ModivCare Inc (MODV) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2013 Providence Service Corporation earnings conference call. My name is Regina and I will be your conference operator for today. At this time all participants are in a listen-only mode. Later we will be conducting a question-and-answer session. (Operator Instructions). As a reminder, today's event is being recorded for replay purposes. I would now like to turn the conference over to your host work today, Ms. Alison Ziegler of Cameron Associates. Please go ahead, Alison.

Thanks, Regina. Good morning, everyone, and thank you for joining us this morning for Providence's conference call and webcast to discuss financial results for the first quarter ended March 31, 2013. The press release was issued yesterday after the market close. If anyone would like to be added to our e-mail list, please call Cameron Associates at 212-554-5469.

Before we begin please note that a replay has been arranged for this call. The replay will be available approximately one hour after the call's conclusion and will remain available until May 16. The replay number is 888-286-8010 with the pass code 44683383.

This call is also being webcast live with a replay available. To access the webcast go to www.ProvCorp.com and look under the event calendar on the IR page.

Before we get started I would like to remind everyone of the Safe Harbor statement included in the press release and that the cautionary statements apply to today's conference call as well. During the course of this call the Company may make projections or other forward-looking statements regarding future events or the Company's beliefs about its financial results for 2013 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 recent filings with the SEC including the Company's 10-K for the year ended December 31, 2012. The Company's forward-looking statements are dynamic and subject to change, therefore these statements speak only as of the date of this webcast, May 9, 2013. The Company may choose from time to time to provide updates and if they do we will disseminate the updates to the investing public.

In addition, the financial results were prepared in accordance with generally accepted accounting principles stated in the press release and provided throughout our call today. The Company has also provided adjusted EBITDA and adjusted EBITDA non-GAAP measurements which present its earnings on a pro forma basis. Providence's management utilizes these non-GAAP measurements as a means to measure overall operating performance and to better compare current operating results with other companies in its industry.

Both EBITDA and adjusted EBITDA are measurements not determined in accordance with or an alternative for generally accepted accounting principles and may be different from pro forma measures used by some companies. A definition, calculation and reconciliation to the financial statement of each can be found in our press release.

The items excluded in the non-GAAP measures pertain to certain items that are considered to be material so that exclusion of these items would, in management's belief, enhance a reader's ability to compare the results of the Company's business after excluding these items. I would now like to turn the call over to Warren Rustand, Chief Executive Officer. Go ahead, Warren.

Thank you, Alison, and good morning. With us today on the call we have Bob Wilson, our CFO; Herman Schwarz, CEO of LogistiCare; and Craig Norris, CEO of Social Services. We will be available to take your questions following our scripted remarks.

We are pleased with our first-quarter 2013 results. Our revenues increased nearly $282 million on the strength of our NET division. As Herman will discuss in more detail, NET revenue benefited from new contracts and program expansions in markets including New York and year-over-year gains in Georgia and South Carolina, as well as negotiated rate adjustments in select programs.

In our social services segment, while revenue declined year-over-year, it was mostly the result of changes to the workforce development business in Canada and the expiration of contracts related to our educational tutoring business due to changes in the No Child Left Behind Act. Both of these factors have been discussed in prior quarters.

Overall our social service contract base is solid going into the upcoming renewal cycle that begins July 1. We have recently started up several new contracts including contracts in Texas and Wisconsin and we anticipate renewal of our existing social services contracts.

While I will let Bob provide a more detailed review of our financials, net income for the first quarter was up strongly and we generated a substantial amount of additional cash from operations. We saw continued improvements in our margins due to full implementation of NET contracts that were in start-up mode in last year's first quarter as well as recent expansion of business in existing markets and negotiated rate adjustments in select programs of both the NET and social services segments.

As we look ahead to the remainder of 2013 and beyond, our management team remains committed to improving operating efficiencies, growing organically, looking at opportunities for tuck-in acquisitions, investing in technology and implementing a corporate wide performance driven management system.

This will help to position Providence to benefit from emerging trends in healthcare, particularly the development of integrated models of healthcare delivery and increased outsourcing of transportation management. Our experience as an in-home provider of services and our ability to manage large patient networks positions us nicely for these healthcare trends.

Starting in 2014 we continue to expect to see increases in our Medicaid population as states opt into the expanded Medicaid benefit as a result of the Affordable Care Act. To date 27 states plus the District of Columbia have opted in with 17 states currently anticipated to sit it out.

We will remain cautious in our projections about the impact of this population on our business until all states have made their decisions to opt in or out of the expanded Medicaid benefit. Some states in which we have operations and other states in which we do not may be affected quite differently based on our current operations and how the states react to the Medicaid benefits.

As we have stated before, to the extent this new Medicaid population is eligible for our services we anticipate to benefit more rapidly on the NET side and more gradually on a social services side.

