Centene Corp (CNC) 2005 Q4 法說會逐字稿

Good morning.

My name is Luwana and I will be your conference operator today.

At this time I would like to welcome everyone to the Centene fourth quarter 2005 earnings results conference. [OPERATOR INSTRUCTIONS] Ms. Wilson you may begin your conference.

Thank you.

Good morning, everyone.

I'm Lisa Wilson, Senior Vice President Investor Relations at Centene Corporation.

Thank you for joining today's call.

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

If you have not received it, please call Libby [Avale] at 212-759-5665 and it will be sent to you immediately.

Michael Neidorff, Chairman and Chief Executive Officer, and Karey Witty, Chief Financial Officer of Centene Corporation, will host this morning's call.

The call is expected to last approximately 45 minutes and may also be accessed through our website at centene.com.

A replay of the call will be available today shortly after the call's completion by dialing 800-642-1687 in the U.S. and Canada or 706-645-9291 from abroad and entering access code 3978030.

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 public SEC filing.

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 us.

We are pleased about our results.

In 2005, we reached $1.5 billion in revenue and achieved our earnings per share objectives.

The last several months in our industry's history have raised a number of questions and concerns in investors' minds about the soundness and foundation of the Medicaid business.

As I have stated all along, we are proud of our Company's operational excellence and disciplined approach.

And we know where the strength is in this business.

It's our people, our organization, information platform and systems, our contracting, and our uncompromised internal matrix to which we are all held accountable that give us ongoing visibility and confidence in the stability and predictability of our business model.

Membership as of December 31, 2005, was 871,900, an increase of 12.8% versus the fourth quarter of last year.

Of this increase, using our conservative methodology, 7.8% is organic and 5% is from acquisitions.

This organic growth number, as discussed in webcast at recent conferences, was materially impacted by the change in the Texas enrollment process and the enrollment agent.

This was an ongoing process up until several weeks ago.

Going forward, we will continue to provide you with individual state membership numbers and we'll limit ourselves to revenue and earnings guidance.

Our business is getting more complex and to the point that varying definitions will lead to confusion.

For example, our recent acquisition in Ohio will result in a service area expansion which will show membership growth beyond that which we acquired in that market.

On a sequential basis, we added 24,200 members, new members and experienced strong organic growth in Kansas, Indiana, and New Jersey.

For the fourth quarter of 2005, revenues increased 46.9% to $423.2 million and our diluted earnings per share of $0.31 compared to $0.27 a year ago.

I'll now go through details for each of our states and their respective rate status.

In Indiana, sequential quarter membership during the fourth quarter of 2005 grew by 17,000 members.

During the quarter, the state completed a conversion of it's remaining counties to a mandatory status.

As I had stated many times, competition for these lives was intense and yet we remain disciplined in our approach to contracting and gaining members, electing not to buy the business in order to grow our revenue line.

We continue to believe that these actions and anything we do must be sustainable and consistent with our long-term approach to building a multiline enterprise.

The state splendid rate increase for 2006 is 6.5%.

In Kansas, the state had sequential growth in the quarter of 5700 members.

Initially the state was planning to commence an RFP in 2006, but instead elected to extend it's current program to the end of the year.

We are pleased with this decision and about the opportunities for ongoing growth in the state.

In Kansas we received a 5.2% rate increase effective July 2005 and are negotiating with the state for this next year.

In Texas, there were a number of factors which impacted our membership results in the quarter.

These included the state's conversion to a new enrollment broker and new eligibility system.

This process can typically lead to initial challenges that are short-term in nature.

I want to make it clear that this problem was an external issue and that we're taking a number of steps to resolve it.

At the same time, we're experiencing increased market penetration or market share in our existing service areas, although there continues to be overall market contraction in the state.

As a result, we expect these issues to continue in the first quarter.

Finally, in the Austin market we saw a reduction in membership as the state completed the transition of the remaining custodial lives that we have been managing for them until a second player entered the market.

We still anticipate the service area expansion in Corpus Christi to go live in September, 2006 and effective September 1, 2005.

Excluding the EPO, we receive a 1.9% rate increase in Texas.

In Missouri, membership declined as expected as the state continued to take steps to reduce the number of Medicaid recipients in an effort to balance it's budget.

However, we continue to be proactive and tenacious in our approach with the governor and the administration.

And have brought to the state a model plan which would produce substantial savings if it were enacted.

We received an 4.4% rate increase effective January 1, 2006.

In New Jersey, membership increased 5600 members on a sequential quarter basis due to growth in the TANF lives as a result of the state's enrollment broker having resolved its prior issues and the processing of default members as we had discussed on our third quarter call.

In addition, we implemented membership continuity programs and tested these as we had developed them the prior quarter.

We are operating under a 5.2% rate increase that was granted us in July, 2005 and are there also negotiating our new rates.

In Ohio, membership increased slightly.

The state has issued an RFP, which will put all of the Medicaid recipients up for rebid, in which we believe will create additional opportunities for growth.

We are presently negotiating 2006 rates with the state to be effective July 1, 2006.

Recently we announced an definitive agreement to acquire MediPlan, which expands our footprint to include Stark County, an important county, and will increase our market share in Ohio.

