ModivCare Inc (MODV) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2010 Providence Service Corporation earnings conference call. My name is Annie and I'll be your coordinator for today. At this time all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Ms. Alison Ziegler from Cameron Associates. Please proceed.

Thanks, Annie. 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, 2010. You should have all received a copy of the press release last night. If you'd like to be added to our e-mail list, please call Devin Rhoades at Cameron Associates at 212-554-5461.

Before we begin, please note that we have arranged for a replay of this call; the replay will be available approximately one hour after the call's conclusion and will remain available until August 12. The replay number is 888-286-8010 with the pass code 761-75685. 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'd like to remind everyone of the Safe Harbor statement included in today's 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 defense or the Company's beliefs about its financial results for 2010 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 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, August 5, 2010. The Company may choose from time to time to update them and, if they do, will disseminate the updates to the investing public.

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

Thank you, Allison, and good morning, everyone. And here in sunny Tucson today is Michael Deitch, our CFO, and Craig Norris, our Chief Operating Officer. On the phone from Atlanta is Herman Schwarz, CEO of LogistiCare.

This is an extraordinary time for us, a time that truly affirms our vision in creating a home-based alternative in 1996 and validates our diversification into transportation management in 2007. Not only is Medicaid enrollment continuing to rise, but our core services are evolving as solutions to the fiscal crisis faced by this nation and multiple state governments.

In fact, as money tightens and stimulus funds dry up our service array has never been in more demand as states struggle to deliver federally mandated services to an increasing number of beneficiaries. Many states have assumed that the FMAP extension will not pass and are making more enlightened decisions than in fact benefit us.

Open Minds, the industry trade magazine publication I encourage all of you to subscribe to, reported in July that waiver services which we have operated under are becoming the standard service model driven by three major factors -- state budget pressures creating a new interest in alternative delivery systems; language in the healthcare reform legislation that requires home and community-based services; and another court decision in Florida that has ruled that community-based services are a right under the ADA.

The FMAP extension did pass the Senate procedural vote yesterday; we expect -- our sources indicate to us they expect that to pass the Senate quickly. Speaker Pelosi has indicated that she will likely recall the House if indeed that extension passes the Senate. Most of our states have assumed that this extension would not pass. Remember our state fiscal years are July 1, so our budgets have already been set. Many states did not include those dollars because it was not certain that legislation would pass.

As a lower cost community-based provider we continue to see states turn to us to help them do more with the budgets that they do have. We have unbelievable staff loyalty, incredibly low turnover, non-existent turnover at the leadership levels and have endeared ourselves to our government payers through the last two years of our recession. This combination of forces is producing record results quarter in, quarter out.

We have had some competitive challenges in the transportation segment, but upon closer scrutiny are satisfied that two of the bids we have lost were due to what we believe to be flaws in the procurement. In Missouri where we have lost an award by 17/100 of a point on a 200 point scale we have identified several concerns with that procurement and will be pursuing recourse through the protest process. We lost Idaho on a technicality but have not elected to protest that award.

We cannot answer any questions today about the Missouri bid given that we remain in an active procurement bound by their confidentiality rules. We would refer you to the public files for further insight into that process. I'll let Michael give you the details.

Thanks, Fletcher, and good morning, everyone. In our second quarter of 2010 revenue totaled $222.3 million, up from $191.8 million for the second quarter of 2009, a 15.9% increase, all of which was attributable to organic growth. For the three months ended June 30, 2010, as compared to the three months ended June 30, 2009, home-based revenue grew 2.7%, foster care revenue declined 1.8%, management fee revenue declined 9.4%, non-emergency transportation services revenue grew 27.8%.

Second-quarter operating income totaled almost $17 million which was 7.6% of our revenue. This compares with almost $14 million and 7.3% of revenue for the second quarter of last year. Second-quarter net income totaled almost $7.3 million which was 3.3% of our revenue. This compares with almost $5.3 million and 2.7% of revenue for the second quarter of last year.

Second-quarter diluted earnings per share totaled $0.54 on approximately 15 million diluted shares outstanding compared with $0.40 for the second quarter of last year when we had almost 13.2 million diluted shares outstanding. The details of the EPS computation can be found in our Form 10-Q which is scheduled to be filed tomorrow. Please see financial statement footnote number 10.

You will note that our effective tax rate increased to 43.9% for Q2 versus 41.7% for Q1. This increase resulted primarily from recording a $300,000 net of tax valuation allowance for net operating loss carry-forwards in one of the states in which we operate. This discrete item is not expected to recur in Q3 or Q4.

