Centene Corp (CNC) 2002 Q4 法說會逐字稿

Excuse me, I will now want to turn the call over to Lisa Wilson.

Please go ahead, ma'am.

Good morning, everyone.

I'm Lisa Wilson of Insight Communications, Centene's Investor Relations firm.

Thank you for joining today's conference call.

By now, you should have a copy of the press release issued by the company this morning.

If you have not received it, please call Donna Renner at 314-725-4477 and it will be faxed to you immediately.

We have with us today Michael Neidorff, President and Chief Executive Officer and Karey Witty, Chief Financial Officer of Centene Corporation.

This call is expected to last approximately 45 minutes.

The call may also be accessed through the company's web site at www.centene.com.

A replay of the call will be available shortly after today's call completion by dialing 800-642-1687 and entering access code 7463552.

Any remarks that Centene may make about future expectations, plans and prospects for Centene constitute forward-looking statements for purposes of the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by the forward-looking statements as a result of various important factors, including those discussed in Centene's year end report on form 10-k for the period ended December 31st, 2002 which is on file with the SEC.

Centene anticipates that subsequent events and developments will cause its estimates to change.

While the company may elect to update these forward-looking statements at some point in the future, Centene specifically disclaims any obligation to do so.

Now I would like to turn the call over to Michael Neidorff.

Michael?

Thank you, Lisa.

Good morning, everyone and thank you for joining today's call.

I am pleased to report that this quarter marked our 14th consecutive quarter of revenue, membership and earnings growth.

Membership at December 31, 2002, increased 74% to 409,600 from the end of the prior year.

Revenues were up 57% to $141.7 million dollars for the quarter, an increase of 41% to $461.5 million for the year.

Earnings per share was 57 cents for the quarter, up from 37 cents in the year ago quarter and for the full year was $1.94, up from $1.25 on a non GAAP adjusted basis as if our IPO had occurred on January 1, 2001.

These results, and I want to emphasize, that these results were generated by significant member growth, reasonable margins at the state health plan level and tight controls over corporate expenses.

2002 was a successful year for Centene.

And I am pleased to be able to say that during our first full year operating as a public company, we achieved our internal expectations.

This gives us continued confidence for our continued successes in 2003 and beyond.

Our goals remain the same, to be an efficient and predictable company and to continue to deliver on our promise, improving the health outcomes of our recipients and saving money for the states in which we operate.

We believe that health care remains an entitlement for all Americans.

An ongoing difficult and challenging economic climate and mounting concerns over state's growing budget deficits have resulted in a lot of sensitivity and concerns about the effect this could have on the managed Medicaid industry.

Over the past six months, a number of news headlines have contributed to the headlines or the category's volatility.

However, we believe that these turbulent times create opportunities for companies that have control over their costs and have proven to the states that their model works.

Medicaid managed care programs were created for low-income people.

Mainly women, children and the disabled.

We believe that current economic environment is an opportunity to work constructively with the state to restructure their programs.

The emphasis is to ensure that basic coverage is available to the maximum number of people at the lowest cost.

By removing unnecessary benefits, the states can maximize coverage to the growing number of uninsured while improving members' health outcomes.

The federal government has stated its own intentions to support or be supportive of the states by giving them more direct influence over what programs they provide above the basic benefits.

Traditional beneficiaries will continue to receive care and states will decide which less essential benefits will be reduced or removed.

We will challenge the states to work with us using our data, information and systems to accelerate the implementation of these changes.

This year, we'll be issuing to each of the states in which we operate a Centene report card to give both qualitative and quantitative assessments of our performance in those states.

We will include matrix focused on quality of care, complaint ratios and efficiency of claims payments as well as data on cost savings over traditional fee-for-service in the Medicaid population.

Importantly, third parties will compile these data, increasing the objectivity and credibility of the matrix and their conclusions.

Furthermore, the states may need to substantially change their cost structures.

Existing reports and data show that the primary care case management fee for service model is inefficient.

And the states will have to shift out of these programs if they want to reduce cost.

We will also share them where we think we can do better.

There will be, excuse me -- there will continue to be states that have problems but we believe that the states in which we operate are responsible and are looking for ways to continue to work with us to find cost-effective solutions.

