Centene Corp (CNC) 2003 Q2 法說會逐字稿

Good morning.

My name is Latoya (ph) and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Centene Corporation second-quarter earnings release conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer period. (CALLER INSTRUCTIONS) Ms. Wilson, you may begin your conference.

Thank you.

Good morning, everyone.

I'm Lisa Wilson of Centene's Investor Relations department.

Thank you for joining today's conference call.

By now you should have a copy of the press release issued by the company yesterday after the close of market.

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 website at Centene.com.

A replay of the call will be available shortly after today's call's completion by dialing 800-642-1687 in the United States, or 706-645-9291 from abroad, and entering access number 148-8323.

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 these forward-looking statements as a result of various important factors including those discussed in Centene's form 10-Q for the period ended June 30, 2003 and year end report on form 10-K for the period ending December 31, 2002, both of which are on file with the SEC.

Centene anticipates that subsequent events or 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.

Thank you, Lisa.

Good morning and thank you, everyone, for joining our second-quarter 2003 results conference call.

This quarter marked our 16th consecutive quarter of record revenue and earnings results.

Membership as of June 30, 2003 increased 57 percent to 438,700 from the year ago quarter, of which 52 percent is organic and 48 percent is from acquisitions.

Revenues were up 73 percent to $186.2 million for the quarter and our earnings per diluted share was 43 cents as compared to 30 cents in the year ago quarter split adjusted.

This was another quarter where we kept our heads down and continued to execute on our business plan.

Our numbers are predictable and sustainable.

We have several reasons to anticipate our future results, and I would like to discuss both our accomplishments and ongoing initiatives.

Since our last call, we announced a three for two stock split which was effective on July 14, 2003.

This decision reflects our continued strong financial performance and confidence in our ability to achieve our stated objectives and growth targets.

We also took this action to enhance our growing liquidity and act in the long-term interest of our shareholders.

As announced early last week, we filed a preliminary prospective (ph) with the SEC for a primary offering of 3 million shares of common stock.

We intend to use the net proceeds for working capital and other general corporate purposes, including acquisitions.

Lehman Brothers, SG&A Cowen, Thomas Weisel Partners and (indiscernible) are serving as managing underwriters with Lehman and Cowen acting as joint book running lead managers.

We believe this is the appropriate market timing to add to our balance sheet and support the next phase of our growth plan.

We continue to have a full pipeline of identified potential acquisition targets, and we continue to see a number of compelling opportunities to grow the business in both Medicaid managed care and specialty services.

Our goal remains the same, to provide ongoing health-care access and benefits to the poor Medicaid population while continuing to save the state's money.

In spite of more challenging difficult times for the states, the legislative environment remains positive.

Less than a month ago Congress appropriated an additional $10 billion to help state governments pay for Medicaid programs and protect their rates to providers.

These funds, which represent an increase in Medicaid matching funds that states receive from the federal government, were part of the jobs and growth tax relief reconciliation act of 2003.

Last week the Health and Human Services department announced a plan for distributing that money.

Funds are slated to begin flowing this quarter and they continue until June 30, 2004.

Each state's allocated increase depends on the amount that the state spends on Medicaid.

And the funding is available only if a state does not restrict its Medicaid eligibility requirements after September 2, 2003.

This fund allocation model supports our business premise.

Now I would like to discuss our programs in each of the markets in which we operate.

We continue to grow our business on a balanced basis, and this growth was in line with our expectations across the board.

In Texas we had strong organic growth, particularly in San Antonio and El Paso service areas.

We also benefited from the retention of the 12,000 lives in Austin that were assigned to us on a temporary custodial basis late last year.

Those lives will remain in our system until the state completes its reprocurement process which it expects to commence in mid 2004.

During the quarter we entered a definitive agreement to acquire the Medicaid related contract rights of HMO Blue Texas in the San Antonio market for the Bear County service area.

This transaction gives us the right to serve an additional 21,000 Medicaid recipients in a market where we currently have 24,000 Medicaid and SCHIP members.

Texas remains a strong and growing market for Centene, and that will continue to be important to us and our future growth.

The acquisition also gives us the opportunity to serve these new members with our specialized programs such as NurseWise and START SMART For Your Baby, and to have an increasing positive impact in a market where our local branding and identity is already strong.

We expect that these lives will be added into our membership base as of August 1, 2003.

Growth in Indiana was strong.

On our last call we commented that the state changed the enrollment process and now requires Medicaid recipients who also receive food stamps to certify eligibility every three months versus once a year and in person.

As you'll recall, this cost us some membership growth in the first quarter.

