Providence Service Corporation Q4 2007 Earnings Call Transcript

Mar.13.08 | About: The Providence (PRSC)

Providence Service Corp. (NASDAQ:PRSC)

Q4 2007 Earnings Call

March 13, 2008 11:00 am ET

Executives

Alison Ziegler - IR

Fletcher McCusker - Chairman and CEO

Michael Deitch - CFO

Craig Norris - COO

Analysts

Bob Labick - CJS Securities

Kevin Ellich - RBC Capital Markets

Mark Hughes - SunTrust

Richard Close - Jefferies

Greg Williams with Sidoti & Company

Nathan Yates - Avondale Partners

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2007 Providence Service Corporation Earnings Call. My name is Dan and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Alison Ziegler. Please proceed.

Alison Ziegler

Good morning Dan, thank you and welcome everyone. Thanks for joining us this morning for Providence's conference call and webcast to discuss their financial results for the fourth quarter and year-ended December 31, 2007. You should have all received the copy of the press release last night. If you would like to be added to our email list, please contact Devin Rhoades at Cameron Associates at 212-554-5461.

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 March 20th. Replay number is 888-286-8010 with the passcode 34828565. 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, or alternatively, www.earnings.com.

Before we get started, I would like to remind everyone of the Safe Harbor statement included in today's press release, and that the cautionary statements apply to the conference call as well. During the course of this call, the company will make projections or other forward-looking statements regarding future events or the company's beliefs about its revenues and earnings for 2008. We wish to caution you that such statements are just predictions and involve risks and uncertainties. Actual results may differ materially.

Factors which may affect actual results are detailed in the company's filings with the SEC. The Company's forecasts are dynamic and subject to change. Therefore, these forecasts speak only as of the date of this webcast at March 13, 2008. The company may choose from time to time to update them, and if they do, we'll disseminate the updates to the investing public.

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

Fletcher McCusker

Good morning everyone. Thank you, Alison. Michael and I just figured out that this is our 13th conference call. This is indeed anniversary as a company and we've been, of course, a public company for five years since the August of 2003.

Good morning from Tucson. With me here is Michael Deitch, our CFO, and Craig Norris, our Chief Operating Officer. John Shermyen and Tom Oram from LogistiCare will not be on the call today. We figured with just three weeks of them in this current quarter that we can deal with the integration type questions and steer you away from the procurement question, and they will both be on the call after the full first quarter of '08.

We are very pleased to be here today talking about a very successful 2007. 10 years ago our revenue was $2.5 million. We are forecasting for 2008 almost $1 billion book-of-business with our managed entities. There's not been a single year that we've not had revenue and earnings growth. We never lost a government contract, which still is an amazing statistic in our business, and we're pleased to say, with the year-end '07, we've had five years of Sarbanes-Oxley compliance.

We are very proud of our achievements in our staff and particularly proud of my colleagues in the room today who have been with us since the beginning of time. Before we talk about our quarterly numbers, we would like to direct to you our website www.provcorp.com to read the recently released Vanderbilt Study. We partnered with Vanderbilt three years ago to develop a five year review of our clients to engage our effectiveness over an elongated period of time.

No one in our business has committed to a five year client study. Vanderbilt has released the first data from that study now in its third year. The results are really quite remarkable, indicating that we are successful 81% of the time over a three year period with these clients. We believe this study will continue to differentiate our services and our capabilities.

Now for the serious part, our nearly $100 million of Q4 revenue is a 77% increase over the same period last year. Of that, about $23 million is attributable to LogistiCare which closed on December 7. They are on a run rate of about $30 million a month, which is consistent with our previously issued 2008 guidance. Our social services segment produced $76 million of revenue in the same quarter, an increase of 36% which is very similar to our historical compound annual growth.

Our contracts are up and our clients are up. We get a lot questions regarding the economy, the recession, and the cost of fuel. Historically it's important to remember that those are typical drivers in our business. When economic times are tight, we see Medicaid enrollment go up, we see child abuse increase, we see crime increase, and we see more eligible people in the system at a time even when state dollars are tighter or flat. That has historically been a driver for our business, and it's a part and parcel while we believe we had a good first quarter and headed in to a good 2008.

Our day sales outstanding are down and cash flow is up. We are not hearing any pressure on our rates coming into the renewal season. We are buffered to a degree from the increase in fuel costs, and neither LogistiCare nor Providence are direct users of gasoline. The population of people eligible for our services continues to grow dramatically. Michael, I will let you give them the highlights.

