CorVel F2Q08 (Qtr End 9/30/07) Earnings Call Transcript

| About: CorVel Corp. (CRVL)
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CorVel Corporation (NASDAQ:CRVL) F2Q08 (Qtr End 9/30/07) EarningsCall October 30, 2007 11:30 AM ET


Gordon Clemons - Chairman

Dan Starck - President, CEO andCOO


John Sabo - Flintridge Capital

Dan Hoover - Hoover Capital

Kevin Malloy - Satellite


Welcome to the CorVel CorporationEarnings Release Conference Call. During the course of this conference call,CorVel Corporation may make projections or other forward-looking statementsregarding future events or the future financial performances of the company.CorVel wishes to caution you that these statements are only predictions andthat actual events or results may differ materially.

CorVel refers you to thedocuments the company files from time-to-time with the Securities and ExchangeCommission, specifically the company's last Form 10-K and 10-Q filed for themost recent fiscal year and quarter. These documents contain and identify importantfactors that could cause the actual results to differ materially from thosecontained in our projections or forward-looking statements. At this time, allparticipants are in a listen-only mode. A question-and-session session will beconducted later in the call with instructions being given at that time. As areminder, this conference call is being recorded.

I would now like to turn theconference over to your host, Mr. Gordon Clemons. Please go ahead, sir.

Gordon Clemons

Well, actually, I think I wouldlike to turn it over to Dan Starck. Dan, why don't you start this off and I'llpick it up later on.

Dan Starck

Certainly, Gordon, thank you.Thank you, Luan, and good morning, everyone. Thank you for joining us for thismorning's discussion to review CorVel's September quarter results. As you cantell, I'm joined here by Gordon Clemons, our Chairman. And for the call, I willhandle most of the current business discussion and the quarter results, andGordon will cover the product development section. So let's get to theSeptember results.

Revenue in the quarter was $73.5million, up 9% over the same quarter of the prior year. Earnings per share were$0.40 for the September quarter, up 18% from $0.34 in the same quarter of lastyear.

During the September quarter inour traditional business lines, the Network Solutions product line savingsresults continue to expand, as we have seen in prior quarters, and our CaseManagement results showed improvement as well. Enterprise Comp, our strategicinitiative of bringing a new approach to the management of workers' comp claimsalso made progress this quarter.

From the marketplace perspective,industry claims volumes continue to be soft as do the insurance premiums.Claims volumes have continued at historic lows. Claims volumes are up 35%nationally over the course of the past 10 years in some states, such as California, approachinga 60% reduction. However, the cost of claims continues to climb.

Healthcare inflation alsocontinues to climb and forecasts have cost increases ranging from highsingle-digits to the low double-digits. These marketplace trends emphasize theimportance of CorVel's medical review services.

Regulatory reform continues,individual states continue to be fairly active. Their interest seems to befocused on changes to both provider reimbursement and eCommerce. One ofCorVel's responses to reform is to enter the clearinghouse business. In ourproduct development section, Gordon will discuss our initiative of getting intothe clearinghouse business.

Consolidation activity within thePPO industry picked up again this quarter and certainly creates an interestingscenario in that industry. However, despite challenging industry conditions,CorVel's results continue to improve, as we will discuss here. Our strategy isdeveloped around the market opportunities that exist and we believe that ouracquisition activity and continued emphasis on improving our executioninternally will move us forward quickly.

Now, I'd like to discuss ourproduct-line specific results and our key initiatives. In Patient Management,revenues for the quarter were $31.5 million. This represents a 20% increaseover the September quarter of last year and a 4.2% increase over the Junequarter. Profits increased 24.2% over the September quarter of last year and32.5% over the June quarter of this year.

As we've discussed before, in thefirst two quarters of the year CorVel acquired two claims administrationcompanies and the results of these operations are included in our PatientManagement product line reporting in today's call. We continue to repositionour entire Patient Management product line. Within our existing Case Managementbusiness, we continue to evaluate our pricing and internal operations in orderto improve our net profitability.

The September quarter resultsdemonstrate that we may be making some headway in this area. On a sequentialquarter basis, revenues in Case Management were very comparable with the Junequarter, while internal costs will reduce by 3%, making this a very nicecontributor for the September quarter.

