Centene Corp (CNC) 2006 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Centene first-quarter 2006 earnings 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 session. (OPERATOR INSTRUCTIONS)

Thank you.

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 Ebelt] 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 about 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 7620184.

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-K dated February 24, 2006, and other public company 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 future, Centene specifically disclaims any obligation to do so.

With that, I would like to turn the call over to Michael Neidorff.

Michael?

Thank you, Lisa.

Good morning, everyone, and thank you for joining us.

Membership as of March 31st, 2006, was 874,800, an increase of 12.5% versus the first quarter last year.

For the first quarter of 2006, revenues increased 36.9% to $455.1 million.

And our diluted earnings per share of $0.20 compared to $0.32 a year ago.

The first quarter of 2006 met our expectations, but was not without its very specific challenges.

We identified increased drug costs in Indiana, and to a lesser extent in Ohio, as the sole reason for the change in our HBR.

The increased drug costs reflected higher physician prescribing, which inevitably led to higher utilization by parents.

Karey Witty will give more details relative to these costs.

I want to emphasize that these issues were and are Q1 issues and did not involve or reflect any prior period adjustments.

There have been no changes in our IBNR, and our reserving methodologies remain consistent.

Furthermore, our neonate trends continue to be consistent and we have experienced no flu season, as I have consistently told you.

Our systems give us real-time information so that we may appropriately respond to issues as they arise.

I remain proud of our operational excellence, our disciplined approach and the strength of our systems.

The programs to bring these issues into line are being implemented as we speak.

Of particular significance and as most of you know, we recently purchased US Script, a pharmacy benefit manager, which will help us control our pharmacy spend.

Our Wisconsin plan transitioned to the US Script platform in March and we already are seeing the economic benefit.

We expect to have Indiana and Ohio on the platform by May 1st, and therefore realize appropriate cost savings.

Assuming this May 1st launch, we expect drug costs to decline and normalize over a three- to four-month period, which should bring HBR down 40 to 80 basis points in Q2 and Q3.

I want to reaffirm that our health care costs are known and we are comfortable with our ability to continue to manage our costs.

In Texas, we experienced a sequential quarter decline of 4500 members.

Last quarter we indicated that we had an issue stemming from the state's changeover to a new enrollment program and have been working with the state to resolve it.

We have asked that the state hold back or delay on accelerating the enrollment process to new areas until they get this issue resolved and are able to proceed in an orderly and sustainable manner.

We believe it will be another quarter or two until the state works this out.

Other trends are stable, with the exception of one hospital in San Antonio, where we are monitoring its policies and practices on neonates.

We are still anticipating the service area expansion in Corpus Christi to go live September of 2006.

We also expect details to be forthcoming on the state's SSI RFP.

In Ohio, membership was relatively flat.

In early March we received preliminary notification of Medicaid contract awards in the Northwest and East Central regions by the Ohio Department of Job and Family Services.

While it was disappointing not to add any new regions, it does expand the number of counties we will serve from 2 to 27.

With these new counties and the MediPlan acquisition, we expect the membership to be in the range of 100 to 120,000 lives once the program is launched by the state.

Ultimately, we decided not to pursue the rebid of the Central region, as we remain firm in our discipline not to enter into global contracts.

We anticipate some minimal incremental G&A spend to add employees under the expansion.

In Georgia, we continue to make progress.

Our network has been and is in good shape and ready to go, and the state's June 1, 2006 launch date looks solid.

I also want to reiterate and remind you that we are still assuming a 90% MLR in Georgia for the first couple of quarters until we know our true utilization trends.

In Kansas, we have a strong sequential growth in the quarter of 4900 members, and we are pleased with our prospects there.

In Missouri, membership declined and we expect the state to continue to reduce the number of Medicaid recipients in an effort to balance its budget.

We are working with the state to develop a model which would produce significant cost savings if implemented.

In New Jersey, membership increased slightly on a sequential quarterly basis.

Wisconsin membership increased sequentially by 3000 lives to 175,100.

We currently do not have any new rate information to share with you, but will update you as it becomes available in our respective markets.

There are also several states which are issuing RFPs, and we're evaluating our position with respect to each of them.

Regarding new business, we continue to have a very full M&A pipeline.

We just announced this morning we have signed a definitive agreement to acquire OptiCare to expand and complement our product services.

OptiCare is a managed vision care subsidiary of Refac Optical Group, a publicly traded consumer vision company headquartered in New Jersey.

OptiCare currently serves members of Superior Health Plan, our managed care subsidiary or entity in Texas.

Eventually, the managed vision care plan will be available to other health plans within the company and continue to be available to external customers.

Turning briefly to other financial metrics, our Medicaid and SCHIP HBR increased this quarter to 82.8, which is still within our guided range of 81.5 to 83.5, but represents a 70-point increase on a sequential basis.

With the Specialty companies, the HBR was 84.1 during the quarter and includes the behavioral health contracts in Arizona in 2006 and reflects the state of Arizona's minimum HBR requirements.

Our HBR in the SSI population was reduced to 87.6%, which does reflect significant improvement from the sequential quarter.

