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CorVel Corporation (NASDAQ:CRVL)

F2Q09 Earnings Call

November 4, 2008; 11:30 am ET

Executives

Daniel Starck - President, Chief Executive Officer and Chief Operating Officer

Gordon Clemons - Chairman

Operator

Welcome to the CorVel Corporation earnings release conference call. During the course of this conference call, CorVel Corporation may make projections or other forward-looking statements regarding future events or the future financial performances of the company. CorVel wishes to caution you that these statements are only predictions and that actual events or results may differ materially.

CorVel refers you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company’s last Form 10-K and 10-Q files for the most recent fiscal year and quarter. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

At this time, all participants are in a listen-only mode. A question-and-answer session will be conducted later in the call with instructions being given at that time. As a reminder this conference call is being recorded.

I would now like to turn the conference over to your host, Dan Starck and Gordon Clemons. Gentlemen, please go ahead.

Dan Starck

Thank you, Dennis. This Dan Starck and I would like to thank everyone for joining us today to review and discuss CorVel’s September 2008, quarter results and as you know I’m joined by our Chairman, Gordon Clemons.

In our usual format, I’ll be covering the financial results and future initiatives and Gordon will be covering product development. After our overview we’ll open the call to questions. Now to the September 2008 quarter results.

Revenue for the quarter was $77.9 million, which is a 5.9% increase from the September 2007 quarter. Earnings per share were $0.36 for the quarter, versus the $0.40 reported in the September 2007 quarter.

During the quarter, in our traditional business lines, the network solutions results reflect ongoing expansion of our overall savings results for customers and improving volumes in our directed care network business. Our case management results continue to show improved results as well.

We also continued with our enterprise comp expansion; our strategic initiative of bringing a new approach to claims management and our transition to becoming a full service provider to the workers compensation market.

As a company, we continue to move through a strategic repositioning of CorVel. From being a traditional managed care provider, serving a portion of the workers compensation industry, to becoming a full service provider, able to serve all buyers in the workers compensation industry. The combination of traditional business growth and our strategic repositioning has required increases in our general and administrative expenses.

This quarter’s results reflect the ongoing investments required to support these initiatives as the year-over-year growth in G&A represents more than the entire net income variance from the September 2007 quarter. As we have covered in prior calls, in the past 18 months, CorVel has acquired two claims administration companies. Following the completion of those acquisitions, came a period of analysis and the setting forth of development plans and at this point we’re now investing to implement our plans for enterprise comp.

During this period, we’ve also continued to invest in our other product lines, such as our directed care network and these product lines enable CorVel to bring a full suite of products to the marketplace and continue our transition process of becoming a full service provider.

Our G&A expense increase have been in three main areas. First, in information technology. Our objective is to bring a unique solution to the workers comp claims handling process and the foundation of that plan is systems driven. As with many projects, upfront investment is required to ensure long term growth and stability and this situation is no different.

From a software perspective, we have made investments in our development processes, in order to support not only our enterprise comp initiative, but also our other existing product lines. From an infrastructure standpoint, in order to ensure stability and security, we moved our data center to a colocation site last fall. The collocation site comes at a fairly significant cost that does not have a direct return. However, with systems as a core component of the CorVel strategy, we feel that the investment is necessary.

Our second area is people and resource additions. We’ve added senior level managers to CorVel in order to manage and integrate the acquired companies, to support the continued development process of the enterprise comp initiative and support product development for other product lines.

Our third area of investment has been in training and integration. As we’ve added additional services and capability, we have invested in training our account executives and our managers on the new products and services. In order for the transition that CorVel is making to be successful, there is a required level of investment. We are actively looking at ways to leverage the investments we’ve made up to this point and reduce any unnecessary expenses.

From a marketplace perspective, the workers compensation market continues to be soft, yet very competitive. Claims volumes have continued at historical low levels creating excess capacity at the claims administration level. Frequency, that is the number of claims, continues to decline; however, severity, the medical cost per claim continues to increase.

From a political perspective, states continue to develop legislation geared towards automating the healthcare transaction process. At this point, it appears as though the Federal Government is also taking a more significant interest in workers compensation or at least ensuring that workers compensation costs are paid for by the appropriate party.

Legislation in the form of Medicare set asides has existed since 1992. This legislation was aimed at providing a funding source so that long term healthcare expenses associated with an occupational injury were paid for under workers compensation coverage and not paid for by Medicare. However, the enforcement of this has been minimal over the course of the past 16 years. New legislation that goes into effect in January of 2009 seems to provide a foundation for future enforcement.

Overall, with the current market environment, the complexities of the workers compensation industry and the progress we are making, we are confident that making CorVel a full Service Provider is the right strategic direction.