With the addition of our claimsadministration capabilities, we have opened CorVel to new markets and to new services.We have experienced positive net effects from our newly acquired businesses, andas we integrate our service delivery, we will be able to deliver our integratedproduct throughout our national footprint. The transfer of our internaloperations from client-server applications to the CareMC portal continued thisquarter as well. We are nearing 100% completion of the conversion process andexpect to have it finished in early 2008.

In Network Solutions, revenuesfor the quarter were $42 million. This represents a 2.2% increase over theSeptember quarter of last year and a 4.7% reduction from the June quarter ofthis year. Profits were up 10.3% over last year's September quarter and 1.2%decrease from the June quarter of this year. Most of the sequential decline isbasically due to one less business day in the September quarter versus June.

Our results in Network Solutionsreflect the ongoing improvements we are making to our software, our specialtyreview services and our improvement in internal efficiencies. Our customersavings are up and our internal costs are down, reflecting the strides that ourfield origination is making in improving our operating efficiencies.

CorVel has now recorded 11thconsecutive quarters of margin percentage improvement in our Network Solutionsproduct. This is a direct result of two main drivers. Number one, our abilityto leverage our technology investment in order to improve both customer savingsand internal efficiencies. And two, our continued emphasis on our specialtyreview service products.

As a result of other industryconsolidation, CorVel is now one of only two national workers' compensationPPOs. In order to ensure that our PPO is able to compete head-to-head with ourlargest competitors, we are continuing to invest in our PPO development.

During the quarter, we signed anagreement with Integrated Health Plan in order to augment the overallperformance of the CorVel PPO. In future quarters, we will continue to look atspecific areas of opportunity for strengthening our PPO results.

In operations for 2007, wecontinue to focus on five basic initiatives. The first initiative is theexpansion of our Network Solutions business. As we have discussed before, theperformance of the Network Solutions business line continues to be a majorcontributor to our overall performance, and we continue to invest in itsfuture.

In the September quarter, we madesome internal organization changes that created a senior position that willhave specific responsibility for the performance of the Network Solutionsproduct line. This role will be focused on continually improving our customersavings and also making sure that our internal execution across the entire continuumof Network Solutions continues to improve.

Another area that we continue toenhance is making our software commercially available on an ASP basis. We hadsignificant interest in leasing our bill review software by companies thatperform this process in-house. While we believe that the best solution is forCorVel to provide the entire service, we also recognize that this scenario isnot always an option for all customers.

The second project is focused onimproving margins in the Case Management service line. We have had limitedsuccess in this area thus far. The September quarter showed improvement. However,we want to continue to refine our approach to the delivery of this service inorder to make our recent success sustainable. Just as we transformed both ourprocess and our results in our Network Solutions business, we will take many ofthe lessons that we have learned from that process to improve our CaseManagement business.

The third project is thecontinued expansion of our sales efforts. In an industry with contractingclaims volumes, we have been able to achieve moderate growth in our NetworkSolutions products. A few members of our existing sales team and a couple ofour new additions have helped create some of the mix change that we arestarting to see in our specialty review services.

The segmentation of our salesteam in order to create a national presence has been in place for the past twoquarters. While we expect this type of change to take a fairly long time, we'veseen noticeable results, and we expect this to continue. Some of the mostexciting news we have this quarter, I believe, is the progress on our fourthproject Enterprise Comp.

Enterprise Comp involvesproviding new claims management technologies to all of our customers,employers, insurers and TPAs. We believe the Enterprise Comp approach willimprove claims management outcomes. Much of the quarter was spent integratingour newly acquired claims administration companies.

We have made steady progress onall of the key integration fronts, cultural, business and informationtechnology. We expect that in the next few months, we will have our differentclaims administration businesses converted to our designated claims system.

Expanding Enterprise Comp toachieve a national presence has been and will continue to be a major focus forCorVel. The platform that we've created with the acquired companies and theexisting CorVel infrastructure gives us the ability to quickly deliver thisproduct on a national basis.

Currently, we are able to deliverEnterprise Comp services in 34 states. And we are working to expand this tocover the entire CorVel's footprint that exists in 49 states. Overall, we arepleased with the financial performance of the acquired companies, theassociated integration progress in the CorVel and the overall progress of theproduct line this year.

The last project is the continuedinvestment in our CareIQ line of direct care networks. We have recently madeboth management investments as well as software investments in this productline. And we are positive about the future of this product.

