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Executives

Ralph G. Gronefeld – President and Chief Executive Officer

Derwin Wallace – Director of Investor Relations

David W. Miles – Chief Financial Officer

Analysts

Newton Juhng – BB&T Capital Markets

Kevin Campbell – Avondale Partners

Richard Close – Jefferies & Co.

Gregory Williams – Sidoti & Company

Jim Macdonald – First Analysis

Kevin Ellich – RBC Capital Markets

Res-Care, Inc. (RSCR) Q2 2008 Earnings Call August 8, 2008 9:00 AM ET

Operator

Welcome to the ResCare second quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Ralph Gronefeld, President and Chief Executive Officer.

Ralph Gronefeld

Good morning and welcome to the conference call reviewing Res-Care's results for the second quarter and six months ended June 30, 2008. I am here today with David Miles, our Chief Financial Officer, and Derwin Wallace, our Director of Investor Relations, who will now present our forward-looking statement.

Derwin Wallace

We provided notice of this call in a public news release, and we welcome those joining us through the simulcast web transmission. Our second quarter 2008 earnings release has been distributed to the financial media, filed with the SEC, and is posted on our web site, www.rescare.com.

From time to time, Res-Care makes forward-looking statements in its public disclosures, including statements relating to expected financial results, revenues that might be expected from new or acquired programs and facilities, its development and acquisition activities, reimbursement under federal and state programs, compliance with debt covenants and other risk factors, and various trends concerning privatization of government programs.

In our filings under the federal securities laws, including our annual periodic and current reports, we identify important factors that could cause Res-Care's actual results to differ materially from those anticipated in forward-looking statements. Please refer to the discussion of those factors in our filed reports. We also would note that the information being provided today is as of this date only and that Res-Care does not assume any responsibility to update those forward-looking comments.

Ralph Gronefeld

I’m pleased to report that the second quarter continued our strong momentum. It was driven by our financial performance, recognition of our quality services, and our continued growth. During the quarter, the Commission on Accreditation of Rehabilitation Facilities, CARF, awarded Res-Care New Jersey with their highest award, a 3-year accreditation. Res-Care New Jersey provides residential, community, personal and social services to people with developmental and other disabilities.

Later in the quarter, the Veterans of Foreign Wars of the United States selected the Workforce Solutions of East Texas as this year’s national employment services office recipient. Workforce Solutions is a part of Res-Care’s Arbor E&T which provides one-stop and workforce solutions for local government agencies in twenty-five states.

I’m very proud of the people at Res-Care New Jersey and Workforce Solutions of East Texas. These are wonderful recognitions of their efforts.

We recently announced that Vincent S. Doran, President of Res-Care’s Employment and Training Services Group, is retiring effective January 1, 2009. Vince joined Res-Care in 1997 and has more than 35 years of workforce experience. Vince has made enormous contributions to Res-Care. I appreciate all he has done for Res-Care and wish him the best in his retirement and future pursuits.

The second quarter reflected continued growth. Through June 30, we had completed nine acquisitions which are expected to generate annual revenues of approximately $29 million. In early July, we acquired Caregivers Home Health, an Illinois home care company, adding another $20 million in annual revenue. Caregivers Home Health further enhances and expanses homecare services division. Our ultimate goal was to have Res-Care Homecare in every state providing consistent and unrivaled quality care people who want to stay at home and live independently as long as possible.

Now, I’ll briefly review the second quarter financial results and our guidance for the reminder of the year.

The company recorded a pretax charge in the second quarter of $24.4 million, $14.9 million net of tax or $0.45 per diluted common share for the four lawsuits as previously disclosed. To date, we have resolved three of the four lawsuits. Although labor charge had a negative impact on the second quarter results, the losses do not affect core business operations or acquisition strategy. I’m pleased with our core operating results during the quarter as we saw revenue growth in virtually all of our segments with a significant contribution from our employment training services unit driven by performance incentives and new contracts. Thanks to the strength of our operation’s leadership and commitment for our employees, underlying business fundamentals were positive in the quarter despite a weak economic environment nationally.