For you analysts modeling our business I am projecting a 41.5% tax rate for Q3 and Q4 along with a 13.3 million share count for purposes of computing diluted earnings per share. At the end of our second quarter our days sales outstanding was 35 days and our management fee days outstanding was 187 days.

Cash collections were very good in Q2 totaling almost $9.4 million, allowing us to report cash provided by operations of almost $24.8 million in the first half of this year. At the end of our second quarter we had $54 million in cash and short-term and long-term notes payable totaling approximately $189.5 million. With that I'll turn the call over to Craig Norris.

Thanks, Michael. For the quarter our direct client census on the social service side was over 60,000 clients. This is an increase of over 4,000 clients compared to the same quarter in 2009. In addition, we had close to 8 million individuals eligible to receive services under our LogistiCare division, an increase of over 1 million eligible members compared to the same quarter in 2009.

All direct and indirect clients are being served from 437 local offices in 43 states, the District of Columbia and Canada. Combined between owned and managed entities there are nearly 11,000 employees serving over 900 government contracts.

Overall this quarter performance has remained strong and within both segments of our business client demand has continued to increase. State budgets do remain challenging. Our field leadership remains very integrated with our payers. We continue to believe we are in a good position to whether the ups and downs associated with these environments.

We also believe this is a time when states will increasingly be looking for quality in outcomes; some will even be looking to do performance-based contracting. We are comfortable in these environments and we will continue to invest in our outcomes and program enhancements within both sides of the operation. With that I'll turn it over to Herman for more details on LogistiCare. Herman?

Thank you, Craig. As described in the press release and reiterated by Michael, the NET segment and strong second-quarter results. Our revenue growth year over year is attributable to new contracts added over the second half of last year and the beginning of this year plus membership growth in several existing contracts.

Our gross margin percent was positively impacted compared to last year and to plan by this revenue enhancement, but is primarily due to the positive work done by our field operations to manage transportation expense and reduce unit cost.

With the exception of the Missouri situation that has already been mentioned, we are pleased with the outcomes from our discussions with our clients regarding rates for next year. You will recall that many states work on a July to June fiscal year. While all of our stay clients are struggling with their budgets, we were able to avoid any significant rate reductions and in some cases, based on higher utilization and mutually agreed-upon actuarial assumptions, were able to adjust rates positively.

We are busy managing the growth in existing contracts and implementing new pieces of business in California, Nebraska and the Northeast region plus bringing on additional counties in our New Jersey state contract. We are preparing an RFP response for the state of Washington which is presently divided into many regions managed by local transits and brokers. It remains to be seen if the state will adopt a statewide broker model or whether we will choose to bid by region.

Given some of the recent bids that have been awarded, there is clearly increased competition in the marketplace. We are reacting appropriately but will continue to be cautious about bidding contracts at a rate that cannot generate positive returns. I'll now turn the call back over to Fletcher.

Thank you, Herman. As it relates to guidance we have taken our forecast up due to the stellar results of the first two quarters. We continue to forecast our original budget for the back half of 2010 which includes our typically flat Q3 due to our school-based seasonality.

Also included in Q3 is an approximately $0.05 bonus accrual from the bonus plan that we announced in February and a normalized Q4 with enrollment stabilizing and no longer increasing. We believe our current guidance to be conservative, states are considering opting in early to the new eligibility requirements of the reform legislation and the recession continues to drive Medicaid eligibility.

If the FMAP extension passes we would expect that to also create a windfall for us given that states annualized their annual budgets. We have ruled out some acquisition targets due to due diligence issues; we remain engaged in conversations that would diversify the Company into senior care as well as military services under the evolving Wounded Warrior programs. With that, Annie, now we'll open the lines for questions.

(Operator Instructions). Bob Labick, CJS Securities.

Good morning, congratulations on a very nice quarter.

Thank you, Bob.

A couple questions. First, I wanted to start with LogistiCare, obviously very strong gross margins again. And at the end there you just touched on new rates that are equal to or higher. Could you just -- has there been a permanent change that we should expect these higher gross margins? Or just talk a little bit -- and talk a little bit about what you've done to lower your per cost rate, please.

Sure. I mean, the gross margins that we're delivering right now are really a combination of all of these things. There is the element of the new membership that we've talked about coming on and that's outstripping any growth in utilization. So that in and of itself, because of our capitated model, means that we are generating more revenue without having equivalent expense associated with that, number one.

Number two, we have over the last three years worked diligently to continue to drive efficiencies into our transportation networks, work with our suppliers, we've provided free software out to our transportation provider network to help them route more efficiently and do the things that we think help them keep their cost down so therefore they're not always coming to us looking for increases and having us support their inefficiencies. And our local management teams have done a fabulous job at working with that network and tamping down on that unit cost.