Michael Deitch

Thanks, Fletcher. In our fourth quarter of 2007, we once again set company records for revenue net income and cash flow from operation. Revenue for the fourth quarter totaled $98.7 million, up from $55.9 million from the fourth quarter of 2006, a 76% increase. 40% of this increase was from organic growth. 62% of the increase was from companies we acquired in Georgia, Oregon, Pennsylvania and Canada, since the fourth quarter of 2006. For the three months ended December 31, 2007, as compared to the three months ended December 31, 2006, home-based revenue grew 40%. We grew 16% organically and 24% from acquisition.

Foster care revenue grew 22%, 7% of which was organic and 15% was from the acquisition of Maple Star Oregon. Management fee revenue grew 13%, all organically. For the year-ended December 31, 2007, as compared to the year ended December 31, 2006, our revenue grew from almost $192 million to $285 million and an almost 49% increase. 27% of that increase was organic and 22% was acquired.

For the year-ended December 31, 2007, as compared to 2006, home-based revenue grew 42%; 32% organically and 10% was acquired. Foster care revenue grew 17%; 7% organic and 10% acquired. Management fees grew 12% all organic.

Our 2007 fourth quarter operating income totaled $8.9 million which was 9% of our revenue for that quarter. In the fourth quarter of last year operating income totaled approximately $1 million. Fourth quarter 2007 net income totaled almost $4.3 million which was 4.4% of our revenue for that quarter. This compares to almost $670,000 and 1.2% of revenue for the fourth quarter of last year.

Fourth quarter diluted earnings-per-share totaled $0.35 on approximately 12.1 million diluted shares outstanding, compared with $0.05 for the fourth quarter of last year on approximately 12.3 million diluted shares outstanding at that time. At the end of our fourth quarter, our day sales outstanding for home and community-based services, and foster care services was 71 days down from 76 days at the end of our third quarter of this year.

LogistiCare day sales outstanding were 24 days. Since LogistiCare is prospectively paid on the majority of their revenue we anticipate that their DSO's will always be below 30 days. You will note that our accounts receivables balance has grown almost $22 million in Q4 and Q3. LogistiCare added $21 million to this increase.

At December 31st, 2006 our management fee DSO was 186 days over our 180 day target. This increase was primarily due to one of the not-for-profit entities we manage, acquiring four companies using a combination of bank financing, seller notes and increasing their management fee payable to us by approximately $1.4 million. These acquisitions should increase Providence's management fee revenue in future months.

During the fourth quarter we generated $11.2 million in cash provided by operations, which was a record for us. At the end of our fourth quarter we had $35 million in cash. During the fourth quarter we closed $70 million convertible debt offering as well as $173 million senior secured term loan. Both of which were used to finance the LogistiCare acquisition. The convertible debt has a 6.5% fixed interest rate.

With respect to the senior secured term loan, on February 25, 2008 we executed an interest rate swap transaction for a notional amount of $86.5 million, effectively fixing the interest at 6.526% for two years on that notional amount. For the analysts that are modeling us, I am using an interest rate of 6.59% for the remaining $86.5 million balance of the term loan.

We have chosen three months LIBOR, which will now flow with the changes in LIBOR. Effectively, we have now limited our downside risk to about 50% of our term debt, with the remaining 50% debt subject to interest rate variability. Overall, I believe we have instituted a prudent and conservative interest rate risk strategy. Also, for the analysts that are modeling us, I am projecting a 12.8 million diluted share count for Q1 and Q2 of 2008.

Currently the earnings per share effect of the convertible debt on share count is anti-dilutive, and therefore not considered in the calculation of diluted earnings-per-share. The potential additional shares totaling 1,678,740 shares related to the convertible debt and pro forma interest adjustment, necessary to calculate diluted EPS. EPS is being considered but not being projected at this time. And finally, with respect to Q1 and Q2 of 2008 I am projecting an effective income tax rate of 41%.

With that I will turn the call over Craig Norris, our Chief Operating Officer.

Craig Norris

Thank you, Michael. For the quarter we ended with a total combined census between our owned and managed entities of 76,195 clients. Compared to Q4 of 2006, this represents a total census increase of over 5000 clients. In addition, over 5 million individuals are eligible to receive services under our non-emergency transportation program through LogistiCare. All clients have been served from 410 local offices in 38 states, the District of Columbia and Canada. We have added 104 new local offices during the same period of time. Combined between our owned and managed entities, we have over 9,500 employees serving 958 government contracts. This represents an increase of 90 contracts as compared to Q4 of 2006.

So far our integration efforts with LogistiCare have gone well. We have been focusing on back-office integration, office colocating in California. We have brought together our human resource teams and our Risk Management Departments. We have been working with LogistiCare's Public Affairs Department and our executives have had several retreats since the acquisition late in the fourth quarter.