Integrated care is also moving forward in multiple states as we see accountable care organizations, health homes and services for dual eligibles becoming more pronounced. We currently have pilot programs operating in California which address unique populations. Early indicators in these pilots suggest that there is an opportunity to alter the cost curve and structure.

This movement and these trends continue to be opportunities for Providence and we remain focused on the positioning of the Company to benefit from the future of healthcare. Let me turn the call over to Bob Wilson now to provide more detail on the first-quarter results reported yesterday.

Thanks, Warren. As was just mentioned, revenue for the first quarter of 2013 was $281.5 million, an increase of 8% from $260.1 million in the comparable period in 2012. Craig and Herman will provide more detail about these results in a few moments. We had net income of $6.7 million or $0.49 per diluted share in the first quarter of 2013 compared to net income of $3 million or $0.23 per diluted share in the comparable period last year. Both business units had strong operating margins.

Adjusted EBITDA for the first quarter of 2013 was $16.8 million, up 64% from $10.3 million in the same period last year. Our effective tax rate for Q1 was 41.2% compared to 35.7% for the comparable period in 2012 and over 49% for the full year 2012. The quarter-over-quarter difference is really primarily related to the benefit of an adjustment booked in the first quarter 2012 related to the final determination of tax liabilities related to an acquisition in 2011.

On the quarter four 2012 call in March we said that we anticipated that our effective tax rate for the full year 2013 would be between 42% and 44%. Even though our effective tax rate in Q1 is slightly lower, we are not revising our review of the effective tax rate for the full year 2013 at this time.

Let me turn briefly for a couple of comments regarding the balance sheet. We continue to strengthen our balance sheet and as of March 31 compared to December 31, 2012 we did that by increasing our unrestricted cash by $27.2 million from $55.9 million to $83.1 million.

Further, we reduced our net accounts receivable by $9.5 million or almost 10% from $98.6 million to $89.1 million. And finally, with respect to the balance sheet, we continue to reduce our long-term debt according to normal payment schedules at this time.

I will turn it over to Craig to discuss the performance of the social services business for the quarter.

Thank you, Bob, and good morning, everyone. For the first quarter our client census on the social services side was approximately 54,000 clients. This is a decrease on the prior year quarter of roughly 7,000 clients. All clients are being served from 339 local offices and 26 states, the District of Columbia and Canada. There are approximately 6,500 employees serving 565 contracts.

In the social services segment for the quarter, we did see revenue and census negatively impacted year over year by reductions in our workforce development programs and the ongoing reductions in our home-based tutoring business, which has been significantly impacted by changes in the No Child Left Behind Act.

Additionally, weather in the Northeast impacted our year-over-year revenue due to the number of late in the quarter weather-related events impacting school attendance in Pennsylvania and Virginia. In the quarter however we did see any number of markets begin to stabilize and we even saw a few rate increases in certain states. These are the first increases in many years and while the impact of these rates is relatively minor it is good news to at least see the start of some rate relief.

As has been mentioned, we are continuing to invest in our technology specifically centered around electronic health records and billing systems. The continued investment in our technology will play an important role in the emerging healthcare system as we improve our ability to pursue opportunities in the integrated care space.

We are continuing the start-up phase of our new contracts in Texas and Wisconsin. The initial phases of these contracts are on track and we are working very closely with our state partners. Revenue should begin to ramp up in the second half of the year assuming the start-up phase of these contracts continues as planned.

We are seeing increased consolidation in this space and Providence is in a good position to grow our market share both through organic as well as tuck-in acquisitions. The pipeline of tuck-in acquisition opportunities is finally increasing in a number of markets. We are necessarily being very deliberate in our M&A efforts in order to make sure the targets are both sound financially as well as strategically.

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

Thank you, Craig. Revenues in the NET segment grew to $193.1 million in the first quarter, a 17.3% increase compared to the same period last year. This growth was generated from a combination of factors that can be mostly attributed to the new revenues contributed by the operations in which we incurred the significant start-up expenses in 2012. These programs included expansion of government contracts in Georgia and South Carolina, new operations in Texas and New York City and a number of managed care contracts across the country.

In addition, during the quarter our revenues benefited from higher payment rates in several states as a result of protracted negotiations. The financial performance in the quarter also was benefited by a much improved spend on transportation expense as a percent of revenue. Unlike last year, during this quarter we realized better economics as a function of trip cancellations due to cold temperatures and winter precipitation.

Additionally, steps executed in the second half of 2012 in several markets to improve the efficiency of our provider network paid dividends during this quarter. As a result of a normal winter weather and our management initiatives our transportation expense ran at 76% of revenue in the quarter versus 81.1% last year.