As we suggested would be the case, we will be able to work effectively with the state on this issue and now have put this matter soundly behind us.

Our largest market, Wisconsin, also showed strong growth.

The numbers speak for themselves.

Our entry into the state of New Jersey is going according to our implementation plan and our predictive modeling.

The health benefits ratio has stabilized for SSI and, although our run rate was down a small amount, we are pleased with our progress and feel strongly about the future potential of operating in New Jersey.

Now I'd like to update everyone on the status of the margin protection program for the states in which we operate.

In Indiana back in January, through a combination of policy changes and rate increases, we received an averaged blended increase of 2 percent.

And we are comfortable with the trends there.

Our health benefits ratio is at the low end of our targeted range at 82 percent in this market, indicative of our efficiency there.

Also in January in Wisconsin, we remind you, we received a 4.3 percent rate increase and are working with the legislative process for the '04 and '05 budget.

In New Jersey, the regulators granted a 6.2 percent increase for our core business.

We continue to negotiate on SSI rights and our weighted CMS approval to expand our footprint throughout the state and be operating in all 21 counties in New Jersey.

I am pleased to report that Texas has granted a 6.3 composite rate increase subject to CMS approval, which will take effect starting on September 1, 2003.

By contract area, these increases are as follows: 10 percent in San Antonio, 7.1 percent in Austin; and 3.2 percent in El Paso.

Once again, these increases demonstrate that our data driven approach is working.

These figures, or this figure does not factor (indiscernible) current plan to reduce the overall provider fee schedule between 2.5 and 5 percent, or the HMO premium tax of 1.75 percent.

It is estimated that the net effect of these two factors will equate to an additional 1.5 to 2 percent margin protection.

Overall, we believe that the reduction in the physician fee schedule provides an incentive for the physician to enhance their earnings capability to our model while improving patient care.

We currently expect the state to buy down rates with benefit changes in the SCHIP business.

Turning to some financial methods, which Karey will discuss in more detail in a few minutes, our SG&A for the core business is down to 10.3 percent for the second quarter of 2003, and we are on track to achieve a single digit run rate in the fourth quarter.

I would like to remind you that these numbers do not include interest income in the revenue line and leave all the other SG&A expenses including depreciation and amortization.

SG&A for our specialty companies was slightly outside the range that we guided due to the startup of the behavioral health business in Wisconsin and the costs associated with new initiatives in our (inaudible) business.

We are presently working on our policy for reporting the Medicaid tax premium.

We believe that it is more transparent to investors and more conservative in general to deduct Medicaid premium tax from revenue so that it never passes through as a revenue benefit.

We believe that this is preferable (indiscernible) rather than including the premium tax on the SG&A line.

We are consulting with our auditors to confirm their approach is consistent with GAAP.

If we ultimately determine that the appropriate accounting treatment requires inclusion on the Medicaid premium tax in SG&A, we will highlight this to you in the third and fourth quarters.

I would also like to note to you two additional developments addressed in the form 10-Q we filed yesterday.

First, we determined that it made economic sense for us to purchase the building in which our corporate headquarters are located.

This building recently underwent new management, and we anticipated that the building either would be sold to a financial investor or would suffer a decline in the quality of services received by us.

After consideration of the alternatives, we decided it was preferable for Centene to purchase the building and to avoid the disruption of having to move our corporate headquarters.

We presently occupy about 40 percent of the building.

We acquired the building earlier this month for a price of $12.5 million, which we paid in cash.

We are currently finalizing with our bank an $8 million nonrecourse mortgage loan to fund -- finance that portion of the building.

Secondly, Aurora Health Care recently filed a suit against our Wisconsin subsidiary, Managed Health Services, with respect to contract interpretation.

MHS disputes Aurora's claim and plans to defend that matter vigorously.

This suit is just under way and, as you know, these matters can take a long time to reach resolution.

There is not much more that can be said at this point except that we do not expect the matter will have a material impact on our business.

We continue to believe that the most compelling opportunity for Centene is to build a company that combines Medicaid managed care services and related specialty companies including behavioral health services.

GPA has completed the implementation of their initiatives in Wisconsin and has the requisite foundation in place to begin to execute on their plans.

We are now fully operational in Wisconsin, and we are pleased with our progress to date which is in line with their objectives of offering and influencing better outcome for this specialized and often underserved population.

Our entry into behavioral health in Wisconsin was particularly timely in that the Medical College of Wisconsin, our previous provider, has determined to exit the behavioral health business.

We are pleased to have assumed responsibility for these members in a timely fashion.

Building on our experience in Wisconsin, we hope to be in a positive position very soon to expand and serve other markets in behavioral health.