Our local management teams are beginning to collaborate across the local and regional markets. We have been very impressed with the local management team and leadership with LogistiCare and look forward to continue to work with them. We are in the initial stages as the beginning to identify possible program development initiatives as we move forward.

Recently we just announced a strategic agreement with Optum Health Behavioral Solutions, a UnitedHealth Group affiliate. We are looking to partner with their public sector business lines. Presently we are working with them to create programs for the adult aging and disabled populations, with a focus on supporting these clients and their homes and communities. Our geographic presence across the country offers us a unique partnership opportunity with Optum.

Recently, as Fletcher stated, we've reported strong program outcomes arising from our ongoing five year program evaluation with Vanderbilt University. These outcomes point toward our commitment to quality and positive client outcome. We are grateful to our employees for their ongoing efforts and believe this is important to our continued accountability to our payers. In addition, the outcome study with Vanderbilt does require extra work from staff and management, and it's a commitment we are going to continue to make to prove our outcomes. But it is a lot of extra work, but it's worth the results.

Overall, the operations had a good year both in terms of budget performance and client outcomes. One of our most important outcomes is the stability of our leadership team at all levels in the organization. Thank you, Fletcher.

Fletcher McCusker

Craig, thank you very much. It is a great year operationally and fundamentally we are very strong. Let me comment a little bit on our guidance and then we'll be ready to take your questions. I think you know, we previously announced revenue and earnings guidance for 2008 with a combined company of $670 million of revenue and an EPS range of $1.35 to a $1.40. We contemplate the LogistiCare contribution is about $0.08 accretive to the standalone Providence business.

Q1 is consistent with that forecast, and is a little ahead of the street consensus before the executive bonuses, which I'll talk about here in a minute, about $170 million of revenue, $0.30 after the net effect of the bonus. We have a number of procurements in play, some we can comment on publicly. You've seen some press on some of our procurement activity. Others obviously we can't and won't comment on. We should expect Q2 to look a lot like Q1 without the impact of the bonuses. Obviously, July is a contract renewal period for us, we would be able to have some announced wins or losses, and hopefully some information on the cost of living increase that is currently been debated across each one of our states' respective legislators.

We expect some continued summer seasonality that impacted our third quarter, primarily as a result of our school based businesses and a typically strong fourth quarter. Regarding the bonuses that were announced with our press release, account committee sets our salaries, so that's a bonus for people in this room. In 10 years we've never had an annual bonus. The compensation committee engaged Mercer recently to conduct a salary survey for our top executives and they determined that we are at the 25th percentile of pay compared to some 20 public company peer groups.

Obviously, this became quite a concern for our board, given the success of the company and the opportunities that develop time to time for our management. As a result, the Comp committee declared this bonus, utilizing the market interest rate drop, to fund them without affecting our forecast, and that can move us to the 50th percentile in the Mercer study. You should view this as a one-time parity pledge and if you look at our filings, you'll see that our future bonuses are tied to the company, not only in achieving plans, but achieving plans plus the accrual that would be required to pay any bonus.

Finally, you'll notice we filed a shelf registration. We are prohibited by the SEC from talking about that or taking any questions regarding that. We've said publicly that we have no intent to raise money in the short-term, and that we are committed to the integration of the LogistiCare transaction. With that Dan, you can open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Bob Labick from CJS Securities. Please proceed.

Bob Labick - CJS Securities

Good morning and congratulations on a strong quarter and year.

Fletcher McCusker

Thank you. Bob.

Bob Labick - CJS Securities

First question just wanted to ask, obviously you had a very strong cash flow quarter and you have given the cash flow characteristics of LogistiCare. Next year should be strong as well. Could you walk us through priorities for cash flow? Is it going to be debt pay down or is it still acquisition? And then update us on the acquisition pipeline or timing if you are just going to sit back for six months and do this integration. Just talk through those issues please?

Fletcher McCusker

Our agreement with CIT Bob actually requires us to pay down 75% of our excess cash, Michael?

Michael Deitch

I think that is correct, and of course we have amortization --

Fletcher McCusker

So not only is the principal amortized, but then any excess cash, Bob, we're required to pay I think 75% of that to the lender. So the entire intent of our ability to generate cash will be to de-lever the business.

Bob Labick - CJS Securities

Okay, great. Then just traditionally you have done one acquisition a quarter on average. Is there a pause to this integration right now, or how should we view that going forward?

Fletcher McCusker

We have said publicly that we would go quite in that regard through Q1. We remain in contact with our pipeline and we continue to generate new interest in that activity. But we do feel obligated to focus on LogistiCare. So you wouldn't see any acquisition in the near term. If we are feeling comfortable with LogistiCare, it's safe to assume that we would get back to that tuck-in strategy starting in Q2.