Now, I would like to turn thecall over to Gordon Clemons to discuss product development. Gordon?

Gordon Clemons

Thanks, Dan. I will discuss thesoftware development and product development in the same sequence in which Dancovered our major operating projects. Our total effort in this area comprisesover a 100 projects, which I will try to consolidate under the five primaryoperating priorities. The most important point though, I think, is that ashealthcare information processing becomes more and more sophisticated andworkflow tools become integrated within our systems, almost all projects becomein someway interrelated as differing healthcare activities share redundantinformation.

The first project is the NetworkSolutions area. A software development here is focused on integrating ourspecialty medical review products more fully within the existing medical reviewin MedCheck and our portal CareMC. We are also adding features to facilitatethe integration of additional PPO affiliates. New PPO affiliates can often havecontracting structures that require us to add to our software.

As we have recently announced, wehave added a major inpatient network that will improve our overall PPO results.Improving total savings is always a key priority and new forms of smart routingare an ongoing initiative that produces improved results for our customers.

The total MedCheck and CareMCproduct continuum in medical review is quite complex. Recent legislation insome states now extends this total service line to include the receiving andtransmitting of medical bills from providers to payors. These state initiativesin the clearinghouse arena, as it's referred to, require capabilities we firstdeveloped several years ago to support CorVel's active project. We see theclearinghouse services as logical extensions of our MedCheck software.

In the long-term, the medicalreview business and healthcare is going to evolve much as transactionprocessing has been modernized in other sectors of the financial servicessector. Being an efficient and technically sophisticated participant will be criticalto those firms who do not want to go the way of the stockbrokers who oncedominated securities transactions.

Our Phase I product will beintroduced, January 1, 2008. With clearinghouse services, our processing for providersand payors will extend from the receipt of bills from providers fortransmission to medical review and then on to payors, all the way through tothe posting of payments to providers. The smart routing of supportingdocumentation will also be included. This work is related to the electronicmedical records initiatives already underway in other segments of thehealthcare industry.

Moving our Case Management businessinto CareMC, as Dan discussed, has been the key development project over thelast couple of years. With the transfer of our business into CareMC largelycomplete, the development emphasis now has moved from accommodations necessaryto hub all of this work to the improvement in the functionality of CareMC.

I would like to compare thiseffort to the completing of each section of a large bridge. The bridge requiresa lot of work, might take quite a bit of time, but does not really pay offuntil the last section is completed and cars can actually cross from oneriverbank to the other.

In a similar fashion,improvements to our service often are not visible until we complete these largeprojects. We have more work to do on the Case Management conversion, but arefollowing a proven path when we moved our medical review to a workflowmanagement process several years ago.

Important improvements to the CastManagement process will continue throughout the coming year, and certainly foryears to follow. Increasingly though our supporting software vendors are alsoproviding tools that facilitate CorVel's overall goals in this regard.

On the sales front, our supportto that effort is provided primarily to our CRM systems. We are improving thesystems in this area. However, we rely largely on lease software in this aspectof our business. We are also now working with business intelligence vendors toimprove our knowledge of the marketplace and our ability to penetrate prospect.

Another infrastructure effort isthe steady move of our processing to co-location facilities. Just this lastweekend, our IT staff work through the night to complete another portion ofthis ongoing change during down hours. And I think our ability to constantlyimprove our hardware and our ability to scale our applications without problemsis a tremendous complement to the staff.

Enterprise Comp support includesa number of efforts and we have been installing, as Dan discussed, our medical reviewsystems in the companies we have acquired. In addition, we are integrating theclaims management software from the Schaffer acquisition into CareMC. It was avery nice bonus for us in getting together with Schaffer to find that they hadsoftware that we are quite impressed with and will certainly look forward tousing across CorVel's infrastructure.

First, we want to have a seamlesscontinuum from the management of incoming claims reporting through to theclaims management and medical management on each claim. Secondly, we want tobring new concepts from the management of workers' compensation claims into theoperations we have acquired.

As you know from prior calls,CorVel believes it's in the process of introducing a change in the way workers'comp claims are managed, which will meaningfully improve the outcomes in thatarea. These are meaningful efforts that will stretch out in phases throughoutthe coming year. These improvements to our software will allow us to achieveadditional synergies in our Enterprise Comp operations.

