ModivCare Inc (MODV) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2009 Providence Service Corporation earnings conference call. My name is Keisha, 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 call over to Ms. Alison Ziegler with Cameron Associates. Please proceed.

Thanks, Keisha. 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 second quarter ended June 30, 2009.

You should have all received a copy of the press release last night. If you'd like to be added to our e-mail list, please contact Devin Rhoades at Cameron Associates at 212-554-5461. Before we begin, please note that we have arranged for a replay of this call. The replay will be available approximately one hour after the call's conclusion and will remain available until August 18. The replay number is 888-286-8010 with the pass code 90155340.

The 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 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 and (technical difficulty) within the Company's (technical difficulty).

The Company's forecasts are dynamic and subject to change. Therefore, these forecasts speak only as of the date of this webcast, August 11, 2009. The Company may choose from time to time to update them, and if they do, (technical difficulty) the updates to the investing public. I would now like to turn the call over to Fletcher McCusker, Chairman and CEO. Go ahead, Fletcher.

Thank you very much, Allison. Good morning, everyone. In Tucson today is Michael Deitch, our CFO, and Craig Norris, our Chief Operating Officer. On the phone from Atlanta is Herman Schwarz, the new CEO for LogistiCare. Herman is the former Chief Operating Officer of LogistiCare. Most of you know we brought John Shermyen, the founder, to the parent company as a member of the executive committee and heading up our development, M&A and strategic initiatives. Herman, welcome to the call.

Thank you, Fletcher.

We are pleased to release this quarter, especially given what we've gone through over the last 12 months, driven mostly by our ability to cut costs, reduce FTE expense, increase productivity, combined with a much more favorable payor psychology, driven for the most part by record federal stimulus dollars and a federal court not willing to let state deficit issues hinder the mandated benefits promised by Medicaid.

There is still a swirl of activity in state government, as they are obligated under the law to manage what now totals about $160 billion revenue shortfall nationwide. Most of this has been made up by the federal government, which can operate in a deficit, where states, under state laws, cannot. There are still 10 or so states without final budgets, but so far, all of our contracts have been renewed and we are seeing volume increases across most of our contracts.

LogistiCare rates are stable. Utilization is manageable. The cost of fuel is not an issue this summer.

We believe at this juncture, fiscal 2010 will be a more typical year for us. We will see serious summer seasonality as our growing book of educational business goes dormant, and our transportation division has to take the place of the school district-paid transportation for kids under Medicaid.

We want to thank our shareholders for their overwhelming support in our annual meeting in June and election of incumbent directors. Our dissonant shareholder attracted only 2% of the vote, and has since sold all of their stock in the open market without disruption.

Our revenue is record-breaking, but most impressively, our operating income is up almost 40%. I'll let Michael give you the financial highlights for the quarter.

Thanks, Fletcher. In terms of net income and diluted earnings per share, our second quarter of 2009 was our second best quarter in our Company's history, second only to our first quarter of this year.

In our second quarter of 2009, revenue totaled $191.8 million, up from $173 million for the second quarter of 2008, a 10.9% increase. 7.1% of this increase was from organic growth; 3.8% of the growth was from acquisitions in Georgia, Illinois and Indiana.

For the three months ended June 30, 2009 as compared to the three months ended June 30, 2008, home-based revenue grew 13.9%. We grew 8.6% organically and 5.3% from acquisitions.

Foster care revenue grew 24.8%, primarily because of the acquired foster care programs in Illinois and Indiana. Management fee revenue decreased quarter-over-quarter because we acquired foster care programs in Illinois and Indiana, which we previously managed, and we renegotiated various management contracts since last year.

Non-Emergency Transportation Services grew 10%, all organically.

Second-quarter operating income totaled almost $14 million, which was 7.3% of our revenue. This compares with approximately $10.1 million and 5.9% of revenue for the second quarter of last year.

Second-quarter net income totaled almost $5.3 million, which was 2.7% of our revenue. This compares with $3.4 million and 2% of revenue for the second quarter of last year.

Second-quarter diluted earnings per share totaled $0.40 on approximately 13.2 million diluted shares outstanding compared with $0.27 for the second quarter of last year, when we had almost 12.7 million diluted shares outstanding.

At the end of our second quarter, our days sales outstanding was 41 days and our management fee days sales outstanding was 159 days.

During our second quarter, we experienced a net decrease in general and administrative expense of approximately $1.8 million from the first quarter. This decrease was mostly due to the fees incurred in Q1 to amend our credit agreement, which did not reoccur in Q2.