Bob Labick - CJS Securities

Great, and then just looking ahead to the July procurement cycle, could you just remind us which states are up on that cycle versus January cycle? And specifically, I can't remember if Florida is July or January. Can you update us on the potential management contracts in Florida and then broadly the size and opportunity in this July cycle, and when we might find out is it, we find out in June or might we find our in May, more timing on that?

Fletcher McCusker

Okay. Almost all of the Providence business now cycles in July. California this time last year's cycle is January. They granted their providers and across the board rate increase rather than to re-bid competitively. I think if you have seen the papers, there are two regional proposals in Florida right now that are being reviewed for a July start date and then our traditional kind of renewal business on our side.

The LogistiCare pipeline, we have discussed publicly is some six states bidding in the neighborhood of $150 million of annualized business. The predictability and timing on our side is a little easier to discuss, Bob in that. Our bids tend to be pretty small contracts when they have a July 1st start date. They usually start July 1st, and once the award has been announced, we can usually handicap the impact to revenue and earnings.

LogistiCare's contracts are much larger, multi-year kind of contracts. It is not unusual to see that kind of a competitive activity protested. So many times after an award is announced the losing bidders have an opportunity to protest the award and that could add 60 days or 90 days to this start date, not unlike what we saw occur in Phoenix with Magellan and Value Option. So, one of the reasons we haven't included any of that in our guidance and encouraged you guys not to include any of that in your models is that even with the announcement of an award we don't necessarily know when it's going to start or if in fact a protest will be successful.

So, we will continue to announce what we view is material wins, for us that is any contract over $2 million. As Craig suggested to you, we have nearly 100 contracts this year that we didn't enjoy last year. You can assume from that, that most of them are smaller than $2 million. We only announced, otherwise we will be issuing a press release every other week. So, we tend to stay to just material announcements and you should see some of that win or lose on our side between now and July. And you'll begin to get some color on LogistiCare pipeline within about the same timeframe.

Bob Labick - CJS Securities

Great, thank you very much.

Operator

Your next question comes from the line Kevin Ellich from RBC Capital Markets. Please proceed.

Kevin Ellich - RBC Capital Markets

Good morning, and thanks for taking my question. Starting off with the non-emergency transportation business, is there anything over the last three months that looks better or worse than what you knew about when the deal closed?

Fletcher McCusker

Boy, you started right off with a good one. I would say we have been incredibly impressed, as Craig suggested, with the program; the staff, the payor loyalty. I think it's important to note Kevin that this was viewed as a change of control by their payors. So, many of them had the consent to the merger. So, we do have kind of the payor weigh in and how they view the combined company. We've had a lot of early integrations success, a lot of camaraderie that's probably better than expected. Had we had our druthers, we would not have closed on December 7, because not only was our first close, it was an annual and audited close.

So, from the time we've closed until today, we've been undergoing two simultaneous audits, two audit firms, a Sarbanes-Oxley review, and it's been quite intense. I am pleased to say, however, that all that is behind us. So I think the only issue that was a surprise to us was the intensity required on all of our parts; LogistiCare staff, the auditing teams, our independent auditors and Michael's staff, on just getting the work done.

But there have been no negative surprises in that process, other than the work that was required to complete.

Kevin Ellich - RBC Capital Markets

Excellent.

Fletcher McCusker

Given that the gas question comes up a lot with us, I think some people still don't understand or appreciate the LogistiCare model. With the rising cost of fuel, you see a direct impact from that in asset-based companies, airlines, transportation companies, trucking companies, cab companies. LogistiCare is a little better buffered from that and that they are not putting direct fuel into company-owned vehicles. They contract with their driver networks on a per trip basis within a geographic grid, and it's the driver's responsibility to pay for the fuel.

So indeed, if fuel goes up, we get pressured from the driver network, but it's not an immediate counter cause and effect relationship, and many of the LogistiCare contracts, we're pleased to say, have some opportunity to go back and negotiate with the State. So the only kind of economic change that we've seen since we've closed, is some increase in the cost of gas, we've not seen that play out currently in terms of any pressure on earnings-per-share or other contributions. But if that continues over an extended period of time, it might.

And of course the pipeline is a very exciting part of that to us. The number of states which have embraced their model; LogistiCare has a 90% hit rate in competitive activity, and they are bidding on an incredible volume of business. So that's really the upside we saw in the acquisition and our ability to deliver, because of the opportunities they are going have in '08 procurement's cycle.

Kevin Ellich - RBC Capital Markets

Got it.

Fletcher McCusker

Nothing's changed in that regard.