We are also pleased to begin a long-term partnership with the Aultman Hospital, a highly regarded service provider in the Ohio community.

We believe that this partnership will strongly position us to participate in the up-coming Ohio Medicaid expansion process.

In Wisconsin, membership declined sequentially by 1800 members to 172,100, as a result of a change in the state's eligibility requirement.

Previously the state had granted members a longer grace period for the termination of a members's eligibility.

Under the new scenario, the state no longer offers this grace period.

There are also some changes in the state's enrollment process.

As we've demonstrated the ability in states in prior times, we will also work through this process with the state.

Regarding Georgia, our newest state, there has been some ongoing chatter in the marketplace that the state's enrollment broker may not make it's April 1, 2006 membership launch date.

I want to make it clear that we are ready to go live in that market for the April 1 date.

And are working hard with the state to keep it on track and minimize any delays they may be thinking about.

We remain fully confident that the state is committed to enrolling these recipients and their target date, an ideal target date, is April 1, or at the earliest possible date.

I also want to remind everyone that we have told you a number of times, that for the first couple of quarters, we are booking a 90% HBR.

With a new book of business it is initially prudent to estimate a higher utilization.

Thus, we are maintaining our conservative approach, as we have historically done, when entering a new service area or a new market.

Shifting now to our specialty companies.

About two years ago I began speaking about a mosaic.

And since that time we have been filling in the pieces.

I think it should be much clearer today how we are executing on our strategy to build a diversified multiline healthcare enterprise.

We are finding that more and more of our states are interested in the suite of services that we can now provide them through these channels.

As you will recall, we maintain a Chinese wall between our specialty companies in the health plan, so that other health plans and other clients may feel comfortable in terms of the confidentiality of their information.

We recently announced the acquisition, and closing in January, of U.S.

Script, a pharmacy benefits manager.

The premise behind the acquisition, that it is consistent with our multiline strategy and adds another important service for us.

On a purely economic basis, it will allow us to help contain and manage one of the more significant cost drivers in healthcare, prescription drug costs.

We also feel it is important to have the control from within, which in turn enables us to be more competitive.

Turning to the health benefits ratio for the fourth quarter, we're now focusing and reporting our HBR by each of our membership categories.

We believe that this is important, so that we can help investors understand that each category is different and thus is impacted by different factors.

And it is also how we view the business.

The HBR for the Medicaid and SCHIP was 82.1%, within our guided range of 81.5 to 83.5, and reflects the initial quarter coverage associated with moving the new Indiana membership from an unmanaged setting to a managed setting and educating the network and members on how to utilize the system.

Let me remind you that we have said for sometime that we're working to maintain the HBR in the range and not below the range, and that new business is impacted.

I wish to reaffirm to everyone that our healthcare costs are known and we are comfortable with our ability to continue to manage our costs within these ranges.

With the Specialty coverage the HBR was 85%, reflecting the receipt of an anticipated positive settlement associated with the Kansas Behavioral Health contract.

Our HBR for the SSI population was 105.4% through the quarter, due to the growth in our Wisconsin market.

One of the factors which impacts the SSI HBR Wisconsin is that there is a 60-day continuity of care requirement, with the majority of the population currently treated in an unmanaged care setting.

The SSI HBR was also affected in that because of this continuity of care, we're limited in generic drug substitution, formulary utilization, managing in-patient costs and excessive durable medical equipment.

This changes as we migrate them into the managed care environment.

As you will recall when we entered the state of New Jersey, the SSI HBR was initially high.

And we successfully demonstrated our ability to manage the cost.

Furthermore, as we have said for several years, the SSI HBR is going to be volatile due to the small membership base.

Today a $125,000 case affects the HBR by 100 basis points.

That's not much when you are a Company of our size.

Thus, as we begin to move more recipients into managed care settings and implement our cost-saving initiatives, we expect our SSI HBR to fall into a branded range of 84 to 86%.

Turning to general, administrative cost, our G&A was 10.3% compared to 11.4% last year.

This reflects leveraging our growing business and a small reduction in compensation costs related to Centene's stock performance and commensurate reduction in performance bonuses.

We want investors to know that we are aligned with them.

I want to remind everyone that on an ongoing basis, as we grow this business, we will continue to invest in our systems and our people.

I also remind you that our stock sales for tax purposes can only be done on a 10 B 51 basis.

Turning to acquisition, we believe that the landscape remains plentiful.

However, as disciplined purchasers, we will consider only those opportunities we have identified that best fit our existing book of business.

With that I'm going to turn it over to Karey Witty, our CFO, who will take you through the financials.

Thank you, Michael, and good morning, everyone.

To recap the highlights of the fourth quarter of 2005, membership increased 12.8% over the same period last year to 871,900.

Year-over-year same-store membership increased by 49,500, representing a 7.8% organic growth rate.

Overall we experienced a membership increase of almost 100,000 lives.

For the fourth quarter of 2005 revenue was $423.200 million, an increase of 46.9% compared to $288.1 million in the fourth quarter of 2004.

Net of acquisitions, revenue increased $81 million or 30.3% versus the same prior year period.