Cash collections were very good in Q2, allowing us to report cash provided by operations of $11.3 million for the quarter and almost $19.1 million for the six months ended June 30. At the end of our second quarter, we had almost $39 million in cash. We had short-term and long-term notes payable totaling approximately $231 million, virtually all related to acquisitions.

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

Thanks, Michael. Overall, this was a good quarter, both the Social Services as well as the Non-Emergency Transportation side of the business. The operations continue to stay efficient, and we are seeing consistent productivity and budget performance across all regions.

For the quarter, our direct client census was approximately 56,000 clients, an increase of over 4000 clients compared to the same quarter in 2008. In addition, we have over 6.5 million individuals eligible to receive services under the Non-Emergency Transportation Division.

All of our clients are being served from 430 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 925 government contracts.

In Q3, we will see seasonality adjusted slowdown, typically due to the school recess period through the summer. The school-based programs on the social service side have performed very well in Q1 and Q2.

As I said on the last quarter call, although we expect 2009 to continue to see some challenges due to state budget issues, we also expect that client demand and enrollment will continue to increase within both segments of our operations. Many states are still working through budget issues and managing their deficits.

Overall, I am pleased with the operations through two quarters and how we've adapted in these very difficult environments. We have had virtually no leadership turnover, and this consistency is a significant factor in our operational efforts and future execution.

Now I will hand off to Herman for more details on the LogistiCare operations. Herman.

Thank you, Craig. I am pleased to take on the CEO role at LogistiCare and appreciate the opportunity to speak with all of you today. While the second quarter is typically not as strong as the first quarter for LogistiCare, primarily due to improving weather in the northern states and the start of summer programs in the southern states, I am pleased with our performance in the quarter. In light of the increased Medicaid membership in several contracts created by the ongoing economic issues, we focused on tight and effective management of our transportation expense in the period.

Utilization remains a concern, as the new membership is leading to a rise in unique users of our service, and these are folks that could get used to accessing the benefit on a habitual basis. Our utilization levels were budgeted to remain at or above the 2008 levels, and with few exceptions, have not yet deviated from expectation.

One significant advantage in the quarter has been in the moderation of fuel prices. As Fletcher mentioned, we did not experience a significant spike in the second quarter, so there was not the additional pressure on our utilization or unit costs as normally caused by fuel. These trends resulted in a better-than-expected gross profit percent that was only slightly less than that posted in our traditionally stronger first quarter.

Not all of this variance dropped to the bottom line, however, as we did incur significant expense in training, community outreach and travel associated with implementations in New Mexico, Hawaii, and our July 1 startup in New Jersey. After the usual challenges of a startup, the New Jersey implementation has stabilized and we are now dealing with the normal daily operating challenges. Our other state clients are still suffering from revenue collection shortfalls and budget concerns, but I am pleased that our service continues to be viewed as an effective means of cost containment.

I don't anticipate any reductions in our rates during this budget cycle. In fact, in a few instances, we have been able to negotiate moderate rate adjustments to offset utilization growth.

All in all, our first half of the year has been a nice reversal from the disappointment of 2008. While we do anticipate pressure on some contracts in the second half of the year, we remain cautiously optimistic that the membership growth and continued strong management from our terrific local management teams will combine to offset utilization increase and provide margin protection.

I will now turn the call back over to Fletcher.

Herman, thank you very much. Great job. As you can see, we are hitting on all cylinders -- productivity is up, volume is up, utilization is stable, the cost of fuel is stable. We still have, as we've mentioned, about 10 states that are still in the legislative process of finalizing their budget. So we won't be providing any guidance until they finish their budgets and pass that information on to us.

I've had a lot of questions about the health care reform initiatives currently in Congress. We will comment briefly on those, but caution everyone to basically watch and observe for the moment; don't try and speculate about the outcome or timing. But generally this will be a huge windfall for Medicaid and Medicaid providers.

Many of the legislative initiatives dramatically increase Medicaid enrollment from as small as a 33% increase to nearly a double, depending on what bill you read. But equally important is the mental health parity language, the support for community-based care and the requirements to provide community networks. Our historical growth has always been state-by-state without a backing federal mandate. We believe the success of community-based services, the costs associated with our in-home care model are now being considered as federal policy, not just loosely endorsed. This is indeed our most remarkable time.

With that, Keisha, we will open the line for questions.

