ModivCare Inc (MODV) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2012 Providence Service Corporation earnings conference call. My name is Katherine, and I will be your operator for today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Ms. Alison Ziegler from Cameron Associates. Please proceed, ma'am.

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 ended June 30, 2012. The press release was issued last night. If anyone wants to be added to an e-mail list, just give me a call at Cameron Associates at 212-554-5469.

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 16. The replay number is 888-286-8010 with the passcode 30949683. This call is also being webcast live with the 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 may make projections or other forward-looking statements regarding future events or the Company's beliefs about its financial results for 2012 and beyond. We wish to caution you that any statements are just predictions and involve risks and uncertainties. Actual results may differ materially. Factors which each may affect actual results are detailed in the Company's filings with the SEC, including the Company's 10K for the year ended December 31, 2011. The Company's forward-looking statements are dynamic and subject to change; therefore, these statements speak only as of the date of this webcast, August 9, 2012. The Company may choose from time to time to provide updates, and if they do, we will disseminate the updates to the investing public.

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

Allison, thank you very much. Good morning, everyone. I'm here in Tucson with Michael Deitch, our CFO, and Craig Norris, our Chief Operating Officer, and also on the line from Atlanta Herman Schwarz, the CEO of LogistiCare.

We are going to keep our scripted remarks relatively brief. We expect you will have a lot of questions this morning. Our extraordinary growth and win record continues to create short-term earnings challenges for us in the quarter and in the back half as we ramp up some of the largest contracts ever awarded in this space.

It is critical to us that every launch be successful as many of the recent wins, especially New York City and Texas, are prototypical with additional regions available if we do well. We have seen competitors cut corners recently in launching a few new states only to be removed within months.

New York and Texas represents several hundred of millions of dollars of new opportunity if we perform well and they expand statewide. Craig will discuss the social services business at a macro level, but in 2013 and beyond, our opportunities have now been enhanced by the recent US Supreme Court decision. A number of states have already announced implementation plans for Medicaid expansion, and to date, we have only seen eight states opt out of the Medicaid expansion -- Florida, Iowa, Kansas, Louisiana and Nebraska and South Carolina, Texas and Wisconsin, all Republican-lead states.

I will let Michael walk you through the quarter.

Good morning, everyone. In our second quarter of 2012, revenue totaled $278.9 million, up from $235.3 million to the second quarter of 2011, a 19.5% increase. Second-quarter operating income totaled almost $4.4 million, which was 1.6% of our revenue. This compares with $9.9 million and 4.2% of revenue for the second quarter of last year. Second-quarter net income totaled $1.4 million, which was 0.5% of our revenue. This compares with almost $7.6 million and 3.2% of revenue for the second quarter of last year. Net income for Q2 of last year included a $2.7 million bargain purchase gain related to an acquisition.

Second-quarter diluted earnings per share totaled $0.11 on approximately 13.4 million diluted shares outstanding compared to $0.55 for the second quarter of last year. Our tax rate for Q2 of this year was 43.3% and projecting our tax rate for Q3 and Q4 for this year to be approximately 43.1%. In Q2 of this year, our LogistiCare subsidiary incurred approximately $1.3 million in startup expenses to establish or enhance operations in Connecticut, Georgia, New York, South Carolina and Texas. Combined with approximately $1.8 million in startup costs from last quarter, we have incurred approximately $3 million in startup costs year-to-date.

For the six months ended June 30, 2012, we have spent $6.3 million on fixed asset additions, primarily technology-related and mostly to support business growth at LogistiCare. At the end of our second quarter, our days sales outstanding was 34 days, and our management fee days sales outstanding was 78 days. Cash provided by operating activities was good in Q2, totaling almost $8 million, allowing us to report cash provided by operations of approximately $17 million for the first half of this year.

At the end of our second quarter, we had $50 million in cash and short-term and long-term debt obligations, totaling approximately $145.5 million.

With that, I will turn the call over to Craig Norris, our COO.

