ModivCare Inc (MODV) 2011 Q2 法說會逐字稿

Good day and welcome ladies and gentlemen to the second-quarter 2011 Providence Service Corporation's earnings conference call. My name is Audrey and I will be your conference moderator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference.

(Operator Instructions)

I would now like to turn the conference over to Ms. Alison Ziegler, Chairman from Cameron Associates. Please proceed.

Thank you and good morning, everyone and thank you for joining us this morning for Providence's conference call and webcast to discuss financial results for the second quarter ending June 30, 2011. The press release was issued last night. If anyone would like to be added to our e-mail list, please call 212-554-5469. Before we begin, please note that we have arranged for a replay of this call. The replay will be available approximately 1 hour after the call's conclusion and will remain available until August 16. The replay number is 888-286-8010, with the passcode 31282673. 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 and other forward-looking statements regarding future events or the company's beliefs about its financial results for 2011 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 10-K for the year ended December 31, 2010.

The company's forecasts are dynamic and subject to change, therefore these forecasts speak only as of the date of this webcast August 9, 2011. The company may choose from time to time to update them and if they do, we'll 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.

Good morning, everyone and thank you, Alison. With us here in Tucson today is Michael Deitch, our CFO, and Craig Norris, our Chief Operating Officer. With us from Atlanta is Herman Schwarz, the CEO of LogistiCare. This year so far is going pretty much as we planned. We are a little ahead of our guidance due to some positive tax rates and have forecast the back half consistent with our historical model. We have had a great contract renewal season in Social Services, renewing all of our Medicaid-funded contracts, failing only to renew 2 workforce development contracts in El Paso where we actually walked away from the conversations.

LogistiCare is doing remarkably well in the contract department, especially considering the highly public competitive threats from other companies, large and small. We successfully re-bid our largest contract in Virginia and also 1 in Wisconsin, and 1, a competitive bid for a large region in an unnamed state. We are awaiting word from 3 incumbent contracts, Philadelphia, Georgia and Connecticut. Herman will talk more about it in his remarks. I will let Michael walk you through the quarter.

Thank you, Fletcher. In our second quarter of 2011, revenue totaled $235.3 million, up from $222.3 million for the second quarter of 2010, a 5.8% increase. For the 3 months ended June 30, 2011, as compared to the 3 months ended June 30, 2010, Social Services segment revenue increased 4.6%. Transportation segment revenue grew 6.7%.

Second quarter operating income totaled $9.9 million which was 4.2% of our revenue. This compares with almost $17 million and 7.6% of revenue for the second quarter of last year. Second quarter net income totaled almost $4.9 million which was 2.1% of our revenue. This compares with almost $7.3 million and 3.3% of revenue for the second quarter last year. Second quarter diluted earnings per share totaled $0.36 on approximately $13.3 million diluted shares outstanding, compared with $0.54 for the second quarter last year.

You'll note that our effective tax rate is 36.6% in Q2 of 2011 which was lower than our projected 42.5% rate. Through the quarter, we recorded a $440,000 tax benefit to reflect the finalization of state tax liabilities for the company's 2010 state tax returns. [Demand] was modeling our business I'm projecting a 42.5% tax rate for Q3 and Q4, along with a 13.4 million diluted share count. During the quarter we spent approximately $4.7 million on fixed asset additions, primarily technology related. We established a call center in Wisconsin, and enhanced our internal billing and e-mail systems.

At the end of our second quarter our day sales outstanding was 32 days and our management fee day sales outstanding was 123 days. Cash provided by operating activities was good in Q2 totaling $9.2 million, allowing us to report cash provided by operations of almost $21.9 million for 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 debt obligation totally approximately $167.5 million. With that I'll turn the call over to Craig Norris, our Chief Operating Officer.

Thank you, Michael. For the quarter, our direct plan census on the Social Service side was a little over 59,000 clients. This was a decrease from the prior-year quarter of roughly 1,500 clients. As mentioned last quarter these reductions primarily reflect the impact of lower census in our workforce development progress. We had over 9.6 million individuals eligible to receive services under our LogistiCare division, an increase of over 1.6 million eligible members, compared to the same quarter in 2010.