Overall, our medical trends are in line and the business continues to be predictable.

With that, I would now like to turn the call over to Karey Witty.

Thank you, Michael, and good morning everyone.

To recap the highlights of the second quarter of 2003, membership increased 57 percent over the same period last year to 438,700.

Organic membership increased 84,000, representing a 30 percent organic growth rate year over year.

Membership increased 19,400 during the quarter, representing a 4.6 percent growth rate over the sequential quarter.

New Jersey membership was stable as expected, and we saw strong organic growth in Wisconsin, Indiana and Texas.

For the second quarter of 2003, revenue was 186.2 million, an increase of 73 percent compared to 107.6 million in the second quarter of 2002.

Net of acquisitions, revenue increased 40.8 million or 38 percent versus the same period last year.

Our Medicaid health benefits ratio, which reflects medical costs as a percent of premium revenue, was 82.4 percent compared to 82.0 percent for the same period in 2002.

The consolidated health benefits ratio was 83.3 percent during the second quarter within the company's targeted range of 82.0 to 83.5 percent and was influenced by our entry into the at risk SSI category through our New Jersey health plan.

The addition of these SSI at risk members caused our health benefits ratio to increase as anticipated.

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

At June 30th the health benefits ratio for the SSI group stabilized at 103.3 percent from 104.2 percent for the first quarter.

Our at risk SSI membership was relatively constant at 4,300 lives and continues to represent a significant growth opportunity.

We expect the SSI health benefits ratio to decrease as these members become fully integrated into our medical management program and as our membership base grows both within the state of New Jersey as well as new markets over time.

Turning to general and administrative expenses by business segment, in our Medicaid managed care segment G&A as a percent of revenue was 10.3 percent, a decrease of 60 basis points from 10.9 percent a year ago.

We are committed to continuing to manage this trend downward and remain focused on achieving a single digit G&A ratio for this segment by the fourth quarter of 2003.

In our specialty services segment, which we implemented during the first quarter of 2003, our G&A expense ratio was 32.2 percent.

As Michael discussed previously, this segment has higher G&A expense ratio.

On a combined basis our G&A expense ratio was 11.2 percent.

Our cost of services expenses, as we discussed last quarter, include all direct costs of supporting the local functions responsible for generating our services revenue primarily from the GPA operations.

These expenses consist of salaries and wages of the physicians, clinicians, therapists and teachers who provide services related to the schools and clinics as well as supporting facilities and equipment.

Cost of services increased over the sequential quarter reflecting a full quarter's consolidation of our GPA venture.

Investment and other income for the second quarter of 2003 was 1.3 million, an increase of 900 -- from 976,000 in the second quarter of 2002 and our tax rate for the quarter was 38.5 percent.

Earnings from operations increased 34 percent to 10.3 million, including the benefit from minority interest earnings from operations increased 46 percent to 11.3 million.

Net earnings improved 7.7 million -- to 7.7 million or 43 cents per diluted share versus 5.2 million or 30 cents per diluted share in the prior year quarter.

At June 30, 2003 the Company had cash and investments of 169.4 million, of which approximately 41 million was free from state regulatory requirements.

Our medical claims liability totaled 87.1 million, representing 52 days in claims payable.

This change from the immediately preceding quarter reflects the payment of physician bonuses related to our ambulatory captation contracts as well as reduced claims inventory per member and continuing efficiencies in claims processing during the second quarter.

For the period ended June 30, our average number of days between claims receipt to payment improved to 6.3 days and our 14 day turnaround time reached 98.5 percent.

Additionally, our period end inventory was reduced to 0.25 claims per member.

We anticipate days in claims payable to remain in the previously guided 50 to 55 day range during the third quarter.

However, as we experienced with UHP, this range may move with the integration of an acquisition.

For the six months ended June 30, 2003, cash flows generated from operating activities were 9.4 million compared to net income of 14.9 million.

Consistent with prior year periods, our cash flow generation is cyclical in that the second half of the year tends to generate stronger operating cash flows.

Items affecting the June period end primarily include the payment of physician bonuses, a continued improvement in claims efficiencies and timing of income tax payments and employee bonus payments.

With respect to our guidance, we anticipate full year 2003 revenue in the range of 765 million to 768 million, and net earnings in the range of $1.77 to $1.80 per share.

We continue to expect organic membership growth rates for the full year in the range of 13 to 15 percent.

As Michael mentioned earlier, the 12,000 lives in Austin, Texas will remain in our membership base until the state commences its reprocurement process in mid 2004.

We had previously only included them in revenue through May 31, 2003.

