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CorVel Corporation (NASDAQ:CRVL)

Q4 2013 Earnings Call

May 30, 2013, 11:30 am ET

Executives

Gordon Clemons - Chairman & CEO

Analysts

Operator

Thank you for standing-by. 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 the 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 given at that time. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Gordon Clemons. Sir, please go ahead.

Gordon Clemons

Thank you for joining us to review CorVel’s March quarter and the last fiscal year.

Revenues for the fiscal year ended March 31, 2013 were $429 million, a 4% increase over the $413 million in revenue in fiscal 2012. Revenues for the March quarter were $112 million, 7% over the $104 million in revenue for the March 2012 quarter. Earnings per share were $0.70 for the quarter, up 57% from the same quarter the prior year.

Our TPA business continues to grow at more than 25% per year. We are expanding investments in our Network Solutions business. We have been able to reduce our corporate administrative costs to 11% of revenue. The productivity management initiatives, I discussed during the year, have also contributed to the company’s margin gains.

This last year saw our Enterprise Comp that is our full service workers compensation TPA offering gain momentum as recognition spread regarding our innovative solutions. Private sector employers typically have an insurance program which wraps around our TPA offering.

The carrier providing that insurance must approve of the TPA chosen to do the claims-order. CorVel had to obtain approvals from the major underwriters in order to open this important private sector segment of the marketplace. That effort took several years and was largely completed in the last year. Brokers likewise, are critical to reaching the employer market. We are building market awareness of CorVel there. This process will stretch out over a number of years.

Enterprise Comp growth continued throughout the year at annualized rates of about 25%. We have also continued to build-out both the services and software that make our program unique. These combined efforts placed a high short term load on our organization. And yet in the past, we have launched a number of new services and therefore our accustomed to the nature of new business launches. There is a special excitement to successfully launching something entirely new.

During the year, we adjusted some of our expenses. This is visible in our current results as our corporate overhead has begun to trend toward our historical norms. Improvements in some operating efficiencies were achieved through initiatives managed out of our new business operation assurance.

Some other improvements came through managing large special projects through tighter budgets. Improving revenue volumes also help reduce expenses as a percentage of revenue. Pace of change in healthcare has increased. The Affordable Healthcare Act will make the next ten years a time of unusual change. There are likely to be new service opportunities at a times usual expenses. Managing through this upheaval will test all organizations and will undoubtedly change the pace of healthcare.

Facing such as sea change it is difficult to say how our expenses will trend, but we intend to continue to be careful with aggregate spending levels, while nonetheless investing aggressively where we see opportunities.

Information systems as we all know is a component of all businesses where innovation is robust these days. Computing technology appears to me to be reaching a point in a six decade long development period where almost every new introduction typically offers new efficiencies and new capabilities of real value. Nonetheless to write this wave requires that CorVel may continue its investments in each new set of software or hardware releases.

Hardware has become less and less expensive, but at the same time software has become the dominant expense required to capitalize upon the new technology. Implementing the capabilities of new hardware and communications creates new strengths for CorVel and our IT Group has had some important successes this last year. We plan to continue our push for new technological solutions. Seldom do we gain a large advantage in any one year, but over time it makes a big difference.

Our strategy has been instead to build more and more value added into our services. As we begin CorVel’s fiscal 2014, I feel we have successfully made a number of the adjustments we needed to in the last year. We can now focus more on our long-term strategies. This year’s efforts are focused on new capabilities in our claims management services as well as innovations in each of the components of our medical review services.

The market for our services appears to be more active than it had been during the worst of the recession years. While the economy has a long-term impact on our industry as it does on all industries CorVel’s has not as affected by economic cycles as our most organizations. Nonetheless an improving labor market does help our business. Last year’s uncertainty regarding the passage of the Affordable Healthcare Act is now a certainty for our healthcare customers.

The need to contain healthcare cost has been heightened by the Act. Our customers are more interested in new innovations than they have been previously. Healthcare inflation continues. State regulations regarding electronic interfaces from the claims community to each states regulatory entity are also continuing to expand.

For these reasons we live in a time of both opportunity and you have uncertainty. Our business strategy has involved somewhat over the last year. We are expanding our investments in medical review now and in provider networks. The Enterprise Comp TPA area will require continued developments but is more established each year. As each new service expansion begins to mature, we discover the next logical expansion to our enterprise.

At this time we are expanding our involvement in liability claims management and are developing interest in those segments of healthcare impacted by the Affordable Healthcare Act. We have strategic initiatives in a couple of areas of mobile computing and I believe these technologies will increasingly impact healthcare management.

A very important aspect of our expansion plans has been the integration of all of CorVel’s managed care services in our claims administration offering. CorVel has the most complete product offering in the industry, but the big differentiator is the integration of all of our services in a real-time environment.