So it's done both through creating more supply our there, obviously, and also by shifting some of the volume necessarily away from a more expensive mode of transportation to maybe mass transit and working with the facilities, healthcare facilities and the clients out there to allow us to put more people on the bus and look for lower cost alternatives.

So, the combination of the revenue enhancement, the rates kind of staying stable, in some cases they've gone up. We did take some rates down because of the budget issues where we felt like the state really had to have something and we could afford to do something. But, we also had just as many cases where, based on the actuarial formulas, we were able to at least maintain and get some slight increases. So it's really a combination, Bob, of all of those factors going into the stronger gross margin.

Great, that's very helpful, thank you. Looking at Q3 guidance and Q3 in general, I understand the seasonality of the business and such, but guidance still appears a bit conservative. Your revenue guidance is maybe $10 million less and it appears that all of that's dropping to the bottom line. And if you take $10 million it's like $0.45 a share at your tax rate. And you're going to be at least that much lower in the quarter versus Q2. Is there anything else going on there expense wise? Where are the variable costs in the model as it relates to quarter over quarter?

Bob, three things happened to us in Q3 and it's important to remember that last year's Q3 was unusually successful for us. But on the revenue side all of our school-based business goes dormant actually at the end of Q1, about June. So we do lose a dramatic amount of revenue associated with that and not all of the cost associated with that because we choose to keep our employees employed.

On the LogistiCare side, their costs do increase dramatically because they now transport the kids in the summer where the school districts provided transportation during the school year. So there is an impact both on the revenue side and on the cost side.

What we forecast is what we forecast back in February, which included the increase in those expenses as well as the decrease in the school-based revenue. So we're not in a position at this point, other than to say we're optimistic, to have any real basis under which to provide further our improved guidance.

Okay, thank you. And last one and I'll get back in queue. You mentioned towards the end there the acquisition environment. If you could just elaborate a little bit on what you're looking at and if you expect to be able to do anything this year or if that's more a 2011 event?

It's likely to be the end of the year or the first quarter of next year. Our typical deal size remains small; the kinds of things we've looked at are typically under $50 million of revenue. We have looked at some larger deals, but most of the things that are for sale today are for sale for a reason. So, we've not really felt compelled to just buy something for acquisition's sake.

So, strategically we like the movement toward the community-based model and senior care. Healthcare reform will obviously make a difference there. We think the margins in that business are going to come down more to our typical margins, so there's going to be some competitive shakeout.

The process in the Department of Defense side is even slower given that there are very few existing providers that provide the level of services that the military is really looking for. So, we can afford to be patient, Bob, and we're going to look for the right deal rather than just chase a deal a quarter.

Okay, thanks so much, keep up the good work and execution.

Thanks, Bob.

Kevin Campbell, Avondale Partners.

Hi, good morning, this is Wes Huffman speaking for Kevin this morning. I had just a few questions on the shifting service mix in LogistiCare to the lower cost mode. Are you doing this now more than in the past? And if there is a change what prompted it? And is there any further room for improvement there?

Well, it's a combination again of two things. One, with the New Jersey contract we've taken on kind of a -- and New York contracts we've taken on more urban environments which allows you to put more folks on fixed route bus systems. So really the presence of a fixed route bus system allows us to do that.

So, if you're looking at say in Oklahoma you've only got a couple places where they might have a good network for that; when you go into New York, New Jersey there are much stronger bus systems and mass transit systems. So that's one element of it is a little bit of a shift in the type of contracts we've brought on in the last few years, number one.

Number two, it's the willingness and flexibility of the client to allow us to do that with their membership. And as their costs have come under pressure and what have you and we go to them and can convince them that long-term this is a savings that they will enjoy, they allow us to be a little bit more aggressive about pushing people in that direction who historically may have objected or came up with reasons why they couldn't get on the bus.

And then finally, we've done a better effort of getting out and working with the facilities, healthcare facilities out there, particularly in the mental health arena, and working with them to understand where putting someone on the bus might actually help in their treatment in terms of socialization and what have you. So, do I think it's a continual opportunity for improvement? I do. I think as budget pressures continue out there other clients will let us again be a little more aggressive in that arena.

I do think that as we continue to look for opportunity to grow in the northeast, again they have a more concentrated level of mass transit up there that we can use. So I do think there's some more improvement, but I think the low hanging fruit we've taken at this point.

Okay, that's very helpful. Thank you. And moving over to state budgets. Beyond what additional government assistance is expected out there, should we expect any major change after that or is it protected under healthcare reform legislation? Or what are your expectations there going forward?