In addition for both ourEnterprise Comp customers as well as for those customers buying just a subsetof our service, we are close to introducing a substantial expansion to our userinterface tools in CareMC. Dashboards are popular these days and yet making onetruly functional, easy-to-use and relevant in everyday operations is achallenge.

In collaboration with somethird-party partners, we have been developing a next generation product, whichis now ready for initial customer review. We have our national user groupmeeting just this coming few days and we will be introducing some of our newdevelopments at that time.

CareIQ systems have been the mostcomplex of our efforts, integrating call center operations with our distributednetwork of 150 offices in 49 states requires substantial capabilities. We'vebeen implementing Voice-over-IP over the last few years and combining a numberof systems efforts to address the CareIQ needs. Our systems in this area havetaken a full year longer to develop than we had originally anticipated.

Nonetheless, we have persevered andcontinue to believe that directed care networks will be important to the futureof PPOs. The more we have added to overall systems functionality, the more eachnew expansion has been complementary to the base we have build.

It is difficult to do justice tothe efforts of our product development professionals. These complex projectsare dependent upon the successful translation of business knowledge intosoftware expressions.

I would like to thank them andcertainly express our appreciation for the very long and steady record ofsuccess that our team has had. This is, I think, [partly a product], the consistencyof our strategic directions, but as always ultimately a credit to the people,who have undertaken all of those efforts on behalf of CorVel.

At this point, I would like toturn the call back to Dan to finish some of the other subjects.

Dan Starck

Thanks, Gordon. I'd just like toadd a few more items prior to opening the call to questions. Cash flow for thequarter improved $2.5 million with quarter ending cash balance at $9.3 million.On the AR front, our DSO improved to 48 days, down from 52 days at the end ofJune.

Stock repurchases, we didrepurchase 153,000 shares in the quarter. We spent basically $158 millioninception to-date and have repurchased 11.5 million shares. [Hard shares] atthe end of quarter were 13,861,000. Diluted EPS shares were 14,111,000.

In summary, we are pleased withthe progress we are making in a number of areas. We have been able to showgrowth in our more profitable lines while improving our internal efficiencies,resulting in a more profitable business. At the same time, we have been able tomake progress on our strategic initiative, Enterprise Comp. We will continue tofocus on areas that we believe will lead to growth opportunities from both the revenueperspective and earnings perspective.

This concludes my comments, andwe would like to open the call to questions.

Question-and-Answer Session


(Operator Instructions) Yourfirst question comes from [John Sabo] of Flintridge Capital.

John Sabo - Flintridge Capital

Good morning. Thanks for takingthe questions. My first question related to the Schaffer integration. Would youconsider that to be completely done and the economics of that integration fullyreflected in the September quarter. Or do you think that we are going to see alittle bit more of that into the next couple of quarters?

Dan Starck

No, we don't believe it was fullycompleted in the quarter. We made the acquisition on June 1st, and through thecourse of the September quarter, we were able to complete some of theintegration activities.

However, there is a fair number ofthem that could stretch into as far as early in the first quarter of next year,just converting some of the internal business as well as doing some of thesystem conversions. So, we don't believe that was fully recognized at thispoint.

John Sabo - Flintridge Capital

This may be difficult, but if youhad to put a percentage of that total economics, which you are thinking about,what percentage of that made it into the September quarter?

Dan Starck

That is a little difficult, but Iwould say it's probably 50%.

John Sabo - Flintridge Capital

Okay, all right, great. My otherquestion was clearly the company is making a lot of investment to help grow thecompany, and I noticed that the expenses did tick up a bit as a percentage oftotal. Would you expect that to come back down, or should we expect that tokind of stay at an elevated level as a percentage of revenue going forwardgiven everything that Gordon just described?

Dan Starck

We will make the technologyinvestments or spend the dollars, we think that are needed to advance. So, weare in a nice position to where we have the cash to make the investments and soI think you will continue to see the investments made. My guess is that itwould be fairly comparable to where it was last quarter. I don't anticipate asignificant downturn. We certainly, like I said, are in a nice position to beable to make significant investments, and we think that that best for thelong-term stretch for the business.