All direct and indirect clients are being served from 443 local offices in 41 states, the District of Columbia and Canada, combined between our own managed entities, there are approximately 11,000 employees serving 919 government contracts. Overall operations were in line with where we expected to be for the quarter. As Fletcher mentioned, our Social Services contract cycle has successfully completed with all but 2 non-renewals.

The Social Services segment benefited in the quarter from a strong performance within our school-based programs and the Transportation segment the LogistiCare RFP team continues the success in [today's] environment for both new and incumbent business. Obviously we are continuing to stay very integrated with our payers. And are constantly promoting our model as a solution to the continued tightening of state budgets. Now I'll hand off to Herman for more details on LogistiCare. Herman?

Thanks Greg, good morning everyone. Our 6.7% growth over the same quarter last year continued our positive revenue trend, in spite of the loss of our Missouri contract. The growth was primarily driven by the expansion of the New Jersey relationship and the positive effects of new programs in Michigan, Nebraska and New York. As discussed in our first quarter call, while our revenue has grown significantly in New Jersey with the absorption of the non-emergency Medicaid transportation for the entire state, our margins on this contract have compressed as we realized the impact of higher utilization and higher costs to serve these new geographies.

As I also mentioned during that call, we were actively working with our New Jersey State client and did agree to an adjustment in our rates which was effective as of July 1. At a time when state agencies are looking for every penny, we believe it speaks volumes to the value, service, and accountability we provide that we were able to get this rate adjustment from New Jersey. We went live statewide in Wisconsin on July 1 as well and after the typical start-up challenges, the operation is beginning to normalize. We appreciate the cooperation and collaboration we continue to receive from all of the stakeholders in that state.

We are also pleased and proud to have been re-awarded the state-wide contract in the Commonwealth of Virginia for a 3-year period, with opportunity for 3 additional option years. As our historically largest contract, this was a program that our competition went after aggressively on all fronts. As Fletcher mentioned we have also received an award notification to manage, under a full risk-capitated model, the NET program, for 1 of 2 regions of a large state. Because we are still in active contract negotiations, we cannot identify the state or discuss the specifics of the contract but this is a good win for us.

We are still waiting to hear on RFP decisions out of Georgia, Connecticut and Pennsylvania where in each case we are the incumbent provider of a portion of the state. These contracts in aggregate generate approximately $75 million in annual revenue. In both Georgia and Connecticut we also have the opportunity to win additional regions of the state as part of this RFP process. The decisions on these states are expected soon as scheduled go-live dates under the new contracts are scheduled throughout the fourth quarter unless the states grant extensions.

We also expect decisions in the near-term on new state Medicaid opportunities with a large region of New York and within an administrative program in Louisiana. We have submitted RFP responses in both instances. Depending on the success of our outstanding bids and the timing of these awards, our second half could be extremely busy on a number of major implementations. With that I will now turn the call back over to Fletcher.

Thanks, Hermann, and congratulations to you and your team on some great wins. Our guidance identifies our typical summer seasonality where we lose Social Services business due to the summer school break and we gained Transportation expense with public school buses no longer running. We will pick up some revenue due to the contract wins in the Transportation segment, but we do not expect these contracts to be profitable in 2011 due to their typical startup costs.

We expect EPS this year of $1.42 with $0.11 of that in refinance costs or, as reported, about $1.31. If you are watching our cash flow statements, you'll notice that we've reduced our sub-debt by about $10 million. We also converted managed entity in Pennsylvania to an owned entity with the use of about $6 million of cash. That's about a $35 million book of managed business that will now become owned business with about a 5% traditional margin. It's accretive in the back half by just a few pennies.

We continue to see growth above what we anticipated, and expect even with the pressure on Medicaid from state budgets, the new debt ceiling negotiations and partisan politics regarding healthcare reform, our services continue to be valued by payer and policymaker alike. We continue to look for diversification opportunities into home health and senior care, with a platform Company that is well positioned to deal with the future changes to Medicare and Medicaid. We prefer to enter this market when the dust settles, and we believe our low-margin model will endear us to payers and regulators in that space as it has in our Medicaid space. With that operator, we will now take questions.