Our fourth quarter revenue includes the retroactive implementation of a Missouri premium tax which amounted to $2.6 million.

This amount is directly offset by a corresponding G&A expense of the same amount, thus having no bottom-line impact.

Our health benefits ratio for our core of Medicaid and SCHIP population, which reflects medical costs as a percent of premium revenues, increased 190 basis points to 82.1% compared to 80.2% for the same period in 2004.

On a sequential quarter basis this segment increased 40 basis points net of the litigation settlement in Q3.

As we have discussed on prior calls, we have expected our HBR to move into our guided range of 81.5% to 83.5%, and this is our second consecutive quarter in this range.

This quarter's HBR primarily reflects costs associated with transitioning Indiana membership into a managed care setting, as Michael mentioned.

For the next new months we will be educating the new members on how best to access the healthcare system.

On a sequential quarter basis, we saw a 350 basis point increase in our Indiana HBR, having added these 17,000 new members in this market.

Keep in mind, however, that the state has also recognized this, as Michael mentioned, and we will now receive a 6.5% rate increase January 1, 2006 compared to our previously announced 4.1% increase.

For the fourth quarter of 2005, the HBR for our SSI population was 105.4% versus 84.7% in the fourth quarter of 2004 and compares to 96.2% in the sequential third quarter.

We have consistently guided that there could be a wide range in the SSI HBR from quarter to quarter, due to the intrinsic volatility of a small membership base.

Moreover, in the state of Wisconsin, again as Michael mentioned, there's a 60-day continuity of care requirement whereby we're unable to implement our medical management policies and procedures.

In other words, there will be higher costs in that 60-day period, as we essentially inherit their fee for service utilization experience while receiving a managed care based premium.

Our Specialty segment HBR was 85%, reflecting the receipt of an anticipated positive settlement associates with the Kansas Behavioral contract.

Turning to general and administrative expenses, our G&A for the Medicaid Managed Care segment, as a percent of revenue, was 10.3% in the fourth quarter of 2005 and compares to 11.4% in the same quarter of 2004.

This decrease was due to overall leveraging of our expenses and lower compensation costs related to our year-end performance bonuses.

The decrease was partially offset by Georgia implementation expenses incurred during the quarter.

Investment and other income for the fourth quarter of 2005 was $3.2 million.

Interest expense increased due to higher borrowings under our credit facility, resulting from acquisitions completed in the last 12 months.

Earnings from operations for the fourth quarter of 2005 increased 17% to $20.4 million versus $17.4 million in 2004.

Net earnings increased $13.9 million, or $0.31 per diluted share, compared to $12 million, or $0.27 per diluted share, for the fourth quarter of 2004.

For the year ended 2005, revenues increased 50.4% to $1.5 billion from $1 billion in 2004.

Our Medicaid and SGF HBR for 2005 was 81.7% compared to 80.4% in the prior year.

G&A as a percent of revenues for the Medicaid Managed Care segment was 10.5% compared to 10.7% in 2004.

Earnings from operations increased by 22.7% to $79.2 million from $64.5 million in 2004, and net earnings improved to $55.6 million or $1.24 per diluted share.

In 2005 we incurred $6.4 million in Georgia implementation costs.

Balance sheet high lights at 12-31-05 include cash and investments of $350.3 million, of which $27.7 million was free from state regulatory requirements.

Our medical claims liabilities totaled $170.5 million, representing 45.4 days in claims payable.

This reflects an increase from 41.4 days in the immediately preceding quarter, attributable to the corresponding increase in claims inventory reflective of the year-end holiday period.

This is also reflected in the slight increase of our average days from claims receipt to payment of 0.3 days to 7.8 days.

We expect our days in claims payable to fall within a range of 40 to 45 days as of the first quarter ended March 31, but currently expect Georgia to cause this matrix to increase as of the end of Q2.

Our debt to capital ratio as of year-end 2005 was 20.8%.

For the year ended December 31, 2005 cash flows generated from operating activities were $74 million compared to net income of $55.6 million or 1.3 times net income.

For 2006 we expect cash flows from operations to increase to a range of 1.5 to 1.7 times net income, primarily reflecting the addition of our Georgia business.

And lastly, our first quarter 2006 revenue guidance is in the range of $444 million to $449 million and we anticipate net earnings of $0.17 to $0.21 per diluted share net of FAS 123R.

For full year 2006 we anticipate revenue in the range of $2.15 billion to $2.25 billion.

And net earnings per diluted share of $1.61 to $1.78 per share net of, again, FAS-123R.

Our revised 2006 guidance includes the U.S.

Script acquisition, but excludes our recently announced transaction with MediPlan in Ohio.

This acquisition will be built into our guidance upon closing.

Additionally, our guidance includes the impact of the accounting treatment of stock options, which we anticipate reducing earnings by approximately $0.04 per share in the first quarter of 2006 and $0.15 per share for the full year.

A portion of this effect is due to the requirement that certain tax benefits be recorded directly in equity, thus increasing our effective tax rate by 100 basis points to 38%.

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

[OPERATOR INSTRUCTIONS] Your first question comes from Gregg Nersessian, Lehman Brothers.