With respect to general and administrative cost, our Medicaid Managed Care G&A was 11.9 compared to 10.8 last year.

This increase was primarily due to expenses for additional facilities and staff to support our growth, especially in Arizona and Georgia, including $4.7 million in implementation costs there.

It also includes $2.4 million in stock compensation expense from the FAS 123(R) adopted in January.

With that, I'm going to turn the call over to our current CFO, Karey Witty, and use this very public opportunity to thank him for that service, wish him continued success as he takes on his new role in operations as part of our succession planning organizational development program, and share with you that in Per stepping up to the new role, he brings the experience and has worked with Karey.

I will also take this moment to share the fact that we feel very good that the planning we've done, the staff we have, the continuity in staff that we have has been fantastic.

We now have a very strong group of leaders, three with incredibly strong backgrounds, backed up by equally strong individuals -- looking at Pat Rooney, who does our health plan accounting for many years and continues to grow with the Company, and others.

And I feel we can all feel good that the house is in good order.

Karey?

Thank you very much, Michael, and good morning, everyone.

To recap the highlights of the first quarter of 2006, membership increased 12.5% over the same period last year to 874,800 members, while revenue increased 36.9% to $455.1 million compared to $332.4 million in the first quarter of 2005.

Our health benefits ratio for our core Medicaid and SCHIP category, which reflects medical costs as a percent of premium revenues, was 82.8% compared to 80.6% for the same period in 2005.

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 third consecutive quarter in this range.

This quarter's HBR primarily reflects costs associated with higher utilization trends in certain markets, especially in January, and an increase in pharmacy-related costs in Indiana and Ohio.

In each of these two markets, we experienced a pharmacy cost increase of approximately $5 per member per month year-over-year.

This is largely attributable to increases in mental health drugs and to the conversion of former fee-for-service members to the Medicaid Managed Care program in Indiana throughout 2005.

As Michael discussed, on a sequential quarter basis, our Medicaid and SCHIP HBR increased 70 basis points.

Again, pharmacy costs in our Indiana and Ohio markets exceeded our internal forecasts by approximately $2.6 million, representing virtually all of this 70 basis point increase.

In addition to the mental health drugs, antibiotics also attributed to this increase.

As Michael mentioned, we expect to transition our PBM in Indiana and Ohio to US Script effective May 1, thus allowing us to see an immediate benefit on these pharmacy related issues.

From the first quarter of 2006, the HBR for our SSI population was 87.6% versus 94.6% in the first quarter of 2005, and it compares to 105.4% in the fourth quarter of 2005.

While the SSI HBR is approaching our target range, we continue to highlight that there can be wide range in the SSI HBR from quarter to quarter due to the intrinsic volatility of its small member base.

Our Specialty segment HBR was 84.1% for the current quarter versus 133.5% for the same period in 2005, and reflects an achievement of critical mass, having added 92,000 members through our Arizona contract win.

Our Specialty Services HBR for 2006 includes the behavioral health contracts in Arizona and Kansa, while the 2005 results include only the initial three-month period of our behavioral health contract in Kansas.

Turning to general and administrative expenses, our G&A for the Medicaid Managed Care segment as a percent of revenue was 11.9% in the first quarter of 2006 and compares to 10.8% in the same quarter of 2005.

This increase reflects implementation costs in Georgia of $4.7 million and the adoption of SFAS 123(R) representing $2.4 million in stock compensation expense.

Additional premium taxes also had the effect of increasing our G&A ratio by 9/10 of a percent and 5/10 of a percent in the three months ended March 31, 2006 and 2005, respectively.

Investment and other income for the first quarter of 2006 was $1.5 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 first quarter of 2006 decreased to $12.6 million versus $21.3 million in 2005.

Net earnings were $8.8 million, or $0.20 per diluted share, compared to $14.4, million or $0.32 per diluted share, for the first quarter of 2005.

Balance sheet highlights at March 31, 2006, include cash and investments of $339.8 million, of which $25.8 million was free from state regulatory requirements.

Premium and related receivables totaled $66.4 million, reflecting an increase in reimbursements due to us from providers, including amounts due under capitated risk-sharing contracts.

Given the increase in medical costs in our Indiana market, certain providers under our ambulatory capitation contract are in a deficit balance.

As such, we have reported approximately $3.2 million in receivables attributable to amounts due under this risk-sharing contract.

These amounts represent a conservative 50% of the total due.

Additionally, having closed our acquisition of US Script effective January 1, 2006, the increase in the premium and related receivables balance also reflects customer balances due our PBM.

Our medical claims liabilities totaled $172.8 million, representing 43 days in claims payable.

This reflects a 2.4 day decrease from 45.4 days in the immediately preceding quarter, primarily attributable to a corresponding decrease in quarter-end claims inventory levels and the effect of transitioning our Wisconsin health plan's PBM to US Script.

Historically, amounts due our external PBM were classified as medical claims liabilities.

With our acquisition of US Script, such liabilities are now classified as accounts payable.