It's hard to handicap, Wes, but there are some themes that emerged over the last 18 months since we were all kind of surprised by the recession in the summer of 2008. State government is indeed running a tighter budget. They've had time to plan and rethink how they utilize systems. And our products tend to be favored in that environment, particularly over our out-of-town competitors.

Our pitch in that arena, Wes, is quite simple -- for every one person you have in a psychiatric hospital we can see six of them in their own home. And that resonates today probably more than it did ever since we started the Company. At the same time the budgets are relatively finite, but there are kind of the stick and the carrot approach to helping maintain those. The federal court continues to intervene on behalf of Medicaid beneficiaries and you've seen that occur in California and now again in Florida.

So there's not a lot of incentives for states to try and dismantle the Medicaid budget because the court has indicated it will intervene. At the same time the federal government has offered additional federal match in order to prioritize our services. Now that match is designed to run out at the end of this year but I think every single state, Republican and Democrat is part of the lobbying effort that led to the Senate vote just yesterday to extend that stimulus through June of 2011.

So, the mood of the country, the mood of Congress seems to be very pro-Medicaid. So in spite of what's going on at the state level, we believe the Medicaid population will continue to grow and the Medicaid budget will continue to grow.

Okay. And with regards to LogistiCare, the Arkansas win. When is it expected to ramp? And are you expecting any sort of protest there like what we're seeing in Missouri right now?

Well, it's actually going through a protest process right now. Those wins in those counties that we -- or in those regions that we took were formerly managed by local transit authorities and most of those local transit authorities have kind of come together to protest the award. We're hopeful that the state and the department will make a ruling shortly on our behalf, obviously.

The implementation was originally scheduled for September 1, that obviously can't happen given that they have not finalized the award at this point. So, right now we're probably looking best case November 1, maybe even the first of the year by the time the legal element gets moved through. But we're fairly confident there that the state will uphold that award.

Okay.

West, our current guidance doesn't contemplate any changes in either Missouri or Arkansas.

Okay. That was my next question and last one as well. So, thank you very much.

Wes, thanks.

(Operator Instructions). [Brandon Austin], [Venetor].

Hey, guys. Nice quarter again. Can we talk a bit about the debt? You have $54 million in cash, it looks like you guys have paid down some more of your long-term debt in the most recent quarter. Given the acquisition pipeline slowed down and that you guys had to negotiate what I hope I'm not out of line by saying some rip-off rates when you ran into trouble a couple of years ago. What's your attitude in terms of your ability to lower the rate or refinance or just pay it off and find another way to get a more reasonable or more realistic rate on your long-term debt?

Great question, Brandon. Our excess cash flow will indeed be swept after the end of the year to pay down the senior debt whether we do it voluntarily or not. So if we don't do an acquisition this year three-quarters of that, Michael, I think -- 70% or 75% of that free cash will indeed be swept by the senior lenders. So that will go to senior debt unless we in fact can close on something by the end of the calendar year, which at this point does not seem very likely.

So we anticipate another significant pay down of that debt given our ability to generate cash. We still like the idea of an alternative acquisition it actually is more accretive than just a straight pay down of the debt and of course it's a long-term return on investment.

You're absolutely right about the bank market. We are engaged in a number of conversations with lenders about the possibility of refinancing our existing debt. We have been involved in these conversations for months as we've watched the market come down now to about L plus 300, L plus 350.

So we're not rushing into it because we think there still may be some room to aggressively challenge rates as the Company's outlook improves and the Company's credit ratings continue to improve. We also would have a serious write-off. In the event we were to refinance something we would have to accelerate the amortization of --

(inaudible) financing --

How many -- how much, Michael? $7 million, $8 million?

$5.5 million or $6 million.

$6 million. So that would obviously be a huge impact to earnings, something that we're very cautious about. So, the nice thing about where we are, we're in the driver's seat in this market. We have a number of alternative opportunities to refinance. We do not expect to do anything in the high yield markets; we think we could take advantage of our credit rating improvement company outlook and refinance at a dramatically reduced rate. But we would have to do something with the existing amortization structure, Brandon, to do it.

Okay. Just before I get to my next question let me say -- I don't think I'm out of line in speaking on behalf of all shareholders that writing off an amortization that no one is going to care about, don't let that stop you from lowering your interest rate.

Just on the transportation segment -- I remember what happened earlier this year, that it was like -- it was something related to the predecessor owners of the business, like the Missouri contract, it was nothing like that, right? It wasn't anything paperwork wise on your -- on your part?

The Missouri award is still alive so we can't speak to it. Its public files are available, some of the analysts have looked at them, you might want to contact some of our analysts. It was not a technical loss, the issue in Idaho was that they took a very literal view of the three years of financial history that we're required, Brandon, to submit in a bid because we had only owned LogistiCare for two years.

