Centene Corp (CNC) 2004 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Centene second-quarter 2004 results 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. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Lisa Wilson, Vice President of Investor Relations.

Please go ahead.

Good morning, everyone, and 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 Libby Abelt (ph) at 212-759-5665 and it will be faxed or e-mailed to you immediately.

We have with us today Michael Neidorff, Chairman 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 our 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 in the U.S. and Canada, or 706-645-9291 from abroad, and entering access code 8350703.

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, 2004 and the Company's other SEC filings.

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 feature, 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 us on this morning's conference call.

I'm pleased to report another predictable and strong quarter.

Karey Witty, our CFO, will review the results in greater detail shortly.

The second quarter of 2004 marked our 20th consecutive quarter of consistent earnings growth.

We have continued to achieve our internal goal of being a leading multi-line managed care company in the government services category.

Membership as of June 30, 2004 was 533,300, an increase of 21.6 percent versus the second quarter of last year.

Of this increase, 12.3 percent is organic and 9.3 percent is from acquisitions.

For the second quarter of 2004, revenues increased 25.4 percent to $233.6 million, and our earnings per diluted share of 50 cents compares to 43 cents a year ago.

We continue to see improving Medicaid industry trends, and the Margin Protection Program that we began implementing over three years ago continues to produce consistent results and offer demonstrated cost savings for the states in which we operate.

We believe this approach helps the states think about pricing and costs in the most constructive and appropriate way.

It also avoids what is commonly called, in the commercial healthcare industry, "the pricing cycle".

State budgets appear to have stabilized and are on track for 2005.

Furthermore, our programs continue to provide benefits to the states and our members with substantial opportunities for future organic and acquisition growth.

I'd like to review the progress in each of our core states, starting with Indiana.

Membership growth was 22 percent and opportunities for the future growth continue to be strong.

More additional counties converted to mandatory status on July 1 of 2004.

Additionally, the state gave us a 4.2 percent rate increase, which was effective January 1, 2004.

Our RFP, consistent with Indiana procurement laws, has now been submitted.

In Wisconsin, quarter-over-quarter membership increased 14.9 percent and as we noted on prior conference calls, we received a rate increase of 4.6 percent effective May 1 of 2004.

I said this on our last call and at the risk of being redundant, the state has worked with us as a partner to implement policy changes that are significant for our Margin Protection Program.

For example, many of you are aware that Wisconsin allows us to pay the lesser of bill charges for the Medicaid D schedule.

The state has also implemented our preferred drug list.

Our efforts are ongoing to work with the state to enroll SSI members on a mandatory basis in 2005.

Our progress in New Jersey continues.

We have been and continue to be profitable in that state.

Our membership remains stable and our programs in the SSI population are moving forward.

The state recently announced the fiscal year 2005 rates.

Beginning July 1, we received a composite 5.3 percent rate increase, or 4.3 percent net of the 1 percent premium tax imposed by the state.

We anticipated the possibility of this premium tax, have continued to work with the state, and received news late yesterday afternoon/early evening that with (indiscernible) September 1, they anticipate increasing the rates an additional 1 percent to offset that tax.

The rate increases, together with the previously reported policy changes, meet our expectations.

We are also actively working with the state to expand the SSI programs into additional counties, and we will update everyone as this becomes effective.

We anticipate modest growth in our (indiscernible) and SSI population for the balance of the year.

Turning to the State of Texas, as we announced on May 24, the state awarded us a contract to our subsidiary, Bankers Reserve Life Insurance Company, for the Texas CHIP exclusive provider organization.

This contract will serve members in the 170 predominantly rural Texas counties, encompassing 16,000 providers.

A substantial concentration of the members to be served is in the Rio Grande Valley, and our rural provider network will be supplemented through our agreement with Texas Food Choice (ph).

This contract was awarded on our ability to deliver a quality product and to be a total (indiscernible) low-cost producer.

The strength of our provider network and our ability to work quickly and efficiently with the state in order to benefit and serve these members (sic).

We are also in the process of completing an RFP, which the state requires in order to re-contract with us.

This encompasses our existing service areas and also offers us the opportunity to consider additional markets for service-area expansion.

We expect to submit the RFP to the state by August and begin the process under the procurement law that exists in Texas.

I wish to point out that the RFP process is done to recertify the existing health plans and is the normal course of doing business in the state.

In addition, we have recently received our fiscal 2005 rates.

Based on our membership mix, we will receive a 4.5 percent composite rate increase, which is to be effective September 1, 2004.

We previously advised you that we have been managing 12,000 custodial lives in Texas and to a second plan to be brought into the market.

A small number of these members have now migrated to this second plan.

In Ohio, our newest state, membership held predictably steady in the second quarter.