Revenues for the second quarter of 2008 increased 6.2% over the prior year period to $385.4 million. The increase was due primarily to acquisitions in community services and international segments, plus new contracts and performance incentives in the employment training services segment. I’m very proud to announce that this quarter was the 66th consecutive quarter, a period over 16 years, in which revenues increased over the prior year period.

Loss from continued operations for the second quarter of 2008 was $0.06 for diluted common share, compared to income from operations of $0.31 per diluted common share in the prior year period. Excluding the legal charge, income for continued operations was $0.40 per diluted common share. The company is providing guidance for the second half of 2008 of diluted earnings per common share in a range of $0.70 to $0.74 and revenues $790 million to $825 million. The guidance assumes no reimbursement rate changes for the balance of 2008 and an income tax rate of 36%.

Now, I’d like to turn the call over to David.

David Miles

Before I discuss our financial results for the quarter, I’d like to note that all our comments make reference to certain non-GAAP measures. A description and reconciliation of these non-GAAP measures can be found in the investor’s relations section of our corporate website.

Revenues for the second quarter of 2008 increased 6.2% over the prior-year period to $385.4 million. As Ralph stated earlier, this increase was primarily related to acquisitions in the community services and international segments as well new contracts in the employment training services segment. Loss from continuing operations was $1.6 million, or $0.06 per diluted common share, compared to income from operations of $10.3 million or $0.31 per diluted common share in the prior year period. The decrease in income from continuing operations was due to the company increasing its legal reserves for adverse developments on four lawsuits. Excluding this charge, second quarter 2008 income from continuing operations was $13.3 million, or $0.40 per diluted common share. Adjusting for the legal charge, EBITDA for the second quarter of 2008 was $31.9 million versus $25.7 million in the same period last year, a 24% increase.

In the second quarter of 2008, diluted earnings per common share from discontinued operations was a net loss of less than $0.01. The company recorded share-based compensation expense for the second quarter of 2008 of $1.1 million or $0.03 per diluted common share, compared with $2.8 million or $0.05 per diluted common share in the same period last year.

The effective income tax rate for the second quarter 2008 was 38.9%, versus 36.7% in the second quarter of 2007. This higher rate is due primarily to the loss in the second quarter. The effective annual rate is expected to be approximately 36%.

Our community services group reported revenues for the second quarter of $273.7 million, up from $266.9 million last year. The 2.7% increase was primarily due to the impact of acquisitions which were partially offset by softness in the home care business. Operating income for community services group was $4.9 million, a margin of 1.8% for the second quarter of 2008 compared to $26.7 million, and a margin of 10% in the same period last year. Excluding the legal charge, operating income was $29.3 million, a 9.7% increase over the last year’s period and representing a margin of 10.7%. The 70-basis point improvement in margin was due primarily to the integration of Kelly Home Care. Operating income includes depreciation and amortization attributable to the operations.

Job Corps Training Services revenues for the quarter were $40.6 million, remaining consistent with prior year period of $40.9 million. Operating income for Job Corps was $2.8 million, and operating margin was 6.8% in the second quarter of 2008, compared with operating income of $2.9 million and margin of 7.1% in the second quarter of 2007.

Employment Training Services revenues were $58.4 million, compared with $49.5 million in the second quarter of 2007. The 18% increase was primarily due to new contracts and then ramping up of the Arizona and Indiana projects. Operating income was $7.3 million for the quarter compared with $4.4 million in the prior year period. Operating margins improved 370 basis points to 12.5% compared to 8.8% in the same period last year. The increase is primarily attributable to higher cost incurred during 2007 to initiate the New York Back-to-Work program as well as performance incentives earned on certain contracts in 2008. We expect operating margins to normalize at 9% to 10% for the balance of the year.

The other segment which includes alternative education and international operations posted revenues of $12.6 million, compared with $5.7 million in the prior year period. The 120% increase in revenue was primarily due to late 2007 international acquisitions of Maatwerk and Biscom. Revenues from our international operations were $7.4 million during the quarter, modest contribution margins.

Other segment operating margin in the second quarter of 2008 was 12.4% compared to 23.7% in the prior year period. The lower margins are primarily due to the operating income in our international business which was caused by slower than anticipated integration. We expect margins for the balance of the year to be in the low single digits as schools are out of session during the third quarter and as we continue to integrate our international operations.