John Sabo - Flintridge Capital

Okay. And then just one more nowand I'll jump off. If you just take out the two acquisitions that you've done,it looks to me like the revenue was just down slightly year-over-year. Andobviously, I have to go back and look at the impact of that one last businessday, whether that had an impact.

But when do you think we mightactually start to see some more organic growth outside of the acquisitionactivities. Is that something that just can't mathematically improve as long asindustry volumes are under pressure, or do you think that some of these acquisitionsmight actually lead to some growth, but they just have a long tail in terms ofthe lead time to get there?

Dan Starck

I think that's probably justabout an hour response, John. But I think there is a couple of things. One, froman organic growth perspective, I think one of the challenges that's masked inour numbers is we've seen reductions in our Case Management business, while we'vegrown our Network Solutions business.

So purposely, we've reduced that CaseManagement business just from walking away from low priced business, and that'smasked a little bit of our growth in the aggregate. We are down on a basebusiness very slightly from year-to-year. But we believe that we are gettingsome traction in the Network Solutions business.

So, from an overall perspective,we've to obviously outpace the Case Management reductions with NetworkSolutions improvement, and we've done some of that in prior quarters. Howeverbasically, we've some pretty good headwind right now with where the claimsvolumes are in the industry.

So, we clearly have a strategy oftrying to make investments in our sales team try to get organic growth movingforward. However, if claim volumes continue to decline, it's pretty tough. Ifwe were able to just see flat claim volumes, we believe that we'd be able tocompete and actually win more business and have a growth rate that we believeis more acceptable at this point.

John Sabo - Flintridge Capital

Okay. And then do you have a viewon when that claim volume might turnaround?

Dan Starck

I wish we knew. I really don't.Gordon, any thoughts on that?

Gordon Clemons

I have been wrong on forecasting thatfor about 15 years consecutively. I think it is hard to say, but claims do seemto be bottoming out. I think severity has been up, which indicates that some ofthe claims that went away were perhaps less serious or perhaps not even real,who knows.

Also, I would add to what Dan saidin saying that there has been a change in our industry, where some of the majorTPAs wanted to take some of the business in-house in the managed care side andthat was the emphasis for us entering the Enterprise Comp business.

So some of the lack of growth inthe last, say three or four years has been from that change in our industry. Wehave responded with a strategic initiative that I think will be successful andso I guess without wanting to give guidance, and I wouldn't want to go close tothat.

I do think that as our EnterpriseComp projects come together, we will see the natural organic growth that weused to accomplish as a company, I think outside the TPA sector, CorVel hasalways had the growth we would expect in our industry.

John Sabo - Flintridge Capital

Okay, thank you.


Your next question comes from [DanHoover] with Hoover Capital.

Dan Hoover - HooverCapital

Yeah. Hi, I was just wondering,can you talk a little bit more about the clearinghouse product and what kind ofimpact that would have as far as revenues. I mean is that 10% additional pricefor customer, 20% additional, how does that affect your business model?

Gordon Clemons

This is Gordon. I will take thatone since I am probably more of a fan of the whole clearinghouse area. I thinkthe whole move by parties as large as Microsoft into electronic medical recordsis really the backdrop to this.

And it's not clear, I don't thinkexactly how profitable or even meaningful clearinghouse efforts will be in theinitial years. I'd say that CorVel in that business one because we've the toolsto be successful in it. They are already developed. This is not an entirely neweffort for us.

But also because it is likely, Ibelieve that the electronic processing of transactions and healthcare is in ourlong-term future, whether it's part of CorVel's business or just part of theindustry and I believe strongly that our technical capabilities give us a realadvantage in that marketplace.

Some of the outgrowth from beingin the clearinghouse business is not exactly clear today. But I'd say that ifyou are involved in the flow of commerce and healthcare, a company the size ofCorVel stands to gain substantially in the long-term.

But that long-term could be fiveyears away. I'd suggest that investors look at that as just a responsible moveby CorVel to take advantage of its position and not a precursor to some kind ofmeaningful financial differences in the coming couple of years.

Dan Hoover - HooverCapital

And can you tell us justhistorically as far as the workers' comp claims -- the number of claims, what'shistorically been a sign that those have bottomed in past cycles. Is it went likeyou said severity is up or rates start getting cut or is it just sort of moreeconomic?