While our operating expenses did go up as a percent of revenue due to the growth in our ASO book of business, with no implementations taking place during the quarter the dollars spent were directly tied to revenue generated during the period being reported.

With the new contracts added in 2012 and the completion of the last phase of the New York City program we now manage transportation in 43 states and have a census of 16.8 million eligible members which is up from 12.4 million a year ago.

As previously discussed, we terminated our contract in Wisconsin and will continue to provide service in the state until a new broker is in place. The good news is that the state has signed a contract with a competitor and we expect transition activity to begin immediately with an ending date of July 31.

We received very positive news as well from Missouri where we were awarded the new contract in the recent RFP process. This contract will replace the emergency service agreement we are presently operating under in the state, but at a price that we believe more fairly compensates us for the level of utilization being experienced. We anticipate the new contract starting on or around the beginning of July.

I am also pleased to announce that Utah has designated LogistiCare as the winner of their RFP process. This is not a very big contract probably less than 3 million a year, but it is a win of a state-wide program nonetheless. As FYI, that contract is under protest -- that award it is under protest right now, but we are optimistic that the award to LogistiCare will be upheld.

We continue to await decisions in Rhode Island, North Carolina and upstate New York. There are no other open Government RFPs in process currently, but there is significant activity in the managed care environment, particularly in association with the CMS demonstration projects for the dual eligible population ramping up in several states. I will now turn the call back over to Warren.

Herman, thank you very much. As you can see, we have made progress improving our NET operations. As a result of the actions taken in our NET segment, anticipated cost savings generated by increased operating efficiencies we are putting in place and the anticipated improvement we see on the social services side we continue to expect operating income gains in 2013 over 2012.

While we have made some progress operationally we remain focused on repositioning the Company and investing in technology in 2013. In preparation for 2014 and beyond, the entire management team remains cautiously optimistic about the opportunity we see today on both sides of our business.

We have a strong cash balance and while we continue a normal course of debt reduction with our improving financial flexibility we will look at tuck-in acquisitions to help further position our business for the changing healthcare trends. With that I would like to open up this call to questions from any of you who have those.

(Operator Instructions). Bob Labick, CJS Securities.

Good morning. First, congratulations, Warren, on your new title dropping the Interim tag there.

Thank you very much, Bob.

Great quarter. I wanted to start with LogistiCare, very strong gross margins. How much if any was there from catch up of prior contract repricing or is there -- is that still to come or where do we stand on that?

Bob, there was no retro recognition in the first quarters. So you're probably referring to what we talked about in the past regarding New Jersey. That is still to come. That amendment has finally been approved and is being processed and we would expect that catch-up to occur either late in this quarter or early third quarter.

Okay, fantastic. So then the run rate in the quarter is very strong. You mentioned Wisconsin you will run through the second quarter and be out at the end of July most likely. Also, Warren, you highlighted in the beginning the 27 states opting in and then the 17 out. Can you give us a sense of what your population would be if everything stayed the way it was right now going into next year for LogistiCare?

Well, we were talking about that earlier today and I think there is a false notion that there would be this enormous tidal wave of enrollees that would hit us. The reality of it is as we look at the various states in which we are engaged, it will be growth obviously and it will be an increase, but it will be slightly smaller we think than what most people are projecting. So we are a little bit cautious about the total numbers at the present time.

I would ask Herman if he would like -- he's done some of that analysis and if he'd weigh in on that as well. So I think the main point for us, Bob, is to be cautious and thoughtful about what that population looked like in terms of their income, their health, what we think their proposed utilization will be and then the absolute impact on our financial statements. Herman?

Just to add to that, Bob, I think it is critical to understand how the yes states match up with where our business concentration is. And truthfully our larger state clients are in the no camp right now. So as we look out at the 27 or so states that have said yes and that is not even clear yet what yes means in some respects, so everyday it is changing.

But if you look at those 27 states and take the proportionate share of the new population coming in relative to what we have today in that state. So if we only have 10% of the current Medicaid population because we are dealing with managed care clients not the state themselves, just look at that. It is really not a substantial impact. We are looking at about -- in those 27 states, about 2 million eligible members coming in at the beginning of 2014. So that is one assumption.

The next assumption would then be at what rate and that is not clear yet either. So from our perspective we don't see it having a significant financial impact right off the bat in 2014. That can change in the next three months as states continue to adjust what they are doing.

If more states follow the model that is being proposed by Arkansas that could turn out to be a negative for us because you are going to get the more acutely ill people going into traditional Medicaid, the healthy group going into the exchanges that don't have a transportation benefit, so we are going to get population with high utilization. We would then have to be out in front of that negotiating new rates.

So I am sure it is frustrating for you as it is for us, but the picture changes every day. We are watching it and I can tell you hopefully by September we will have a better perspective on where they are going because obviously they're going to have to implement January 1 if they are moving forward.