(Operator Instructions) Kevin Ellich, RBC Capital Markets.

Good morning, guys. Thanks for taking my questions. Fletcher, going back to your last comment about the 10 states still in legislative session, what percent of revenue do those 10 states account for, and I guess what is your outlook while they are still in session?

These are all big states for us, Kevin. It's California, Arizona, Pennsylvania, and North Carolina. These are states also that -- where we struggled last year, who have been some of the hardest hit states in the recession. Part of what is unique about this summer versus last summer is that the legislatures are still in session or have been called into special session by the governor.

Every state will have to balance their budget, and you are seeing phenomenal conversations, from legalizing to increasing gambling taxes in states like Pennsylvania and Virginia. You are seeing sin taxes, revenue increases. Not only are states wrestling with the cuts, but they are also having to create revenue sources, so at the end of the day they have a balanced budget.

Last year at this precise time, as the recession encroached, the legislative budgets were approved at a much higher and more robust level. So it left the bureaucrats and administrative types to make the budgetary decisions. This year, the federal government has made it very clear what they expect to happen in and around Medicaid, both at the court level, preventing cuts to the Medicaid budget, and then at the stimulus level, providing huge additional dollars for Medicaid-driven programs.

So for the most part, Kevin, our line items have been left alone. While the states still struggle to balance budgets, we have not seen anything like we did this time a year ago that could seriously impair our programs or our staff. So for the moment, we remain very optimistic that this budgetary season will conclude without any real damage to our programs or the line items that fund them.

Do we have any timeframe as to when we expect them to be finished, and at that point in time will you provide guidance?

This is an unprecedented time. The fiscal year started for these states July 1, so many of them are into the year already. Some of them have struggled with enabling legislations. Pennsylvania, for example, couldn't pay its employees until they passed an emergency piece of legislation. So no one has ever seen states go this far beyond the beginning of the fiscal year to resolve their budget. So I would expect it would have to be done relatively quickly.

The other reason we are trying to stay out of the guidance business is the health-care reform initiatives, which the President has assured us will be taken up in September after the August recess, will have a huge impact on this Company and any other Medicaid provider. So it will be the most dramatic piece of legislation that we will have ever seen in our career, let alone the history of the Company. So we probably want to see what happens both at the state and the federal level, Kevin, before we can provide any respectable guidance.

I got it. That makes sense. And then just going back to the transportation business, with the lower fuel prices, I was wondering if that actually provided somewhat of a tailwind for you guys in Q3.

And then Herman also made a comment about some states you guys negotiated moderate rate adjustments. I was wondering if you could quantify that or give us some more details as to how much those increases might have been.

Kevin, in terms of the fuel, certainly as we go into the third quarter, with fuel prices traditionally start falling after school goes back in session, we look at that as a positive. That's not to say that if there was not an immediate spike or spontaneous spike, that our supply chain wouldn't come back to us and start looking for help and relief to offset cost increases, nor would we not see a corresponding increase in utilization because of that. So we do see it as a positive, but it can change very quickly, depending on what goes on in the world.

In terms of the second question, I would rather not get into specifics for competitive reasons and what have you publicly. But when I say moderate, these were very slight increases that allowed us to offset these huge utilization spikes that we'd seen over the course of the last year to 18 months. So that is the mechanism we have within our contracts to go back to our clients and ask for rate relief, is when that utilization moves beyond a previously agreed upon [band]. So what it does is help keep us even, really.

I see. And then on the utilization spikes, how has that trended into the third quarter?

Like I said in my talk, we had budgeted in '09 for the utilization increases that we saw in '08 to maintain, and that has been the case in most situations. We have seen some slight uptick in utilization as new membership comes on.

The positive is the new membership that is coming on is traditionally not the sicker population. So it takes a while for them to become users of the program until they are used to the benefit, but we have not seen a major decline in utilization as that new membership has come on the roll.

So it is kind of holding its own and we are watching it, but if the economy continues to suffer and more and more people stay on the Medicaid program longer and learn about the benefit and become ill or more depressed or what have you, it could continue to drive up utilization.

Got it. I have a quick question for Michael on the debt covenants. Good operating cash flow this quarter. What is your outlook and comfort in meeting the debt covenants for the rest of the year and actually as they adjust going into 2010?

Kevin, thank you for the question. No problem at all that I see this year. And likewise, our internal projections show we have plenty of covenant clearance for next year.

And is that all being driven internally through this cash flow or EBITDA?

Yes, it is. That makes no assumption for any kind of debt paydown we might choose to do.