Hi, good morning.

Just a couple of quick ones first.

Could you quantify, Karey, the magnitude of the impact of the lower comp expense in the quarter as well as the Specialty -- the benefit from the lower Specialty MOR.

Gregg, as far as bonuses, I would rather not give you a specific dollar amount.

Clearly we highlighted this.

You are going to see lower bonuses in our proxy.

So we certainly felt worthy to tell the investor base that, in fact, we did have lower bonuses in this year.

On a full year basis it is not material.

But, clearly again, just knowing that you're going to be seeing this on proxy, we wanted to be forthright and share that with you.

The specialty HBR was our second question, was roughly about a $1.2 million benefit that we received in the current quarter.

Essentially, we had been paying for services from the start of this contract that had not been built into our premium.

So this was a reconciliation to get our premium dollar in line with our expenses, such that it was a true up for the year.

I'd like to add something-- Gregg, may I just add one comment.

Because we put that in there about the bonuses because we wanted to get this out to our investors.

One, there is a policy that's carved in stone that says if we don't meet the annual operating, meet or exceed the annual operating plan, EPS targets, that nobody in this Company, myself or anyone, gets a bonus.

And one of the components we look at in determining what the bonus should be is in some way stock performance.

We're not going to be a Company where you see the shareholders stock has not done well but the bonuses are still at very high levels.

So the only reason we even put that in there is we wanted to use this vehicle to just remind every investor how we look at it.

Okay.

Great.

I guess what I'm trying to get at is I'm trying to figure out what the sort of run rate EPS is in the fourth quarter.

Because it looks like the Georgia costs were a little bit lower than your previous expectation of $0.07 to $0.10, and so I'm trying to get to what the run rate fourth quarter EPS is.

And then try and compare that to the first quarter, because it looks like even after excluding the $0.09 to $0.11 of Georgia in the first quarter, it's lower than I would have otherwise expected.

Our guidance, Gregg, for first quarter, if you strip out Georgia costs for Q4 and look at that-- compare that to the sequential first quarter, is essentially flat.

That is tempered by, as Michael indicated, the Texas market.

It's primarily driven by what we perceive to be continued pressures on membership in our Texas markets.

So we're actually forecasting dips in our membership in Texas.

You know, Texas, Gregg,--

Yes.

-- started off -- if this was a movie they would call it the Perfect Storm.

It started off with Katrina and then shifting enrollment agents to hand out staffs.

And then change your systems in the middle of that and our people in Austin told us that they notified a lot of the employees on this new system that they would be terminated, a tight labor market, they quit and took new jobs.

It's a combination of things.

So in looking at the forecast we know we're going to make it all up over the course of the year and the guidance could stay the same.

And it was not a whole lot of it, but let's keep the expectations, right?

Because it's still a strong quarter if you look at.

So that was kind of the mentality.

Is the impact there just a membership issue or are you expecting some shift in the risk characteristics of the membership they are -- ?

No we're not seeing that.

In fact, we didn't highlight it but it's been out there, we wrote a check for part of our businesses because our MOR was at a level that required a refund to the state, which we were glad to do.

So our costs there are known and under control and we're very comfortable with those.

Okay.

And then, Karey, last quarter you gave us the average dollar amount of the claims on hand at the end of the quarter, do you have that number.

Sure, we ended the quarter with an average cost of about $158.

158?

Right.

Okay.

Last quick one is the Ohio expansion RFP any new business?

Is that included in the current guidance or would that be added to current guidance?

That would be added to it.

Okay.

Thank you.

Your next question comes from Scott Fidel, J.P. Morgan.

Hi, thanks, good morning.

First question just has to do with the SSI and you are targeting the 84 to 86% range, any timeline on when you think you can get the Company to that level?

Yes, it's going to be a gradual -- it's probably going to take the next -- I would say if I had a stagnant population, Scott, I would say you would see it over the next couple of quarters.

But as we'll keep bringing in more members, which we want to do, you'll see it as a more gradual deceleration as the ones we brought on last quarter become managed and the new ones come in.

So I think you should expect it to, kind of in a sustainable way, start to reduce over the next three or four quarters.

Three or four quarters.

Okay.

But once again, I want to remind everybody, if you take 10 points, that's $1.2 million.

And on a $2.25 billion company that's not a lot of money.

Okay.

Second question, just on Georgia and you have told us what you expect, sort of the underlying cost structure that's built in.

Just thinking about sort of sensitivity to that and also just because you do have in your guidance an expectation for an MOR of 90%, so let's just say that Georgia was pushed out, how much sensitivity is there -- the fact that you are already predicting a higher MOR in Georgia into your guidance?

I think it's going to really impact the G&A side initially.

And it just says that if we anticipate a 90% MOR for a quarter or two in our guidance, if it gets pushed out then it's going change that a little bit later on and then you'll have the G&A expense in Q2.

Okay.

But I view all of those things, and I ask you to share that, that it's kind of a one-time charge.

It's still a great business.

It's nothing that the state-- it's not a state issue.

It's not an industry issue.

It's the intermediaries.