For the company as a whole, net interest expense for the second quarter was $4.5 million compared with $4.8 million last year. Corporate general administrative expenses for the second quarter were $14.6 million or 3.8% as a percentage of total revenue compared with $14.3 million or 3.9% of total revenues in the second quarter of 2007.

Cash provided from operations for the quarter totaled $31.6 million, and we closed the quarter with cash of $21.2 million. Total capital expenditures were $5.4 million for the second quarter of 2008, consistent with our plan, and DSO was 49.4 days at June 30, 2008.

That completes our prepared remarks.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Newton Juhng - BB&T Capital Markets.

K. Newton Juhng - BB&T Capital Markets

I was a little curious about one comment that you made here on the homecare business. You described it is soft; can you give us a little more detail as to what’s going on over on that side of the business?

Ralph G. Gronefeld

It’s really driven by three things, one internal, the other two a little external. The three things are, one, we’re still putting in our systems and fully integrating all of our home care operations, and as we do that, we’re training people and we’re getting people on board, and that takes the eye off the ball from a gross standpoint, and so we continue to do that and move that throughout the country as we put our home care business on our systems.

The other two issues are that we have seen a little bit of softness because it is discretionary income, the economy is becoming tight, and from a private pay standpoint, we’re seeing a little bit there, and then the third factor is the prices of gas and the ability for our staff to be willing to and able to go from stop to stop, and us working through ways to compensate them, increased mileage, mileage rates, and those types of things; so, nothing that gives me any cause or concern on a go-forward basis long term. I think all three of these issues we will manage through and ramp up our homecare organic growth.

It’s more of a timing issue and more of us have to deal with some things that are currently occurring that we just have to find ways to manage and I think that we will. Demographics are still very strong for this population. The need is great, and I think that we will continue to see opportunity here, and the opportunities currently exist in our pipeline as well. Our pipeline is very robust with homecare acquisitions at this time.

Newton Juhng - BB&T Capital Markets

Ralph, in terms of looking at the way you’re terming it, I’m just curious; it sounds like your outlook hasn’t really changed, but in terms of organic growth, can you maintain it at this point or do you think that it’s something that we need to re-jig here a little bit in terms of expectations going forward?

Ralph G. Gronefeld

I think going forward, long-term; we’re still going to be in that 8% to 10% to 12% range organic growth. I think short-term, next quarter, maybe going into the fourth, it’s going to take a while for us to pull that back up there, but we’re doing all kinds of things right now to accelerate that process. We’re seeing some results of that acceleration; but this is now a big business for us; it’s right around $300 million, and so it’s going to take us a while to get the ship turned a little bit, but we are moving in that process. So, I think still very bullish about the opportunity. We’re very excited about it, and I think this is just the short-term bump in the road that we’ll get through really quickly.

Newton Juhng - BB&T Capital Markets

On the retirement of events, how should we be looking at your push to acquire more in the international business at this point considering I know you are really at the tip of the spear there?

Ralph G. Gronefeld

Well, one of the reasons why Vince is staying on with us for 6 months is to continue that momentum and to make sure that as we integrate our international operations we’ve got focus on the ground over there that has that same push and the same outlook for growth in our international markets; so, we wanted it to be a time period that would work for both us and Vince from the standpoint of making sure that we put things in place to continue our momentum and still work within Vince’s time period as far as what he wanted to accomplish; so, I think we’ve got that with our 6-month transition opportunity for us.

Operator

Your next question comes from Kevin Ellich - RBC Capital Markets.

Kevin Ellich - RBC Capital Markets

David mentioned that the integration of the international acquisitions was a little slower than anticipated and that impacted the margin. Can we get a little bit more color on what’s going on there and what the status of the integration is now?

Ralph G. Gronefeld

There are a couple of things driving that comment. The first is culture, us learning how to interact and our new teammates learning how to interact with us from a standpoint of how we manage our business, what are the economic drivers, those types of things. The other is putting the infrastructure in place, making sure that we’ve got that infrastructure in place to grow the business on a go-forward basis.