For example, the state of New Jersey reached an agreement with the industry to remove the general assistant components of the population from their program.

That's the homeless.

This was an essential consideration for us in our decision to enter New Jersey.

While recognizing these are uncertain times, uninsured individuals will still require cost-effective and quality health care.

Two recently published studies, the Millman USA report on the state of Wisconsin and the Urban Institute Health Policy Centers study showed that the managed Medicaid industry reduced emergency room visits and increased primary care visits.

In Wisconsin, the magnitude of savings through the state was estimated at $56 million in 2002.

A study published in the Journal Inquiry stated that mandatory HMO's are likely to face the greatest challenge to ensure that beneficiaries have access to regular sources of medical care.

I'd like to spend a few minutes in shifting gears reviewing how we use our Banker's Reserve reinsurance entity.

Based on comments and questions that we have heard over the past few weeks, we believe there may be a misunderstanding on how we use our reinsurance entity to manage the purchase of reinsurance.

The clear facts are, one, Bankers Reserve is a reinsurance entity domiciled in Wisconsin and fully regulated by their department of insurance.

We not only meet -- [AUDIO FAILURE] I apologize, everyone, I don't know what happened.

I was commenting on our Bankers Reserve where I said that based on comments and questions over the past few weeks, we want to try and clarify the misunderstanding, the true facts are, one, Bankers Reserve is a reinsurance entity, domiciled in Wisconsin and fully regulated by their department of insurance.

And that we not only meet but exceed their statutory requirements.

Two, we use Bankers Reserve only to sell to our own entities.

No outside companies.

Bankers currently sell only to our Wisconsin subsidiaries.

Although we do have plans to expand our sales to the other HMO subsidiaries.

All other entities still buy appropriate levels of stop loss insurance from third parties.

Four, the contracts between Bankers Reserve and the HMO's are state-approved contracts with state-approved rates.

Because they are intercompany sales, the revenue expenses of Bankers Reserve are eliminated on the income statement and the reserve requirements are fully consolidated on our balance sheet.

Bankers Reserve helps us manage risks among our subsidiaries.

Our entities continue to purchase insurance from third parties, and its operations do not change the risk profile of our company as a whole.

Since Bankers operations do not affect our financials or our risk profile, we have not historically described its operations to investors in any significant detail.

This may have led to a misunderstanding on the part of a few investors.

I hope this clarifys the issues for those investors and that it has now found a comfortable bed.

We are growing our business organically and as previously disclosed, we are evaluating opportunities, including Medicaid and Medicaid-related specialty companies.

We believe as we have discussed for the past year, that this multi-line approach together with adding new states will be the most appropriate diversification strategy for our business going forward.

It will also be important in the current environment to use these specialty companies to support the management of cost strength.

As previously discussed, we have solidified our rates with the 2003 contract year and have in place effective margin protection programs.

The integration of our New Jersey acquisition and their conversion to our system platform went as planned and was fully implemented an December 1 of 2002.

The expansion of our claims facility is on schedule, and we're moving into it as we speak.

We anticipate realizing additional and increased efficiencies in claims payments in the first half of 2003.

This year also showed an increase in the depths of our management group.

John Tatters was hired to drive our Specialty Operations and Dan Packwin to grow our Healthplan Business group.

Among other important additions, is John Facey, Director of Pharmacy.

He is already implementing programs that will help us main -- minimize the increases in our pharmacy costs.

Karey Witty will discuss the balance of our cost trends for 2003 in a few minutes.

We will continue to build financial transparency to our investors and to deliver on the expectation of conservatively calculated SGA to single digits by the fourth quarter of 2003.

All of us recognize the challenges of 2003, and we believe it is companies like Centene that emerge from these years stronger than ever.

Before we move on, I want to inform you that I may be considering the sales of a few shares of my Centene holdings over the next four weeks.

Four to six weeks.

I have been leading cheers for Centene since our IPO and continue to have high personal expectations for its future success.

In this case, however, my Centene equity continues to wrap a fairly high percentage of my personal assets.

I may be able to make a personal real estate acquisition, and I currently expect to fund it in part through the sales of a small percentage of my stock.

And we are talking about a small amount.

In the next couple of weeks, should the opportunity present itself, and it may not be consummated, I would file a Form 144 covering sales of 50 to 60,000 shares.