This accounted for 0.6 days of our sequential quarter decrease in DCP.

As we convert our other health plans to US Script, we expect a further decrease in our days and claims payable.

Nonetheless, we do expect that our days and claims payable for the second quarter will be maintained in our guided range of 40 to 45 days, given that our Georgia market will commence operations on June 1, 2006.

Our debt-to-capital ratio at March 31, 2006, was 26.4%.

For the quarter ended March 31, 2006, cash flows generated from operating activities were $9.3 million compared net income of $8.8 million, or 1.1 times net income.

And lastly, our second-quarter 2006 revenue guidance is in the range of $495 million to $500 million, and we anticipate net earnings of $0.25 to $0.30 per diluted share, net of FAS 123(R).

Our second quarter earnings guidance also reflects an $0.08 reduction reflecting the previously announced delay in the Georgia implementation to June 1, 2006.

For full year 2006, we continue to anticipate revenue in the range of $2.08 billion to $2.16 billion and net earnings per share of $1.53 to $1.70.

That's net of FAS 123(R).

Our 2006 guidance excludes our pending acquisition of MediPlan in Ohio, as well as the OptiCare deal which we announced this morning.

Both of these acquisitions will be built into our guidance upon closing.

Additionally, we are excluding our contract expansion in Ohio until we get better clarity on timing.

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

(OPERATOR INSTRUCTIONS) Scott Fidel with JPMorgan.

Thanks, good morning.

First question has to do with the vision acquisition.

Can you talk about the potential revenues and EPS impacts and opportunity from that?

And then also, what type of margins that the vision products carry?

And also at this point, now that you've added a number of Specialty lines, what other Specialty benefits you could think about adding in the future, or at this point, do you think that the Specialty businesses are pretty much set at this point?

Sure, Scott.

Relative to guidance, we didn't guide per se as it relates to revenue.

What we did disclose is their 2005 annualized revenue of $25 million.

On the EPS front, we essentially said that the deal would be accretive to us -- which is one of our requirements under our M&A activity -- the deal would be accretive to earnings -- slightly accretive to earnings 12 months post close.

So I hope that is helpful.

And then just in terms of the margins that that business carries?

From a margin perspective, we are seeing that margin coming in essentially in line with what we currently experience.

They are pretty consistent, Scott.

Relative to other opportunities in Specialties, we continue to evaluate opportunities.

You should watch us to continue to look at disease management, things we can do to continue to build on our AirLogix one, which is starting to become very valuable to us and continues to sell outside the company.

So you should expect to see us continue to focus on that in the coming months and quarters.

Okay.

And then just a second follow-up question.

Karey, could you tell us what, on a PMPM basis, the pharmacy costs were in the two impacted markets relative to the remaining markets?

And then also, maybe just walk us through the type of medical management processes that US Script can bring online to start bringing those Rx costs back in line with normalized levels.

What I will say, Scott, is when I say in my prepared remarks that we saw essentially a $5 increase on a per-member basis in excess of our expectations, essentially what I'm saying there is that we did see at a minimum a $5 increase in those two markets.

So that is our experience in Indiana and Ohio, was $5 in excess of essentially what our other markets are running.

Now, that is going to vary depending on whether we are at risk for SSI on the pharmacy side or not.

But of pure TANF, it was about $5 in excess of our expectations.

As far as what US Script will bring to the table, first and foremost, the acquisition does allow us to internalize any profits that we would have been passing on to a third-party PBM.

Secondly, it allows us to better negotiate contracts, whether that is for the providers of the pharmaceuticals, etc.

It also allows us to put all of our PBM spend on one platform, whereas currently we are actually using two third parties.

So from a data analysis standpoint, it provides us real-time -- once we get every market on this platform -- it allows us real-time data analysis across the Company.

I think you are also going to see when, from what when I looked at, Scott, their ability to look at what they look preauthorize, and as we work through, look at the alternatives, and can work with the providers on their prescribing patterns.

If you have ear infections, Amoxicillin works as well on a baby as Zithromax or the equivalent.

So we see them with their systems capable of working with the providers real-time.

It starts to drive it in that direction, as they're doing in Wisconsin and elsewhere.

So a lot can be done in formulary management when you have the systems that allow you to do it.

And that is where you, short- and longer-term, derive consistency.

Okay.

And just one last question.

If you could update us on the expected ramp of the Georgia membership in terms of the two tranches.

And then also just where the network is at this point -- is everything ready to go there or are there still some final contracts to be signed?

I will start and Karey can add to it -- he can speak to his new role now.

The network is in place and we have our hospitals.

There are still a few that we're still loading into the system and -- we're very consistent.

We insist on the contracts, whatever we use, have to follow a template to get them into the system by June 1st, because we went to pay accurate and correctly.

But that is moving along very well.

We have given guidance historically of 150 to 250,000 in the Atlanta and Central regions.

We are cautiously optimistic that we will be on the higher end of that.

As I say, we want to be very cautious; we tend to be conservative in our thinking when it comes to this type of thing.

But I think that Georgia is in place.

We've done a lot of contingency planning and understand the risks that we're dealing with.