Thank you, Michael. For the quarter, our direct client census on the social services side was approximately 53,000 clients. This is a decrease in the prior year quarter of roughly 6000 clients. We have continued to see census pressure resulting from reductions in our workforce and job training programs in Canada and select markets in the United States. The NET segment had approximately 13.6 million individuals eligible to receive services under our LogistiCare division, an increase of approximately 4 million eligible members compared to the same quarter in 2011. All direct and indirect clients are being served from 527 local offices in 43 states, the District of Columbia and Canada. Combined between our owned and managed entities, there are approximately 11,000 employees serving 895 contracts.

For the quarter, operations performed close to plan overall, excluding the unusual spike in healthcare plans, which we do not believe at this time will continue at these recent historical levels. In addition, we have made some planned design changes to our health insurance program effective July 1 that will reduce overall costs.

In the social services segment, we are seeing some challenges in a few of our workforce job training operations that are in the middle of system design changes. Additionally we are still transitioning in a few markets that are undergoing managed-care initiatives. These are not necessarily unusual changes, but it does require adapting to the new operating environments and compliance standards.

In the social services segment, we recently have seen significant RFP success by winning contracts in the Midwest and likely our largest single RFP award in the social services segment in the Southwestern state. Those awards will be going into negotiations soon, but I do not want to discuss further details at this time at the request of the contracting entities.

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

Thank you, Craig. Good morning, everyone. NET's segment revenue was up 33% from the same quarter last year, growing from $141.9 million in 2011 to $188.8 million this year. Second-quarter revenue also represented an increase of nearly 15% over the first quarter of this year.

The growth over the last year has continued to be driven from the implementation of state contracts in Wisconsin and Missouri during the second half of 2011, the first-quarter 2012 expansion of the state contracts in South Carolina, and during the second quarter, the addition of new regions to the state programs in Connecticut and Georgia, as well as the start of the Texas contract for the Dallas region and the startup of the first phase of the contract to manage the New York City program.

We also continue to experience positive revenue comparisons as a result of increased presence in Florida, Hawaii, Louisiana, Michigan and New York through new managed care contracts. While we are pleased and proud of the efforts to secure all of this new business, we do recognize that it has come at a short-term price to our margins. We have discussed on previous calls the price pressure that occurred in 2011 with competitors aggressively trying to take our market-leading share. We successfully beat back these challenges, but did reduce rate in several incumbent contracts and chose to bid to win on new contract opportunities. The reduction in rates, combined with significant startup costs and unexpectedly high utilization, negatively impacted margins in Q2 and the first half.

Our transportation expense is running at 81.8% of revenue year-to-date in 2012 versus a comparable 78.5% in 2011. On a positive note, our non-transportation expense as a percent to revenue has remained relatively flat year to year, in spite of the significant startup expenses and the addition of the large administrative service only contract for New York City, which requires the same operating expense on a lower recognized revenue base.

We are taking steps to improve the margins in a variety of ways in those states where utilization has increased substantially and we have a good argument for price adjustment, we are actively engaged in negotiation. In some states, we are also pursuing policy, changes which will have the effect of reducing or at least stemming utilization trends. These policy changes must also be negotiated with the client and then communicated over a reasonable timeframe to allow for the change in behavior.

Finally, despite relatively high fuel costs, we are adjusting trip assignments and renegotiating provider rates in several markets in order to reduce trip costs.

In terms of the sales pipeline two states, Alabama and Maine, which are new to the broker model, have recently released RFPs. We are reviewing the RFPs and assessing the attractiveness of each opportunity. Given the pressure on our margins, we will not willingly enter into contracts where the potential risks far outweigh the possible rewards.

Frankly, based on what we know today, we believe one of these states enjoys significant underutilization and underreporting of NET costs in its current program. We are attempting to highlight these concerns through the question-and-answer sessions, but may ultimately decide this is not a good opportunity to pursue.

I will now turn to call back over to Fletcher.

Thank you, Herman. As we now know from our release, the audit committee has elected to suspend guidance. We have a number of moving targets that are impacting earnings but are not necessarily predictable. We are not running the business focused on short-term results and encourage investors to look at the macro trends, the impact of the Supreme Court decision, the new movement, as Craig discussed in children's services outsourcing and the continued expansion of NET privatization.