I want to take this opportunity to not only explain the reasons for these sales, but to let people know this is a one-time event, but to state unequivocally that this sale should not be perceived as a decrease in my enthusiasm for the future Centene or its common stock.

It reflects my personal circumstances, not those of Centene.

Now I'd like to turn it over to Karey Witty.

Thank you, Michael and good morning, everyone.

To recap the highlights of the fourth quarter of 2002, membership increased 74% versus the same period last year to 409,600.

We had solid growth in each of our markets, adding 113,500 members during fourth quarter for a combination of organic growth and contract acquisitions through Our University Health Plan joint venture and our acquisition of Texas University Health Plan F- Chip business and three Texas markets.

Same-store membership grew by 98,000 throughout the year representing a 41.8% organic growth rate.

During the fourth quarter, two smaller plans exited the Austin, Texas market.

As a result, our Texas health plan increased its membership by approximately 28,000.

This increase includes 12,000 lives that we will be managing for the State of Texas on an interim basis, and they will become part of the normal reprocurement process scheduled for later this year.

For the fourth quarter of 2002, revenue was $141. 7 million, an increase of 57% compared to $90.3 million in the fourth quarter of 2001.

Net of acquisitions, revenue increased $37.2 million or 41% versus the same prior year period.

The health benefits ratio, which reflects medical services costs as a percent of premium revenue was 82.5% during the fourth quarter, within the company's target range of 82.0% to 83.5%.

This compares to 82.8% for the same period in 2001.

We remind that you our health benefits ratio will fluctuate on a quarterly basis within this targeted band.

General and administrative expenses as a percent of revenues improved 20 basis points to 10.8% from 11%.

Our G&A ratio continues to trend downward and we remain committed to achieving a single digit G&A ratio by Q4 of 2003.

Investment and other income for the fourth quarter of 2002 was $900,000 a reduction from $1.1 million in the fourth quarter of 2001 largely stemming from a change in the company's investment strategy.

You may recall that this change in strategy was discussed on prior conference calls.

Centene is now fully invested in tax advantaged securities which resulted in a 36.2% effective tax rate for the quarter.

Earnings from operations increased 68% to $9.6 million.

Net earnings improved to $6.8 million or 57 cents per diluted share versus $3.9 million or 37 cents per share non GAAP in the prior year quarter.

At December 31, 2002, the company had cash and investments of $165 million of which approximately $50 million is free from state regulatory requirements.

Total assets were $210 million and we remain debt free.

Premium and related receivables increased $8.5 million during the quarter associated with the acquisitions of UHP and the S-chip business in Texas.

Medical claims liabilities totaled $91.2 million representing 71.8 days in claims payable influenced by the company's acquisition of UHP.

This is consistent with previous guidance.

Net of the acquisition, days and claims payable were 64.5 within our stated target range of 60 to 65 days.

We anticipate days and claims payable to normalize in the first quarter even after giving effect to UHP's operations.

We continue to see improvement during the fourth quarter in the average days from the date of the receipt of the claim to the date it is paid as well as an increase in our EDI claims submission.

Nonetheless, consistent with our previously expressed expectations, claims inventory levels increased at year end due to our closing of the UHP acquisition on December 1, 2002.

For the quarter ended December 31, 2002, cash flows generated from operating activities were $17.6 compared to net income of $6.8 million.

For the quarter ended December 31, 2002, revenues increased 41% to $461.5 million from $326.6 million in the year ended 2001.

Net of acquisitions revenue increased $120 million or 37% versus the same prior year period.

The full-year health benefits ratio was 82.3% also within the company's targeted range compared to 82.8 % for the year ended December 31, 2001.

The general and administrative expense ratio improved 70 basis points to 10.9% from 11.6%.

Earnings from operations were $31.6 million for the year ended December 31, 2002, an increase of 71% from $18.5 million in 2001.

Net earnings for the year improved $25.6 million versus $12.4 million in the prior year.

Exclusive of the one-time dividend, earnings per share of $1.94 reflects a 55% increase over the non GAAP $1.25 per diluted share for the same prior year period.

For the 12 months ended December 31, 2002, cash flows from operating activities increased 31.4% year-over-year to $39.7 million.