Bob, we will continue to model that internally and we are happy to give you some sense of that as we go along just to be sure that we are being very transparent about what we think the impact will be on our numbers.

That is very helpful color on that. And then over for Craig on the social services side you mentioned the Texas and Wisconsin contracts ramping up. Are there any other bids that you have out there or how do you see that market shaping up for the rest of this year?

There aren't any bids of that nature on the RFP side. I think the segment as a whole, as I mentioned in my remarks, I do think you are seeing it start to stabilize. I won't say it is 100% stabilized at this point, Bob. There are still managed care implementations that are going on.

But as I said before, I think that the states from my perspective need to kind of figure out where they want to be by the end of the year so that when Medicaid expansion does happen they have made their changes, they have their systems set, many of them have chosen their providers, if you will.

So I think there are some pockets of success, we have seen some rate increases finally -- not huge increases but anything is helpful since we haven't had one in probably four years. So I'm hopeful that as the year progresses, Bob, we continue to see these systems kind of reach a stabilization that that we can kind of get back to normal course once 2014 starts and the systems are stabilized.

So no big RFPs on the horizon certainly like a Texas, that is a pretty unusual RFP. They are discussing potential other pilots in the state similar to the one that we are running right now. We don't have any more information on that but I do think they are looking at that in the future.

Bob, this is Warren. I think one of the opportunities we see on the social service side that Craig is tracking very carefully is the tuck-in acquisitions and the opportunity to grow through those tuck-in acquisitions.

What we are finding is that a lot of the smaller providers under these new Medicaid requirements are going to have difficulty investing in the technology and making the investment in technology that is necessary. And also an increase in heightened awareness around the regulatory compliance.

And so as a result of that it is putting new demands on many of the smaller providers. As a result of that we believe there is an opportunity and we are in discussions obviously with some of these. We believe there is an opportunity for us to do some of the tuck-in acquisitions to get the growth where there may not be RFP opportunities.

Okay, that sounds terrific. Thank you very much. I will get back in queue.

Kevin Campbell, Avondale Partners.

Good morning. Thanks for taking my questions and congratulations to you, Warren. Herman, I wanted to start with a question on LogistiCare. Obviously you had a nice decrease in the cost of services provided there and you mentioned sort of a benefit from cancellations, trip cancellations.

Could you -- have you guys tried to figure out how much of a benefit that was in the quarter in terms of it decreased utilization by X percent and maybe lowered cost by $1 million? Or do you have any sense as to what the impact of those -- the better weather I guess was for you guys?

Not really, Kevin. It is really hard to isolate. We know cancellations obviously go up in bad weather and we try our best to try to get our hands around what that means. But the truth of the matter is we don't always get the information, the data, because we subcontract that transportation out.

We just get a cancellation and we don't always get the reason from the provider is to why that occurred. So it is very difficult for us to always isolate out whether it is a weather-related cancellation or just a normal cancellation in the course of business. So we really don't have a great sense of the impact.

I mean we can kind of ballpark it based on if you look at what our transportation spend is in the year, $600 million, and how many days in a year there are what a day is worth and kind of start breaking it down by operation. For instance, you have to keep in mind that New York City we don't get any benefit from whether because it is an ASO contract. The same is true in Connecticut now because we don't pay transportation.

New Jersey, we obviously get a major impact when there is a snow day. So -- and other states, Wisconsin it doesn't matter when it snows; they still go to the doctor. So it is really difficult to kind of isolate it down, but we do obviously receive a large benefit when it happens.

And if you had to ballpark it for the quarter looking at maybe the year-over-year change, any sense sort of percentage wise or dollar wise as to what was from maybe weather versus reduced start-up costs versus exiting underperforming contracts?

Well, as I mentioned in my comments, the 76% transportation expense versus 81% this quarter last year, I would say probably 65%, 70% of that is probably weather-related, the difference.

Okay, so of the 5% delta, two-thirds of it let's say was from weather and the rest was improvements maybe that you guys have made?

Correct.

Okay, that is helpful.

Improvement plus some rate increases that we have talked about in Missouri and Wisconsin.

Yes. And can you give us a sense for the revenue run rate for LogistiCare after you factor out the changes from exiting Wisconsin and I can't remember if there was other changes you were making that would have affected LogistiCare. But any sense of what the normalized run rate revenue is there on a quarterly basis?

Well, you are going to have -- Wisconsin is going to come out at about $18 million -- $18 million, $19 million for half a year starting in August. So Wisconsin is about a $35 million, $36 million number; Missouri is going to stay in. So as we exit the year we are going to be with the new businesses that have come in and everything, we think we are going to be ahead of where we were coming out of last year.