We didn’t make these acquisitions just to sit there; we made those acquisitions so we can diversify our revenue and grow our business internationally. In order to do that, we’ve got to make sure that we’ve got an infrastructure in place. We were probably a little overly aggressive, optimistic in how we were going to be able to do that frankly. It has taken a little bit longer than what have we wanted it to take, but we’re still moving forward.

Every month, it’s about continuous improvement, and we’re doing that, and we still believe that we’ll get where we want to be from an international standpoint, and again, as with the home care, it’s just a the timing issue, it’s a bump in the road that we’ll continue to manage through.

Kevin Ellich - RBC Capital Markets

Would you see getting back on track or close to schedule pretty much you expected?

Ralph G. Gronefeld

No, no, we are still behind, and we’ve incorporated that in our guidance.

Kevin Ellich - RBC Capital Markets

And then just wondering if Ralph may be you could give us an update on your outlook regarding the states’ spending environment. It looks like another provider in the government’s sponsored social care space hit a couple bumps and we are wondering if you are seeing similar things?

Ralph G. Gronefeld

Well, the good news at this point is the reimbursement climate for this year is in our rearview mirror. We are past July 1, past August 1, we’ve still got less than a handful of states in the aggregate that have fiscal years beginning September 1 and October 1, we’re not anticipating anything from those few states. So, we know where we are right now for the balance of 2008 and into the first part of 2009, and we’ve been very pleased that we were on course as far as what we thought were going to happen with our rates when we initiated guidance back in December and that’s come to fruition.

Kevin Ellich - RBC Capital Markets

Have you been seeing any rate increases from any of the states or is it pretty much flat?

Ralph G. Gronefeld

No. Our guidance and the way we manage is that we've seen rate increases and rate decreases to come up with our aggregate flat rate, so we’ve seen both. Yes, we’ve been pleasantly surprised on some fronts, and we’ve been negatively surprised on others, but again, from an aggregate standpoint, we came out in line with what we anticipated.

Operator

Your next question comes from Kevin Campbell - Avondale Partners.

Kevin Campbell – Avondale Partners

I was hoping you could comment a little bit about guidance for the back half of the year. It seems typically you do a very good job of improving numbers sequentially, and obviously with the $0.40 you did on an adjusted basis and your guidance of $0.70 to $0.74, there’s some pullback there, so perhaps you could talk a little about that, what’s driving that, how much of that is related to the incentive payments? That’ll be helpful.

Ralph Gronefeld

Well, as we’ve discussed over the last few quarters, our business has changed. As we continue to grow in employment training, we’ve talked about the choppiness of those margins driven by both incentive payments, ramping up of contracts, start-up of new contracts, all those things that are going to create a little bit of bumpiness as far as our margins and our earnings from a quarter to quarter basis with within employment training services, and that’s one of the drivers, the fact that we’ve earned the incentive payments, we’ve received those in the second quarter.

Those will be not received substantially in future quarters because most of our contract years run through June 30. We have won some new contracts. Once we ramp up on those new contracts and some start-up loss losses on those contracts beginning the first part of the third quarter and through the third quarter, we’ve got schools which we’ve expanded that in the last couple of years.

School is out for the summer during the third quarter, so we go from generating profit contribution from those schools to generating a loss in the third quarter, and that will be offset growth in Community Services Group, as it has been in the last few years. We’ve been able to manage through seasonality of the schools by growing community services. We will do that again in the third and fourth quarter.

So the primary driver, if we move all the noise out is going to be the incentive payments we received, the incentive awards, and some of the start-ups that we’ve got for some of our new contracts within employment training, and there’s a little bit of increase in interest cost, dealing with the legal charge, and that’s incorporated in there as well.

Kevin Campbell – Avondale Partners

Could you comment on the incentive payments just so that we know how much not to include going forward. How much did you receive in incentive payments that would have impacted revenues in the quarter, and how many new contracts did you win, and what are the annualized revenues you expect from those contracts once they are fully operational?