The opportunity for future growth in this state continues to be excellent, and we have been successful in working with providers in this state to gain future contracts for service-area expansion.

Our growth strategy is consistent with the strategy that we have implemented in other states over the last several years.

Regarding rates, Ohio has now converted to a fiscal calendar year.

As reported on the last call, previously the state gave us a 5.6 percent rate increase to all managed care providers in July of 2003 and also gave a 2.3 percent rate increase effective January 1 of 2004.

This equates to a cumulative increase of 8 percent in order to move managed-care organizations to a calendar year renewal.

Turning briefly to other financial metrics, our consolidated GAAP health benefits ratio was 81 percent on the Medicaid component, and 80.3 percent in SSI of 97.8 percent compared to 83.3 in 2003.

Excluding the Texas premium tax on a non-GAAP basis, our health benefits ratio was at the low end of our band at 81.4 and reflects the successful implementation of our Margin Protection Programs.

We are at the low end of our range as a result of these programs and other disease management -- (technical difficulty).

This range could trend even lower in subsequent quarters by as much as 10 to 40 basis points because of the programs we've just discussed above.

Following our policy of sharing directional issues with you, while HBR may be lower for one or two quarters, following an acquisition, you should expect it to return to normalized levels.

We are also ensuring our clients, the states, understand these short-term positive trends.

Turning to G&A, our Medicaid Managed Care segment G&A was reported at 10.2 percent under GAAP.

On a non-GAAP basis, our G&A fell within the Medicaid segment for the quarter at 9.8 percent, consistent with our ongoing target for a single digit ratio.

On a consolidated basis, our G&A was 12.1 percent and continues to be impacted by the Texas premium tax and the higher overall G&A in our specialty business segment, as previously discussed.

As you will recall, we calculate G&A conservatively by not including interest income in the revenue line and including depreciation and amortization expense.

I'd like to now spend a moment reviewing our SSI product initiative that was discussed in detail by Rick Frederickson, our Vice President of SSI Product Development, at our Analyst Day in New York.

Our initial entry into SSI came when we entered the State of New Jersey.

It is a laboratory for us and has given the organization a very high level of comfort in our ability to manage this product.

SSI encompasses the aged, blind and disabled.

Recipients represent over 8 million eligibles under the age of 65 and command premiums that are, on average, six times those of (indiscernible) population.

Total national Medicaid health expenditure -- (technical difficulty) -- SSI recipients were $57.9 billion in 2003, of which are five current states account for $11.8.5 (sic) billion, or 20 percent of the total.

We are confident that our programs and strategies will enable us to greatly influence the quality of care and costs of serving people with disabilities.

Our medical management programs focus on a needs-based segmentation, which identify higher risk members earlier in the enrollment cycle.

These unique programs focus interventions to an integrated approach that addresses acute care, behavioral health and socioeconomic needs.

Aggressive pharmacy management strategies, individualized for members' primary and secondary conditions, results in lower costs, identification of fraud and abuse, and creates opportunities to work with physicians on appropriate prescribing practices.

I would now like to update everyone on the status of our M&A pipeline.

As I have said over the past several quarters now, we remain aggressive.

We are actively pursuing a number of opportunities which are at various stages of development.

This process, which was disclosed to you at our Investor Day, I believe demonstrates the discipline we follow.

Several investors have asked us at recent meetings if prices have increased and are therefore a deterrent to us completing acquisitions.

While there has been some upward adjustment for pressure in pricing, we remain disciplined in our approach and will not sacrifice our strict criteria, including earnings accretion in the first year and in mandated states.

I want to clearly reiterate what I have said in recent investor conferences;

I'm not concerned about disappointing investors on the acquisition front.

With that, I'd 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 2004, membership increased 21.6 percent over the same period last year to 533,300.

Year-over-year, same-store membership increased by 53,800, representing a 12.3 percent organic growth rate.

Membership growth in Indiana, Texas and Wisconsin was strong, and New Jersey and Ohio membership was stable, as expected.

For the second quarter of 2004, revenue was 233.6 million, an increase of 25.4 percent compared to 186.2 million in the second quarter of 2003.

Net of acquisitions, revenue increased to 27.8 million, or 14.9 percent, versus the same prior-year period.

Our health benefits ratio, which reflects medical services costs as a percent of premium revenue, was 81 percent compared to 83.3 percent for the same period in 2004.

Excluding the Texas premium tax, which was imposed by the state on September 1, 2003, the HBR was 81.4 percent for the current-year quarter, essentially at the low end of our target range.

The ratio continues to be influenced by the benefits of our Margin Protection Program, which has resulted in fewer emergency-room visits and significantly reduced pharmacy costs.

For the second quarter of 2004, the HBR for our SSI population improved to 97.8 percent from 103.3 percent in 2003 and compares to 99.3 percent in the sequential first quarter.