Kevin Ellich - RBC Capital Markets

Okay. Could you talk a little bit about the contract announcement with Optum Health and what do you think the possibility is of providing transportation services to Medicare beneficiaries at some point?

Fletcher McCusker

That's a great strategic question. We've never signed a national agreement with the managed care company; we typically negotiate market-by-market agreements. I think what United and Optum saw in us was a company that was capable of mobilizing to their needs across all of their markets. We are prioritizing with them where they want us to start. So we would expect the economic impact of this to be small in the early months, as we feel each other out and identify where their priorities are, but they indeed have over one million lives in this public sector programs. We do see this as a huge opportunity, and we wouldn't be surprised if at some point in the future that this is our largest contract. And the second half of your question was remind me.

Kevin Ellich - RBC Capital Markets

No, that was pretty much it. I just wondered if there was a possibility of providing transportation services to the Medicare population?

Fletcher McCusker

Yeah. LogistiCare's involved in a couple of Medicare pilots. Right now Medicare does not reimburse for the transportation benefit. We do expect that to open up, typically, in the Medicare system. If the pilot is successful that generally does move to authorize the benefit.

I think organizations like United and others have anticipated some changes in the delivery system for people of my age who do not intend to grow old in a nursing home. And I think transportation is going to be a huge part of our independence, along with a home-based delivery system. So we do see Medicare as part of our future. It's probably too early to tell. But if you are monitoring trends, it seems to be very positive to us that Medicare is at least engaged in a pilot to demonstrate the opportunities that transportation has to reduce out of home care.

Kevin Ellich - RBC Capital Markets

Okay. And then what's the combined Providence LogistiCare entity? How did that affect your concentration to any specific contract or payor? Do you have greater than a 10% concentration to anybody?

Fletcher McCusker

Michael I will refer to you. I don't believe we do Kevin. The market is so large that even between the two of us we represent 1% of the market. The transportation market is about $2.5 billion. LogistiCare has less than $400 million of that today. Our market is into the $100 billion and we have about the same amount on our side. We were in 15 of their 17 states. So combined, I would say probably in Virginia, in Florida and some other states. But even then that book of business is probably not $50 million or $60 million out the multi billion state budget. So I would say we have no saturation issues. Michael, is there any single contract?

Michael Deitch

Nothing comes to mind, it's at 10%.

Fletcher McCusker

I think we disclosed the Arizona contract in our filings Kevin. I think that's about 6% of our revenue now. That would be our largest contract.

Kevin Ellich - RBC Capital Markets

Okay. And then just one last question again on the transport business? It looks like a competitor just signed a deal with a Medicaid managed care provider for transportation services in Michigan. Was this one of the contracts you guys were looking at?

Fletcher McCusker

I can't answer that. I'll find out and get back to you.

Kevin Ellich - RBC Capital Markets

Thank you.

Operator

Your next question comes from the line of Mark Hughes from SunTrust. Please proceed.

Mark Hughes - SunTrust

Thank you very much. Is there any meaningful seasonality in LogistiCare as we model the quarters out?

Fletcher McCusker

Well, they have never had this heightened scale, but they have had some history of summer seasonality. So we are going to watch that. That's one of the reasons we didn't want to guide for the rest of the year Mark, as we know fully appreciate the impact of their summer at their current run-rate.

Mark Hughes - SunTrust

Got you. And then G&A in the fourth quarter came in at a pretty nice clip, i.e. low clip. What do you expect going forward in terms of run-rate?

Michael Deitch

Mark a second, G&A 4.5% to 5% combined. And the reason it's down is because LogistiCare is being accounted for and treated just like any other acquisition in that majority of their costs go into client service expense.

Mark Hughes - SunTrust

Right. Now the 4.5% to 5%, I guess G&A relative to revenue was about 9% in the first quarter?

Fletcher McCusker

In terms of income models we're pretty consistent in our guidance there. We believe we'll stay in the 9.5% range Mark and LogistiCare is about 7% up income margin. So we'll segment these businesses when we report. But we will show the combined SG&A and we do get the benefit of bigger revenue base without a lot of incremental corporate expense. So, it'll come down, but our cost has not come down, but we do have the opportunity to integrate them incrementally. We've not added any corporate positions, have we Michael in this integration?

Michael Deitch

Not yet.

Fletcher McCusker

You're anticipating there may be a couple in accounting…

Michael Deitch

It may be one in accounting and one in communication.

Fletcher McCusker

Yeah. So we are talking about adding maybe two people, Mark, over the year to integrate $400 million of revenue.

Craig Norris

Mark, I'd urge you when you see the 10-K on Friday to look at the segment reporting footnote. And you'll see where our business is, LogistiCare's business and the corporate costs are displayed.