David Miles

One of looking at this is the margin differential that I indicated in my comments. We reported about 12.5% margins for the quarter in ETS and indicated that normalized margins are going to be in 9% to 10% for the balance of the year. So, on $58 million of revenue, that’s close to $0.03. That’s a big part of the bridge in terms of the performance incentives and the impact of what Ralph mentioned.

Last year, we reported 8.75% margin on this business. We’ve improved performance overall in Arbor year over year without regard to the performance incentives. This is the day’s performance fee that we earn off the contracts that’s improving, and that’s what migrated it up more towards the 9% and 10% level.

Kevin Campbell – Avondale Partners

Could you comment on the contracts won for July 1, the number and revenues associated with those?

David Miles

On a net basis, we’ve won 13 contracts for $17 million worth of revenue. In incorporating that number, we’ve only lost five of the contracts that we re-bid with basically a 92% hit rate on our revenues. The 92% hit rate was on re-bids, so we’ve got the $17 million of new contracts. We’ve won 92% of our existing contracts, so again we continue to show some substantial growth in that area.

Kevin Campbell – Avondale Partners

What was the percentage hit rate on the new bids?

David Miles

Well, on the new proposals, we won 18 and lost 14 with another 15 or 16 still out there that we’re waiting on.

Operator

Your next question comes from Richard Close - Jefferies & Co.

Richard Close – Jefferies & Co.

Someone brought up, earlier Providence and the difficulty that they were seeing in the budget process. Obviously, your business is quite a bit different because you are serving the disabled in your largest division there, the Community Services Division, and Ralph, I was wondering if you can just refresh us maybe how the government of individual states look at funding for individuals with disabilities, maybe how that differs with how they look at funding for just general social services. Is there a big difference in how they deal with those two different populations and maybe taking extra care not to cause too much pressure on the individuals with disabilities through cuts?

Ralph Gronefeld

It’s not a simple answer, but I’ll try to simplify as best I can. First of all, the folks that we support with developmental disabilities, they will pass any needs test that can be thrown at them as far as them needing services. They’re truly worse this date. They need the services. Any kind of services raise the quality of life issue for the people receiving those services. The advocacy groups are very strong because they understand that. Families are very strong because they understand that, and the provider associations are very strong because we understand that.

So, I think, from that standpoint, we do have a little bit of an advantage because of needs testing. The second is the fact that our population represents a very small percentage of the total Medicaid budget as far as spending. In every state that we’re in, our population is in the single digits, less than 10% of the total Medicaid budget, which means there’s 90% more out there they can look at and reduce their costs without looking at the population that we’re serving, and the third and just as important as the other two is that Res-Care has a very strong grassroots campaign out there with states, with local governments, with elected officials to make sure that everybody understand the services that we provide and the services that the people that are receiving these services from other providers, that they really do need these services and have them visit our homes and see the type of services that’s provided, see the types of needs that these individuals have, and once somebody sees that, it becomes very difficult to vote against people with developmental disabilities who need these services very strongly. So, those are the things that are going on with our population versus maybe some of the population of some of the other companies that are serving out there.

Richard Close – Jefferies & Co.

David, I was wondering if you can maybe comment on maybe in a little bit more detail the margin expansion year over year that you did see in the community services when we add back those legal fees. How should we think about the margin on a go-forward basis? Was there anything one time in the quarter to drive that higher margin, or are you beginning to see more benefits maybe from the pharmacy side, or the remote monitoring, anything like that that can give us some indication of maybe where this margin on a go-forward basis?

David Miles

First, in terms of the margin expansion year over year in Community Services Group, there are two offsetting factors, one being the growth in the home care business, higher margin business for us as we indicated earlier, offset by headwinds by on some of the same issues that many other providers and companies throughout the country are facing in terms of fuel and commodity prices, food prices, and the like.

With that in mind, as we move forward, we would expect our margins for the balance of the year in the Community Services Group to be relatively flat, with maybe a little bit of compression from the integration efforts that Ralph mentioned earlier as well as these headwinds on costs, offset by acquisition growth.