We expect two more quarters of startup expense in New York City, and our agreement with Herman is to ensure that all five of our startups are incredibly successful and that our payers remain satisfied. We are investing in brand loyalty here, and we know that state Medicaid directors are some of our best referral sources when it comes to new business.

As Herman mentioned, two new states have released RFPs to outsource transportation. Simultaneously we have six Social Services bids in Canada that should be announced within the next couple of months and have just been awarded the largest contract ever in social services in the Southwestern state.

Medicaid opportunities, we believe, will increase significantly, especially in light of the recent Supreme Court decision that affirmed the expansion of Medicaid enrollment, but will allow some states to opt out. Until we know what states intend to expand enrollment, we cannot predict the impact to the Company revenue and earnings.

Katherine will now open the line for questions.

(Operator Instructions). Nick Halen, Sidoti & Co.

Good morning, guys. The first question I had was, do you have the breakdown of what the expenses were that were tied directly to New York City in the quarter?

We are looking. I think we have aggregated setup costs, but stand by.

Let me get back to you.

Okay, that is fine. Just in terms of the $500,000 in startup costs that you are expecting in the second half, should we expect that to be pretty even over the next two quarters, or do you think we will see more of that in the third quarter as opposed to the fourth?

Herman, you want to --?

Yes, I can get that. Actually most of those costs will be in the fourth quarter. The way New York City is working is it is a phased-in program, and starting January 1, 2013, at least as of today -- that is the scheduled date -- is the move of the managed-care population in New York City should get moved into the state contract. That is a huge population. So in mid-October, all of November/December, we will be hiring and training up another 80 or so people, and that is the bulk of that startup.

Got you. Okay.

We have got the number for you, $700,000.

$700,000, okay. All right. Perfect. Thanks. Just one for me in general, when do you guys expect to start seeing some of the benefits from the increases in Medicaid enrollment? I mean is this something we are expecting to slowly ramp up and hopefully take off, or is this something where you can see a pretty significant impact right away, and I guess a little bit of the timing of that?

We would not expect to see the census related to that until the back half of 2013. You are seeing many states play into that and begin to talk about strategies that will implement that. We may see bidding activity, but in terms of the actual revenue, it would be in the back half of 2013.

All right. Great. Thanks, guys.

Jack Sherck, SunTrust.

Thank you very much. Fletcher, on those eight states that you mentioned that were not -- that pulled out of Medicaid expansion, what percentage of our revenues did that currently represent?

We would have to get back to you on that. Remember this is all expanded revenue, so it will not be impacting any of our current book of business.

Right. But I mean just in terms of your current base of business, how much do those states represent for exposure?

They are all relatively small. Florida is probably the largest of those eight. We can do a little research for you. From our perspective, it is ideological. You know, the way the Medicaid expansion program is going to work is, if you opt in, the Federal government will pay 100% of those costs to take you from 100% of poverty to 133% poverty.

Arizona, as you know, very shrewdly recently retracted back to 100%. We were at 133% in Arizona, and now if the state does spring forward to the new enrollment, the Feds will play all of that.

So you have seen the Republican presidential candidate and a number of Republican governors express their desire to repeal this legislation. So you do have some partisan issues that have crept into Medicaid and Medicaid expansion. We expect that very few states will actually opt out.

Okay. And I guess this question is for Herman. On the LogistiCare contracts that came up for rebid and you had to cut price on, just to get a sense of competitive landscape, what percentage of those contracts (technical difficulty) and how many contracts did you have to reduce price on? I'm not concerned with how much, just what percentage of overall contracts?

What percentage of the contracts did we have to reduce --?

Yes.

I would be guessing off the top of my head, but I can tell you like Virginia, which was our second largest contract, we had to reduce price in order to keep that contract.

Was it fairly widespread, or was it more concentrated?

It was almost across the board. We had -- where before 2011, we were typically seeing two or three competitors coming into the marketplace and compete on different RFPs and we were by far the largest compared to all those competitors, in 2011 we had two very large corporate entities, divisions of large entities with deep pockets that got very aggressive at wanting to break into the space. And so they came in and aggressively priced.