It's just what happens when June 1, you push a button and you have a couple hundred thousand lives coming in -- you have to be ready for it.

And we are rehearsing and practicing to be ready.

So the state has indicated they are going to move up the December 1 to September 1.

I don't think we've built that in -- I know we haven't built that in yet.

Our experience says, let's build it in once we have true confirmation it's going to happen.

But we continue to be optimistic, we're looking forward to going live, and I believe we have the network, the rate, the management team and capabilities in place to deal with it.

Okay.

Thank you.

Joseph France with Bank of America.

Thank you.

Karey, I may have -- I got interrupted, so I may have missed your explanation on the change of -- well, you didn't really previously give second-quarter guidance -- but the full-year guidance.

Could you walk through the change in the revenue and the change in the EPS guidance?

There was no change.

Essentially, our EPS guidance, as well as our revenue guidance, Joe, was consistent with what we released when we did announce the additional 60-day delay from our Georgia implementation.

So there was no change in full year, either revenue or bottom line, from that point.

I guess Q2 we talked about the delay costing what it did in the first quarter.

And obviously it impacts the second quarter by two-thirds of that amount -- two of the three-month delay.

So the $0.38 consensus didn't fully reflect -- for the second quarter didn't totally reflect your latest guidance, is what you are saying?

Yes.

I mean that's your model, not mine, but --

That is First Call consensus.

Yes, correct, that is right.

I mean, it did not reflect, Joe -- what we were saying about the cost Georgia -- I mean we are fully staffed; we are still adding people, but I mean we have ramped up Georgia.

You have to be -- if you're going June 1 and you expect a couple hundred thousand lives, as we've talked about, according to what we've said, you have to be ready for that and any upside contingencies.

So those costs are there without the revenue.

I don't think that was taken into consideration by some of the analysts.

Right.

And maybe not all in the appropriate period.

When we said it was an $0.08 delay, we didn't identify which quarter.

I guess now we are saying definitively that $0.08 delay is going to come in the second quarter of 2006.

That is great.

Thank you very much, Karey.

Gregg Nersessian with Lehman Brothers.

Hey, good morning.

My first question is just on the revenue in the quarter.

It seemed better than expected, above the guidance, despite the weaker enrollment.

Is that related to stronger pricing or was there some loss of enrollment towards the end of the quarter or were there some onetime items of premium improvement or something like that in the quarter?

I'll tell you what, let me take an opportunity to introduce Per to you all, who will be taking my seat.

I'm going to push it [in front of] Per and let him answer it.

We did close with our revenue above the guided range.

One of the big pieces of that related to our contract in Arizona, which was a bit of a onetime type item.

And given the nature of that contract and the HBR associated with that contract, it had very little impact on the bottom line, but certainly saw the top line exceed our expectations on the revenue side.

I would also offer, Greg, that when I mentioned an increasing utilization in my prepared comments, a lot of that increase came in the form of delivery.

And if you recall, we get paid in many states an ancillary delivery payment, which is not built into our premium payment.

So we don't know definitively how many deliveries we're going to have every quarter.

So we did have a pretty high number of deliveries in the current quarter.

But along with those number of deliveries comes higher revenue.

Okay.

That makes sense.

On the receivables that you mentioned, that issue, could you just talk about how we should think about the cash collection on those receivables -- the timing, what processes have to be put in place to collect those receivables?

And then I know your second-quarter guidance is typically a weaker quarter because of all of the physician bonuses that you pay.

How should we think about 2Q cash flow guidance, given --?

Yes, good question.

Given the fact that we have recorded receivables for deficit balances, I'm not saying there aren't any bonus payments in Q2, but certainly they are not to the magnitude that you are used to seeing.

So from a cash flow perspective, cash flow should be, I would say, much stronger in this second quarter than you are used to seeing on a normalized second quarter.

As far as how we're going to go about collecting these model one deficits, we have a contract, an existing provider contract, with each of these physicians under this risk-bearing model.

Essentially what we have been doing is meeting with these physicians, walking them through their balances, educating them through the data that we have and can share on how to better their performance.

Ultimately, Greg, you're going to see this receivable sitting out there for some period of time.

Some providers are going to choose to write a check immediately; some providers on a smaller scale are going to need to carry this out 12, perhaps even 24 months.

So you're not going to see a significant reduction immediately.

It's going to take some time.

Okay.

So should we think about the guidance you gave in the last call of cash flow from operations of 1.5 to 1.7 times net income -- are you holding onto that or will this impact that?

Certainly, that was our full-year cash flow guidance for 2006 and that is why we were holding onto that.

This is not that.

This is about (indiscernible) on the total -- the total scheme of things, Greg, to impact that.

Okay.

Just making sure.

On the DCP that you mentioned, Karey, did you say 2Q was going to be in the guided range, not including Georgia or including Georgia?

Including.

Okay.

Even though you are getting only a month of claims, but all the pay -- okay, I see what you are saying.

Because all the payables will be related just to that one month.

Okay.

I understand, okay.