Gordon Clemons

I think historically, we've nothad a big decline like this. This is a 10-year decline that well or even maybeas long as 15 years from the ultimate peak in the early 90s. Perhaps that wasdue to changes, perhaps, in legislation, let's say, or the environment for Compand as some of those laws began to be pulled back a little bit, there wasnaturally going to be some retrenchment of the market.

But underlying growth in theworkforce in the the ultimate driver of workers' compensation, if you take out the adjustmentfor benefit plans and some of the reforms that have taken place. So, I think, atsome point, we would expect the resumption of growth that was really always apart of our path. This drop has been far more than cyclical. It's been aninfrastructure change, I would say, that's gone on for quite a while.

Dan Hoover - HooverCapital

Okay, thanks.


Your next question comes from[Kevin Malloy with Satellite].

Kevin Malloy - Satellite

Hey, Gordon and Dan, how are you?

Gordon Clemons

Good, Kevin, how are you?

Kevin Malloy - Satellite

I'm feeling great. So, looks likeyou put up another pretty solid quarter in terms of year-over-year improvementin gross margins, gross margin expansion over a 100 basis points. And I'm just curious,we've talked a little bit before about this coming from mix shift to percent ofsaving type contracts, higher savings rates which you highlighted in your pressrelease where you're benefiting together with your customers and also a mixshift generally to Network Solutions?

What would you say the driverswere in this quarter on a year-over-year basis and how should we be thinkingabout the opportunity there over the course of the next few quarters?

Dan Starck

Kevin, this is Dan. We had aphenomenal quarter in our Case Management business. I mean completely oppositeof kind of where we've been for the past number of quarters. Revenues wereessentially flat to the June quarter and costs were down significantly. So thatwas a very nice contributor.

But we have continued to see verystrong performance in the Network Solutions business. We've seen some mix shiftand some growth in our out of network product, which has produced some nicepiece of business. But the big driver for the quarter was Case Management.

I alluded earlier to it to makeit sustainable is I think something that one of the things we have to do iscontinue to build the process underneath with the system to make sure that theworkflow continues to be driven that way, so that we can make that changesustainable.

But the real big change for usthis quarter again was the Case Management business, nice gains on the NetworkSolutions side as far as the margin percentage. But the big dollar gain wasactually in the Case Management business.

Kevin Malloy - Satellite

That's great. And I guess,secondly, can you elaborate a little bit more on the TPA opportunity, justadditional bolt-on acquisitions that you see, and what’s the environment like?Is it target rich, and what should our expectations be in terms of deploymentof capital towards those opportunities over the next year or two?

Dan Starck

Well, we are certainly keepingour cash in an opportunity to execute more acquisitions. I wouldn't call it atarget rich environment at this point. Certainly, we are interested inexpanding our footprint into the Midwest andinto the central part of the country.

However, the receptiveness by thenumber of that potential targets is just not there. So, at this point, we willkeep our powder dry, if you will. But we are also looking at how do also we jumpstart just to organic growth in that business.

Kevin Malloy - Satellite

All right. Thanks very much.

Dan Starck

You are welcome.


Are there any further questions?We do have a follow-up from [John Sabo] of Flintridge Capital.

John Sabo - Flintridge Capital

Thanks. Just to follow-up on thequestion about the claims volume. Do you think that sort of 10-year declineparalleled a decline in the manufacturing base in the country, and if so, doyou think that sort of, what's going on with the dollar and the potential forincreased exports coming out of this country, given where the dollar is? Yousee any signs that employment and manufacturing sector may turnaround and do youthink that could actually affect the volume of claims at some point?

Gordon Clemons

This is Gordon. I will take thatone. I'd say that, that's kind of the-- I the lay person's general perspectiveis that may be off-shoring of labor or the decline in the manufacturing sectorin the U.S.are drivers. They certainly are contributors, but the decline appears to bemore, I think, a part of the nature of the regulations and comps and just the kindof excesses that might have got into the system in the late '70s and throughoutthe '80s.

There are a number of factorsthat contribute to the number of injuries and to some degree, certainly thenumber of illegals working in the workforce who don't turn in claims has someimpact. The regulations though and the reform seems to be the biggest one. Somedecline in the manufacturing sector is a contributor.

To some degree, though, as I saidearly on, there has also been a mix change in those claims. And that is that wedo see growth in the severity of claims, in other words the more seriousclaims. So I think that perhaps this comp has been reformed, and perhapsmanaged care is become increasingly effective. Some of the smaller claims havejust declined or not shown up in the numbers as much.