It's the enrollment agents have to get their algorithms right so we can do this.

And then just on Ohio, I know you don't have anything baked into the guidance yet, but just if you can give us an update on the expected date for the announcements?

And then also the potential level of enrollment that you think the Company could achieve from the expansion.

The-- excuse me-- we expect the awards to be out most likely in the March time frame.

As far as a go-live date, the state is going to stagger it throughout the balance of 2006, much like Indiana did.

They are going to stagger the roll out.

That roll out has not been communicated as of yet, so we can't tell you, Scott, which regions that we bid and at what point they are anticipated to go live.

But the plan is that by the end of 2006, the entire state would be Medicaid Managed Care.

Okay.

And then just one last question.

I appreciate the state data on the rate increases.

Do you have what your expected blended average rate increase for 2006 is all in?

Well, we don't have all of the rates.

Michael mentioned some of the rate increases that we're still yet waiting on.

We get some midyear rate increases that have not yet been communicated.

Indiana we got 6.5.

Some of the things that we have already mentioned, Wisconsin was a 2-1 effective date at 1.8.

But we have got Texas at a 9-1 date.

We have got Kansas at a 7-1.

Jersey at a 7-1.

So-- we're not able to tell you yet what our rate increases are.

Okay.

I was thinking about sort of for modeling purposes sort of a 4% average.

Does that sound like a good average level.

Yes, that's reasonable.

Okay.

Thank you.

Your next question comes from Steve Halper, Thomas Weisel Partners.

Hi.

Regarding the SSI, the explanation on the medical loss ratio, the HBR sounds plausible, but to back that up, could you tell us what the HBR was in New Jersey during the quarter or the trend over the last couple of quarters.

As Michael said, in New Jersey we're doing okay on SSI.

It's really -- clearly Wisconsin is a higher SSI HBR.

In Jersey we have proven that we can manage that business.

It's like 88 or something like that.

Is it in your targeted range in New Jersey yet.

It floats in and out.

When you start paring down just the individual books of business, again, critical mass is the entire issue, Steve.

So it's -- while it might be in in some quarters, it's out in certain other quarters and I would say it's clearly out of the range for Q4.

Okay.

And then, one final question on the Ohio expansion.

How much cost do you think you might have to sink in if you're awarded new business there?

We'll have to-- that will be a wait and see.

We can certainly share that with you once we determine how many regions we win.

We are in -- the state is going break the regions into eight regions.

We anticipate bidding 6 regions.

We're already in, assuming the close of the MediPlan, we would be in three.

We'll just have to wait and see, Steve, how many regions we might be -- .

Steve, it's not going to be in the order of magnitude you saw because we already have an infrastructure.

We have a plan president.

We have offices.

We have member services, call lines.

So you will see incremental growth consistent with the membership we get.

So it's not like a standing start like we had in Georgia.

Thanks.

I mean, Georgia you are talking about a lot of members at one day, one time.

So we were just ramping it in over a period of time will help us.

Got it.

Thanks.

Your next question comes from Carl McDonald, CIBC.

Thank you.

As we think about Georgia from a longer term perspective, can you give us a sense of what type of a margin you think is reasonable there, say for full year '06 and then relative to a full year 2007?

Yes, full year '06, Carl, as we're indicating, we have got Q1 that's nothing but G&A.

As Michael had said, first couple of quarters we anticipate booking in the 90% range on the HBR.

So those are at best, say, breakeven quarters.

So you could say it's -- for a full year let's assume we make money in Q4 to offset the G&A we experienced in Q1, you could almost say it's a breakeven year for '06.

As we roll into '07, if we do our jobs right, we should be making a lot of money in that market.

But, again, that is going to be driven by the number of members that we ultimately achieve that today we just don't know.

I guess, if I may add, we talk a lot about this.

I'm kind of blessed with a very experienced board that has a lot of experience in new markets and healthcare costs.

And we were talking a lot about it yesterday.

It's the type of thing where if we're doing it right and it goes live April 1, you start to look for more normalized ranges for G&A and medical loss, starting in Q1 of '07.

And in terms of an ultimate margin in the business, should we be thinking low-single digit, mid-single digit, high-single digit?

I was thinking at the state level a, from what you are going to see on the statutory filings, I would say low-single digit.

Okay.

And then the second question on Georgia.

Any sense for how the enrollment -- whether the enrollment in Georgia is going to be choosing plans voluntarily versus being auto assigned?

What the percentage breakdown there is going to be?

Kind of early, it seems, but I'm hearing in the range of 15 to 25% have made choices so far.

Okay, so if the state were to start on April 1, given that scenario -- .

Could be some autos.

You never know.

It's one of these things because of the the uncertainty that's been created about when it's going to start, that probably as much as anything can impact some of that.

They come out February 15th and say it's absolutely a go.

April 1 you can expect that to pick up.

I think these recipients are like the rest of us.

You bake them when you have to.

Got it.

And on the Specialty business, can you give us a sense for what the pipeline looks like for the next 12 to 18 months?

Well it's-- we continue to grow it-- there's a number of businesses now and they have varying opportunities.

The U.S.

Script, they are maintaining their independence out in Fresno.