Okay. Actually, Craig, maybe the same question for you on the social services side as you think about Texas and Wisconsin getting rolled into the mix. Once those are more fully ramped any sense as to what the normalized revenue run rate is there?

Texas, I think we had said early on -- and it won't be this year of course, but starting in 2014 you are probably looking at a $27 million, $28 million contract in full implementation mode. Wisconsin fully implemented is probably around $10 million, Kevin.

Okay and what were the contributions this quarter from those? You said they are sort of still in the start-up phase, so was it sort of de minimis this quarter?

Yes, very de minimis, mostly set up, start-up phase.

Okay. Bob, a couple of questions for you. The G&A was $12.5 million this quarter. Is that sort of a good run rate to use going forward?

The primary driver of that relative flat G&A, Kevin, there are several factors of course, but our employee health costs were down below what we thought they might run in the first quarter. We are not necessarily anticipating that that represents a new run rate for our healthcare costs.

It may or may not be an aberration that is just specific to the quarter versus some kind a step shift in how our employees are utilizing services. My best advice would be to take the first quarter as it is and whatever assumptions you might be making with respect to the rest of the year I would continue with those assumptions.

Okay, that is helpful. And then the cash flow obviously was fantastic. Any sense as to what a normalized level of cash flow from ops should be after you've made all the improvements you think you can from a working capital perspective? And then secondly, what are your preferences for using that cash?

It was a very strong quarter obviously from a cash flow standpoint; probably my same comment would be the same as what I said regarding the G&A cost. That the first quarter was very strong; I don't know if that necessarily represents a new trend for the balance of the year. I would continue with whatever assumptions you might have behind that for the balance of the year. Having said that obviously our cash position is building substantially.

Regarding uses, I think Warren and Craig and Herman have talked about the potential for tuck-in acquisitions. That is certainly a use -- investments in technology. The first quarter of the year was really around technology investments which largely focused on defining our IT investment requirements really on both sides of our business, so the first quarter represented kind of normal.

I think we will see a ramp up in those investments, particularly in the last half of the year. It takes a while, as you know, to move from planning to staging to execution to spend. Then there are the converts that are out there and we will be evaluating that as well in the context of our overall debt structure in the next few months.

And do you have an order of preference for those or is it sort of as the opportunities present themselves?

Cash is a fungible commodity, so I think it is a combination of our continuing build of operating cash, plus the capacity under our current debt structure, plus the potential for adding to that. All of those things I think will be set in motion. In terms of priority, I would think they are all priorities; frankly it's a matter of timing in terms of which comes first and what the sequence of that is.

And then one last question, and this maybe goes back to Herman because it is a LogistiCare one. It is there any discussion in the Medicaid expansion at the state level about the additional beneficiaries not having the transportation benefit?

You mentioned Arkansas would be a negative because if they are on the exchanges they wouldn't have it. But just in general is there any discussion about the folks that are on Medicaid from the 100% to 138% of poverty level -- any discussion of them not giving them that benefit?

Yes. The state of Virginia, that has been very specifically discussed by the legislature as they try to decide whether or not they want to adopt the ACA or not. So right now the state has said no, the governor has said no and they are not planning to do it for 2014.

But they have indicated a willingness to potentially look at it at a later date. But the legislature has directed the Department of Medicaid, DMAS, to look at ways to reduce the benefits to be provided to that population and transportation is specifically on that list.

Okay. All right, thank you very much. Great quarter.

Thanks, Kevin.

Walter Winnitzki, Nicusa Capital Partners.

Yes, thank you. Two questions for Herman. Herman, if you look at the awards that you have in hand right now and the duration of those, is it possible to give us a ballpark as to what that total book of business that you have in LogistiCare would be right now?

And then the second question is just in a general sense maybe a more broad update relative to the competitive environment, if there have been any changes both in who the players are and how they are competing with you?

Well, like I mentioned, keep in mind while the Missouri award is an award, we already have that run rate in our numbers right now. So it is not going to -- what it is going to do is allow us to obviously maintain that going forward as opposed to losing that out of our run rate. Utah, like I indicated, is very, very small and really won't have a material impact.

So I would kind of go back to what I indicated in the earlier question which says that we anticipate coming out of 2013 our revenues would be slightly, slightly ahead of where they were in 2012 -- because of the loss of Wisconsin and the change of Connecticut going from a capitated contract to an ASO which means we have to record revenue at a much lower level. So there is growth in there but it is offset by those takedowns.

And then on the competitive environment it's still the same players. I would say that we talked a little bit a couple years ago on about Access to Care and First Transit being worrisome. I think they have both kind of retrenched. We don't see First Transit being very aggressive these days in our space. Access to Care is a little more selective in what they go after and is being more careful in terms of how they price.