Now, for instance, in Wisconsin, which we won that bid, we were the highest priced bidder, but we still had to bid it probably lower than what we would have preferred to do just because of the competitive environment.

And then I guess the last question on that is, the policy change that you are going to implement or are currently implementing to get some of that pricing back, how long is that going to take to roll through?

Well, every state is a little bit different, Jack, unfortunately because in some cases they have to do it through communitywide meetings where they announce it and explain it. In other places, they can just execute and it goes into effect immediately. And then there is always the -- even if they can do it immediately, there is always the transition period where we work with the client to try to educate the beneficiaries versus just cutting them off at the knee.

So we would like to -- in some cases, we think that some of these policy changes can be fairly immediate in the next couple of months. In others, it will probably take until 2013 before we start seeing an impact.

Okay, great. Thank you very much.

Wes Huffman, Avondale Partners.

I think you had a couple of questions on social services first. What we normally see in the social services segment, there is, I think, a sequential decline in revenues from the second quarter to the third quarter due to the normal seasonality. I think that is usually anywhere between, say, $3 million or $4 million, and it tends to rebound in the fourth quarter. Should we expect the same pattern this year or not because of the softness in the quarter?

No -- this is Craig -- I still think you will see that phenomenon because the school summer programs are certainly a lot less than one regular schools and sessions. So I think you will see that rebound effect similar to years past once schools -- the regular school season starts.

Okay. And then on the direct client census, it was down about 10% year over year. Is there anything -- I guess if you could give us a little commentary there on the main theme, the main cause.

Sure. Most of the volume of the census drop is, as I said in my scripted remarks, is coming from the workforce development programs. Canada specifically had a huge drop in census. Canada is going through what they call a system transformation where they are combining federal and provincial funding and changing these programs. This transformation has been delayed, and that has affected contacts and has affected census. I'm hoping they get back on schedule there, but that has been part of the delay there.

The other year-over-year decline was a workforce contract we got out of in El Paso. We got out after rate reasons. That was a fairly high census program, but the rates were just not attractive to move forward. Those really are your two big drivers in census change.

Okay. And then, Herman, I have a couple of LogistiCare-related questions. When we look at the costs of NET services as a percent of total revenue, we have seen a tick-up from the first quarter to the second quarter. So given the expectations for the continued startup costs, should we assume that it is approximately the same in the second half, or should it improve some from the first half run-rate?

When you say cost of NET services, you mean in total? You are not talking about specifically transportation?

Right.

Well, what you are going to see is typically the third quarter is a challenging quarter for us because of the seasonality that is inherent in back-to-school and programs and people taking their kids to the doctors before school starts. So we typically do see the third quarter as being a lower margin quarter.

What is going to happen this year because of those startup costs and as I mentioned earlier, primarily those are going to hit us in the fourth quarter. You are going to see the third and fourth quarter be about the same. So it's going to even out over the second half, and then hopefully as we get past these startup costs, we will start seeing back to the normal seasonality that we enjoy in the business.

Okay. And then also for modeling purposes, if we were to assume, say, no new contract wins, at what point do you think that we should start to expect to see the current startup cost moderate and reach more normalized levels?

Well, if we don't have any more startup or any more contract wins, then the massive startup costs that we have experienced to date are not going to be evident at all. Typically if we win a few managed care contracts, they don't typically involve the same kind of startup expense that a state contract might because we are not having to go open a facility and hire new. It is usually just a ramp-up of some staffing to handle the calls.

So, again, if we do not win either of the Alabama or Maine RFPs, if we choose to go after them, then you really should not see any of these big significant startup costs coming through after the fourth quarter.

Now if New York gets delayed, again, if the start of New York gets delayed, that population gets delayed beyond January 1 and they tell us soon enough, then it might delay us incurring those startup costs into 2013 and not having to incur them in the fourth quarter. The real negative could be what happened to us in the second quarter, which is where we had to incur startup costs, and then at the last minute, the state delayed the phase that was scheduled to start on July 1 and moved it to August 1. So we had to carry the labor that we hired in late May and paid for in June that we thought we were going to start generating revenue on in July, we did not start generating revenue on until August, and we carried that cost through July. So that will have a negative impact on the third quarter.