This HBR is predictable, given our at-risk SSI membership was relatively stable at 4,400 members.

Turning to General and Administrative Expenses, our G&A as a percent of revenue was 12.1 percent in the second quarter of 2004 and compares to 11.2 percent in the same quarter of 2003.

This quarter-over-quarter increase reflects the effect of the Texas premium tax, expenses for additional staff to support our membership growth and our expansion into the specialty services segment.

Excluding the premium tax, our G&A was 11.7 percent.

For our Medicaid Managed Care segment, G&A as a percent of revenue was 9.8 percent, excluding the premium tax, and compares to 10.3 percent a year ago.

Earnings from operations for the second quarter of 2004 increased 54.2 percent to 15.9 million.

Net earnings increased to 10.8 million, or 50 cents per diluted share, compared to 7.7 million, or 43 cents per diluted share, for the second quarter of 2003.

The weighted average share count increased by 3.9 million shares year-over-year, primarily reflecting our follow-on offering in August of 2003.

Balance sheet highlights at June 30, 2004 include cash and investments of 298.4 million, of which 124.9 million was free from state regulatory requirements.

Our medical claims liabilities totaled $110.1 million, representing 53.5 days in claims payable and reflects the expected decrease from 55.4 days in the immediately preceding quarter.

As we indicated last quarter, physician bonuses are paid contractually during the second quarter of each year and accordingly lowered our days claims payable metric by 1.9 days.

For the six months ended, cash flows generated from operating activities were $30.1 million compared to net income of 21 million.

For the quarter, cash flows generated from operating activities were $17.7 million, compared to net income of 10.8 million or 1.6 times net income.

Lastly, we are increasing our guidance and anticipate 2004 revenue in the range of 962 million to 970 million and net earnings of $1.99 to $2.02 cents per share.

This does not include the potential impact of any acquisitions that we may undertake during 2004.

For the third quarter of 2004, we anticipate revenues in the range of 242 million to 245 million and EPS in the range of 51 cents to 52 cents.

With that, we can open the call up to any questions.

(OPERATOR INSTRUCTIONS).

Todd Allen from Kenny Securities.

Congratulations on a good quarter!

I have three questions for you just quickly.

Membership has been stable for awhile in New Jersey; it sounds like it's also stable in Ohio.

When and at what rate do you anticipate to start getting organic membership growth in those two states?

I think New Jersey will be slow.

We're working with the state to expand the SSI, which will improve it, so you should start to look for it Q3, Q4, some minimal growth and then as we get the SSI expanded, which we feel very comfortable now, see that happen.

In Ohio, of course we went into the Toledo market knowing that there were two plans there, ourselves an the other both (indiscernible) out 50 percent share of market.

We've opened our office in Columbus.

We are doing our service area expansion work, so you should expect to see only nominal growth -- because of the process the state goes through -- until Q1 of next year, and then watch for the growth.

Okay, and this is just housekeeping question for Karey -- what was the number of free unrestricted cash?

I missed that.

124.9.

Okay.

Then finally, Michael could you give us an update on the specialty business and how that piece is going?

Sure.

The initial focus, of course, is our internal business and it's clearly contributing to our margin improvements and delivering very nicely.

We have cut back a little bit of the external volume while we still have sales outside the Company, as we've pruned away some less-than-profitable and efficient business, so I mean it's there; it's doing what we want.

We are building the organization.

We've been hiring the staff that's necessary to take it to the next level.

We will be announcing some of that shortly.

So -- (technical difficulty) -- and it's performing.

Which states are you in currently?

You had introduced in Wisconsin, correct?

Pardon me?

You had introduced the specialty business in Wisconsin?

Yes, it's in Wisconsin, doing very nicely there; it's in Texas; it's entering Indiana.

Ohio we will be entering and New Jersey, of course, is still on the burner.

Okay, thank you very much.

Greg Nersessian of Lehman Brothers.

Good morning, nice quarter.

My first question actually is for Karey on the cash flow in the quarter.

You had mentioned, I think on the first quarter call, that you had essentially expected slightly weaker cash flow trends in the quarter because of the physician bonus payouts, but it looked like a pretty strong number to me.

So I was just wondering, were those payouts less than you had anticipated or was there some other adjustment in there?

No, the payouts were not less.

As I mentioned in my prepared remarks, you do see the effects of the payouts on our (indiscernible) claims payable calculation but as far as the cash flow strength, there are a number of metrics that are driving the strong cash flow, starting with, Greg, if you -- just comparing the six-month stuff, '03 to '04, there was an increase of net income of roughly about $6.1 million.

Starting with that as a base, clearly that's going to generate cash flow in and of itself.

There is an increase in the claims liability.