If there is one slight change it's there is a small not for profit out of -- a non-profit out of Connecticut that is -- we knocked out of Connecticut when we took the whole state from them actually. I mentioned them on the last call. They did win six regions in Maine by going in and really cutting the price on the RFP and one purely on price.

And we do think that they might be the cause for the very slow RFP award in Rhode Island. We do think that they way undercut pricing there and Rhode Island is struggling with that decision as a result. So it would not surprise me honestly if the Rhode Island award was given to them as well.

Following up on last question, is there a trend moving more towards ASO contracts?

I would not call it a major trend right now. Obviously Connecticut just did it. They are really the only one that has changed. And Connecticut has a history of liking to kind of try new things every few years whenever they get a new commissioner or director or -- I can't remember what they call it up there but they kind of come in and put their own twist on things.

The new director came out of a managed-care environment so knows ASO and likes the ASO. New York is kind of going the other way from what they have laid. We talk about New York as an ASO, but you have to remember New York was a fee for service contract managed by the state at the county level and this going to an ASO was the first step of going from a completely state run contract to now using a broker with the stated intent of once they kind of get used to that, of moving to a capitated model.

So I wouldn't say there is a trend. I would say it is certainly something we have to watch and be careful of. I honestly think that with Health Care Reform and all the structural changes going on in healthcare we are going to jump right over ASO and be looking at a completely different incentive structure for folks like us as you start talking about accountable care organizations and medical homes and things like that.

Because we are not going to be able to get paid on keeping utilization down when access is going to be the buzz word of the day in terms of getting people to the doctor. So we are going to have to find a different way to get paid and share in the outcome payments as opposed to on a capitated basis just for transportation. So Walter, I don't think I would get too concern that the ASO trend is going to take off and reduce our revenues before the whole new structure comes through.

Okay, thank you.

Jack (technical difficulty), Sidoti & Company.

Thank you for taking my questions, guys. A quick question about the NET business. Can you maybe talk a little bit about any more potential states where you could see some rate increases in 2013?

Rate increases in 2013.

Sorry, rate relief similar to what you --?

Yes, I think that is going to be a pretty short answer, Jack. I wouldn't say that there is really a lot of anything. There might be one as we renew or get the option year in Mississippi there is the possibility that we will get a slight increase there, kind of an inflationary increase. Other than that we would expect that rates are going to be pretty stable.

The troubling spots we had in the past -- Missouri, Wisconsin and New Jersey -- are all taken care of in one way or another. So we don't have a lot of justification at this point for going in and asking for major rates and our states, given their financial situations, don't have a lot of incentive to want to offer it.

Okay, thank you, that is certainly helpful. And then and again on the social services side, the organic growth numbers have been down for the last couple of quarters. And I know you guys have talked a little bit about tuck-in acquisitions and hinted that that could be a good use of capital. Just on the organic side maybe is there anything else kind of being done outside of working on your IT advantage to go ahead and grow business organically?

Yes, of course the Texas and Wisconsin contracts, once they ramp up, probably starting in the second half, Jack, we'll start certainly adding to our organic growth numbers.

I think in the areas that have transitioned through their managed-care changes, one of our focuses is really regrouping around those states that have kind of gone through the transition, they have selected their providers, the system is in place and now we can kind of get out and get out the ahead of growing census in those environments.

There are other environments that are certainly still evolving they're managed-care systems, but some are past that process. And I think those are some of our target areas to sort of get out ahead of the changes as the preferred provider in those areas.

The tuck-in acquisitions, we have mentioned we are being very deliberate about that process. I would say the pipeline is increasing substantially but we want to be very selective about who we are going after and where we might make those deals, especially in this environment where you see providers downsizing through natural attrition let's call it. We certainly don't want to buy them on the down side. We want to be able to evaluates states that are going to be opting into the Medicaid expansion.

So, while our pipeline is increasing we are going through a very deliberate process strategically to try to figure out what is the best use of our acquisition strategy so that we are kind of buying these companies on the up side. I think it's going to crank back up here at some point, but we are taking our time to make sure we are buying into the right environments on the acquisitions side.

Jack, this is Warren. I would also say that as we look at social services from a strategic perspective we are also trying to discern how it is that we proliferate our exceptional programs in one state across other states. And take a foster care program where we are very strong and expert say in the state of Arizona and how do we move that to the state of Texas?

We have been able to do that now with the new contract in Texas for example. And so, as we can sort of think of ourselves as a transnational organization meaning that we can move across geographic boundaries easily, it is the proliferation of these programs that is going to help us grow the social services side of the business. So we are paying a lot of attention to that as well.

Okay, great. And so, maybe just kind of thinking about the timing on when some of these tuck-ins might come in, would it be safe to say that maybe the latter half this year and early next year maybe start seeing some activity on that front?

I think that is a good assumption, Jack.