Ralph Gronefeld

To add a little bit more color to it, the 70-basis point increase in margin is really driven by integrating Kelly, moving offices and consolidating offices within our other homecare businesses which is what we wanted to do, or incorporating our offices into existing Kelly offices anyway that we decided to go, which we knew we were going to do and we knew we were going to have some improvement in those Kelly margins as we communicated when we did the transaction a year ago, and as David mentioned, it was offset somewhat by the increased utility, gas and oil, and dietary costs that we needed to manage through and we’ll continue to manage through as we have in the past.

Richard Close – Jefferies & Co.

Ralph, you’ve been around this business for a good amount of time, so you’ve seen good times and bad times and how that impacts Res-Care. How would you characterize the current environment? Is this one of the most challenging that you’ve seen, and then maybe how would you characterize how your company right now is set up to handle a touch economic environment?

Ralph Gronefeld

I would tell you that, yes, it is one of the most challenging environments I have seen, but Res-Care is in a much better position than we’ve ever been to deal with the environment that we’re in. As I look back over the years, we didn’t have employment training services. We had Job Corps; we didn’t have employment training services.

Those services are very much needed right now, as unemployment continues to go up, more people are out of work, more people need training, they need help getting re-employed, and that’s what we do, so that’s a positive for us. We’re in a much better position than we have been in some of the other times from a balance sheet perspective and a capital perspective. Tuck-ins are going to become available to us.

Other providers are going to be struggling with the environment as we are, but they will not have the balance sheet or the capital to manage through it that we have, so that’s an opportunity for us. The fact that we’ve diversified into homecare and private pay, which is in a better position, not solely relying on state budgets, so we’ve positioned ourselves much better from that standpoint, and internationally, although we are a little behind from an integration standpoint, it’s still absolutely the right decision for this company on a long term basis to diversify our revenue overseas and diversify our services and so we’re positioned ourselves to weather whatever storms occur in our country overseas, so we’ve done that.

So, as I look over our history, the good times and the bad times, I think we’ve done an excellent job as an organization as we’ve gone through these things positioning ourselves better for the next go around so that we can weather it, and that’s exactly where we are right now, and I am optimistic about the opportunity that we have, and I think that you will see us managed through it. We’ll deal with the increased cost issues by growing the business. We’ll continue to work hard with our customers to make sure they understand how important the services that we do, and we’ll continue to improve those services, as David indicated, that we’ve done within our employment training over the last year.

Richard Close – Jefferies & Co.

I got from my standpoint, the guidance for the rest of the year and then the commentary with respect to the reimbursement, the guidance assumes no reimbursement changes for the rest of ’08, just to clear, so there’s really no risk here, and we shouldn’t look at the fact that your guidance assumes no reimbursement changes for the rest of the year as a risk. Is there any risk that there could be reimbursement changes in the second half of this year that negatively impacts the second half?

Ralph Gronefeld

I understand what you’re asking, Richard, and there’s no way we can be absolutely sure. We have seen states in mid-years do things, so is there a risk that some state looks at their budget and says, ‘hey, we can’t continue on, we’ve got to cut services’ mid year, absolutely, there’s that risk. We’re not seeing any particular state that has that possibility at this point in time. We have gone through the budget cycles. We’ve weathered pretty well with that.

We are going to see, and it gives me an opportunity to comment a little bit on the tick-up of our DSO; we have seen and we are going to see states conserve and stretch out payments, which we know that’s going to happen. It happened in Kentucky. They went from a week pay to 21-day pay. We’re going to see that in California. Historically, California has done that over the years, and we anticipate that they will do it again, so we may see an increase a little bit in our DSO because of state budgets and what they’re trying to do, but at this point in time, looking forward, we believe that’s where we are.

Richard Close – Jefferies & Co.

Again, you had said that the year is in your rearview mirror. I forget how you exactly stated that, but it’s not like there’s a lot of states, budgets, or funding that is outstanding that has yet to be decided that might have a material effect on the second half?

Ralph Gronefeld

No, not all, we’re talking about two to three states. That’s all that’s left. As we were actively involved and our finger around the pulse of all 38 states that we’re operating in, we’ve got our finger on the pulse on those handful of states, and we’re pretty comfortable about where they are going to come in.

Operator

Your next question comes from Gregory Williams - Sidoti & Company.