(Operator Instructions)

Rick D'Auteuil, Columbia Management.

It's Rick D'Auteuil. A couple of questions for Herman on LogistiCare. The New Jersey adjustments -- did they offset the issues you were experiencing I think in the rural markets that you picked up, or are they still insufficient to cover the incremental costs that you were experiencing there?

They went a long way towards helping offset that, but we have supplemented that, Rick, with a lot of cost savings opportunities. We've been very aggressive on our rate structure in New Jersey to make us whole there. So it gave us a lot of what we needed but we've had to take some action on the cost side as well.

Okay. Just as it relates to the lower margins that are being talked about in your business, Herman, versus the startup costs. How much of the startup costs impacting the third quarter with a couple of the new wins?

Look, everything is an estimate because we don't actually always know the timing of these implementations. So just to give you an example, in Wisconsin, which went live on July 1, we incurred over $0.5 million in startup costs in the second quarter that we had to cover. Now in terms of how we price these bids when we go out there, we obviously take into account the startup costs but we do tend to have to spread that across the life of the contract, whereas unfortunately under the accounting rules, we incur all that expense up front, we have to expense it up front. So over time we do absorb it and make it back. It's in the period of when it's incurred, it does have a negative impact.

So that -- actually that item alone may help largely explain the difference between where the Street was in the third quarter and your new guidance for the third quarter bottom line.

I can't speak to the total, only Michael would have to do that. But certainly from a LogistiCare perspective, it was in there.

Yes we have a couple of anticipated start-ups, Rick, in that quarter. So the Wisconsin example is a good model for how we would forecast start-ups

Okay. And the state that wasn't identified, is there likely to be -- when will those startup costs impact you?

Well, if you'd asked me 2 months ago, I would've told you we would be going live there sometime in the third quarter but because, as I mentioned, we were 1 of 2 regions that were awarded, there seems to be some delays being driven out of the other region. So we are kind of in a holding pattern right now waiting for the state to come back to us. We are still negotiating the contract. It is a Medicaid agency that is very detailed and very specific about what they want in the contract, so it could take a while to continue to negotiate and get everything down on paper. I'm guessing that we might make it and go live sometime in the fourth quarter. It could slip to the first of the year in which case we would probably incur most of those startup costs in the fourth quarter.

Okay and did you size that deal or not yet?

You know what -- we are still negotiating pricing so I really can't do that.

Okay. Fletcher, on the Social Service side of the business, did the margins in the new contracts are in line with -- I think you said, referenced something like flat. Is that fair, pricing came in roughly flat?

Yes, we expect to maintain our historical margin in that segment. The model we guided to in Q1, we have not had serious issues on rate. We have had a couple of states cut overall, Arizona the most; mainly with the very highly publicized issues with Governor Brewer. We had about a $2 million reduction in our $20-some million Arizona contract, but it wasn't rate related so much as it was volume related. So we've seen our typical, very small cost of living kind of negotiation, not a lot of upside for us, Rick, in rate but we're not seeing serious margin depression in that segment either.

This is kind of been out there for a bit -- Canada, whatever transpired there? Did we ever get full resolution of the issues you were experiencing there?

The arbitration continues. We prevailed at the arbitrator level. The province has elected to appeal that. The province is currently going through its re-bid on contracts, with a November expected announce date. So we'll know more about the win-loss status in Canada toward the fall. We've assumed and we maintain that business earnings in our guidance.

What is your run rate up there?

We make about --I think it's about $20-some million in revenue and we make $1 million.

Jack Sherck, SunTrust.

Just a question about the year-over-year decline in the census. You mentioned the non-renewal of the one contract in workforce development, so ex- that you said primarily -- would census have actually been flat or up year-over-year?