So, again, you have got to understand, we are dealing with state governments here. There is a lot of unpredictability. We do the best we can in times of estimating and dealing with it, but as Fletcher mentioned earlier, the most important part for us is making sure these implementations go well and that we are working with the client because, in the long run, we believe we will get it back.

Okay. So let's say theoretically in the fourth quarter, with all those things postulated, that there is no new wins or anything like that and we normalize in the fourth quarter, --?

I mean you will have $500,000 of startup costs in the fourth quarter that we should not experience going forward.

Okay. So how should we think about the total costs of NET services to be as a percent of LogistiCare's revenues at that point if those things happen? Or I guess --

I mean as we have said I guess consistently, we expect NET to generate an EBITDA in that 6% to 6.5% range, and we would expect that once all these startups are in place and we've got everything under control, we will be generating about that level.

Okay. Thanks a lot.

And it is not margin we are struggling trying to forecast. It is all the things that are impacting margin as it relates to new found depreciation if we had to add significant capital, startup costs now in at least two contracts that we know we have won, possible startup contracts in significant other. So it just made it impossible for us to have an intelligent conversation with our Board on how to forecast all that. And what we did not want to do is pick a number and then miss.

So we think the most prudent thing for us to do is just to spend guidance, try and to get our arms around some of these kind of things, and you should begin to see and make some sense out of all this for 2013. So there is no real significant impact to operating margins, other than these kind of extraordinary external events that are affecting margins.

And it's probably good to clarify what we mean by startup costs. For the most part, that is FTE expense. We have to hire staff, rent office, furnish and supply office, train people, and that is all pre-revenue dollars. In a New York City, they are bringing up one of each of the five Boroughs one at a time, so that is why we have got continual startup challenges there as we bring up one Borough after another. It is almost like we had five separate startup contracts under that one agreement.

And let me just interject, the other big piece of it, aside from FTE, is the communication part of it, which is either having to do a mailing to all the beneficiaries in that market and/or getting out and meeting all of the medical facilities and communicating the new program.

So, for instance, in New York with each phase, we have to have team -- five to eight teams of two people each out in the marketplace calling on all the medical facilities, handing out documents, teaching them how to fill out the forms and how to now order trips for their patients, which is a little bit different than how they have done under the state program. Well, frankly, we don't have eight teams of people sitting in New York ready to go so that requires travel costs and sending in experienced people from other places.

So, as Fletcher indicated, each one of these is like a new implementation. If the New York City contract were on a capitated basis and measured from a revenue perspective like the rest of our businesses, it would be basically the equivalent of a $200 million to $220 million contract, which all by itself would be close to 25% -- 30% of our business.

So it is a massive contract. I mean we will have by the time we are done implementing close to 300 people working on the New York City program. That will be 15% of our headcount will be New York City. So this is a huge program. The state is extremely nervous about it.

The Hospital Association in New York is very strong, and the state is very sensitive to making sure that things go well. And so they have requested and we have obliged to make sure that we put the resources in place to make sure that it goes well so that it can be a long-term healthy relationship for both sides. So that is really what has caused a lot of this expenditure during 2012.

Okay. Thanks a lot for the additional commentary there. I appreciate it. That is it for me. Thanks.

(Operator Instructions). Rick D'Auteuil, Columbia Management.

I have a number of questions. Just on the LogistiCare side, so for Herman, the New York City startup costs that we are talking about in the back half of the year, you and I have talked about these startup costs in the past, and we thought they would largely be behind us by now through the midpoint of the year. So, I guess, what has changed? It feels like the states are mandating changes that are not consistent with what you signed up for, and my concern is we are not getting the compensation for that on the revenue offset on the other side. Again, I think you guys have said you are targeting EBITDA margins of 6% to 6.5%. By the way, in the past, it was 6.5%. So we are hedging down, and that is after the program is up and running.

So I thought we were supposed to be absorbing this and still getting overall over the duration of the contract 6.5% operating margins. And now it is like we are eating the upfront costs, and then the reward is we will get 6% to 6.5% after we eat the upfront costs. That does not incorporate a return for that.