Mark Hughes - SunTrust

Okay, thank you.

Operator

Your next question comes from the line of Richard Close from Jefferies. Please proceed.

Richard Close - Jefferies

Yeah, congratulations on a very good year. Just a point of clarification, Michael, what was the G&A, was that 4.5% to 5% of revenue?

Michael Deitch

That's correct, Richard, for the year.

Fletcher McCusker

Forecast year?

Michael Deitch

Forecast

Richard Close - Jefferies

Okay, just really quick. Want to go over this gas, gassing. Obviously you spent some time on it. With the core business and gas prices going up although you guys obviously do it in, provide your services in the community, do you get squeezed at all in terms of having to pay your counselors more? Obviously they are driving out to see the clients.

Fletcher McCusker

We reimburse them Richard on the IRS allowed reimbursement rates, so if they go up, we'll have some issues there but we typically have been able to pass that on because it's rarely increasing just more than once a year. We can typically pass that onto our payors. So we've not had any direct impact on our side. I think our people know that this mileage reimbursement kind of covers the use of their vehicle, they are not going to make any money on it and we have consistently used the IRS per mile rate as our reimbursement.

Richard Close - Jefferies

Do you get any pushback from them? Obviously the rise in gas prices is immediate versus I guess any adjustment you would get from this IRS thing or going back to the states?

Fletcher McCusker

A lot of that is in how we organize the client case load. We try and assign clients to home-based councilors within a 50-mile radius of their house. So we are not asking people from Charlottesville, Virginia to drive to Fredericksburg to see clients. So we are putting a lot of miles on our cars. Our councilors are not obligated to come into the office after every day. They fax in their notes and they fax in their billing records. So, we've done a lot work to kind of keep the mileage requirement down and by blocking clients. And of course in urban areas, we can give you a caseload for a counselor is about six families, and we can give you a six family caseload that's within a few miles of each other. So we are driving really great distances.

Richard Close - Jefferies

Okay. And then just I guess to put this to bed. On the LogistiCare side, it doesn't impact them, but it impacts I guess the people that they or the drivers that are contracted with them. Is there any risk that all of a sudden LogistiCare might not have the - that someone might back out a taxi group, might back out just because they can't make any money after the current per diem, or something?

Fletcher McCusker

We ask that question during the due diligence process too, and learned that they have quite an extensive diversified network with drivers in to the thousands. So they don't concentrate with any one large organization in a market. They prefer the smaller two or three van kind of companies. They also have a commitment to direct volume to those people that are signed up in their network. So there are some tradeoffs in terms of volume commitments, exclusivity and LogistiCare's self insurance program. Remember, Richard is available to the driver networks.

So, LogistiCare can offer them pretty substantial savings on their cost of insurance. So what we've seen happen is, if fuel continues to go up, you do see downstream drivers begin to whine about that; request shorter trips and they may refuse a trip or two. We've not seen a significant impact with anybody bailing because of the price of fuel. And then LogistiCare will use that data then to go back to their payors and try and create a fuel surcharge or a rate increase based upon the cost of gasoline. So the point we were making is, yeah there is pressure there, but unlike American Airlines, it doesn't impact us today. It might have some impact to us in the future as you suggested regarding the availability of drivers and the potential margin issues if we don't get cost increases from our payors.

Richard Close - Jefferies

Okay. Mike, I had a couple of questions. I guess if we take the LogistiCare. While your total revenue guidance for '07 and then that LogistiCare back that out, I guess you are looking for about, is that about $50 million from sort of the core Providence business year-over-year to be added. How much of that $50 million is coming from the acquisitions that you did in '07?

Mike Deitch

Richard, I would have to go back and slice that up for you. I can tell you exactly if you'll just call me.

Fletcher McCusker

We have guided about $310 million over to whatever we did this year. Craig, do you know offhand that's probably some we'll have to research.

Mike Deitch

Because it came in over the year, Richard, now we just have to get the run rate for you and get that to you.

Richard Close - Jefferies

Okay. Well I guess maybe just generally Fletcher, how would you characterize sort of your organic growth outlook for the…

Fletcher McCusker

We see that Richard consistent with what we've done year-in, year-out. And we don't have any real pressure from any particular market, where we are planned, we enjoyed a 10% rate increase in California which is one of the states that struggling the most with their budgetary issues. So it's kind of across the system increase both in terms of rate and client census. We really don't have any flatness in any of our programs. So it's kind of our typical 20% organic growth which is pretty much what we've modeled for in 2008.

Michael Deitch

Richard, I had given you that calculation, it included everybody and it is not -- I got 19%, so Fletcher is right on.

Fletcher McCusker

We will double check just to see how much of that purely organic, same-store versus acquired.