There is a couple of phenomena operating in census. The census pressure is in non-Medicaid business. It's in foster care, it's in corrections, it's in workforce development. The Medicaid census is actually up, and that's about 90% of our revenue business. So because we aggregate census, the trends show some flatness overall but the decreases are entirely in those other 3 segments, Jack. The Medicaid census is continuing to grow.

Okay. Just on LogistiCare, could you refresh my memory on how many states LogistiCare has contracts with now?

Herman, off the top of your head?

It's changing everyday. Directly, it's 15 or 16.

And then Herman, how many of those just roughly are coming up for renewal next year? How does that sort of look?

Actually, Jack, once we get through this year, most of the renewals will have -- will be behind us. We are working right now on, as I mentioned the 3 that were waiting on, Georgia, Connecticut and Pennsylvania. Those obviously are waiting and we've already submitted RFPs. We are working on a renewal RFP for Colorado which is a very small program for us. And then next year, we might have 1 that comes up but that's about it.

And then when will they cycle through again, about 2 or 3 years?

Yes, I mean, every 1 of them is a little bit different but you can kind of look at it and say starting 3 years out. And then depending on option years, it could be 3, 4 and 5 years out.

Walter Winnitzki, Nicusa Capital.

A 2-part question relative to the Transportation margins. Is there a way to quantify the negative impact in the quarter of the New Jersey contract, both what the margin may look like or kind of what kind of a hit there was in the quarter that should be eliminated? And maybe then to step back and just provide a little bit more color on what you're seeing relative to the overall competitive environment? What is happening, what's driving it and you know, who the players are and their competitive -- how they're coming at you from what kind of a competitive position?

Want me to do that Fletcher?

Yes. I think we had the numbers of about $1 million in the impact of New Jersey but I'm trying to recollect if we discussed that in Q1. But Herman, do you have any?

Yes, it's a little bit bigger than that. It's going to be a few million dollars. About 10 points is what we were looking at and the rate increase will make up about 7 points of that and then the cost savings will get us the rest and get us back to where we expected to be.

And then in terms of the competitive environment -- I mean the big players, the 2 kind of more aggressive players that are out there right now that are relatively new to the space and have gotten more aggressive are Access2Care, which is an arm of AMR, the big ambulance company, part of the EMS. AMR bought Access2Care through an acquisition a number of years ago and is just recently gotten more aggressive at pursuing that as a strategic growth area for them, And then First Transit which is a large UK company that does primarily school bus work here in the United States. It's always had kind of an NET arm but was kind of a sleeping giant.

We share the state of Connecticut with First Transit. We have 65%, 70% of the state and they have the remainder of it. They had never really been that aggressive, they bid a few times but not been real aggressive until just recently. And have frankly staffed up -- hired some former LogistiCare people and have really gotten very aggressive at going after NET business. Those are kind of the 2 that are in there causing a lot of the disruption. MTM, which has been a long time competitor of ours and is probably the second largest company in the industry, is always there as well. And then a couple of smaller competitors, TMS out of Florida which is a former coop -- cab cooperative which has made a few inroads, and Southeastrans which is a local minority-owned company here in Atlanta that has 3 of the 5 regions of Georgia. Those would probably be the main 4 competitors that we run up -- 5 competitors that we run up against.

It's important to remember while you can't just be the low bidder in this bidding environment. So we've yet to see these competitors, even as large and as aggressive as they are, significantly affect our win rate because you just can't underbid us. You have to win the bid. Technically they look to companies that have significant experience in this space. These bids are scored and typically the financial piece is weighted 25% or 30%. So you know we're very confident we will continue to win our fair share of this business.

(Operator Instructions)

Mike Petusky, Noble Financial.

Good morning. I'm sorry, I didn't catch this, I got momentarily distracted -- the contract -- the NET contracts that you're waiting on in Pennsylvania, Georgia and Connecticut. What's the timing of hearing something back on those?

Any day. Frankly, we're a little surprised we haven't heard out of Georgia and Pennsylvania yet because the Georgia contract, current contract expires in September. So to give a kind of a full implementation period, they'd really have to be putting something out there right about now. So we expect to hear Georgia any day unless they have to extend again and then Connecticut and Pennsylvania should be shortly thereafter. All of those for implementation kind of into the fourth quarter.