Many of the most costly developments in workers compensation claims have always been exacerbated by the delays in the management of the claims. These delays have been such an integral part of claims management that most participants in the industry have come to accept them as the norm.

Much as users of rotary phone saw no need for digital dialing so to new participants in healthcare take for granted most of the industry characteristics common today. Our goal is to make the healthcare experience for the employees of our clients increasingly easy and friendly. Most of the point-of-sale developments in retailing may also become common in healthcare but with more complexity. Moving the industry off paper and off old legacy systems is difficult process. The change is now finally starting to come.

During the last year, we expanded our liability claims management services. Employers often purchase their workers’ compensation in a package together with liability management services. CorVel’s liability claims administration service was expanded to meet the needs of a number of our new customers. This expansion in the types of claims we can intake and manage is an example of how we will continue to expand the scope of our enterprise programs.

Now I would like to discuss our product line results. Patient Management revenue for the quarter was $58 million, an annual increase of 13%. Profit increased by 31% over the March quarter of 2012. Patient Management includes our full service workers’ compensation solution and our traditional case management product. Our Enterprise Comp product has been growing at over 25% annual rate. This segment within Patient Management is most dynamic within CorVel.

Our expansion plan in this segment is on track. Enterprise Comp is continuing to become a more important component of our results each quarter. Our case management business declined somewhat during the recession and the ensuing soft labor markets but has been improving recently. We've invested in mobile computing applications for this service and will be implementing some new capabilities later this year.

This service was favourably impacted late in the year by productivity initiatives began earlier last year. We believe we have opportunities to continue to improve result in this segment. Network solutions revenue for the quarter was $54 million up 2% from the same quarter of the prior year and profits were also up 2%.

This service remains a CorVel strength and competitive advantage after a period where investments were focused entirely upon the launch of Enterprise Comp; we have now stepped up the pace of investment in network solutions. We've had to add new customers to replace both TPA customers who formerly used CorVel, but who have not partnered with us in the TPA space.

Software and service enhancements are in developments, which should support improved growth in the future. Product development has been the cornerstone on which we've build the company for over quarter century. Simply put, we are trying to eliminate lost time in the management of healthcare claims. While we dream of exciting futures, today we are implementing applications that address the net symbols of our service.

The March quarter continued the emphasis we discussed for December quarter that is first using improved claims intake to permit new workflows and claims administration. Adding features through our claims system, making our web portals more friendly and expanding our analytic tools and their impact upon healthcare outcome.

We're also adding foundation strength to our system expanding our data centers and constantly working on process improvements. On the first point claims intake, claims intake sets the table for claims management, we will be implementing new claims intake process we've developed last year, mobile computing ideas are a part of this effort.

Improvements in claims intake also open opportunities for new services as claims incident intake is key to all insurance transactions. On workflow, automated workflow can bring specialization of labor to insurance claims processing. Workflow improvements are a constant in our businesses, some of the more interesting ideas are currently in development and should begin to reach implementation late this year. We continue to believe we can achieve new claims outcomes through innovations and how claims are managed.

Integration of services is a key and very important in CorVel's competitive advantages. As I mentioned earlier interfacing our various services is a project area with good promise, our industry is accustomed to unbundled programs with multiple vendors involved in various components of the program. As a result service norms in the industry incorporate the natural impediments associated with [filed] or loosely connected services. The potential for improved service, is with tightly integrated components is substantial and will continue to be one of our key priorities.

More friendly systems interfaces are always a priority for us and we'll continue to work on those during the current year. Analytic tools identify the best opportunities for improved service, clinical and predictive modeling are tools of special interest in the marketplace. Company is uniquely positioned in analytics as a result of our decades of investment in systems.

The output of the clinical modeling effort feeds our rules engine development efforts. In the last year the business operation unit has brought increased attention to the development of new software applications it helped us make more improvements to our operating processes and controls. And I'd like to add a few additional statistics. The quarter ending cash balance was $20 million and our days sales outstanding was 40 days compared to 43 days a year ago.

A 151,000 shares repurchased in the quarter at this point, we have returned a little over to $300 million to shareholders in the last 15 years and believe this is the most flexible form of shareholder return and that allows those shareholders who wish to remain invested through the larger percentage of the company, without triggering taxes on cash dividend. Those who prefer cash dividend can sell a pro rata portion of their shares and achieve a cash dividend. Shares outstanding at the end of the quarter were 10,761,000 and diluted EPS shares were $10,902 for the quarter. Shares were reduced 3% in the year and 5% this quarter over the same quarter of the prior year.

I'd now like to turn the call back over to our operator for the question-and-answer period.

Question-and-Answer Session

Operator

(Operator Instructions) There are no questions at this time, do you have any further comments.

Gordon Clemons

Yes, I just like to thank everyone to joining us today. It was nice to have little better results to report to you and we look forward to talking to everyone in the coming quarter, thank you.

Operator

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

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