Remember, Kevin, our covenants are set on LTM EBITDA. So this quarter will be the first quarter calculated in Q1 of 2010. So the fact that this quarter is up so dramatically does create a tailwind all the way through the next three quarters. So this is the first quarter that will be calculated in the covenant reset. And as Michael suggested, we show ample clearance to this year, which were amended, and then through the reset as a result of a very powerful Q2.

Got it. Thanks, guys.

Mark Hughes, SunTrust.

Any way to quantify how much expense you incurred in the quarter related to the ramp-up of the business for LogistiCare?

Herman, you can touch on that. Those contracts, Mark, remember are effective July 1, both the New Jersey and North Carolina wins. So there is some modest spending prior to that, but it is probably not a big number. Herman, do you know?

I do know. In the second quarter, we incurred just south of about $0.5 million in startup costs for New Jersey, New Mexico and Hawaii, Mark. And that is primarily around getting people trained up and ready to go for that July 1 date. So we had that expense in the quarter and don't get any revenue benefit until the third quarter starts. So that is where that came out.

Right. Anything else in the cost structure? You obviously took a number of actions six months ago or so. Any of that begin to unwind as we move forward, or should we look for the cost structure to be pretty steady?

Well, we don't expect we will continue to enjoy these margins north of 10%. We've always talked historically about a comfort zone that we have that we share with our payors in and around 10 or lower. We've also, as you know, operated under a salary freeze since the beginning of the year. We've got to begin to think about our employee base and how we deal with their cost-of-living and merit increases.

So you will probably see those margins come down. But they should hold, Mark, in the 9.5% kind of range. We are going to try and do as much margin production as we can, obviously, but we do have to pay the piper to some extent in some of the actions we've taken that are punishing our staff.

Got you. Thank you very much.

[Rick Duarte], Columbia Management.

Good morning. Just on the cost of the proxy fight, I don't think that was broken out or discussed. So what was that in this quarter? And then if you can remind us what you spend last quarter on that.

We've got all-in about -- for Q1 and Q4, about $1 million, Rick. About $447,000 in Q2. The balance was in Q1.

Okay, and there shouldn't be anything like that -- there shouldn't be anything going forward, right?

Many of the one-time expenses we saw in Q1 and 2 we will avoid now in terms of the credit agreement amendment cost, the proxy fight, some of the other kind of things that were associated with Q1 and Q2. We would have done dramatically better. Now remember, we have said not to anticipate or annualize Q1 and Q2 results because we do know there is some pent-up demand in that the stimulus funds, Rick, were made retroactive to October of 2008. So as the government year normalizes in October of 2009, you will not have these revolutionary spikes that we've seen in volume and census.

That is why we think 2010 will be more of a normal year for us. But these first two quarters are probably not achievable again in the near term, and by that, we mean the next three or four quarters.

I mean, but in all fairness, those one-time items are very meaningful. So the fact that those don't continue, I think would largely offset some of the positives you got related to government-related -- retroactive help here.

Yes, they are quite significant. Our summer season will be very dramatic for us. The good news piece of that, of course, is our educational revenue is now increasing dramatically. We expect to lose $3 million to $3.5 million of margin in Q3 just related to our educational products.

LogistiCare -- Herman, correct me if I'm wrong -- has a similar increase in expense, Rick. So you are going to see a dramatic dip, which I think so far the Street has anticipated in Q3 as a result of the dormancy of the Social Services educational product line and then the integration expense on the NET line. So that is going to take up any of these kind of upsides from the loss of the one-time charges.

Q4, we expect will be a normalized quarter for us. It will be into the government's new fiscal year. We are not seeing any pressure on our rates or utilization. So we expect Q4 will be a normalized quarter to us, where Q1 and Q2 were exceptionally good quarters in terms of volume.

Okay. One thing we haven't discussed in a while is what does the LogistiCare new business pipeline look like and any thoughts on timing?

I think there are two states that are public that are currently in the procurement process. I think they are small, $25 million to $30 million a year kind of contracts. Those should be announced in the near term.

There are a number of states, Rick, some $200 million of contract volume that is in the conversation process, which more likely would result in procurement activity in 2010.

The one thing the recession has done is highlighted the economic opportunities that the NET model brings to state government. Now, they've been incredibly distracted over the last several months just trying to balance their budgets. But as state governments begin to stabilize, we are seeing a heated up conversation regarding the benefits of this model, and we do expect to see increased procurement activity either in late ''09 or 2010. Am I pretty close, Herman?