Therefore, our guidance now reflects revenue from these additional members as well as the acquisition of Medicaid related contract rights of HMO Blue Texas in our Antonio market.

For the third quarter of 2003, we anticipate revenues in the range of 194 million to 197 million and net earnings in the range of 45 cents to 47 cents per diluted share.

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

(CALLER INSTRUCTIONS) Steve Halper, Thomas Weisel Partners.

Just a clarification on the Texas rate increases.

Are those for two years, and do you have the ability perhaps to get a little bit more one year out?

These are one year rates, Steve.

Is that a change from the process in Texas?

Last year, because of the way they had done the budget it was one year, but it's kind of a deviation from what they did last time, but we're very pleased to do this on a one year basis.

So you'll go through the process next year as well?

Yes.

Great.

Thanks.

Greg Nissan (ph), Lehman Brothers.

Congratulations on the quarter, I just had two quick questions.

One, you mentioned that the state of Texas was considering some benefit buydowns, could you just sort of elaborate exactly how they plan to do that, what benefits they were looking to change and then what the impact would be?

They're looking at some of the behavioral health benefits by example, and I don't have all the details.

We're still in discussions with them, so I don't want to negotiate in this public arena.

But, for example, they've talked about eliminating some of the behavioral health benefits for this population, which really has very little impact in the sense that it's -- this is not a populations that has heavy behavioral health utilization. (indiscernible) school-aged kids you don't see the schizophrenics and some of the more difficult behavioral health issues in that population.

Just for clarification there, they're talking about the SCHIP business.

That's just the SCHIP.

Okay, my second question was just on New Jersey.

You mentioned that you're in the process of potentially getting applications to service all 21 counties in New Jersey.

Could you just talk about the market potential that represents?

Well, we right now, by example, we're in -- we're not in the Camden area in southern New Jersey, and we previously have been filed and when CMS approves it, whether it be August 1, September 1 or whatever date they choose to do so.

I don't recall the exact number of members, but I want to say there's probably 30,000 lives or so there that are -- approximately 30,000 lives that we would get our portion of.

Okay, great.

Thank you very much.

Todd Allen, Kenney Securities.

Congratulations on a good quarter.

I was hoping that you could go over -- Mike, you had mentioned state by state rate increases and the rate increase and the type of rate increase that happened by market and taking in margin protection in Texas.

It got a little bit blurry for me.

I was wondering if you could go state by state and type of increase?

We have seen kind of blended with -- over the past -- effective in January and Indiana 2 percent.

We saw 4.6 in -- 4.3 in Wisconsin, these are cash increases.

New Jersey, we gave you the number there, that's a cash increase.

And Texas the increases are cash increases.

On top of that, last year we put in place some emergency department policies and practices.

Never was anywhere from additional 1 to 2 percent of margin protection.

And we're working with the states on some other alternatives today that, once again, until the state -- while we're discussing with them I don't want to go public with it.

But we're looking at some other alternatives that longer-term protect the margins.

Okay, and to follow up on the question you just got regarding expansion in New Jersey, do you have a feel for when that -- when you might be able to enter say Camden and the rest of those counties?

Yes, all the paperwork is in there.

The states have looked at it, they've sent it to CMS as they have to do for approval.

This is -- I would say this was not a holiday period.

You might expect to get it in August 1.

But these -- that's the unpredictable aspect of these businesses, when the bureaucratic system gets to it.

So, Todd, it could be August 1, it could be September 1.

That's why if we had a firm date we would have built it in.

And one final question.

The discussion of the number of days from receipt of claim to payment of claim was -- what was that number?

6.3, Todd.

6.3, and the follow-on statement to that was 95 percent is turned around within 10 days, was that correct?

14 -- it was 98 within 14 days.

98 percent?

Yes.

Right.

Okay, great.

Thank you, guys.

(indiscernible) doctors in hospitals.

Chris Sargeant of Stifel Nicolaus.

A couple of things.

On the behavioral health businesses, as you look at them state by state, are there any of the states that mandate those to be risk-based contracts?

And secondly, can you give us a feel for the magnitude of the premium tax pass-through, should there be a line item repositioning on that?

I'll cover the behavioral health and Karey will pick up the tax.

I know, for example, Indiana has indicated that next year they're looking to include the behavioral health which is carved out in the risk based business.

And after that there's a wide variety of states and it would be probably difficult to go state by state to highlight them all, but there are a number of states -- a large number of them have risk-based contracts.

How then do you look at your initial forays into behavioral health in terms of a business model?

Let's take Wisconsin just as the initial.

We put it in there, it's our business.