Now I’d like to discuss our product line performance, specific results and our key initiatives for 2008. In the patient management business, revenue for the quarter was $34.4 million. This is a 9% increase over the September ‘07 quarter and a 3% increase over the June ‘08 quarter. Profit increased 6.8% over the September ‘07 quarter and 0.3% over the June ‘08 quarter.

Our initiative to reposition our entire patient management business continues. In case management, we’ve been actively moving away from low priced business over the past couple of years, as well as working to improve our efficiencies. While our strategy is simple, our results reflect better execution. Revenues have grown, profits have improved, and margins have stabilized.

Within our patient management business we continue to develop our claims administration capabilities. The addition of our claims administration product offering expands CorVel’s service offering to meet the needs of all types of buyers in the workers compensation market. As I’ve remarked already, we’ve made significant investments in this area over the course of the past year in all phases; systems, management and training.

Now on to network solutions; revenue for the quarter was $43.5 million. This is a 3.6% increase over the September ‘07 quarter and a 3% decrease versus the June ‘08 quarter. Profit is 0.2% increase over the September ‘07 quarter and 6.6% decrease versus the June ‘08 quarter. Network solutions continues to be a major driver for our overall results.

On an annual comparison, our revenue gains this quarter versus the September 2007 quarter came mainly on our lower margin products. This mix shift caused a lesser amount of incremental gross margin associated with the revenue increase that we have normally seen.

The ever increasing cost of medical expenses and medicals increasing share of each workers comp claimed total cost emphasizes the need for the continued emphasis of our MedCheck software and our total network solutions product line.

20 years ago, medical expenses accounted for approximately 46% of the total cost of every workers compensation claim; today, that number is 59% and rising. Some have projected that by 2017; medical costs will make up 70% of the total cost of every workers comp claim. With our continued investments rules engine technology, smart routing and workflow management tools; we’re committed to delivering strong results for our customers in the future.

Moving forward in 2008, we’ll continue to focus on our four key initiatives. The first initiative is improving our overall sales performance. Our organic growth rate is improving, up to 5.9% in the September quarter. We’ve made significant investments in our sales team in a number of areas, headcount, training and our CRM systems. These investments have also contributed to our G&A and expense increase in the past year.

The improvement in organic growth this past quarter gives us some evidence that we’re beginning to see some return on our investment. We’ll continue to invest in the sales process as we move forward in the form of sales leadership and headcount.

The second initiative is the continued expansion of our enterprise comp initiative. Enterprise comp is a unique approach to managing workers compensation claims. Despite a difficult broader economic environment, we continue to be very optimistic about the possibilities that the enterprise comp product brings.

CorVel now owns all of the major components of the workers compensation continuum; claims administration, managed care and the underlying IT systems. We’re in the process of integrating the different data sets and providing a true end-to-end solution. CorVel also possesses the physical infrastructure to meet the needs of both large and small clients by utilizing our 150-branch network. We now have the ability to administer workers' compensation claims in all 50 states.

Much of the September quarter was focused on software development and the ongoing organizational development necessary to expand the company’s ability to present itself to the employer market. We expect to see improving growth in this product line as our software and system integration process continues and we bring a differentiated product to the market.

The third initiative is the continued development and expansion of our network solutions product line. While we’ve had strong performance in this area, we continue to invest in its future success. As I discussed earlier, the rising cost of medical care and the need to contain cost requires that development of our MedCheck software remains a top priority. Two other components of our network solutions product line that we are continuing to develop are; first, our PPO network.

Today, we’re actively evaluating and strengthening our PPO network via better contracting and affiliate relationships. Second and it’s been mentioned a couple of times in our call, is our directed care network, one that we refer to as CareIQ.

Our directed care network delivers savings opportunities for customers via unit cost savings and utilization management and it continues to be developed and is generating significant interest in the marketplace. We’re starting to realize some of the growth opportunities in this product line. Growth in this area will allow CorVel to take advantages of economies of scale, as we’ve made large investments in call centers and software in order to deliver a high quality product to our customers.

Our fourth and final initiative is the transformation of our case management business. As I said earlier, we’re seeing better performance. In the September quarter, we continued to expand our implementation of a paperless work environment in a number of our case management operations. This is the first step of the transformation process.

The implementation of a paperless work environment will allow us to implement the technologies that we have successfully utilized before in the medical bill review business, in order to make longer term progress on the deliver of this business.

Now I’d like to turn the call over to Gordon to discuss product development. Gordon.

Gordon Clemons

Thanks, Dan. The project areas I’ll cover today include the build out of our claims handling infrastructure, our next generation claims handling technologies, various projects in response to ongoing legislative changes in workers comp and the national legislation to which Dan referred, directed care work flow management software and lastly our web based reporting tools.