And a few comments relative to our guidance.

We anticipate full-year 2003 revenue in the range of $695 million to $710 million.

And net earnings in the range of $2.55 to $2.60 per share.

We expect organic membership growth rates of 13% to 15%.

For the first quarter of 2003, we anticipate revenue in the range of $168 million to $172 million and net income in the range of 58 cents to 60 cents per share.

And with that, we will open the call up to any questions.

Thank you, sir.

If you would like to ask a question, press star then the number one on your telephone key pad.

If you would like to withdraw your question, press the pound key.

One moment for your first question.

Your first question comes from John Szabo with CIBC.

Good morning.

Good morning.

Just a quick question on UHP.

In the cash flow statement, I guess it looks like the acquisition of the joint venture net of cash received was 7.3 and then you had investments and joint ventures.

So is that to assume that the net purchase price excluding cash was, you know, roughly $10 million?

That's right, John.

Can you tell us how much cash was received?

Net cash received from UHP, I can tell you what if was at year end, anyway.

It was approximately $3 million.

Okay.

And then, could you just review in terms of your projection for accretion, sort of the top three things that would lead you to that accretion?

Is it mostly SG&A or medical expense savings?

If you just kind of scale it a little bit for us?

Sure.

We had guided previously, John, on UHP revenue in the range of $115 million to $125 million.

And EPS in the range of 20 to 24 cents for the full year 2003.

Mm-hmm.

We spoke on our call last quarter about the loss ratios of UHP seeing those operating in the mid 80s.

I made comments in my prepared statements about a continued decrease of our G&A ratios.

So certainly we expect to see that downward trend to continue.

Well, of that 20 to 24%, I mean, how much of it relates to the medical loss ratio improvement versus the G&A leverage?

The 20 to 24 cents per share, is that your question?

Yeah in projected accretion.

Right, right.

What would be the relative contribution?

I would say it's, again, from the medical loss side, operating at the mid 80s, we will be able to reduce our G&A percent.

So if you wanted to split out accretion, let's say it's roughly 50/50, to more heavily weighted towards G&A.

Okay.

Thanks.

That's all I have.

Okay.

Your next question comes from Ed Shannon with US Bancorp Piper Jaffray.

Good morning, Ted.

Hey, guys.

Can you talk a little bit about your medical days or your medical reserves.

Have you ever had a negative development in your reserves in the past?

I think maybe if we had it, it was back, what, Karey, 1998 or something?

Ted, we had unfavorable development in 1999 relative to 1998 dates of service, yes.

Okay.

But it's -- and was that related to Medicaid business or is that related to when you guys still had some commercial lives?

Right.

Part of that is commercial as well.

[INAUDIBLE] That was during that time when we were doing our stand down and cleaning up the systems and fixing it.

Right.

I mean, that was part of when the turn around was really getting going.

That's right.

Exactly.

And then can you talk a little about activities down in Texas?

And I know you had a couple of people exit the market in Austin.

What do you see for the viabilities of your competitors down there?

Do you think more people could potentially exit the market over the rest of '03 or, you know, could you talk a little bit about your membership expectations down there next year?

Yeah, and I think, Ted this is not just Texas, but all of our markets.

When you see the smaller players, and they don't necessarily have bad books of business, but they have - just don't have the size or the scale necessary.

Mm-hmm.

To continue to survive as the market does consolidate in this way.

And Texas is one of them, we do see opportunities where we may be a consolidator in Texas and other markets as we just experienced in Q4.

That potential exists.

I'm not saying it will happen, but it does exist.

So those would be consolidations you would be able to do without making acquisitions potentially?

Yeah.

And then can you talk a little about the acquisition outlook?

Do you think you guys see more opportunities in - both on acquisitions or potentially new markets for you guys?

I think our strategy stays very consistent.

We will of course always look at in-market first when those opportunities exist.

It's a lower risk profile.

We'll continue to look at new markets.

We're looking at the specialty companies.

All is I can say is we have a very full pipeline, and we've been talking about maybe adding some more help in that area.

Just continue to work through it.

So we see some opportunities.

Okay.

Thanks a lot.

Your next question comes from Chris Sergeant with Stifle, Nicolas.

Good morning.

Excellent quarter thank you very much.