Okay, great. Thank you, guys. And congratulations, Warren for the full title there.

Thank you very much, Jack. Appreciate it.

Chris Brown, Aristides Capital.

Good morning, gentlemen. I just had kind of a long-range question on financial targets. When you are bidding on business or you're looking to do a tuck-in acquisition, is return on invested capital kind of the most important metric for you or could you just speak to what metrics you look at and what your targets are?

This is Bob, Chris. Thanks for the question. You are absolutely right. The rate of return -- (inaudible) rate of return -- there are thresholds that we have in mind when we look at these things, so it is not just about creating more EBITDA, it is about is this going to be accretive to us from a rate of return standpoint.

So I think Craig was talking about the deliberateness of that. That is what he was really referring to, both strategic fit as well as financial fit for us. We recognize that we might be making some -- potentially some acquisitions where from the start we may not be able to hit that hurdle, but the anticipation is through integration, consolidation and so forth that we can meet those targets.

So I can see where when it comes to bidding on business you wouldn't want to reveal that ROIC target. Can you speak to kind of the targeted returns you look for in a tuck-in acquisition accounting for synergies?

I would rather take that off-line -- I don't want to comment on that on the call here.

Okay, thank you.

Thank you.

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

Good morning and I extend my congratulations to you, Warren.

Thank you.

First I would like to -- Herman, on your side of the business, you threw out some metrics on the transportation expense and you compared this year to last year. I guess I would be curious, last year was abnormally mild with weather and this year I am not sure -- I have heard various things whether it is worse than normal or not.

But how would that number have looked if we went back several years so we could get a more normalized sense of whether that 76% this year is more in line with what you've historically had in this first quarter?

You'd probably be looking at -- I would actually had to go back and look, Rick, but just in terms of where we kind of look at our gross margins normally, you'd probably be looking between normalized about 78% to 80%.

I don't know if you want to speak anything to April, but we had an extended winter in some states and I'm not sure to the extent that overlapped with your geographies. Did you see that trend continue in April?

We didn't get a major impact, weather impact in April given our states.

You didn't get a major help in April?

No.

Okay. So the New Jersey make whole was -- I assume was retroactive. Can you quantify that? Is that around $1 million or better than that or --?

I would probably rather not talk about it publicly, but it is going to be a big number.

Okay. And that will come in, I think you have already said some potentially in Q2 and some in Q3 or is it going to be one --?

No, it will all be at the same time. We just don't -- as you know, because you ask every quarter, I can't really estimate the timing of how New Jersey does things. If it gets processed quickly and they can turn the payment around we will get it this quarter. If it slips a little bit it will probably be early third quarter. But it will all be in one lump payment.

And at that point in time we will recognize the revenue from it. We have not accrued for that because we were waiting to make sure that the agreement was signed.

Craig, historically I think acquisition pricing has been fairly tame for these tuck-ins and we used to on a related competitor that would buy things at three and four times EBITDA in your space.

What would you expect -- it is almost like they are selling defensively if they are acknowledging they can't compete going forward either for technology or because of the increased level of regulation. You would think that would be a buyer's market. Is pricing likely to be four times EBITDA or somewhere in that ballpark?

Well, a couple things on that. I mean I think the multiples -- it's my impression they should be coming down, as you indicate. The other issue is, as I said before, we have to be careful that we are not buying these providers that are sort of -- how can I say it politely -- kind of downsizing anyway because we are just buying into a downward trend.

So the trick is to buy the right kind of providers that are not so behind the curve with where they have prepared themselves for these environments but don't want to have to endure the future of other changes. So there is a narrow band there, Rick, of what I would call valuable providers that may not be going out of the space anyway like other providers would be where we might be pursuing more organic census growth around providers who exit environments anyway.

So having said that, I think the multiples I would see probably coming down, but I think the targets that we really want to look for, although the pipeline is increasing, I think the providers that we are going to probably target is probably going to narrow in that band if that makes sense.

Okay. And how about competition for acquisitions? Are you seeing yourself come up against anybody else that is trying to roll up the space or what are you seeing in that regard?

We have seen a few others. We have even seen some private equity in some states ironically, you'll probably see the same opportunity in some of these evolving Medicaid expansion opportunities as we will foresee, but for the most part we are not seeing heavy competition.

But I suspect as we get into the sort of nitty-gritty of the providers that are really strong and we've sort of weeded out the others, there may be competition that we don't know about at present.

Okay. And how do you define a tuck-in? Is this $5 million to $20 million in revenue? Give me a sense of what relative size range we are talking about?

I would say it is in the $5 million, $15 million, $20 million range. I view it is as an acquisition where we can easily reduce the administrative cost, consolidate that into our administration. Easily sort of bring it over within our operating regions.