Gregory Williams – Sidoti & Company

Could you talk a little bit about the acquisition pipeline and your earlier comments of homecare softening a bit, would that give you an opportunity to take advantage of acquisitions in the homecare market from some struggling operators?

Ralph Gronefeld

Greg, possibly, I don’t want to send a panic message at this point as far as homecare. I think it’s a little blip. Things have changed, and I don’t think they’ve changed drastically enough to where other providers are going to be seeing significant issues with that change. They’ll be able to manage through it as we will, I think, because it’s just a minor pressure that’s going on right now from a cost standpoint and a sales standpoint.

If it gets worse, of course, and that would put us in a better position from pricing standpoint and maybe additional opportunity for some of the smaller homecare providers. I’m not sure that we’ve talked about it recently, but in the homecare provider market, there are 900 small providers out there, so the opportunity is great for us to consolidate the industry and grow, and we do have pretty robust pipeline with some of those providers currently that we’re looking at.

Gregory Williams – Sidoti & Company

And staying on basically the acquisition topic, can you talk about the international opportunities? Are you still looking to further penetrate Europe, or are there other opportunities out there, even Asia, Australia, and Middle East, etc.?

Ralph Gronefeld

Yes to all those questions, again, we want to make sure we get the integration done. We want to make sure that we’ve got the infrastructure in place. It doesn’t make sense to try to grow and pile on and at the same time trying to integrate. We’ve got to make sure we do this in the right order, and we are very disciplined about that. We’ve learned how to do acquisitions. We’ve learned how to integrate acquisitions over the years, and we know the order in which to do that; when you start growing and when you hold off on growth, and so that’s where we are with international market.

The opportunity absolutely exists in all those areas that you focused on, the Middle East, Asia, expanding the European market, and we will be looking at those opportunities as we move forward, but I want to make sure we’ve got a management team on the ground and the systems in place, so they can effectively manage that business and grow the business.

Gregory Williams – Sidoti & Company

If you had to give maybe just like a percentage of completion of the Kelly integration, how far along are we?

Ralph Gronefeld

As far as the low-hanging fruit, the consolidation of offices, management structure in place, that’s 100% done. As far as putting all of our homecare on our systems and the systems being robust as we expect them to be to give us the management information for our folks to measure and focus on sales, I would have to say that’s in the 50% range.

Operator

Your next question comes from Jim Macdonald - First Analysis.

Jim Macdonald – First Analysis

Could you comment a little on the size of the opportunity and the timing in the UK and your thoughts on how that will play out?

Ralph Gronefeld

The size of the opportunity in UK?

Jim Macdonald – First Analysis

The privatization initiative they are talking about.

Ralph Gronefeld

Well, it depends on what numbers you look at. I’m going to give you a range because that’s what we’ve got right now. We’ve got from $88 million market opportunity to about $140 million market opportunity depending on the direction and how they continue to privatize and those things, and those are very soft numbers, but that’s the range that we’ve got right now as far as the opportunity.

Jim Macdonald – First Analysis

And when do you think that could really kick in?

Ralph Gronefeld

Well, there are a lot of things going on as far as how those contracts are going to be let and how those contracts are going to be managed. They are looking at numerous different things. They are looking what the providers should look like. From that standpoint, everything that we’ve heard is that Res-Care is in a great position because one of the things that the European Union looks at is the strength of the company and their balance sheet, and our balance sheet is extremely strong, and I think that gives us a heads up in winning contracts on a go-forward basis, but again, as we’ve demonstrated with Employment Training Services and from getting that to where it is today, we need to make sure that we’re doing the things and we’ve got the systems in place and the people in place to operate it effectively first. The worst thing that you can do as we learn is to go out there and win a contract only to lose it, and so that’s one of the things we want to make sure that we’re doing, but the opportunities to implement is worse. There’s no doubt about it.

Jim Macdonald – First Analysis

Back to the US, can you comment a little bit on the WIA and TANF funding issues and where we stand on those?

Ralph Gronefeld

In terms of the WIA funding, it remains a little bit under pressure. We’re seeing some areas where we’ve had the WIA boards pulling the services back in house. We’re seeing some pressure on the level of services, but nothing that we’re not going to be able to manage through and grow through, but we do see some pressure domestically on WIA funding. TANF is relatively flat

Jim Macdonald – First Analysis

Is there any impact on your bank line with the charges you took this quarter, or any covenants or other issues?