There is a dearth of alternatives, and I know our behavioral health people have had discussions in calls from others saying as you're set up we'd like to talk to you about it.

Once again, without -- we have other states that are in contact with our people vis-a-vis our script assist business and our behavioral health business.

So we will probably move into a state with a demonstration model in a region of it, and then expand it from there as opposed to attempting to go in and say we'll do the whole state for you.

Do you have an idea of the mix of risk and fee arrangements kind of countrywide that you would look at?

In this business we would typically start off in a fee for service business, an ASO type environment which will give us a new state and a new attempt to manage a particular segment of it, and then gravitate that as we have experience to a risk business.

I would like to see 50 percent or more in the fee for service side longer-term.

We're going to be cautious as to what risk we take of other companies.

We start up with our which we can manage, get the experience, get the model, the network, everything right, and then you take that and you parlay it to others on a fee for service, you talk to new states on fee for service and you move at it very cautiously now.

John Tadich who joined us last year has a wide range of experience in this having been President of the United Behavioral Health Department.

So I think -- and they've been very successful.

I think we have the potential to have a very successful model.

Good.

Thank you.

To pick of the premium tax portion of your question, the premium tax is effective September 1.

It is a 1.75 percent, a true percent of premium tax.

What it means to us is obviously it's a derivative of the premium that we generate out of the market.

But for the four months ended 12/31/03, it should be in the range for us of about $1.4 to $1.6 million.

So to the left of zero on the Richter scale.

Good, thank you.

John Szabo of CIBC World Markets.

It's Amy Mulderry on for John.

Just a quick question on New Jersey.

I noticed you lost a little bit of money at the health plan in that state.

Is that related to some reserve strengthening and, if so, are you strengthening reserves to the SSI risk population there?

I think, Amy, you're right.

What you see on the face of our income statement is the 20 percent share in the health plan.

So you don't get the entire picture of our New Jersey market.

I think what's important to understand in New Jersey that on a run rate basis New Jersey is running according to plan.

But, yes, there is in fact some reserve building in the -- during this quarter, which is consistent with what you have seen and will continue to see as we do acquisitions.

We maintain very conservative estimates until we have operated the plan for some period of time.

And was that reserve building then specifically for SSI or would you say it was for the entire market -- for the entire membership there?

Again with SSI being a somewhat small piece of our business there, 4,300 lives, it was more across the board.

Okay.

Is there any way to qualify what the days claims payable effect was of just the reserve strengthening in New Jersey, or if there was any?

In the end it's really not going to move the days claims payable number because it's a component of the medical expense as well as the liability, so it's more than likely a wash.

Okay, thank you very much.

(CALLER INSTRUCTIONS) Mark Elliante (ph) of Alliance Capital.

A quick question on the guidance.

Does that reflect any dilution from an offering?

It does not.

Okay, thank you.

Ed Kroll of SG Cowen.

On the rates that you announced in the press release, Texas, New Jersey, I guess I'm just wondering how many members in each of those states you're still negotiating rates for?

I think, Karey, did you just say you have 4,300 SSI members in New Jersey?

That's right.

So you're still negotiating that piece?

Correct.

And how about in Texas, how many SCHIP lives are there?

It's about 24,000, so it's a pretty small piece of our business in Texas.

So basically you're getting 6 percent plus on the bulk of the New Jersey and Texas books.

Right.

After we close on the HMO Blue transaction SCHIP will represent about 15 percent roughly of our book.

And then on the cash flow.

I guess basically are you still expecting your full year GAAP operating cash flow to be 1.5 times reported net income?

Yes, this is -- again, granted this is a little bit under net income compared to the six months ended '02, but certainly if we were to identify for you, which is easy to do, the cash flow generated for the six months ended 12/31/02 you would see it was substantially higher than net income.

So yes, at the end of the 12 month period we do anticipate to be back around that metric.

So basically just timing.

And then my last question, your tax rate was higher this quarter, slightly higher than we had expected, 38.5 percent, we had 38.2.

But what do you think for the rest of the year?

I think around 38 and change is a good number.

We are doing a lot as it relates to tax planning, and I would anticipate that rate to come down slightly.

I would not go below another 50 basis points or so, though.

Okay, so I guess if we're at 38.2 we'll probably just leave it right there.

Yes, that's a good number.

Okay, thank you.

There are no further questions at this time.

Mr. Neidorff, do you have any closing remarks?

I just thank you all and we look forward to the next quarter as well.

Thank you.

This now concludes today's Centene Corporation second-quarter earnings release conference call.

You may all disconnect.

(CONFERENCE CALL CONCLUDED)