally in pretty good shape as it relates to the kind of services we provide both on the social services side and the transportation side. So we don't see the ratio of utilization to membership getting any worse, but as John suggested we don't necessarily see the utilization levels coming down either.

Just one comment, and I know you are disadvantaged by being a public company, but my recollection is in most cases you guys -- LogistiCare saves the state 50% or somewhere around that kind of number, so you are a solution to the issue. I guess I would look at it from a position of power when you are in this position because if they were to take back the program that is a very expensive proposition or take back the obligation. So I guess I wouldn't just rollover because they are having funding issues at the state level.

I would agree with you. We feel with the high-quality service we provide that [we don't] need to be shy and we certainly bring in the actuarial data. But you have to remember that under the CMS rules rate setting does require actuaries on both sides of the equation. At the end of the day, the payer, government actuary, whoever they hire, are going to set the rates and they are obviously going to have a slightly different point of view than we do.

I would say in terms of your point, though, we are an acknowledged way in order for states to get budget predictability and saves money. The flip side of the coin is we are beginning to and continuing to see acceleration in the acknowledgement of that and the adoption of our model. So I think in terms of the future growth of the business we are very bullish on that.

It's very difficult for states to give one vendor a perceived bigger rate increase than the rest of the vendors within the Medicaid group. There is sort of a perception that we need to share the pain, whether it's a fact-based or not. I think that is part of the emotional part of the business that we are in.

The big states, Rick, where there was some tension regarding rate have been resolved in our favor. So we predicted as early as Q3 of last year there would be some lag at we worked diplomatically through these rate issues, but now in Q1 of '09 the largest of those was resolved in our favor. The smaller estates have also resolved.

You are right. They, at the end of the day, will recognize the value that these programs bring to them. But it does take six months, typically, to reset a rate. So we are enjoying the benefit of the rate setting conversations that began to occur in July and August of last year, also in Q1 of '09.

Is there a pipeline? It did seem like you were acknowledging there is a pipeline of new opportunities. Not just increased opportunities [within] the states you are serving down, but other states that are looking at this as a solution?

Yes, there has been a significant additional research that has been done on this model as being the best way to provide the service. CMS has come out very strongly. So we don't want to point you to particular states but, yes, we are seeing a lot of interest in acceleration in looking at adopting this.

But to Fletcher's earlier point, even that takes time because people have to decide this is where they want to go, go through a request for proposal process. And as you all who have been long-term shareholders have now learned, these are big procurements and typically a protest is a part of it. So these are year to 18 months long and when they are thought about and when they might actually begin.

There are a couple of states that are in the RFP mode, right, John? But they are relatively small -- $20 million-ish?

Right.

So, Rick, there are a couple of active procurement opportunities that we will compete for that are, as John suggested, a result of some new ideological thinking and we are seeing momentum in other states. You might mention where you are, John, on the Carolina, New Jersey wins which now have been fully awarded and the implementation.

In New Jersey, July 1 start. We are already on the ground in New Jersey and then we have got quite a bit of managed care that is also going to be starting in roughly that same time period. That is approximately $80 million worth of new contracted revenue that we signed up in the latter part of 2008 that we will begin to see -- at least we will get a half-year impact during 2009.

I think you only have one contract that is up for competitive bid, one or two?

They probably will slip for another year. One of those is Connecticut, but it looks like they still haven't quite figured out what they are going to do.

Okay. My last question is you evaluated a program on the foster care side and decided to exit because of the minimal profitability. I assume that is a dynamic process and you are looking at that all the time.

Are there other programs that -- I know you said Pennsylvania, North Carolina, Canada all improved or had a plan. But they can't be where you want them to be so is there a bucket out there that you are looking at that may be potential exit opportunities?

That is a great question, Rick. We have identified last year four or five troubled markets; one of those a very small contract we did exit. The other of those we have taken incredible steps to change our model so that we were more in tune with the revenue volatility of the states.

We can tell you, and I will let Craig respond directly, that each of those markets have returned to profitability so there is not a single market that is a drain on us today. So we don't expect that we would have to exit any other contract. We have kind of suffered through those issues in the back half of '08 and returned to profitability in each of those markets.

Craig, you might want to provide some color.

I agree. I don't see any markets as I sit here today that I have any interest in exiting. I am certainly always have my pulse on that for sure, both how we are performing and the politics in the state, the system design. But I don't see any operations out there right now that I want to exit or need to be exited.

And Canada feels resolved at this point?

The current operations are profitable; the politics seem to be resolved. We are in arbitration regarding some of the contractual issues from middle 2008. We did have a new win in Canada so our challenges to that payer do not seem to have affected our ability to maintain and win new business. Again, we think we are fine in Canada and have continued upside in Canada.