Richard Close - Jefferies

Yeah, okay and then with respect to -- just a real quick number question, it's silly for me to ask this, but I guess if you guys come up with $1.19 in earnings in '07. It comes out to $1.21 I guess. What's the difference there, the variance there?

Michael Deitch

Between basic and diluted?

Richard Close - Jefferies

Is that all it is. No, I think if you take the net income and divide it by your year-end shares outstanding you get $1.21.

Michael Deitch

Richard, its kind of screwy how we have to do diluted EPS now and have to do with the WCG shares, the preferred shares, it is not a direct calculation anymore. If you really want that detail, I can certainly share it with you but there is a little new one in there on how we now calculate diluted earnings per share.

Fletcher McCusker

Now modeling for the year Michael, what number should they use for EPS guidance?

Michael Deitch

Well, I'm using the 12,800,000 that I said in the script.

Richard Close - Jefferies

Okay, I just --

Fletcher McCusker

We can help you with that offline.

Richard Close - Jefferies

And then there has been a lot of rumblings in California, in North Carolina, I should say, with respect to some of the social services there. I know you won a contract last year. Is there anything going in North Carolina we should know about, that's negative or --

Fletcher McCusker

Read the paper, there is a lot of energy, a lot of controversy, if you will. This is a new program for the state. The state had estimated the community services budget at about $5 million. They spent $50 million. So there is a lot of intervention at the legislature at the governor's office, at the auditor's office. The auditor published a report that indicated a number of providers were abusing this new service in their opinion. And weren't real careful about the eligibility and have asked for a substantial of money back. We are pleased to say that we are not on that list.

So it may in fact become an opportunity for us. The state has put more guide lines on eligibility and more control on the authorization. We tend to be pretty disciplined when we authorize recruit and provide services to these clients. So we have been done it no differently in North Carolina. But you are right there is kind of buzz in terms of how this program has just exploded. And how is the state going to continue to fund it at this level. But we are pleased to say that our service is there still pretty well thought of and it might in fact become an opportunity for us to expand.

Richard Close - Jefferies

And just finally you took a reserve, I guess on the Tucson contract the fund that was taken last year in the fourth quarter. What's the current status of that contract? Are you getting paid on this stuff that you took a reserve on last year, just sort of an update there?

Fletcher McCusker

Our CPSA contract Richard from '07 to '08 went from $16 million to $20 million. Those are obviously different periods, so it had no impact on the '06 reserve, but their commitment to make us whole, we found they do what they say. They have increased our services, increased our contract, we are paid prospectively. Our encounter levels are below now the contractual amount. We are not being obligated to provide services above the allocation, so we are very content with that relationship today. And have had no issues with it in '07.

Richard Close - Jefferies

But they are still not paying, they have not paid you?

Fletcher McCusker

Well not in the same period. So we don't get to go back and book any -- we are booking it in the current year and on a 1/12 basis. But it didn't go back against the reserve.

Richard Close - Jefferies

Okay. Alright, thanks.

Fletcher McCusker

Thank you.

Operator

Your next question comes from the line of Greg Williams with Sidoti & Company. Please proceed.

Greg Williams with Sidoti & Company

Good morning everyone. Thanks for taking my call. In the press release it said LogistiCare has created more demand on your services. I was hoping you can elaborate on what more demand means and maybe even quantify it or just talk about that opportunity?

Fletcher McCusker

It is settled Greg, and that we are making inroads with their staff, with their organization on how we can provide services to riders that are difficult to manage. We do not currently handicap nor can we predict ultimately what this will mean for both companies, but part of the synergy we saw early on was the opportunity we have to help them deal with problematic riders? And that will in fact increase referral business to us.

Gregory Williams - Sidoti

Okay. So that would be above and beyond the $0.08 and accretion you mentioned before?

Fletcher McCusker

Yeah. I would not put too much weight into that for '08. It's very subtle, and we are very careful not to abuse that privilege. The payor has to approve it in every situation, but it is one of the things we identified early on as opportunities between the two companies.

Gregory Williams - Sidoti

Okay. And just - again [you're] going to get that first quarter bonus, so it's one-time in nature. Is it Providence executives or LogistiCare or both?

Fletcher McCusker

No. It's just the Providence top four; it's myself, Michael, Craig and Fred Furman. It's pretty equally distributed. We do have to provide an 8-K under the new SEC guidelines that will be out Friday, and we have to describe the comps process, the reasons behind the bonus etcetera. But indeed it is one-time; it's in relationship to the Mercer Salary Study and the low percentile in which we are operating under. And we benefited Greg from the windfall that we are seeing from the LIBOR savings as kind of the proceeds, if you will that confirm that bonus.