John Sabo - Flintridge Capital

Okay. And Gordon, could you giveus an example of that change in regulations that may have affected the claimsvolume? Just so I could get a better understanding of what that might be?

Gordon Clemons

Yes, certainly. And California is kind of themother ship in workers' comp. Why would be? It's a 10% of the U.S. population, but it's 20% of the U.S.comp market. In Californiaat one point, it's more than 50% of your stress in life came from your job, youcould file for workers' comp that generated a lot of claims, that weredifficult to address for employers. That regulation has now been changed and Idon't think stress claims are much part of the workers' comp environmentanymore. So that took a bunch of claims out of the market.

A second one was a very stronginitiative in Californiato address fraud and some of the people participating in the marketplace thatwe're not delivering real care. So, I think, California is kind of a bell weather in thatregard. There have been a lot of efforts that are related but somewhatdifferent in other states. The big states in comp around the country tend to beCalifornia, Texas,Florida andmost of the states where there have been a number of initiatives to try toaddress the problems in comp.

John Sabo - Flintridge Capital

Now I understand that California is looking atactually increasing workers' comp rates for '08 after a fairly significantdecline in '07. Would that sort of track your comments on severity or is theresomething else there?

Gordon Clemons

Well, that’s interesting; I don'tknow. We're not in the premium part of the market, or in other words theinsuring markets, so we don't pay close attention to that. I thought lossratios were remaining quite low. There might be efforts to increase the comppremium rates. But well, I don't know, I probably shouldn't comment because weare just not very close to that. But I'd say loss ratios have been quite low overthe last few years.

John Sabo - Flintridge Capital

Okay, all right. And then, justone other unrelated question. Do you see the company continuing to buy backstock, I know, I think, Dan made the comment about trying to keep the powderdry. But, I mean, should we expect to see sort of similar levels of sharerepurchase going forward?

Dan Starck

Actually, at this point John, weare not planning on share repurchases. We are planning on, as I said, keepingour cash in order to execute acquisitions at this point.

John Sabo - Flintridge Capital

Okay. Would that suggest thenthat the amount of capital that you could apply to that acquisition strategycould be bigger than what you've done in these last two deals?

Dan Starck

Sure. We certainly do not carry-- as most of you know, we don't carry any debt. So, our ability to husband cashand then be able to utilize credit lines or debt facilities to financeacquisitions could be a meaningful size deal if we came across the right one.

We've had several that we passedon that were significant in size, but certainly for us, we want to be verycareful on how we evaluate deals. We want to make sure that we get both thecultural and business debt and deals that we've received from both the Schafferand the HRMS acquisitions, so that the economic value is really driven.

We are not buying just to buy. Weare certainly buying in an order to execute a strategic initiative, and that'swhy, what we are really trying to make sure we do is husband our cash and line upany credit or debt facilities that we need.

John Sabo - Flintridge Capital

You put in a credit facilityearlier this year and you have $10 million in cash. So, I guess what you say inthat, is that you wouldn't want to do both in terms of share repurchases andacquisitions?

Dan Starck

Right, at this point we wouldn't.

Gordon Clemons

And this is Gordon. We are alsolooking at other possible credit lines or access to other forms of credit, morejust on a contingency basis though in the event that we do come across a nice-sizedopportunity.

I think we are very excited aboutthe synergies between the companies we've picked up the last year and our basebusiness. The Enterprise Comp strategy has been working very nicely and is verysupportive of doing more of that. So, we just want to be a little careful onthe husbanding of our cash.

John Sabo - Flintridge Capital

Right. From my perspective, Ialways like it when companies buy back stock, but I like it even more when theycan find very good acquisition opportunities with good returns on investedcapital. And it seems to me like you've got that with this TPA strategy. So, I wouldbe all for seeing a few more acquisitions there. Okay, thanks a lot.

Dan Starck

Thanks, John.


And are there any furtherquestions? There are no further questions. Mr. Clemons, do you have any furthercomments.

Gordon Clemons

No. I think that's all for today.We would like to thank you all for joining us. And we will look forward totalking to you again next quarter.


This concludes our conferencecall for today. Thank you for your participation. Please disconnect at thistime.

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