Just my last parting comment is a lot of what has been derived here has been expense related. We strongly support that most, if not all, of our other portfolio companies are watching their expenses. I know this was a terrific quarter on the bottom line in cash flow. I guess I continue to be vigilant on the expenses given the caution you have said about state budgets and not necessarily open up the flow in the hiring and adjusting back up in the near future.

I agree with you. The name of the game right now operationally is discipline; looking for opportunities. Hiring staff is a Catch-22. When there is the opportunity, clearly, we want to hire staff, but we want to be efficient.

There is no message given from me across the Company that we crossed the victory line and we are going to start spending a lot of money. We are going to stay vigilant and disciplined, and that is our commitment this year.

Thank you very much.

Chris Robertson, Cardinal.

This is Gene Fox and Chris Robertson from Cardinal. Could you all talk about changes that you have made your business model both on the LogistiCare side and the core social services business to adapt to the pressures that you felt over the last, call it, six to 12 months?

Sure, I will take that one. This is Craig. In the areas that challenged us the most what is most important on the social service side, because most of our business is fee-for-service, is that we have to be efficient with our direct care. We have to be efficient with our payroll to revenue percentages.

And in the areas that challenge us the most one of the biggest things we do is change our productive model of how we hired staff, how we paid staff so that we weren't committing across the board to fixed salaries, but instead initiated productive-based hourly programs instead of salary-based programs. And that both incentivized the staff to be productive and limits our downside when they are not productive and they have salaries.

Then across the board in all areas, including the areas that have been doing well, we have initiated certain cost saving measures such as salary freezes, changes to our benefit programs. Those affected all of the operations, not just the ones that were challenged last year. But the biggest change is I think operationally the areas where we had the biggest challenges really was our productivity model and our payroll model.

Anticipating your next question, Gene, we have not seen what I would call it disastrous impact on morale. Some of the process that we went through when we identified opportunities to reduce expenses, we knew that we could individualize and isolate these problem markets. But we also knew that with $0.80 on the dollar being FTE-related the only way the Company was truly going to save money was to attack our personnel costs.

So as Craig has suggested, we have implemented across the board to all 11,000 employees a reduction in sick pay and holiday pay, in vacation pay. And we don't intend to lift those. At the same time the salary freeze will remain in effect as will the management and executive bonus freeze remain in effect. So even though we have had a quarter we don't believe one quarter a trend makes. So we don't intend to reinstate many of those items until we fully appreciate what the rest of the year is going to look like.

Just briefly on the LogistiCare side, I don't know if you remember but late Q2 of last year and early Q3 we began to roll out an enhanced set of operational software tools to our provider base. This sounds counterintuitive but we actually sped up our AP to our providers; made it easier for them to maintain their cash flow, which was very important. And it allowed us to help partner with them but make them more efficient.

So we have been very focused on the average trip cost in each of our markets and obviously making sure that there is no utilization that is being created that is not part of the program. And those efforts are certainly ongoing.

I think, if I am correct, that your trip costs in Q1 were the lowest that I have seen. It's $0.20 here or there, but times a million people that is a lot of money.

Times north of two million transactions. Yes, that is real money as Senator Dirksen used to say.

As it relates to that we know that I guess you paid the drivers a bit more towards the middle of year when gas prices spiked and obviously gas prices have come down. Can you talk about how you are dealing with the volatility in costs of fuel as it relates to the costs of your drivers and your entire costs structure?

The transportation network, I think, I clearly did not do a good job last year of explaining this. To the extent we had pressure in particular markets we put out what we called fuel supplement or surcharge checks. We did not adjust our base transportation rates, because we hoped that those were one-time spikes and we did not want to build an increased cost into that.

So as fuel came down obviously there was not a need to continue to provide those supplemental funds so that we are actually in quite good shape. The upside of that process was many of our providers are more efficient thanks to the tools we have. We anticipate in the couple of markets that we may need to raise rates because of challenges by a particular level of service. But there was no big rate increase to the base that we then had to negotiate back down when fuel came down.

We have been impressed, Gene, with how LogistiCare manages the loyalty of their drivers through a geographic grid, through exclusivity in volume, through providing discounted insurance, through captive insurance programs. So the driver retention even through a very volatile time was really pretty good given that fuel was going up. And to some extent they addressed that by paying them more rapidly.

So all of those things, which I would describe as operationally efficiencies, are in place today and as John suggested, we have been able to eliminate the fuel surcharges. So the cost of delivering the transportation service is pretty stable.

Can you talk on the social services side about when you would have made these tweaks to your business model such that we clearly saw the benefit in the first quarter? Would that have been something that would have been done towards the -- in the fourth quarter of last year or the third quarter?

Some of them were effective, Gene, January 1, with our new budget. Some of them were in process, implemented, but as we budgeted for the year the benefit changes, the changes to the health plan were done as part of a budget. The productivity changes, Craig began as early as Q3 of last year.