The third year in that presentation was the predecessor venture capital company who operated the business under a parent company and they rejected that submission as non-responsive. It's the first time it's ever happened to us before or since. We think it was an unbelievably literal interpretation, but we chose not to protest it. We have assured ourselves that that is not likely to occur again because we can address it now that we know it could be an issue in any future bid. And we should know something in Missouri in the next few weeks.

How many -- what was that you mentioned, something about how many points you fell under something, what was that?

When we lost that bid on a 200 point scale we lost that award by 17/100s of a point.

17/100 of a point, okay. That's a fine line. Okay. Can we -- can you maybe give me a sense -- it seems whenever you guys are talking about competition and protests and all that kind of stuff, it seems to be a local competitor as opposed to a more significant multi-state competitor. Is that basically the competitive landscape at this time? Is it always you going head to head with several locals or how would you characterize the competitive environment there?

I'll let Herman weigh in on that. But from my perspective when we looked at LogistiCare in 2007 it was a first mover in this space. That was part of the advantage it had, it was the incumbent, it was the preferred provider, there was not as much competition as you see today. The only competitor we see of scale, Brandon, is that EMS and of course you are seeing some of these local providers.

Most states indicate out loud that they intend to move to this model of care, it's a $2.5 billion book of business. We never expected to own all of that exclusively. So we're not surprised by the level of competitive activity, nor in the state's interest in competitive proposal. We will not chase a low bid. And I think Herman said that in his comments.

We're not just going to go be the low bidder in order to win territory. We still want to be able to protect our margins and what happens typically in our inexperience in these low bid environments is someone under bids their ability to deliver the service, they survive for about a year, a year and a half and that bid comes back around anyhow. So, we're not inclined to be the low bid.

Well, how many states are controlled by you and EMS versus states that either don't have contracts or controlled by locals?

Can you do that off the top of your head, Herman?

Yes, I mean in terms of states that use what I would call similar broker models like us, you're probably talking about 20 -- around 20 use kind of a -- maybe a little bit less than that -- use kind of the broker model where it's a pure broker where we talk about a Washington or even an Arkansas in the regions that we didn't have already that we talked about.

In that case they're using local transit authorities that serve as both broker and a transportation company, so it's kind of a little bit of a mix. CMS endorses the model that the broker and the transportation companies be separate, so that's where the states have -- many of the states have begun to move in that direction. But a lot of states are still -- they still managed themselves, they don't want to outsource it. Their Medicaid Department or their Department of Transportation actually manages that benefit.

So the first thing you have to do is go in and convince a state that they ought to be thinking about outsourcing that as the first step and then it's a matter of can you get in there and convince them to use a national player versus some of the political organizations that are already in that state.

To kind of give a little bit more color to your question and Fletcher's answer, I would say we run up against both. There have always been a group of national players, the names have changed a little bit over the last few years. We clearly were the leader and still are the later. We've had some formal competitors over the years. And there seems to be this feeling out there that LogistiCare never lost a bid in the past and that's not the case. Three of our current state contracts we took from a national competitor after they won it and didn't perform.

So, it's not that unusual that we go in head to head and sometimes don't win particularly for a new state. We have been very successful, up until this Missouri situation, with renewing our contracts with our existing clients and we're hopeful that we can rectify even the Missouri situation.

But it's a combination. There are probably three or four large national players that we run into on every bid now. Fletcher mentioned EMS, MTM has been around a very long time and is probably the second largest player in the industry behind us. And they were the ones that were just awarded the Missouri bid which is their home state. And there are a few others there.

And then there is always a couple of local folks that kind of play both as broker and transportation company that usually try to use their connections politically to get a piece of the business. So, Arkansas it happened to be just -- actually MTM bid on all those regions in Arkansas as well as the local player and we won eight of the 10 that were up for bid. So, --

Herman, of those 20 states you identified in this space, how many of them do we contract -- do we manage the contract for?

14, 15.

Excellent. Thanks a lot, guys.

Brandon, thanks.

At this time there are no further questions. I would like to turn the call over to Fletcher McCusker for closing remarks.

Thank you, everyone. August is a pretty quite a month around here and I think in your part of the world too. So, we do expect to be on the road in September. I'll be attending the Baird conference in New York in mid-September we're going to try and visit some accounts in and around that. So if you are interested in seeing us, please let Allison at Cameron know and we'd be happy to come by. If we didn't get to a question today feel free to call us, either Michael, Craig or myself, Herman directly. And we will probably see you all after the summer. 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.