Gregory Williams - Sidoti

Okay. And this maybe a silly question. But if you don't have another bonus next first quarter, won't you be back down in the 25 percentile?

Fletcher McCusker

Unless that our competitors go crazy, we are moving up to the percentile. If you go back and look at our salary filings, you will see that we've had an increase in management compensation in terms of our base. We have a new bonus plan in effect that includes opportunities to increase our compensation based upon our ability to hit plan, and then we have a long-term incentive grant that you'll see us get year-in, year-out.

So the intent I think is to move us closer to our peers, but I think we fully understand that we will not get to the 100 percentile, and of course every year they are probably going to increase their executive comps. So this was designed to create some parity but it's not our design, Greg, to double or triple executive comp.

Greg Williams - Sidoti

Okay. Can you talk about just the opportunities and updates on the Arizona Magellan subcontracting.

Fletcher McCusker

Craig, you look probably closest to that, we don't see anything immediately, Greg, but we do see opportunities there.

Craig Norris

Yeah, I think this is a large system. I think they are still trying to settle up, how this system's going to look, who is going to be where. It is taking a long time that is by history, how Phoenix has always - when they have changed their authorities they have gone through a rather long period of trying to figure out how the system is going to need to look. So we are still hanging in there, but we don't have anything yet.

Greg Williams - Sidoti

Okay. And just last question, as I just look at my modeling. The WCS acquisition and the FPS acquisition in the core business, are they at full run rate now?

Craig Norris

I would say, yes. All the acquisition we have are up and running; the full board.

Greg Williams - Sidoti

Okay, thanks guys.

Fletcher McCusker

Greg. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Kevin Campbell from Avondale Partners. Please proceed.

Nathan Yates - Avondale Partners

Good morning. This is Nathan Yates standing in for Kevin. Just going back to the guidance for 2008, we took guidance for 1Q and annualized that and came up with around $680 million and we are just hoping you could talk a little bit about the difference there from your guidance, up $673 million?

Fletcher McCusker

Probably summer, Kevin, we typically don't have four straight line quarters. On a run rate basis you would see a little dip in our revenue in Q3, that's probably the difference.

Nathan Yates - Avondale Partners

Okay. And looking at D&A and 4Q, we saw an up tick. And could you provide, maybe an idea what we can expect in 2008 for D&A?

Michael Deitch

About 1.7% for the year.

Nathan Yates - Avondale Partners

Okay, alright. And lastly, may be just a quick update on contract opportunities in Canada with WCG?

Fletcher McCusker

Too early to tell, they are on a July cycle. We are not currently bidding anything new. We have been very well received in Canada. We believe we are doing a very good job and it will create new opportunities. But as of today, we don't have anything to report.

Nathan Yates - Avondale Partners

Great. Thank you very much.

Operator

You have a follow-up question from the line of Richard Close from Jefferies. Please proceed.

Richard Close – Jefferies

Yeah Michael, I just wanted to follow-up on the shares outstanding and I guess you are using the 12.8 million number for the first quarter and second quarter. But then you said something about the 1.7 million, is not in guidance. Can you just walk us through the share count again?

Michael Deitch

Yeah, Richard. I have the benefit of Q1 share account which is rounded 12.8 million, that's why I'm using it. On the convertible debt, there are $70 million amount out. The conversion rate is 23.982, if you do that math, it's just 1.678 million shares.

Fletcher McCusker

And to calculate EPS Michael, you exclude the coupon, you won't divide, and you would add back the tax-effected interest and then divide by the share. If you can do that Richard and I have done that, you virtually get a wash, the same EPS between that calculation and the one we have now, it's less than a penny. So it's pretty close under either way.

Richard Close – Jefferies

Okay. And then, you said something about the second quarter as well if I am not mistaken. Are you assuming the same, roughly, the same share account or --?

Fletcher McCusker

Yes, sir I am.

Richard Close – Jefferies

Okay. Alright, thank you.

Operator

At this time there are no further questions in the queue. I would now like to turn the call back over to Mr. McCusker for closing remarks.

Fletcher McCusker

Sam, thank you and thank you everyone. We appreciate your questions. If you didn't get anything you needed answered today, please give one of us a call. I will be at the Sidoti Conference in New York week after next, and then at the SunTrust Conference in April. We are also doing some non-deal Road Show activity, so we should be in your neighborhood. Let us know if you would like to see us and again we encourage your visits to any of our programs. Avondale is hosting an Investor Day in Atlanta which has been very well received. Contact them if you have any interest in attending as they may get booked up. And we will see you in one of those places soon. Again, if you have any questions, please give us a call. Thank you very much and good day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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