The September quarter saw us begin to make good progress on the key projects in support of our enterprise comp initiative. While we still have ongoing work to do over the coming quarters and years, good progress has been made building our domain knowledge and getting the key new claims management modules running within the CorVel infrastructure.

We have moved acquired systems into our Portland, Oregon data center and have addressed the stability and scale ability of these systems to handle national service needs of our larger customers. We have also begun moving selected features into the CorVel CareMC web portal. These projects were a high priority for our development team over the last nine months. We are satisfied we have our new claims system in a strong position to continue accepting the move of our next generation tools into this suite of services.

Secondly, during the quarter we continued development of the enterprise comp software, which includes the rules engine and workflow management tools. Our goal has been to have an important new workflow management features operational by the end of the year. Fortunately, tools previously developed for customers doing their own claims management have provided a base from which we have begun.

Similar applications have also been successful in our medical review applications, particularly in improving outcomes for customers. These are large projects though, especially when viewed in their entirety and in the contexts of their ultimate potential and will be in a continuous improvement mode for the foreseeable future.

Thirdly, a number of states have been implementing and making ongoing modifications to regulations requiring EDI file transfers to state based authorities and also adding clearing house capabilities. Just as CorVel has in the past chosen to apply for all new elective PPO certifications on a state basis, as they were passed, so to are we choosing to provide clearing out services in states implementing such new regulations.

In general I’d suggest that the passing of records to and from other parties is an ever-increasing aspect of the ongoing development of electronic commerce. State and federal legislation will, we believe, continue to support the expansion of such commerce in the insurance industry.

During the quarter, we largely completed a new operations console to facilitate improved management of the staging and control of data being fed either to CorVel or from CorVel to other parties. We continue to implement tools that address electronic reimbursement processes as well in healthcare.

The federal Medicare program to which Dan referred is also continuing to expand its effort to coordinate with workers compensation claims management. CMS, the Medicare claims management center is increasingly requiring the coordination of workers compensation claims settlement with Medicare claims funding. This is intended to have retired workers claims arising out of prior comp claims be funded by the private sector.

These set-asides as they are called are requiring increasing claims database coordination and also set the stage for further electronic data exchanges in the future. CorVel’s systems are well suited to meeting these needs and we plan to continue responding to federal opportunities, much as we have always addressed state-based workers compensation regulations.

Fourthly, our directed care networks have been a labor of love for us for a number of years, although perhaps not a force. Anyway although margins have been difficult in this business, we see it as an integral part of the future of healthcare management. Workflow management software is a key in directed care processing and in the quarter we introduced it in the Radiology segment of our business. Tools used in this launch will be of value as we extend these workflow management tools into other segments of our business.

Lastly, we continue to work on electronic dashboards and client facing tools for both internal and external users. Although, we’ve made progress here, more visible tools are scheduled for the first quarter of the next calendar year.

Now I’d like to turn the call back over to Dan for his closing comments; Dan.

Dan Starck

Thank you, Gordon. I’d just like to add a few more items prior to opening the call to questions.

Cash flow for the quarter was $1.8 million with quarter ending cash balance at $23.6 million. Our DSO increased two days to 48 days. From a stock repurchase standpoint, 55,000 shares were repurchased in the quarter and we spent $1.5 million. We spent $168 million inception to date and we have repurchased $11,842,000 shares inception to date.

Subsequent to the end of the quarter, in October we purchased an additional 302,000 shares and we spent an additional $7.8 million on those purchases. Hard shares for the quarter were 13,733,000 and diluted EPS shares were 13,960,000.

In summary, we’re making progress in the execution of our strategic initiatives and the investments we are making are in support of our long term strategy. We’re hearing positive responses from the marketplace regarding our products and seeing some positive movement in our organic sales growth in a very difficult claims environment.

With the difficulties in the overall economic environment, the principles with which the organization has been run and will continue to follow are proving to be advantageous. It’s an especially good time to be an organization that currently carries no debt and has strong cash flow.

I would now like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) At this time, there appear to be no questions.

Dan Starck

Okay. Dennis, I’d just like to wrap up and I’ll turn it over to Gordon for a couple of comments here, but I think that I’d like to thank everybody for joining the call, maybe a little bit of a light turnout there. Everybody’s out doing their civic duty and voting and certainly I look forward to speaking with everybody here in the future.

Gordon, any comments to wrap up?

Gordon Clemons

I don’t think you would be real happy if I had questions to ask of you. So, I think I’ll let you off lightly today.

Dan Starck

Well, thanks everybody. Appreciate it and we certainly look forward to speaking with everybody here in the future.

Gordon Clemons

Bye-bye.

Operator

This concludes our conference call for today. Thank you all for your participation. Please disconnect at this time.

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Source: CorVel Corporation F2Q09 (Qtr End 9/30/08) Earnings Call Transcript
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