Ralph Gronefeld

The short answer is no. The long answer is it of course has impacted into the calculation of the EBITDA for the purposes of leverage ratio, but we’re going to be by all of our projections in compliance for the foreseeable future under our current structure, and we’ve also been talking to the rating agencies, and all indications are that there won’t be any change in either the outlook or the ratings as a result of this charge.

Operator

Your next question is a follow-up from Kevin Ellich - RBC Capital Markets.

Kevin Ellich – RBC Capital Markets

Ralph, given the softness in the economy that’s affecting the private pay side of the homecare business, could we get you to share your thoughts on maybe extending more additional Medicare home health business?

Ralph Gronefeld

Medicare as a payer source is the natural continued care for the homecare business, and we’ve got some Medicare component in our homecare. As with everything that we do, it’s all about diversification, and I lived through 1997 with the Balanced Budget Act, and what it did to home health companies at that time. You may or may not be aware that we actually had a home health agency that we sold in 1995 in order to buy the MRDD operations from Beverly, and the timing of that was incredibly in our favor when we did that, and having seen that in the past, we want to diversify.

Right now, Medicare home health is a shining star for a lot of companies, and they’re doing well, and we’re incorporating that into our business model, but we want to make sure we’ve got a good mix. We want to make sure we’ve got a good mix of Medicaid waiver of homecare, Medicare skilled home health, private pay, and long-term care insurance, and that’s the way that we’re building our homecare business.

Kevin Ellich – RBC Capital Markets

Of the home care business that you have now, the locations, how many of those are Medicare certified?

Ralph Gronefeld

I would say that we’re less than 25%, and that’s a very soft number. That’s not something that we’ve looked at, but my gut tell me to back down; we’re probably less than 25%.

Kevin Ellich – RBC Capital Markets

On the cost inflation side, have you ever broken out how much you spend on mileage reimbursement, and is that already accounted for in your guidance?

Ralph Gronefeld

Yes, we do, we’ve had to tick that up for our staff, and that is incorporate in our guidance.

Kevin Ellich – RBC Capital Markets

Actually, can I get how much the mileage the accounted for in operating expense this quarter?

Ralph Gronefeld

It was approximately 1.4% of our total CST revenue.

Operator

Your next question is a follow-up from Kevin Campbell - Avondale.

Kevin Campbell – Avondale Partners

I wanted to ask you about the Job Corps margins. It looks like they were down about 60 basis points sequentially and maybe 30 year over year. Could you talk about (a) what’s driving that, and (b) what should we expect going forward should that pick back up into the low 7’s, or is it a sub-7 number that maybe we should expect going forward?

Ralph Gronefeld

There has been pressure on Job Corps funding over the last few years. A lot of what’s driving that is that Job Corps continues to move the goal post from the incentive performance initiatives that they have, and as they do that, then there’s always a downturn in our margins and all providers’ margins, all contractors, until we can get back up to speed on what they’re measuring now and how they move the bar. So, that’s part of it, and part of the margin is going be driven by spending.

Again, it’s a management contract, so the more you spend, the higher your revenue, but your fee stays the same, so your margin will be less. If you spend less, your revenue is lower, and your fee is going to be higher from a margin perspective, so that’s part of that mix too. I think where we are with the current margin is probably a good place to be. I don’t see it really improving much, and I don’t see it going the other way either. I think that it’s going to be in this range that we’re in, this 6.5 to 6.8-6.9 range I think.

Operator

Mr. Gronefeld, there are no further questions at this time.

Ralph Gronefeld

Res-Care is having another strong year. Operations during the first six months have performed well. We continue to grow the company and achieve solid financial results. Res-Care’s primary focus is on our mission to provide the best possible services to the people who rely on us. We are committed to investing in our service lines through strategic acquisitions that build on our core businesses. We’re excited and optimistic about the future of Res-Care. Thank you for your continued interest in our company.

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Source: Res-Care, Inc. Q2 2008 Earnings Call Transcript

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