That's correct, Fletcher. And the thing to keep in mind is particularly when it is a state-involved contract is the timing is both driven by budget issues as well as political issues. And even after it is awarded, as you saw with New Jersey, you've got a long time before the contract's actually awarded and it gets executed, typically because of protests periods and what have you. So anything that was to be awarded in late this year would be a mid-2010 start at the earliest.

Okay. Any states that are -- I know you mentioned 10 states don't have budgets, including some of your larger states. But any states where you are seeing some issues that you -- similar or that you had callouts for last year? So you mentioned some of the states you have exposure to that still don't have budgets. But are there any states that are concerning you and you're not able to make a profit there, or for that matter Canada?

Canada is looking great. We are not seeing the recession type issues that we see in the States. Reputationally, we are doing well in Canada. We have new business developing. So Canada we don't consider a hotspot for us.

Many of the states that were controversial this time last year have resolved, California, Arizona. They are delayed, but we are not seeing this kind of panicky decision-making. Most states took substantial heed, Rick, to the federal court intervention in the US Court of Appeals that prevented California from cutting provider rates. So at this juncture, we've not seen a single state move forward with a plan to reduce Medicaid rates.

We think a number of states would have. We know they were considering that, except for this very successful precedent-setting case in California.

North Carolina has passed a budget with a 3% reduction in overall Medicaid spending. That's the only state we are tracking so far who actually anticipates spending fewer dollars next year than they did this year. However, they've left the discretion of those cuts up to the Secretary, and typically in an environment like that, where money has to be prioritized, we do very well.

So we are not seeing nor hearing from any of our state payors that there is any particular across-the-board attack which is part of what we struggled with last year, or is there any attack on our particular service line, which for the most part now, are being viewed as economically viable as opposed to costing the states additional money.

And the huge stimulus dollars make it virtually impossible for states to walk away from that money. A lot of states, particularly those with Republican governors, when those stimulus dollars were announced indicated they may not take them. In fact, every state is now taking the Medicaid stimulus. So we seem to have solved -- many of the problems that created our budgetary challenges last year have been solved by the federal government.

Okay. And then my last question is there were some thoughts on the board complexion and maybe switching an inside director to an outside director. Any update there?

We can tell you what we've committed to, and that is that we will replace Craig Norris on the board with an independent director. We have a board meeting, Rick, in two weeks. I do know that the nominating committee is vetting candidates in that regard.

So we intend to in the short term appoint someone to replace Craig, which will be an independent director. So probably either in this meeting or the next one.

Okay. Thank you.

(Operator Instructions) Bob Labick, CJS Securities.

First question, you mentioned in the press release you plan to look at options to reduce debt or improve the Company's capitalization. Could you just expand on that a little bit? Particularly does it relate to equity offering, or what are your thought processes around that?

Thanks for the question, Bob. In November of last year, we'd had virtually no options to delever except sell some assets. With our performance improving so dramatically and our syndicate in good shape, with no challenges to our covenants or any of our lenders, we have a number of options this year that we didn't have a year ago.

The high-yield bond market has reemerged very successfully. The opportunities to recapitalize the Company, to renegotiate the senior debt, to do some sort of exchange with the convert holders are all things that now are possible to us, given a couple of solid quarters.

We have said and will continue to reassure our shareholders we would not entertain equity at these stock prices. That message was given to me loud and clearly over the summer, and we would view that as possibly too dilutive. And as Michael suggested, we really have no urgency to do anything with our senior debt. With the amount of free cash that we've generated, $20 million, in the year so far, we're also in a much better position to make a senior debt paydown.

So all of those kinds of things, Bob, will be discussed at the board level, and we will try and approach those opportunistically as the market opens up for us. Again, we don't have any urgency to do a deal, nor any real plans at this point to do anything other than to continue to reduce the senior debt.

Okay, great. And that led to my next question, which is you had very strong free cash flow in the first half of the year. What are the priorities? Is it going to be purely debt paydown? Are there still small social service acquisitions that could be accretive and could actually boost EBITDA and help of covenants down the road in that regard, or how are you thinking about that?

We are seeing increased opportunities in the consolidation market, particularly as these small providers struggle in the economy and struggle with the slow-paying state. We do believe, however, the best use of our cash today is to pay down debt.