Are you going to be giving us the claim costs in inventory PMPM -- do you have that number?

202.

202.

And then just last question, the Indiana RFP I saw just came out.

What are your expectations there about potential for new entrants or any new market opportunities there?

I think obviously we expect always to have other people consider it, which is fine.

I mean we tend to do very well in a competitive environment.

We have been there a long time, a lot of long-term relationships with people.

So I think -- and the indications are they are going to change possibly to a choose your -- a provider to have multiplan as well.

We do that in every other state; that is fine too.

But I don't see a lot of changes, a big impact.

The full state is managed care at this point; they went last year.

So there may be some shifting around within particular service areas, but I expect it to be fairly consistent to go upside for us.

All right, great.

I'll get back in queue.

Thank you very much.

Ed Kroll with Cowen & Company.

Good morning.

Can you hear me okay?

Good morning, yes.

My first question is on the Specialty revenue in Q1, the $19.5 million.

X OptiCare, is that a good quarterly number going forward?

Is that kind of a quarterly run rate?

That should be a pretty good number.

US Script came online effective the first of the year.

So you are pretty close to being at a good annual run rate.

Great.

On OptiCare, is that -- if you think about it strategically, would you say, Michael, it's more of a medical cost management driven acquisition or an opportunity to drive more Specialty revenue from third parties?

I think it is a combination, where we offer optical.

You know, our goal is to drive to being the total low-cost producer in our markets.

And where we offer optical or choose to offer it, it's nice to have that benefit.

We will always sell our Specialty company properties to anybody in the markets at the same cost that our plans pay our own companies on -- across that Chinese wall I like to talk about.

But I see them continuing to sell outside the Company and grow revenue, as we've seen in other areas, and really have that dual approach.

As we would buy from others, if they had a product that we could use.

So I think there is a way to do it where everybody can benefit, and that is our mentality.

Got it.

Okay, and then just shifting gears here.

On the SSI population, on the MLR there for Q1 of '06, you really made some nice progress sequentially, understanding that is something of a volatile moving part.

But is there -- the improvement in particular on those Wisconsin SSI members that helped push Q4's SSI HBR, I should say, above 100, was there anything extraordinary there or is that just blocking and tackling and things improved a little more quickly that they normally would?

Well, some of it was -- you recall for 60 days, continuity of care we could do nothing.

And then, so now all of a sudden -- not all of a sudden -- but during that 60 days, we're putting in place the management programs that you implement when you're able to.

I kind of like that at one level, because you don't take a chronically ill person and go in and just change things immediately.

You work through them, help them understand what is coming.

Anything you want to add, Karey?

I would say you somewhat hit it there, Ed, in your question, and I would say it was basic blocking and tackling.

There is nothing on the rate side; we didn't get a nice rate kick or anything.

So it was consistent with what we had been saying, as you've already identified -- some quarters are up, some quarters are down, given the small member base.

And this was a good down quarter.

Very good.

And then any final comments on Ohio, not bidding in the Central region?

I mean, is that strictly a contracting issue for you or was there anything else there?

I mean, we have been very consistent on how we contract, and we will do nothing that's short-term.

I don't think there's more to be said.

I think I've said so much about that that people are getting tired of hearing it.

But we won't do global contracts, and that was the expectation of one of the hospitals we needed for the group.

And just won't do it, Ed, ever.

Never say never.

We will never do a global contract.

Okay, Good enough.

I will get back in the queue.

Thank you.

Tom Carroll with Stifel Nicolaus.

Good morning.

Most of my questions have been answered, but just quickly on Ohio.

You've mentioned a number of times that your assumption for medical loss in Georgia is 90%.

Do you have a similar number for the incremental business in Ohio that you expect to get?

I would say, Tom, what we would expect to see in Ohio is a slight reduction in premium as we take on the more rural areas within these service areas.

Those more rural areas are going to show lower utilization, and as a result I think it will weight down our overall premium in the Ohio market.

But net-net, we're not expecting significant movement in our HBR in Ohio at the end of the day.

I know I'm not throwing out a percent to you, but I would say it's consistent with our existing experience in Ohio.

(indiscernible) we have our infrastructure in place.

We'll add a few member services, provider relations and things of that nature.

But there will be some movement there.

Great, thanks.

That is all I have.

Thanks.

Matt Perry with Wachovia Securities.

Hi.

I had a question kind of following up from an earlier question on the 2Q '06 guidance you've provided.

Did I understand it correctly that you expect the total impact of Georgia to be $0.08 dilutive in the second quarter or was that just the two-month delay?

That was the two-month delay.

So what would be the total impact of Georgia on 2Q results -- or your expected 2Q results?

From an EPS standpoint, is that your question?

Yes.

It's going to be in the range of, say, 14 to 16; it's going to be a pretty big number.

Okay, that is helpful.

And secondly, on Georgia membership you've said you expect to be at the higher end of a kind of wide range of 150 to 250.

Can you talk about what gives you confidence you'll get to that higher end --?

Let's say midpoint -- I'd rather throw in a new 200 number.

Okay.