Thank you.

Of course our line cut out just as you were beginning the commentary on Banker's Reserve and I lost a good 20 seconds of it before I could get back in.

Could you give me the short fly by on that again, please?

Sure.

I'd be glad to.

Essentially, I covered that this is a state regulated Wisconsin domicile company.

It is fully regulated there.

Its reserves are there, and that we had -- we actually exceed the state's reserve requirements.

I covered the fact that while we only sell in Wisconsin now, we do hope to sell that at the other entities as the states approve the contracts and the rates that the intercompany charge so that we covered that.

We said that the entities have their own stock lots as well, that they buy from our side, so it's a combination.

And that the contracts between the HMO's and the entity are all state approved.

That when one looks at the income statement, the revenue and expenses are eliminated 'cause they're intercompany sales.

And that the reserves for that entity are fully reserved for on our balance sheet.

So it's really, I guess, in the past because it does not change the risk profile, that's about as much detail as we've given or we think supports the investor community.

Good.

Thank you.

Just looking at the model going forward, I appreciate the conservatism in the overall commentary as it relates to bottom line given the top line momentum.

Is there anything inherently in the New Jersey acquisition by example that would be holding the bottom line down as compared to the revenue move or is it just, you know, keeping that trend up?

Under promise, over deliver sort of posture going?

Chris, I think what you will see with this company is that one, we are very inquisitive .

Two, we are going to be very conservative in our estimates for UHP for some period of time.

So certainly, that conservatism in the claims liability estimates falls out through the accretion.

Good.

Keep it up.

Thank you.

Your next question comes from George Hill with Thomas Weisel Partners.

Yeah, hi, it's Steve Halper.

Good morning.

How are ya?

Is there anything at the New Jersey plant that would prevent you from getting your medical loss ratio down closer to 82%, 83% or is that just gonna stay in that mid 80s range?

I'll start off and then Karey may add to it.

I think there's a combination here.

I mean, we do have the SSI population in there.

And as we've talked about in the past, we are going to start to report different metrics of by product line just for that reason.

But we see nothing that will, at this point in time, keep us from meeting our targeted -- overall targeted goal of 82 to 83 1/2 across the company.

That's how we look at it.

And the cost -- I should say the margin protection programs are in full swing in terms of implementation in New Jersey, but we don't see if there's anything that would prevent us from achieving that at this point.

Did you say during the quarter that the organic growth rate and revenues is 41%?

I have it marked down, 41% net of acquisition.

Is that the organic growth rate excluding New Jersey?

Are you talking revenue or is that the revenue organic growth rate Q4 over Q4.

So that was 41%?

Correct.

Thanks.

Mm-hmm.

Your next question comes from Ed Kroll with SG Cowen.

Good morning.

Good morning.

I've got a couple of modeling-type questions, quick ones then I'll ask more of a big picture-type question, if I may.

First, the minority interest that you've got on the income statement, I presume that's from the New Jersey acquisition.

That's right, Ed.

What kind of -- how should we model that going forward, I guess, is the easiest way to ask it?

Well, I think again, relative to my earlier comments about conservatism in claims liability estimates.

Again, Ed, we see mid 80 loss ratio in New Jersey.

SSI is a, while it's not a new product for us, this is a great opportunity for to us start small, let's say with SSI. and grow that product, which is something that we have an intention to do.

So we're going to be very conservative with this health plan in its first year of operations with Centene.

Okay, so is it fair to say that for approximately one month, the 116,000 if Q1, '03 is the first full quarter with New Jersey, maybe we just multiply that by three?

No, Ed.

The minority interest you are seeing on the income statement for the quarter ended obviously is only the one-month activity that we consolidated for our New Jersey acquisition.

This is essentially our sharing the 20% interest with our minority partner of the losses in the health plan for the month of December.

So I think to extrapolate that, assuming that there would be a loss going forward, I would not take that approach.

Certainly we anticipate that we will generate income, obviously, from this health plan.

But again, you are seeing the effects of our conservatism in the December close compounded by the transition costs incurred having generated only one month's revenue for New Jersey.

Okay, great.

So I mean, you should be making, based on your statements regarding integration, you should have made some operating progress --

Right.

In the first quarter.

Okay, thanks on that.