Herm, go ahead and break down the revenue for those 3 states.

Georgia -- our current revenue in Georgia for the eastern region is approximately, these are annual, approximately $17 million, Connecticut is $18 million and Pennsylvania is around $40 million - $42 million.

That's helpful, and I guess, Fletcher -- to me, it sounded like your comments on home health in senior care where you say, hey, we'll probably wait until the dust settles before we kind of follow through on our diversification initiative there, and then obviously I get that, given all the noise that's been around in terms of pricing. But I guess my question would be in terms of the excellent free cash you guys generate, what's the thought behind that? I mean to just continue to pay down debt or, with the stock this cheap I've got to believe it's tempting to do something in terms of stock repurchase.

I think we have 3 uses, Mike, of our cash that we think are appropriate, one you mentioned is a buyback. We have a Board meeting in a couple of weeks and will take that up with them. The continued deleverage, we did that in the last quarter and we can, when the opportunity presents itself, continue to attack the sub-debt specifically, and acquisitions. The issue for us in the acquisition space is most of the target companies are private equity owned and they want to sell them off at trailing EBITDA.

So we know that, particularly Medicare, there are going to be rate cuts. The profits that these organizations have enjoyed are going to come down more to our typical level, so what we don't want to do is pay for a 20% margin business and then cut that profit in half. So it may require just some patience or the appropriate seller for us to enter that space. But we really like -- and we've been identified by a number of payers as somebody that would be very valuable in that space because of our margin discipline, and we fully expect -- we've been very public about our desire to diversify into home health.

Most states have a moratorium on new providers so it's not the kind of thing we can start up de novo, so it will take a platform kind of acquisition for us to do that. And we've yet to find the ideal target. And so short of that we did convert a not-for-profit to own. We did take down some debt and we will -- we did carve out in our new loan agreement the opportunity to buy our stock back.

So let me try to press down a little bit on that issue. Given what's gone on in the market, given again your free cash flow yields which is through the roof. I would assume that the idea of stock repurchase has moved up the list in terms of your different options in the last couple weeks. Is that fair to say? There's part of me that frankly wishes I could drop the stock in coverage and buy it myself. Don't tell my employer that.

That's a fair statement. And we wanted specifically to address that when we signed the new lending documents, so historically we've had to go through the senior lenders for that approval and now we have a basket that we can initiate, and all I need to do that, Mike, is Board approval.

[Greg White, Rubico].

My line of questioning was all about the buyback as well, and I just reiterated what seems like the valuation of cash flow in the free cash flow yield, it just seems like a great use of capital here. It seems like it was already covered but that's where I was going as well.

A follow-up question from Rick D'Auteuil, Columbia Management.

You can throw my hat in the ring on the buyback too as a large shareholder, if the Board listens in on this. What was determined on the bonus plan for the year? Last year you did a cliff kind of thing where if you hit X, you essentially got the increment above that. And this year we are -- even though it's a good absolute level of earnings, its down from where you've been. Where are the lines drawn for this year's bonus and was there an accrual in the quarter that we just reported?

We continue to operate under forecast requirements, Rick, so that's the trigger point for the bonus. So we've yet to accrue and it's not likely that we would accrue any bonus this year, unless we have an unbelievable back half. So it still remains EBITDA driven for us and we've yet to achieve budgeted results.

We have a small bonus piece and it's $139,000 was the accrual for the quarter, and that's all.

Okay, thank you very much. Fletcher, I'll see you next week at CJS conference.

Very good, looking forward to it.

There are no further questions inside the queue. I would now like to turn the call over to Mr. Fletcher McCusker, Chairman and Chief Executive Officer.

Thank you very much everyone. As Rick mentioned, I will be at the CJS Securities conference next week, and I will be at the Baird conference the week after. So we continue to appreciate your feedback and welcome your questions, and I hope to see you all in the next couple weeks. Thank you very much.

Ladies and gentlemen, this does conclude your presentation. At this time you'll need to disconnect, and enjoy the rest of your day.