So, I guess, what has really changed? Are they pushing things out? Are they pushing requirements on you guys that were not originally anticipated when you signed the contract? Clearly, as shareholders, we are taking a beating here, and I guess I want to understand why.

Well, if the understanding was that we were not going to incur any more New York startup costs through the year, that was a misunderstanding or a miscommunication. Because the thing was phased throughout the year, and every one of those phases was a new startup, which required new staffing.

So our plan has always been to staff as needed, not to put them all in place and then have them sitting around waiting for the revenue to start.

Now the main difference is I think that from a standpoint of what we were talking about before, Texas was out of the way, South Carolina was out of the way, Georgia was out of the way, Connecticut was out of the way in the first half of the year. So a lot of that startup cost that Michael referred to also involved, as well as South Carolina, the other five or six states that we talked about. New York was always scheduled to implement over phases and always had startup costs associated with that.

Has there been a change from what we expected? Not drastically. As I indicated, I think the state as we get into it and we learn more about how their program is currently working and they expressed their nerves and what is going on there, it may turn up the dial a little bit in terms of, as I mentioned, having to send in more teams to do the communication. But I would say that the bulk of those startup costs were expected and are built into our pro formas for that contract over time.

So, if I'm hedging on the 6%, 6.5%, it is not because of the startup costs; it is because of the utilization increases that have occurred across the board, and the states are not as willing as they might once have been to just walk in and let us negotiate rate increases because of their own concerns and budget problems.

So if there is pressure in the market, it is that they have not been as reasonable as they might once have been in terms of granting rate increases when utilization spikes.

So, with that in mind, it feels like you need to get them on the front end, and if that means missing business that is not going to be profitable, then as a shareholder, I don't mind foregoing that.

Well, that is what I just said. In terms of that one contact that we are looking at now, we believe that that might be the case, and there is a high likelihood we will not bid that contract for that reason.

Okay. Let's get into the detail then. How many contracts do you have now that you are not making money on and that you are hoping to adjust the rate, but you are telling us the environment is not conducive to that?

If we cannot adjust the rate to a point where we are making a reasonable return and we have the ability to get out of that contract, we will.

But how many states are under water, I guess, in your business?

Two or three.

And are they actively being pursued?

Yes.

Okay. I know the last time we spoke, there were constructive discussions going. Is that still true or not?

Yes.

So -- is it the utilization that you are not being compensated for?

Yes, and as we have talked about in the past, the compensation and the conversation about utilization there is usually a lag. We have to be able to walk in, present the data, make a case and typically the state client has to go back to either their purchasing group or the governor's office or wherever it may be and get approval for a rate increase. That is not a fast process. It takes time. It is a negotiation. So it is not -- and then frankly, our model is built on us absorbing some of that utilization. And if a state wants to play hardball, their pushback is going to be -- that is the risk you take, particularly if they are under their own budget concern constraints. So that is the dance we are doing now. We fully anticipate getting rate increases in all three of the states that I just mentioned to you not by name but generically. I don't know how much yet, and I expect that it will help us improve our economics as we get into the second half of the year and into 2013.

Herman, I cannot think of a single instance where we have asked for rate relief and had the data that it was not granted. We have had some go on for as long as a year, I remember, but I don't know that we have ever actually failed to the point where we thought about terminating a contract.

We have one that has recently happened. That state will come out -- (multiple speakers)

So generally we are quite successful at bringing these issues to our payers. Remember, these are long-term, multiyear contracts. We would not invest, Michael said, $1.2 million in New York City if it was an annual contract.

So we see these as opportunities to invest upfront when multiyear is a business, and if we do have issues into a contract, the payers have always been pretty good about working with us. So we continue to push Herman to that 6.5% or better, and as things settle out, I think you will see our margins improve probably above that, particularly if we don't have the competitive energy that we had last year. We are not going to know that until we see the new bids in Maine and Alabama. I would be very surprised if we have the same level of competitive activity in those new bids.

How are you -- how is the, Herman, on the four or five contracts that are new that have come up, how are they operating? Were there any timing issues on start times that hurt us so we absorb more of the infrastructure that was there without revenues against it? Did they come up on schedule, I guess, is the one of the clarifications I'm looking for?