So the --

We're looking at our net, we're looking at the voluntary enrollment, just the market dynamics.

And we don't think it will be at the bottom end, but let's be conservative and cautious and say -- and push the -- Karey, in a couple of hours, it's your area.

So how do you feel about it?

I think I'm hard pressed to say anything definitively today.

But I would agree with Michael.

And what level of visibility do you have related to the June 1 members you'll pick up?

I mean do you have a good sense of what that amount will be or will that be something you won't really know until the very last minute?

It's going to be more the latter.

We will get our eligibility tapes, we think, from the state anywhere from May 15 to May 20, that time frame.

So we'll know as soon as we get our eligibility tapes.

And do you have a sense right now or at least give us an update of what percentage of members have actively chosen a plan versus the amount that might get auto-enrolled?

Yes.

I'd rather not -- rather not say.

I would say that what we are seeing has exceeded our expectations.

Okay.

And then lastly, you know, you talked about -- I think Michael mentioned the M&A pipeline being robust or full or something to that effect.

Could you talk about any change in dynamics when it comes to M&As specific to health plans that are out there?

I mean, is that still a good market?

Yes, I think it is still a good market.

I think we're seeing the kinds of plans we like to look at.

We have the opportunity to continue to be selective in what we look at.

And we have our criteria, and those are some bright lines, Matt, that we've traced in the sand a long time ago.

And so it's easy to run through the matrix and the models that we have, and we will find it to be a solid marketplace for us.

But once again, it's not how fast but how well.

Right.

And just lastly, could you comment on how dilutive US Script was for the first quarter?

I would say for the first quarter, when we originally announced the closing of the deal, we did not anticipate having closed or having converted the market so quickly.

So we are pleased to get our Wisconsin market on that March 1.

But nonetheless, I would say it's neutral to slightly dilutive.

Okay, thanks.

John Rex, Bear Stearns.

Just had a quick question on cash flow.

You said you maintained your full-year 1.5 to 1.7 net income.

Can you tell us the swing factors we should think about in getting there from when you look at kind of current period results, and maybe any timing differences we should think through that were running through the 1Q and how we should expect that to trend?

John, let me start, and if Per wants to jump in, he can as well.

But I would say right now a wild card might be the days claims payable, which obviously is going to have an impact on our cash flow.

And by that, I mean when Georgia goes live, the state of requiring all of the physicians to bill electronically and for us to pay electronically, which I think is the way the world is headed.

That said, we expect a lower liability on our balance sheet at any quarter end, given that phenomenon.

So the reality is we're not sure how -- if the physicians are willing and/or capable of billing electronically in order to meet that requirement.

So I would say a swing factor is are we getting 100% of our claims electronically.

And if so, then that is going to ultimately speed payment.

Which, John, is a good thing.

Because the faster we get claims in and then it moves into our economic model, which is solid, the econ model, the better visibility we have on trends and issues and costs, and can be very proactive.

But on your full year, I mean when you talk about this 1.5 to 1.7 and we're talking discreetly Georgia, would that really have impact on moving you kind of from the current metric, the 1.0 or 1.1 that we saw the quarter to a 1.5, 1.7?

Well, it's not --

I mean, because were talking about a 60-day lag typically anyway.

So would that really have impact on the full year?

I think it will on the full year, yes.

Now, it is not [0.4] times net income necessarily.

I would say another factor, though, is going to be that Georgia is going to prepay its premium, which is going to affect cash flow as well.

So there are some wild cards yet to be seen coming out of Georgia.

Q1 has historically been lower than this.

Right.

And where we pay insurance premiums, a lot of things.

So historically this is a better Q1 than what we've seen the last couple (multiple speakers).

We also are dealing a little bit with the magnitude of the numbers and that -- with earnings we had in Q1, there's a lot you could swing (technical difficulty) on your 1.1 ratio.

So any change that we had in Q1 has a pretty significant effect on that number.

Okay.

And were there any significant late payments in 1Q that fell into the 2Q?

No.

No, okay.

So as I'm thinking about this, trying to set expectations as to what we should see for the year.

So is your expectation that 2Q is a meaningfully higher cash flow quarter?

I mean, I guess it has to be to get to the 1.5 to 1.7.

Well, if you looked at our even our history, John, the first half is generally very low as far as cash flow generation, and the back half of the year is always extremely strong.

If you looked back at our history over the last two or three years, that is what you are going to see.

So we are already, I would say, somewhat bucking that trend, in agreement with what Michael just said.

Okay, great.

So you would look for 2Q to kind of come in similarly, and understanding 2Q is going to be a little hard to predict because of Georgia coming in in June.

Right.

I mean, one would expect that going live June 1, realistically, how many claims are we going to receive.

And then within that 30-day period, if we receive it, are we going to pay it?

So we expect a pretty big liability for that one month.

Okay.

And then correct me -- the full-year view, 1.5 to 1.7, is kind of a bump-up from what we've seen in the last few years.

I think you were more like 1.4, 1.2 -- is that 1.4., 1.2, 1.4 if I go back the last three years, is that right?