We don't have too sort of -- it is not a transformational reorganization around an acquisition. We would certainly bring in our operating standards in the short-term, our expense infrastructure, for example, healthcare insurance. So something you can easily get your hands around in the short term and that is probably a $5 million, $15 million, $20 million range.

And then lastly, Bob, on -- this was a phenomenal quarter. And I know you answered questions related to SG&A run rate. Was there adequate -- give me a sense of how you are accruing for bonuses knowing that this is the first quarter.

We are accruing bonuses in accordance with the plans that are in place that I think is public information. So we are not withholding anything in terms of bonus accruals.

Okay. But again, I don't know what you are looking at the rest of the year being, but you wouldn't expect to need to later in the year do a catch-up based on how we started off here and (multiple speakers)?

Not as I see the rest of the year at this point in time, no.

Okay. All right, thank you very much. Appreciate it.

Mike Petusky, Noble Financial.

Good morning. First on social services, was there actually any revenue associated with Texas and Wisconsin in the first quarter?

None with Texas and there was a little bit with Wisconsin.

Okay. And then on Texas, I had taken a note either last conference call or maybe the previous one where there was some expectation that in the first year revenue associated with Texas would be about $13 million. Does that still seem about right or is that too aggressive based on the early ramping? Can you just speak to that?

I think that is probably a little aggressive. The contract actually started I think it was a couple of months later just for a number of contract start-up situations. So I would say that number is probably a little heavy at this point, Mike.

Maybe like $8 million to $10 million or something like that?

I think that is a better range.

Okay, All right, great. And then moving on to the transportation business. North Carolina, Rhode Island, upstate New York are still out there. North Carolina, as I recall, I think was in a few different regions and then upstate New York. What is North Carolina and upstate New York, what is the revenue opportunity in aggregate associated with those two pieces of business?

North Carolina is probably -- the whole state is probably in the $60 million range if they ultimately come out. They got a new governor in November, he brought in a new head of the Health and Human Services Agency and she has turned it really upside down and I think that is what has really slowed down that process. But in the aggregate it was about a $60 million contract.

I think you will recall we indicated we did not think we would win all three regions. Two was kind of what we were hoping for. New York is very small, a couple of real small regions. I don't recall, Mike, offhand exactly how much it is but it is not a big number. And Rhode Island at around where we think it should be is $20 million to $25 million. But I believe CTS is going in much lower than that.

Okay. Do you still expect -- I think on the last conference call you expected a decision on Rhode Island and North Carolina somewhere around the first half of the year. I mean is that at this point given what has occurred in those two states, is that maybe too optimistic and maybe it is going to be more like third quarter/fourth quarter?

We really don't have a lot of insight into what North Carolina is thinking right now. So at this point they are not really putting out any real information, they haven't indicated it is just delayed, it is off the table. So I really can't give you any -- clearly it is not going to happen in terms of being able to be implemented anytime during the first part of this year.

So if you are to see any impact in 2013 it would need towards the very end of the year given where we are. Rhode Island, if we are right in what is going on there, we think they are waiting for the main implementation to take place and they will probably make an award sometime in the fall for either a false start or a start of 2014.

Okay, very good. Thanks, guys.

Kevin Campbell, Avondale Partners.

I just wanted to make sure I understood some of the numbers that Herman gave in terms of the 76%, 81% numbers and what he said for a response to Rick's question. So those numbers as a percentage of revenues don't match up with the cost of NET as a percentage of LogistiCare revenue. So maybe you could just tell us or maybe just help me understand exactly what that 76% to 81% number is?

When you say cost of NET, that is based off of the financials that we put out. We look at it a little bit differently internally, Kevin. Gross margin is revenue less transportation expense. Cost of NET includes some of our G&A and other expenses that you see in the published reports. So when I am talking about 71%-81%, it is strictly what we pay out for transportation as a percent of revenue -- not including any of our people or any of the cost to actually operate the call centers or anything like that.

So it is just what you pay to the providers to provide that transport. And this quarter, based on your response to Rick's question, was 200 basis points sort of short of what normalized gross margin would be?

That is correct. It is what we really consider to be the cost of goods sold as transportation.

I got it. Thank you very much.

There are no further questions in the queue. So, ladies and gentlemen, this will go ahead and conclude the question-and-answer portion of today's broadcast. I will go ahead and turn the call back over to management for any closing remarks they would like to make.

Again, thank you all for being with us this morning. We are pleased with our progress, but we have a long way to go. We have a lot of hard work ahead of us. This is just one quarter of four and so we will continue to focus on our business.

We thank you for joining us on the call today and we continue to look forward to what we believe will be a good year for Providence and we look forward to updating you after the second quarter. Thank you all for your time today.

Ladies and gentlemen, thank you for your participation in today's webcast. This concludes the presentation. You may now all disconnect. Have a great day.