The comfort zone for companies and leverage today is probably 3 to 3.25 times EBITDA. I think the rating agencies made that pretty clear in their most recent ratings announcements for us, that they view anything north of that problematic. So I think our best use of cash, Bob, in the short-term is to pay down debt.

Great. Thanks very much. Look forward to seeing you at our conference next week.

Mark Hughes, SunTrust.

What did you say the amount was for the cost of the proxy plays in the quarter?

For the quarter, it was about $0.5 million. Overall, Mark, it was right at $1 million.

Right. When you talk about the fact that there has been some catch-up in spending, that the extra stimulus dollars are concentrated in this shorter window. But then on the other hand, your organic growth was good, but 7% does not necessarily suggest some sort of incredible unusual circumstances.

As we think about next year, how do we frame that up, the opportunity for organic growth to continue, but I think you are somewhat cautious comments about sustainability of current trends?

In a normalized environment, budget year over budget year, we have historically seen in every year except 2008 about 10% organic growth. We would expect, Mark, to be able to return to that kind of organic growth. And that is really a function of legislative budgetary improvement as a result of Medicaid enrollment.

What will blow the roof off of those numbers, of course, is the health-care reform initiatives, which could dramatically change the Medicaid enrollment number. So assuming there are no changes other than the organic changes to Medicaid enrollment, we have historically seen in the neighborhood of 10% a year organic growth. And then -- between 10% and 15%.

And then of course we've grown at double those figures combined with our acquisition strategy. So if we don't acquire anything, you would expect to see us grow organically 10% to 15%. All bets will be off for that growth, of course, if the health-care reform initiatives dramatically increase Medicaid.

If there is positive organic growth in 2010 and you don't make any real dramatic changes to your cost structure, then would it be reasonable to assume that the earnings would be up next year?

Yes, I think that is the assumption the Street has. That is the assumption we would have in modeling our business. That organic growth is exclusive to the Social Services side, so if you look at our $800 million book of business, about half of that now should see some sort of organic growth next year.

The LogistiCare growth is procurement growth, both in terms of Medicaid volume, but also in terms of new contract opportunities. So their growth will be subject to both Medicaid enrollment and then the opportunities the states present to them. But we do expect 2010 to be a growth year.

Right. And then the LogistiCare. even now with New Jersey in there, that will -- you get at least a half contribution the first half of next year. So organic growth should be positive in 2010 across the board, presumably.

Yes, for the full year, their revenue will be up $100 million.

Right.

(Inaudible) 400, because of their new wins. But you are right, you will see half of that in '09; you will see all of that in '10. And that is assuming that we lose no business and there are no additional procurement wins. But yes, they will grow 20% organically with the business that is in hand.

Right. Just an observation, a lot of the commentary about -- even Craig talked about expecting client demand and enrollment to increase; even the states that haven't finalized their budgets, you're still looking for Medicaid spending to rise, with maybe a single exception -- at least the federal budgets calling for Medicaid increases. It seems like an environment where if you're going to provide guidance, there's a lot of support that you have at your hand to make a reasonable forecast. Is there -- in your mind, what is the key reason why you can't give that guidance?

I think there are three, Mark. One was the lessons we learned this time last year, that stuff happens that we did not anticipate, forecast or even see coming. So we've developed a much more cautious perspective regarding states where there are unknowns. So until the state budgets are done, we would not guide.

Two, once they are done, we, as you suggested view guidance as upside guidance. Health-care reform could dramatically change how much of that is upside guidance. So you've got two things kind of coming to a head here in the near term. One is state governments. The ones that are still holdouts are the most problematic and the ones that created problems for us last year.

Remember, our budgetary issues were not across the board. They were in a few states, many of which do not have a budget today. So we would certainly not guide until that is resolved.

And I think generally, our board is discussing the Company's historical guidance philosophy, because we had two misses to guidance last year, which gives the Company some significant caution about doing a forecast, relying on things the government tells us and then releasing that information to the public. So we are taking a much more cautious view about the information that we release as it relates to guidance.

Thank you.

With no further questions in the queue, I would now like to turn the call back over to Fletcher McCusker for closing remarks. You may proceed.

Thank you, everyone. As Bob Labick mentioned, I'm on my way to New York for the CJS conference. I know I see many of you there next week. I will be back in New York in September at the Baird conference. So we will see all of you soon.

If you have a question we did not get to today, please call Michael or I directly. And then as always, if you are out and about and would like to visit any of our programs, please call Kate Blute in my office, and we would be happy to help arrange for you to do that.

Thank you everyone and we will see you soon.

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