I mentioned New York did not; the second phase of New York did not start on schedule. It was pushed back 30 days, so we carried that cost for 30 days. All the rest, I believe, did start up when they were expected to. But, again, we incur the cost prior to the revenue being recognized.

And, frankly, the other thing you had going on here is we had so many at once. Historically we have been able to absorb some of these startup costs in our base business because we usually only have one going on at a time. Wisconsin we talked about last year was an unusual one because of some additional costs that came in, and frankly, it is not something that when we were a private company ever was a big issue. Because the timing of the cost incurred and the revenues being reported did not matter that much. It is a little bit more sensitive obviously as a public company because we do incur the cost upfront, and we make the revenue back later.

So, if we have a lot of them going on like we have this year, we are incurring the expense ahead of the revenue. It takes a while to bring enough revenue in to cover that.

I know the weather, we talked about weather last quarter impacting utilization. This quarter you cannot blame it on weather, right?

So what is actually going on here? I guess I'm a little concerned that this increased communication in bringing the awareness to the beneficiaries of the service might be contributing to the increased utilization. How many states are experiencing increased utilization? What do you attribute it to?

Well, look, I mean communication is always the sensitive topic. We obviously do not go out and communicate and try to encourage people to utilize the service. However, we do have an obligation contractually and morally to provide transportation when it is requested and when it is an eligible service. And as part of our contracts at times, we are required to send out mailings and do different things. So that is something we try not to overcommunicate, and I don't want to give the impression that we are out there trying to sell the service. But we do have an obligation to make sure people understand how to use it.

I attribute the utilization increase to the fact that the economy in many cases has not gotten better for a lot of people, that we are doing a good job in many of these states where we have come in and taken over regions, and we are better than our competitors and people talk. And it is a word-of-mouth community in terms of the Medicaid beneficiaries and they hear about it or they tell their neighbors and more and more people call. It is also a function of the fact that the populations themselves are not growing like they did in 2009 and 2010 in terms of more people coming on to the Medicaid roles.

So if the population is staying flat and, therefore, our revenue on a monthly basis is staying flat, even a slight tick in utilization is going to compress margins. So I attribute it to the fact that that is a natural progression of what happens in these programs over time is that utilization ticks up.

I do think the economy and fuel prices have exacerbated that.

I mean I understand that, and I would not -- I was not advocating for trying to snooker the Medicaid population. I guess I'm just saying if that is a fact of life, you need to be compensated for it because you are not in a not-for-profit business, and it is starting to feel like a not-for-profit business.

Well, Rick, I mean you are right. It is a touchy subject for these states in terms of when they are struggling is how much their vendors should be making. So we do walk a fine line. I will tell you Wisconsin, which has higher utilization than we might have imagined, we have seen the news, all of you have, and they don't quite know which side of the political spectrum they are on, conservative or liberal. So you have got a conservative governor trying to hold down costs, and you have got a nearly split in terms of a liberal community that has a lot of advocates for the folks out there pushing hard.

So that is one state where our utilization is higher than we would have expected, and that is one state that we are working on all the things I indicated there -- policy changes, rate negotiations, trip costs, everything. So if we can get that one in line, then we will go a long way towards turning the corner.

Okay. Thank you.

I would now like to turn the call over to Fletcher McCusker for closing remarks. Thank you.

Katherine, thank you. Thank you, everyone. And if we did not get to your question, please call Michael and I back. I think the important message from us today is to give us a little patience as we work through these growing pain kind of issues. We have spent $0.15 a share out of this year investing in new contracts that are probably worth over $200 million of revenue annually in the out years. We would not be having this conversation, except for that kind of a mess, but we think it is a worthwhile investment, and this clearly trumped our competitors given the energy that we have put into this space. So we remain very optimistic about the out years, very bullish on how we fit in with the whole Medicaid reform and continue to do the best work we possibly can on behalf of these payers.

So thank you very much. We have some conference schedules coming up late summer and the fall, and we are happy to visit with anyone that wants to see us. And, again, if you have a question, please give us a call. Thank you very much.

Thanks for joining today's conference. This concludes the presentation. You may now disconnect, and have a very good day.