I have got two more questions. Are there any other changes that you envision in either of the segments that we haven't seen yet going forward in terms of adjustments to your business models to make them more efficient?

Both John and Craig are shaking their heads no. I assume the answer to that is no, Gene.

Okay. Last question and then we will get back in queue. Fletcher, you highlighted at the beginning of the call the increase in Medicaid dollars expected over this year and next. Can you talk about how we envision seeing that? Clearly, we saw some benefit this quarter in terms of increased volumes. But how should we think about how Providence is going to see those dollars flowed through to each of your businesses?

You have to multiply that times 50 because there is no federal mandate on how Medicaid is spent. Each state submits a plan. There is a new administration, a new secretary; they will probably prioritize particular services. We like to think, Gene, that our services are going to be prioritized in terms of their economic value as well as their effectiveness. That is one of the reasons we are so proud of the work that Vanderbilt has done regarding our outcome.

And as Rick pointed out earlier, the transportation benefit is a huge problem for state governments. So with additional money our instincts are that we will benefit disproportionately from those funds as states have to prioritize Medicaid benefits, Medicaid expenditures. We like to think we are part of the solution side of that equation rather than being on the part of the problem side. So that will evolve, literally, over the next several months as states set first their budgets.

Then they will sit down with us for our contracts, 1,020 contracts that all renew July 1, and say here is the deal. We are going to give you a little bit of a rate increase or maybe no rate increase and we want you to accept this kind of volume. Those contract indications will be our first kind of indication as to how we will directly benefit from the Medicaid funding increase. We can better answer that question in a couple of months.

Well, if the Medicaid population is growing, even if you don't see rate increase per individual, you should still see that population grow assuming that the Obama administration is essentially requiring the states to cover the people that are eligible. Is that a reasonable --?

That is true, but it is a direct relationship to LogistiCare. Enrollment actually affects revenue. On the social services side it still has to be a prioritized decision to refer business to us. So states actually will have to go through their budgets and say we want to maintain this level of home-based. We want to increase it, we want to decrease it. So that is the process that, literally, each state is going through as we speak, Gene, looking at how they would prioritize our services.

Thank you, Fletcher.

Mark Hughes, SunTrust.

Thank you. I think you have touched on this but what is the rate outlook do you think? What is the risk that rates flatten out, perhaps are cut? Have there been any recent contracts on the home-based side that give you some insight as to what the trend might be?

Based on what we have seen and heard we would expect rates to be relatively flat. Historically, we have enjoyed a 2% kind of cost of living increase. We don't expect to see dramatic improvement in rate this year. We think most of what the states are going to do with additional funding is improve volume.

So I think our overall expectation, the way we budgeted markets flatness in rates, some improvement in transportation rate as John has been able to renegotiate some of the issues from the back half of '08. And if we see a cost of living increase it's going to be very, very small.

And if rates are flat, does that naturally put pressure on margins or can you compensate?

Not if the volume increases. And we are not improving salaries. Normally our rate increase falls to the FTE line. Our SG&A stays relatively stable, our D&A is predictable, our interest rates are predictable, our rents are predictable, so the only thing that fluctuates for us is salary. With that frozen flat rates will not affect margin.

Michael, the overall organic growth rate in the quarter, what did you say it was?

3.8%.

3.8% was the overall organic, okay. Thank you.

Kevin Campbell, Avondale Partners.

I just had a quick follow-up question. This is Wes Huffman speaking for Kevin again. This was just about the $2.1 million one-time item. The three areas mentioned that that flowed to in the press release, do you see any carryover into the second quarter from now at all?

The credit agreement amendment fee is a one-time item; that is the substantial majority of that, Wes. There were some expenses associated with a consent solicitation. There will be some ongoing proxy expenses in Q2 that are likely to continue. But for the most part that is the credit agreement amendment expense which is not an ongoing expense.

Okay, thank you very much.

Is that your last question, Shirell?

Yes. And with no further questions in the queue I would now like to turn the call back over to Mr. Fletcher McCusker for closing remarks. You may proceed sir.

Thank you very much. We are on the road -- I am on the road extensively between now and June 15. If you would like us to stop by, please let Alison at Cameron know. Whether you are an existing shareholder or a prospective shareholder, we probably have a room to see you from San Francisco to New York over the next several weeks.

We are excited with this Q1 performance. We have actually enjoyed this call, obviously, over some of the ones we have had more recently. And as you can see, we are cautiously optimistic about the rest of the year. I credit again our operational staff for making dramatic improvements to our business models expecting flat revenue. The increase in revenue has been total windfall for us.

Again, we believe we are positioned very well given the current changes in Medicaid funding and look forward to the rest of 2009. So we will see many of you on the road. If you have a question we didn't get to, please call Michael or I directly. Again, thank you very much.

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