If you were, again, to compare the six months, June 30 balance sheet to the 2004 balance sheet, the June 30 claims liability was 87 million, as compared to the 2004 balance sheet for June 30 of 110 million, so a significant increase in the claims liabilities as well.

But you are right; we did have strong cash flow during this current quarter.

I think part of the effect as well is the overall growth in the business.

While the bonuses are still at a very significant level, we are seeing less impact of that on our financials as we do continue to growth business.

Okay, great.

Then my second question was on Indiana, the RFP process there.

Are you aware of any new participants who have submitted and RFP in that state that don't currently participate or was it just the three plans that have been participating (indiscernible) part of an RFP?

Do you know?

Yes, I don't have an answer to that.

We don't know.

I don't know that any list has been published, to my knowledge, of who has submitted it.

We hear that people have been talking to providers.

I mean, our providers call and say they've been getting some calls from other players, but I don't know of anybody that's specifically (indiscernible) an RFP besides ourselves and the existing players.

Okay.

Then just one last quick (indiscernible) -- could you just clarify, in the New Jersey rate, you got 5.3 percent but 1 percent related to the premium tax.

Then I think you mentioned you were going to get that 1 percent back.

Is that finalized -- (multiple speakers)?

We got a message late yesterday noon, early evening that, after the release was out, that the state was looking to restore that 1 percent sometime in September with a September rate, so I'm just reporting that as I received it, Greg.

So that's not finalized yet but more color on the next call?

Well, we will know clearly by the month of September ends but I have no reason to believe that they would send that message out to rescind it.

Steve Halper from Thomas Weisel Partners.

Hi, Michael.

Could you just give us an update on your IT conversion to the latest version of Amisys and where it stands on your various plans?

I will be glad to, Steve.

We have started a migration in one of our states; we've tested it, the feasibility of it.

The migration will be state-by-state.

Everything we've done so far has performed perfectly.

We will have the first state fully converted probably in October, maybe late October, early November, in that time frame or sooner.

It's just moving right along.

The new boxes are downstairs in the computer room; all that good stuff is happening.

So the IF (ph) staff is excited about what they are doing; they put together a baseball theme on it.

It's the year for the Cardinals and the Yankees, so they put together some kind of baseball theme and having a lot of fun doing it.

When do you expect the program to be finished?

That will be July, probably -- figure Q3 of '05.

Q3 of '05.

Are you incurring additional CapEx to facilitate this?

Sure, there's additional CapEx but it's falling in within that 1, 1.25 percent or so budget that we have.

I just want to go back to (indiscernible).

We are doing it very methodically, very carefully because we have all seen the companies that try to do it too quickly, and it's not how fast but how well and we are very pleased with it.

Matt Tetterri (ph) from Wachovia Securities.

A couple of questions on SSI -- we've seen -- because there's a small book of business right now, we've seen that HBR (ph) move around a little bit.

Do you guys have a sense of how many members you'll have -- you'll need before we see that HBR (ph) stabilize somewhat, and what levels it might stabilize at?

Yes, I've talked about 12,000 lives as a critical mass, the lower limits of critical mass to which you avoid the volatility, but as I think we've talked about in the past on these calls, right now, with the size we are, $50,000 is one point of medical expense.

So, you either have a $0.5 million case and that gives you the volatility of 10 points, but it's not catastrophic to the entity or to overall Centene because of the size and the scale.

So we have a lot of confidence.

I mean, we normally -- you remove some of those outlier cases, one or two cases, and we have a very normalized result and -- (technical difficulty) -- benefits ratio.

So everybody has a high level of confidence that we are managing that business well and just have to get the numbers.

Could you talk maybe about the opportunity size for SSI in Texas?

I don't have a lot of those numbers in front of me.

It's the third-largest SSI population in the country, going by memory.

I think they've been doing some of it in Dallas, maybe the Houston market up to this point, so we have 4,000 ASO members in a couple of markets.

So I mean, it's a very large opportunity.

I can get some numbers for you for the next call.

Okay, thanks very much.

I think I had it in the investor presentation; we may have shown those numbers at that point.

I just don't have it off the top of my head.

Joe France from Banc of America Securities.

This is Jay Penn (ph) for Joe France.

Just a quick question -- I know you had said that additional counties for Indiana were added July 1.

What drove the growth in the second quarter there in that state?

It was organic within the existing markets, (indiscernible) doctors.

We have a relatively high level of our physician satisfaction -- (technical difficulty) -- the bonuses we've been paying, the programs, the overall approach we've taken there.

There's a lot of loyal physicians that are driving membership.

(OPERATOR INSTRUCTIONS).

Ed Kroll from S.G. Cowen.

Ed?

Mr. Kroll, you may proceed with your question. (OPERATOR INSTRUCTIONS).

At this time, there are no further questions.

We thank everybody and look forward to the call next quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.