And then, how about the investment income on a quarterly basis going forward now that you're pretty much in tax-free securities?

Right.

We did experience only roughly about a 2% return in Q4 and you see the benefit of the tax advantage securities fall out in the income tax rates.

I think going forward, Ed, certainly a million dollar estimate per quarter is a reasonable estimate.

And how about final question, the tax rate going forward.

Right.

Again, I think full year is about 38% for 2002, and I would keep that consistent for '03 as well.

Got it.

So your new guidance, you raise the guidance slightly.

That assumes a 38% rate?

That's right..

And then on a larger picture, what are you seeing as or what are your discussions regarding next year's rates with your state customers?

What's it sounding like?

If you could just give us some color on that.

Yeah, it's still early.

As you know, the states don't deal with these too quickly.

What we're doing is our local plans are actively engaged at the legislative area.

Helping them look at ways to ensure that they continue the basic coverages and talking about what are some of the frills that can be identified.

And, you know, we still believe that the state's recognize their obligation due to increase or to maintain this coverage.

In fact, some of the recent publications are showing that the rolls continue to grow.

So I think we'll see some offsets by still higher roll growth, but we're trying to offset just the overall benefit level, Ed.

And we're encouraged with that.

It's an appropriate thing to do.

A drug formula in the state can save them a lot of money and can make those kinds of things work.

Elimination is of some fringe benefits or eliminating to what's really necessary can save money.

In the past, the states have added benefits that they'll probably use now as an opportunity to remove.

We're comfortable with that approach.

Right.

Thank you very much.

Once again, if would you like to ask a question, please press star then the number one on your telephone key pad at this time.

Your next question comes from Todd Allen with Kenny Securities.

Good morning, guys.

Congratulations on a good quarter.

Thank you.

I was hoping could you give me a description of SSI.

If you describe that block of numbers, I think I might have missed it in the discussion.

SSI is supplemental security income.

It is essentially the blind agent in the disabled group of the Medicaid book of business.

I should highlight that the premium generated for an SSI member relative to a TANIF member is substantially higher in the range of between, let's say $400 to $600 per member per month, whereas our Tanif is generating, on average, in the range of about $130 to $135.

These are chronically ill people?

I mean --

right.

They're severe and it's ongoing management and it's an important segment that some of our states are now talking to us about helping to manage recognizing that there are savings to be gained there with better outcomes.

We see that as an opportunity.

Also, what is the premium per member per month for the New Jersey acquisition?

Todd, it's right at $200.

Again, the SSI membership is driving that upwards.

Okay.

And did you mention what percentage was SSI there?

How many lives?

We highlight that for you.

It's very small but we highlight that for you in the supplemental table.

Okay.

We have had historically some SSI lines in the State of Texas that we only manage for the state.

We are not at risk for those lives but we do provide management services for the State of Texas on those lives.

oKay.

And then finally, you guys made a very interesting observation at one of the recent conferences stating, I think the number was -- you guys acquired 1.6 full time employees to service 1,000 lives?

Right.

Is that a ratio that we can expect to hold going forward?

Yes.

It's one that we keep vigilant on.

If we can move to it down, we will in terms of fewer people managing.

That's the emphasis.

We had a question earlier, you're going to manage the health care costs and you are going to -- and your trends.

And you are going to really control your costs and just keep driving that SG&A and our business, FTE's is a big part of the SG&A.

Great.

I think you've answered all my questions.

Thanks a lot and congratulations on an excellent quarter.

Thank you.

You have a follow-up question with George Hill with Thomas Weisel Partners .

Hi it's Steve Halper again.

Within that SSI population, do you have any duel eligibles and what do you do with them?

We currently do not have the dual eligibles.

Great, thanks.

Your next question comes from Vivac Conom with August Partners.

Hi, I just had a question.

Can you just remind us what the same-store enrollment growth was in the quarter and what is the expectation going forward?

Same-store enrollment growth sequential Q3 to Q4 was 14%.

Q4 versus Q4 was 42%.

Okay.

I said in my prepared comments, we should expect to see in the range of 13% to 15%.

Thank you.

Year-over-year.

Year over year.

Right, thanks.

There are no further questions at this time.

Well, we thank everybody, and we look forward to the next call.

Thank you.