I understand they have their ongoing book of business and development.

They're going to keep down that path.

We're bringing our plans into the fold on a very planned methodical basis.

The behavioral health is constantly evaluating different RFP's they can respond to, where they're going.

Script just says it takes so long doing its thing.

Over time -- and we're looking at some other specialty companies, the pipeline there has some interesting opportunities.

Air Logic is adding to it's book of business.

Our disease management, they are also looking at expanding their platform into other disease states.

So I guess -- I can't give you the specific numbers, but I remember last year everybody was worried about Jim Portico, the behavioral health was like 14 million.

Of course now it's about 140 million -- it has some big numbers and growing.

So, I guess, Carl, I'm not trying to be evasive on you, but it's going to be a little lumpier as you get these new businesses up and running and they start to realize it's still theirs to run.

Okay.

On the earnings from the specialty business, U.S.

Script, obviously, going to be accretive this year.

For the remainder of the Specialty business, should we expect modest loss, modest gain but fairly breakeven for 2006?

Yes, clearly, we're making money on the behavioral health side, Carl, so air logics is a bit small yet to be terribly added to our earnings, but clearly a great deal for us and good growth opportunities.

But clearly, behavioral health is a significant piece of our earnings in specialty.

It has it's roll within the guidance we have given.

And I keep reminding this whole Company, it's not how fast but how well.

Every decision we make is driven to doing it with superb execution.

You have to execute.

We could double the size of the Company, as everybody knows, very quickly, but that would probably just create a lot of problems that would not be as beneficial to investors.

Great.

Thank you.

Your next question comes from Matt Perry, Wachovia Securities.

Hi, couple of questions.

First, I know you gave these numbers out in the prior quarter, could you maybe talk about prior period development that you experienced in the quarter?

And maybe if you could make some directional comments about our IBNR versus three quarter '05.

Sure.

Let me just start with the year, Matt.

In our table in our press release we are indicating roughly about $7.7 million in favorable IBNR development for the year 2005.

That would compare to $15.9 million favorable development in the calendar year 2004.

These tables will be in our K as well.

But on a sequential quarter basis, we continue to see favorable development on IBNR.

And directionally, IBNR is up over Q3.

I think those were your questions.

Great.

Yep.

And then second, can you talk or can we assume that the specialty MCR will move back up?

That the 4Q '05 lower level of MCR was just a one-time from that payment?

That's correct.

Okay.

And then speaking maybe specifically about Ohio and Georgia, the expansion in Georgia, then the potential expansion in Ohio, what type of specialty business opportunities do you see in those two markets?

The state recently announced that their disease management programs were things they were postponed and going to look at it again in '07, because they wanted to be sure that they get this other-- their core business up and running.

But it's a case of where once you are in play in the market, we just continue to work with them.

And we had a little behavioral health for a while in Ohio, when they were testing some things.

They continue to express some interest in it on our part, on a very specific part.

So it's the kind of thing we keep talking to states about, but we also encourage them to keep it all integrated.

We also want you to understand that we don't want to see behavioral health carved out, because we could do a much better job integrating it.

But then they have some areas where maybe they want specifics.

I think of one state that we're speaking with that has a geographic area that has an incredible amount of individuals suffering from severe psychosis.

It may have been industry trends or something there at some point.

So we use Scrip assisted, our simpatico and others, to talk to them and say we could probably, in those couple of counties, do something for you.

It's going to be more of that kind of approach, Matt for now.

Okay.

And just one final question.

I the share count tick down a little bit and was that from just lower options or have you done any repurchase on that share repurchase authority you announced?

We did not do any repurchasing in the fourth quarter.

The slightly lower share count is just a product of share price in the calculation.

Okay.

Thanks.

I might add we couldn't buy stock in Q4 because we had to buy it-- we have filed a 10 B51, so there's no definite individuals, because our deal flow and LOIs and things would make it impossible to go in the active market and just direct the buying of stock.

So we do it on a formula filed in the 10 B51, Matt.

Your next question comes from Patrick Hojlo, Credit Suisse.

Good morning.

Good morning, Pat.

Can you clarify for me how your Georgia spending looked in the fourth quarter versus your expectation and whether some of that expected spending shifted to 1Q.

When we initially guided on our second quarter release, I think it was, Patrick, that was in anticipation of a go-live date of January 1.

So essentially, yes, there is a 90-day push in our spend as well.

So we spent approximately $3 million in Georgia spend in this fourth quarter.

That would ramp-up fairly significantly in Q1 as we ramp towards an April 1 start date.

So 7 million plus or so in Q1, 7 to 8 million, looks like you're guiding to?

Right.

Okay.

I think part of it is -- I know we have told everyone that even though they delayed it, we instructed our team to not take the pressure off and keep the pressure on to be ready as if we're going Jan 1.

Because we think when you start getting into starts and stops or fits and starts, that's when people get in trouble.

And so we did not ease it up as much as maybe we could have, because it's just better business to be ready.

Yes, I actually thought it might be a little heavier for the Q given your comments, so that's why I asked the question.

Okay.

With regard to the U.S.