No. 1.5 or 1.7, I would again say, is more consistent with what you would see over the last several years -- not 2005, per se.

But if you were to go back previous years, you would see that higher cash flow generation.

Okay.

Can you just quantify for us the -- I'm sorry -- on the 1.4., 1.2, 1.4, I was talking about kind of in prior 1Qs, also -- weren't we seeing -- is that incorrect?

Ask your question again -- I'm sorry?

Actually, as I am thinking about the prior 1Qs, you said they ran lower cash flow to now.

I thought they had run better?

Definitely, yes, they ran (multiple speakers) right -- significantly lower than -- (multiple speakers).

Okay, great, great.

Just can you quantify for us the magnitude of reserve development in the 1Q?

Identify what your --

How much favorable reserve development did you experience -- prior period favorable reserve development did you experience in the first quarter?

What we do disclose, John -- we don't address individual quarters.

But what we do disclose is a rolling four quarter.

So if you look in essentially the last page of our earnings release, we're disclosing that for four quarters ended March 31, we experienced favorable development of $11.3 million.

Okay.

But can you characterize what kind of magnitude or reserve development you saw in the one -- First of all, I guess -- sorry -- I can assume it's favorable reserve development in the 1Q, is that correct?

Right.

Is there some kind of characterization of magnitude you can give us?

Again, I don't want to get backed into a corner of addressing individual quarters, and specifically the first quarter, because there is really not enough lag yet to, I would say, definitively quantify what we believe to be favorable development specific to the first quarter.

Okay, great.

Thank you.

I think what's important, John, is the statement that we're consistent with -- we have said we've had consistent favorable development since 1999, Patrick right?

So I mean, so it's -- so we look at the consistency, the methodology is consistent, the development has been consistent.

Which I think is what people need to think about.

Great, that is helpful.

Thank you.

Steve Halper with Thomas Weisel Partners.

Hi.

Given your active acquisition program, could you talk about some of the trends that you're seeing out there specifically with pricing, given some of the issues that your publicly traded competitors have had lately?

No, we have commented at various conferences or webcasts that we've seen some of the pricing come down.

Of course, we have the stated policy of not going into [processes] and auctions and will walk away from anything that gets close to that.

What we've said, we're willing to pay a little more for direct negotiations because you end up with a healthier product at the end of the day.

But we are focused on our IRR.

And I guess a lot of people like to talk about cost per member, Steve.

And we said we have a hurdle rate of 20 to 25% IRR.

We have a terminal discount value the same as the entry value over five years, discounted aftertax cash growth.

We're able to meet that criteria.

We won't pay $50 for a member if it's a 10% IRR, but we would pay $800 a member if it is a 28% IRR.

So I mean that is the discipline we're bringing to it.

But generally speaking, there is less competition for some of these acquisitions now?

We are finding that we are able to acquire the properties we want.

Thanks.

(OPERATOR INSTRUCTIONS) Melissa Mullikin with Piper Jaffray & Co.

Good morning.

A couple of quick questions.

First, on [OptiCare], of their 2005 revenue, can you just give us some granularity as to how much of that might come from Medicaid plans?

Certainly they do provide services to Medicaid companies, but they provide services to commercial as well.

So on the Medicaid side, it is certainly less than 50%.

Okay.

So they'll do carve-outs -- they have specific carve outs in specific states under other plans?

Right.

Okay.

And then my second question was how much is remaining on your share repurchase authorization?

We essentially have authorization of 4 million shares and we have acquired through the first quarter roughly about 130,000 shares.

Okay, great.

Thanks.

That is all I had.

Gregg Nersessian with Lehman Brothers.

Michael, more of a macro question.

The requirement in the DRA that Medicaid beneficiaries validate their proof of citizenship beginning on July 1st, do you have any color there in terms of how that is going to be implemented and what, if any, impact that might have on enrollment in any of your states?

You know, it's something that we've been asking and I could find some upside, some downside issues.

So I'm seeing it as a very neutral issue at this point in time.

We may find some more coming in, we may see some eligibility loss.

But I think they have said you have to have a birth certificate or a passport.

Obviously, if you're a U.S. citizen and you don't have a birth certificate, you're not going to get a passport very easily.

So if you're somebody that is here legally, you may have a passport or if you have a green card or something, I guess they would substitute on.

So I think we're going to find some documented people signing up and we will have some undocumented falling off.

South Texas, obviously, has a significant undocumented population.

And until we get into Corpus, it's a little less impact -- there's some in San Antonio and elsewhere.

But the valley, I know, has a large number.

So we have not tried to quantify.

We see -- we've tried.

But until they come out with more color on how they are going to go about it.

The DRA also gives the states a lot of flexibility on alternatives they can look at.

So you have to put it all together state by state.

And I think we need more definition.

Right now we see it business as usual, Gregg.

Okay, that is helpful.

And then just last question, on the acquisition pipeline that you talked about, any changes in your strategy for financing any future deals?

I notice you've got about $25 million of free cash, I'm assuming $7 million will be in cash for the OptiCare --

Right.

So that gets you down to about $18 million.

