PRSC

The Providence Service Corporation (PRSC)

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Industry: Health Care
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The Providence Service Corporation (PRSC)

Q2 2008 Earnings Call

August 7, 2008 11:00 am ET

Executives

Alison Ziegler – Cameron Associates

Fletcher Jay McCusker - Chairman and Chief Executive Officer

Michael N. Deitch - Chief Financial Officer, Vice President, Secretary and Treasurer

Craig A. Norris - Chief Operating Officer

John L. Shermyen - Chief Executive Officer, LogistiCare Solutions, LLC

Thomas E. Oram – Chief Financial Officer, LogistiCare Solutions, LLC

Analysts

Analyst for Kevin Campbell – Avondale Partners

Robert J. Labick, CFA - CJS Securities

Kevin Ellich - RBC Capital Markets

Gregory Williams, CFA – Sidoti & Company

Jack [Sure] – SunTrust

Christopher Robertson – Cardinal Capital

Richard Close – Jefferies & Company, Inc.

Presentation

Operator

Welcome to the second quarter 2007 Providence Services Corporation earnings conference call. (Operator Instructions) I would now like to turn the call over to Alison Ziegler with Cameron Associates.

Alison Ziegler

Thank you for joining us this morning for Providence's conference call and webcast to discuss its financial results for the second quarter ended June 30, 2008. 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 August 14. The replay number is 888-286-8010 with the pass code 83942965. This call is also being webcast live with a replay. To access the webcast go to www.ProvCorp.com and look under the event calendar on the IR page.

Before we get started I would like to remind everyone of the Safe Harbor statement included in the press release and that the cautionary statements apply to today’s 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 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, August 7, 2008. The company may choose from time to time to update them and if they do will disseminate the updates to the investing public.

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

Fletcher Jay McCusker

Our management group is all here in Tucson. With me today is Michael Deitch, our CFO; Craig Norris, our Chief Operating Officer; John Shermyen, the CEO of LogistiCare; and Tom Oram, the CFO of LogistiCare. We will all be available to answer your questions after our scripted remarks. Hopefully we can address many of the issues related tour recent guidance revisions and communication around those revisions before our Q&A session.

Let me begin. We fully expected to achieve our Q2 forecast until we were recently advised by a payer facing an unknown 2008/2009 budget that they have elected to withhold funds associated with the 2007/2008 year until they had a clearer picture of their forthcoming budget. GAAP prevents us from recognizing this anticipated revenue. Since mid-June the budget picture has become clearer in most of our markets. However there are a number of unresolved issues which we will report on here in more detail. Rather than withdraw our guidance entirely we elected to forecast a base case and also communicate what our payers are telling us regarding the potential upside to the base case. We elected not to hold an immediate conference call so we could continue to gather the facts affecting the forecast and hopefully have some additional visibility between the warning and our regular scheduled call.

We also wanted to provide specific market details which we have never done so we wanted to be assured our field staff was involved that so we did not alienate a payer or lose a competitive advantage by disclosing proprietary data. The biggest challenge we faced this season over any year in our history is trying to predict the timing of state budget resolutions and create a clear forecast when many state budgets remain unclear or evolving. Normally our state budgets are completed in April and we have good visibility into the fiscal year. We have always communicated precisely what our payers are telling us but with the legislative delays, the rapidly declining economy and reduced tax revenues many states have been left reeling and struggling to budget revenue and expenses. This uncertainty has caused us to be conservative in our guidance as of July 1, 2008 the new budget year.

We currently contract in 43 states. Most of them have complete budgets, rates are set, renewals are done. We still have some markets that are struggling with complex issues where the budgets remain unclear or where the payer has implemented measures to reduce expenses in the short term beginning July 1. Part of our news update is that our social services segment did not have a single contract terminate during this very uncertain summer. The NET segment had six competitive renewal situations in existing markets. We are pleased to announce that the NET segment prevailed in five of those six markets holding on to about $90 million of annual revenue for five years or $450 million worth of renewals. We have only one NET contract worth about $10 million up for annual renew in 2009. Our NET loss in Kentucky was not assumed in our forecast and we could not foresee the general slowdown in the 2008/2009 fiscal year. John will offer more detail during his remarks.

Our original forecast assumed $3 million of rate and new business operating income in Qs 3 and 4 for LogistiCare. We have now eliminated most of this in our base case forecast. We have lowered our forecast by $0.36 for the second half. $0.13 of that is related to LogistiCare. Likewise California is potentially becoming a problem for us. The Governor has asked for an across the board 10% cut. The Legislature is resisting. The Session remains ongoing even today with the Governor taking steps recently to cut salaries and terminate positions. Arizona has recently advised us it does not have a departmental budget and may not have the full picture until October. British Columbia has recently advised that it will enforce revenue caps on a per client basis. North Carolina has elected to redesign its system of care and is reducing the number of authorizations in the authorizations in the meantime. Pennsylvania too has a system redesign proposal developing and is also reducing authorized levels of care.

We intend to work through these issues but have begun to see margin erosion that will likely continue. These reductions in revenue did not create a material problem in the first half but would be dramatically off our second half forecast and we cannot predict a resolution timeframe. We believe we’ve captured the downward pressure we are facing as a result of the uncertainty around the 2008/2009 state budgets. Let me spend a minute outlining some of our upside. We expect some rate consideration with LogistiCare payers but will report that now if and when it occurs. We expect procurement announcements in the near term related to over $100 million annually of new business. Another $70 million of previously reported pipeline activity has been delayed until 2009 not withdrawn.

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