Script accretion, dilutive these first two quarters and then accretive for the year, can you just go into the detail, again, of how that is working exactly, how you are bringing these contracts on and what the rate limiting steps are.

Sure.

Step for those contracts.

Sure.

The way we see the transition, clearly today we're with a third-party vendor for PBM services.

Part of our accretion for U.S.

Script, clearly, will be transitioning our PBM spend to our owned PBM's.

So our pharmacy spend to our own PBM.

We have a schedule that we have plotted out over 2006 such that by the end of 2006, or let's say the start of 2007, we would have internalized all of our pharmacy spend on our own platform and be free of third party vendor.

So the dilution that we're showing you in the first quarter, essentially, is their current book of business, but then we have to add on the carrying costs of the debt, the amortization of the intangibles, et cetera, that we're showing you the dilution in Q1.

Then as we begin to transition on to our own, or take our own platform on to this -- take our own book of business on to this platform, that's when the accretion will really kick in.

So that's why it's back-end loaded.

Got it.

Does U.S.

Script serve any of your competitors?

Let's see, no.

Okay.

One last -- .

By the way, I would be happy to do it for them. -- feed back in my prior lives.

If there's a product there that can help them, good for the market.

I'm with everybody making well-- do well.

Remains to be seen what they would think, of course.

One last question.

Days claims payable, what are you guys targeting right now after all the hullabaloo over the last couple quarters?

Should we expect it flat from here?

In the 40 to 45 range?

What do you think.

I said in my prepared comments, Patrick, of 40 to 45.

Once Georgia gets on that should drive it up, I would expect, in Q2.

But for Q1 we're saying 40 to 45.

Got it.

Thanks.

Your next question comes from Robert Gettit, Comfortable Capital.

Thank you.

Just a quick question on the U.S.

Script acquisition, my question is how applicable is that to your current book of business.

For the SCHIP or TANF business, is there any -- do you have responsibility for pharmaceutical costs or is it applied more to the elderly and disabled plans?

We have pharmacy costs in all of the plans except Texas, where they carve it out.

So it's very applicable to what we have now.

And of course as the SSI ramps up, there's bigger pharmacy spends there, so it becomes even that much more important us to.

Great.

Michael, I was wondering if you could give us an update on Tennessee and is that state going to be pursuing an RFP program?

I know we hear it.

We've heard that the people who did the Georgia program, the consultants are talking to them.

But, a very long time ago the at the State of Tennessee, until you hear it you haven't heard it.

Right.

And even then wait a little bit.

Right, I hear you.

So I'm not going to-- as somebody I knew once said, I'm not going to put my hand in fire on that one.

Right.

Okay, great.

Thank you very much.

Your next question comes from Ed Kroll, SG Cowen.

Good morning.

It's Ed Kroll from SG Cowen.

Good morning, Ed.

Hi.

Couple of things, first on the days moving up, still within your range for Q4.

Was there anything in there other than the normal timing issues one sees with payments, pended claims, and so on?

Anything else out of the ordinary between September 30 and December 31?

I think I mentioned again, Ed, in my prepared comments, the holiday season.

We as a Company only worked three days of the five days in the week before Christmas and New Year's.

So the week of year-end I'll say we were only in here three of those five day, so that did build up our inventory some slightly.

So that would be certainly worth mentioning.

I would also mention we looked at the age of the claims.

And the age has stayed down.

It's very important that when we did that big clean up, we talked about cleaning up some -- all of the old claims.

In Q3?

Yes.

And that's when we had put in there all that system stuff.

And it's working because the age of the claims has stayed down.

So it's not like we cleaned them up and there's a new backlog of older claims building up, which is important to us as operators, because it says that what we did in Q3 is sustainable.

Got it.

Okay.

I want to make one other comment, I have also told the world that even though they can probably develop some more efficiencies, now is not the time to do it.

Okay.

On the SSI, I understand that mix issue from Wisconsin and how that will come back the other way, as New Jersey did.

But you get -- I guess the good thing about SSI members is you get more revenue for them.

And I'm just wondering if you can remind us, what is the differential revenue per member per month on an SSI life versus a regular Medicaid life?

It, like any program, it's going very by market, Ed.

But in Wisconsin, for example, we receive about $850 on a composite basis for an SSI member.

And I would say on the TANF side it's more along the lines of about 150.

In New Jersey it's slightly lower.

The pharmacy is carved out on the SSI in New Jersey, so it is about $200 or so lower in -- 2 to $300 lower in New Jersey because of the pharmacy risk is gone.

Again, it is going to very by market.

But 850 is our number in Wisconsin.

Another point I think is relatively important is that in SSI, when you are assigned a member or you get a member enrolls with you and you do it right you keep them for a long time.

So it's not like you are taking this initial 60-day higher cost.

You know that there will be more continuity care.

It's worth the investment because you will have them probably for years.

It's not as mobile a population.

Right.

Okay.

Thanks for that.

And then if you said this, I'm sorry, I missed it.

In your '06 guidance, what start date are you assuming on Texas?

September 1.

By September 1?

Yes.

Okay.