If you were to look at another, say, health plan deal that might be bigger in size, any changes in how you think you might finance that?

Well, we have our credit line, we have an [accordion] feature on the credit line.

We have a debt-to-cap of turn 26.4%, I think, at the end of the quarter, so we are in a strong debt-to-cap position.

So I think we have the leverage to do more healthcare deals.

With the strength of our balance sheet, the consistency of earnings and knowing where we are, I think we have a lot of alternatives longer-term for virtually any size deal.

If the question is getting to are we going out with an equity offering tomorrow?

No.

No, we're going to be very sensitive to all the financing alternatives.

And equity is driven by our prestated 30 to 35% debt-to-cap ratio we've always maintained at the high end.

And we're within that, so will use financing.

We're able to borrow at a level that looks a little bit almost like capital, when we using the LIBOR rates.

Okay, thanks.

[Conan Lofland] with CCL Capital.

Hi.

Thanks for taking my question.

I was just wondering -- if you look at the first-half run rate on an EPS basis and then sort of against the full-year guidance.

I don't know if you have quantified what the revenue impact from Georgia would be, kind of based on seven number months or however you calculate that.

But can you just walk through how you get from the first-half run rate to the full-year guidance?

Certainly.

I will give you some -- (technical difficulty) of comments anyway.

Certainly Georgia, we should start with Georgia.

For the first five months -- in the first six months of operations, clearly Georgia is nothing but a drain.

So it is pure G&A spend with no revenue.

Now, that obviously changes June 1.

But that's not going to go very far in the first half.

Clearly in the second half, we will have a full six months of full earnings, not just the G&A drain that it has been on the first half of the year.

So in the back half of the year, the second half of 2006, Georgia is fully operational.

Secondly, we do have the service area expansion awards that we won in the state of Texas that are set to go live September 1.

I would also offer that when we did announce our acquisition of US Script, we had said that the first half of the year, the acquisition would be about $0.02 dilutive; the back half of the year $0.4 to $0.06 accretive.

So effectively what we are saying is that acquisition is $0.06 to $0.08 accretive on the back half.

So you can see that certain things, I would say, may be beyond our control.

Georgia and the Texas RFP forced us to somewhat back-end load our earnings estimates.

Okay.

Have you said what Georgia is on a revenue basis for the year, or what is implicit in your guidance?

We have not.

If I did back of the envelope just to kind of get in the range and I said 200,000 lives, so 170 per member per month, using the kind of current level and then seven months would be $240 million in revenue.

Is that in the ballpark or is that too high?

I would say that is in the zip code.

Okay.

So if I take the current premium run rate and then I layer in the Georgia at 90% and then I just run rate all of the G&A, the cost of services and the services revenue, I get about $1.30 in earnings.

So are you expecting -- how much MLR improvement from kind of the run rate pre-Georgia business are you baking into your guidance?

I think what is important, as we indicated on the last call, the 90% is a number at the statutory level.

We will still have opportunities from our management agreement, from our behavioral health agreement, etc., etc., the ancillary agreements that are part of the Georgia contract as well.

Okay.

And then just a quick one on the Indiana, the $5 -- is that about $2.5 million of kind of overage -- is that the way to do the math?

Right, right.

Okay.

And when I look at the stat filings, it looked like drug costs in Indiana were up about, I think, up about 43% in 2005, and premiums were up about 19%.

Did it accelerate further from that level or what can you do to kind of fix that?

I'm not sure about your 43% number.

But nonetheless, as we indicated in our prepared comments, we certainly did see a $5 per member per month spend in excess of our expectations.

And what we can do and what we are doing is, one, we are converting our PBM spend to our US Script platform effective May 1.

We are out meeting with physicians on their prescribing pattern.

A lot of what is happening on the pharmacy sides has some residual effects on the Model One contract.

So, it's important for everyone to get this right.

(multiple speakers) audits.

We're going to audit some drugstores to ensure that they've been in compliance.

There is a lot of central effect things that happen here.

We've seen this historically in other places, and we just do the blocking and tackling to get there.

Okay, great.

Okay, thanks for taking my call.

Tom Carroll with Stifel Nicolaus.

Just a quick one on OptiCare.

Do you currently outsource that need right now?

And will there be some future savings that accrue because of a lost outsource agreement replaced with this new subsidiary?

Yes, Tom, we in fact use OptiCare in Superior.

So we feel like we know them well as a customer.

And how about other places?

We are only using it -- I mean, certainly we will convert our internal vision care spend to OptiCare over some period of time, just as we will with our US Script acquisition.

So absolutely, we will be moving this spend to our own platform, yes.

Okay, thank you.

At this time. there are no further questions.

Gentlemen, are there any closing remarks?

I would just thank everybody.

We want to just reemphasize that we think this was a good quarter, we're comfortable with dealing with the pharmacy issues are, which was the only real issue affecting MLR.

We are dealing with it and look forward to sharing the benefits of those activities on the Q2 conference call.

We thank you, everybody.

This concludes today's Centene first-quarter 2006 earnings results conference call.

You may now disconnect.