And back on Georgia, would you say, just based on what you know, Michael, do we reach a point as April 1 gets closer, where they almost -- it almost becomes too late, if you will, to delay?

How much lead time would they have to give the world, beneficiaries, providers, vendors like you, if the April 1 date is going to slip?

When would that announcement come, would you think?

I would think it would come sometime in the next week or so.

Okay.

The point is, if they called us today, that's how we have set this up, we would have some people working all night, but we could start tomorrow morning.

The phone lines are in, the people are trained.

They are rehearsing.

In fact, I was down there doing a business review and they are really in good shape.

I said, boy, we get that first member we're going to be able to analyze the heck out of him because we have been practicing so long.

But I think the case is there that the assignment process is what they have to get done.

So they have to be confident they can get the people enrolled onto the right plans and the algorithms have to be right.

Got it.

Thank you for that.

And then cash flow, there has been, any way, seasonality, the quarterly pattern for you.

Typically Q2 is a weaker quarter.

Is that still going to be the case in '06 and should we expect Q1 cash flow to be relatively strong, 1.5 to 1.7 times net income?

I would expect the pattern would be much like prior quarters, prior years, Ed, for Q1.

Q1 is generally a pretty light quarter as far as cash flow goes.

Okay.

Actually, the first half of the year, generally from a cash flow perspective is pretty light and then the cash flow generation really comes in the back half of the year.

I would say that would be less so in 2006.

Q1 I expect to be a light cash flow quarter.

Q2, given some of the HBR that we're booking in the Indiana market, you should expect -- we generally talk about in our second quarter the bonuses that we pay to physicians.

Those bonuses, for obvious reasons, are going to be lighter this year, I would expect, in Q2 than they have been in years past.

So it wouldn't be as draining, if you will, on Q2 cash flow.

Georgia we're -- there is a possibility, we don't know yet, but an offset might be that the State of Georgia would prepay their premium.

So that's the way they are heading, but we don't know yet.

Okay.

Thank you.

Your next question come from Doug Simpson with Merrill Lynch.

Good morning, everyone.

Was just wondering if you could help me connect the dots.

Starting with kind of the run rate of earnings now and just looking at how it builds over the rest of '06 to kind of get to a $1.78.

Starting with something like $0.20 in Q1, if you kind of did, 20, 30, 50, 70 you would get up to a $1.70 type of number.

I am just wondering, could you walk us through the main pieces of that, obviously, of Georgia and some of the other changes.

But maybe breakdown the incremental gains there.

Sure, we have got a couple of dynamics going on.

Clearly, Georgia, even though we're going to be booking a 90% loss ratio at the health plan level, there are our Specialty Services that will be ideally selling to that market.

For example, our PBM will be selling to Georgia, we hope.

We hope we can get it up and running April 1, behavioral health, et cetera, et cetera.

All of our internal companies selling to Georgia and hopefully making a slight margin off of that business.

But again, at the state level it is a 90%.

We have got rate increases, that I mentioned, coming on in the back half of the year that are going to be additive.

We have got the new Texas business coming on September 1 that's going to be additive.

We've got various other items that are coming in sporadically throughout the year.

But you're going to see a significant jump between Qs 1 and 2 and then it should somewhat level off, I'll say, between Qs 2, 3, and 4.

Even with the 90% loss ratio?

Correct.

Okay.

Doug, it's not a hockey stick.

Presuming Georgia goes live April 1, I think what Karey is saying is look for some-- we see material improvement in Q2 and then returning to a normalized growth.

Okay.

And I didn't mention, but U.S.

Script does -- it's paid $0.02 dilutive in the first month and then $0.04 to $0.06 accretive.

So that means we're going to be earning $0.06 to $0.08 in the back half to offset the $0.02 dilutive.

Then I apologize if you said this earlier, I may have missed it, but in the quarter the expenses related to Georgia did they hit any SG&A line?

Yes.

And that was still down 110 bps year-over-year?

Right.

But again, we grow our top-line by 50%, so you would expect some leverage out of G&A.

Right.

Okay.

Okay, that's great.

Thank you.

Your next question comes from Steve Halper, Thomas Weisel Partners.

Yes, hi.

Relative to the share buyback, what was the thinking about doing it under a 10 B5 plan as opposed to a discretionary plan.

Steve we can't -- it's no different than an individual.

If we know that we have a deal flow and we have active LOI's, we cannot be buying stock on a directed plan.

So what you do is you file a 10 B51 and we put in a whole series of pricing and there's a whole matrix of the formula, which is very confidential, that says if the stock does given things you buy stock.

And that way we will never be accused of buying stock today and then having U.S.

Script, had it been them, finally reach an agreement.

We may have been in negotiations and then we get the last 5 points done and we go to definitives and then we would be -- so we have to be careful of that.

That's why you do it on a 10 B51.

Okay.

Thanks.

Thanks you.

At this time there are no further questions.

Are there any closing remarks?

Yes, I guess I would thank everybody.

I would say it is kind of nice to be back where -- to being bored.

And we look forward to continuing to do that through the balance of '06 for you.

Thank you.

Thank you.

This concludes today's Centene fourth quarter 2005 earnings results conference call.

You may now disconnect .