Centene Corp (CNC) 2007 Q1 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Centene first quarter 2007 earnings result conference call.

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

After the speakers' remarks there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS).

Ms.

Wilson, you may begin your conference.

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

You should have a copy of the press release issued this morning.

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

Our press release this morning includes a table reconciling our GAAP financial statement presentation to non-GAAP amounts.

We've included this table for comparability purposes because it allows us to present our 2007 results excluding the FirstGuard activity.

Per will refer to those non-GAAP amounts at various points in his prepared remarks.

Michael Neidorff, Chairman and Chief Executive Officer and Per Brodin, Chief Financial Officer will host this morning's call.

We expect the call to last about 45 minutes, and it may also be accessed through our website at Centene.com.

As her usual, a replay will be available after the call's completion by dialing 800-642-1687 in the U.S.

and Canada, and 706-645-9291 from abroad and entering access code 3639977.

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

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene's form 10-Q dated April 24, 2007 and other public SEC filings.

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

While the Company may elect to update these forward-looking statements at some point in the future we specifically disclaim any obligation to do so.

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

Thank you, Lisa.

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

Let me make some overall remarks, and then I will turn the call over to Per Brodin to comment on the financials.

To summarize, membership growth in Texas, Ohio and New Jersey was consistent with our expectations.

In Texas, strong membership growth continued as more members came out of the PCCM and enrolled in our plan.

During the first quarter of 2007 we commenced the Texas STAR Plus rollout with initial membership ahead of our expectations.

We are particularly pleased about the Texas foster care contract award which we won in March to serve approximately 30,000 foster care recipients.

We believe that our technology platform will enable us to provide the state more effective tracking of these members and provide a more consistent quality of health care.

Despite the initially dilutive impact of this contract we expect to return on investment to be significant.

We also believe that if in the future this capability will become attractive to states that require this type of service for their foster care children.

In Ohio the ABD rollout is on track, and we are now serving 10,700 ABD members in the Northeast, Southwest and Northwest regions.

Implementation in the fourth region East central commenced in April.

In Georgia the membership at quarter end of 291,300 is consistent with our guidance of 290,000 to 300,000, and reflects the impact of member recertification requirements imposed by the state on January 1, 2007.

As a result, some members temporarily lost eligibility.

As we stated historically these membership fluctuations emerge on a temporary basis from time to time as states make adjustments to requirements for Medicaid recipients.

Regarding our claims payment, effective February 28, 2007 we have met the state's requirements and have substantially reduced the claims backlog.

We continue to pay new claims on a timely basis.

Recognizing that we have in Georgia an immature market during the first quarter we experienced higher physician costs, which attributed to a seasonality from our perspective.

Hence we continue to maintain a conservative approach to our HBR but likewise expected to normalize during the course of the year as our management programs continue to take old.

In Wisconsin membership declined as a result of more stringent state eligibility requirements.

Eligibility administration issues and the plan termination of certain physician contracts associated with a high-cost hospital system impacted it.

In Indiana our membership declined due to the expected provider terminations.

Last week we announced our entry into South Carolina to our acquisition of PhyTrust, the state's second-largest Medicaid operator.

There are a total of 650,000 eligible recipients in the South Carolina marketplace.

This acquisition positions us to participate in the state's conversion to managed care and creates an immediate opportunity to grow our footprint in South Carolina.

We closed this transaction last Friday and have included this new business in our forecast.

Our specialty company segment continues to perform as expected.

Our Medicaid and SCHIP HBR was 82.3, reflecting the predictable seasonality we expected in Q1 of last year, what we experienced in Q1 of last year.

The HBR for the three months ended March 31, 2007 did not include any overall adverse medical cost development related to prior periods.

With respect to general and administrative costs our Medicaid managed care G&A ratio for the quarter ended March 30, 2007 was 13% compared to 11.9% last year.

This increase reflects increased premium taxes partially offset by the leveraging of our expenses over higher revenue, especially in our Georgia Health Plan.

We completed a $175 million debt offering at an attractive rate of 7.25%.

We thought that this was a prudent balance sheet management strategy to term out this level of debt.

We thank our banks for the work they did for us.

As stated in the press release, released last night, over the last several months Lisa Wilson, our current Senior Vice President of Investor Relations has expressed her desire to return to operating her healthcare investor relations company, In-Site.

This relationship is important to us, and we honor Lisa's decision to pursue her entrepreneurial interest.

We look forward to continue to work with her as one of In-Site's anchor clients.

Furthermore, we're pleased to welcome Ed Kroll as our Senior Vice President Finance and Investor Relations.

Ed joins us at an important time in our growth as a leading Medicaid managed care provider.

As well as a respected healthcare service analyst when at Cowan, his background positions him to work closely with our shareholder base and act as the company's chief spokesperson to the buy and sell side analysts.

I want to remind you that we look forward to seeing you at the June 5th investor conference to be held at the St.

Regis Hotel in New York.

With that, I'm going to turn the call over to Per Brodin who will take you through the Q1 results.

Thank you, Michael, and good morning everyone.

To recap the highlights of the first quarter of 2007 revenue was $670.8 million, an increase of 47.4% compared to $455.1 million in the first quarter of 2006.

We previously announced our intent to begin reporting revenue net of premium taxes this quarter and believed we had agreement with our accountants on making this change.

It recently came to our attention that some of the large accounting firms have not yet concluded whether the scope of the associated accounting guidance is applicable to our fact pattern.

Accordingly, we decided to wait to make this change until the firms have completed their debate of this issue.

Our first quarter earnings from operations were $17.2 million including a $4.2 million gain on sale of FirstGuard Missouri and $2.9 million of other FirstGuard activity.

Excluding the FirstGuard activity operating earnings were $15.8 million compared to $12.6 million in the same quarter last year.

Our health benefits ratio for our core Medicaid and SCHIP population, which reflects medical costs as a percent of premium revenues was 82.3% for the three months ending March 31, 2007 compared to 82.8% for the same period in 2006.

The decrease is primarily attributable to the effect of increased premium taxes.

On a sequential basis our Medicaid and SCHIP HBR increased from 82.1% to 82.3%, reflected expected first quarter seasonality.

For the first quarter of 2007 the HBR for SSI population decreased from 87.6% in the first quarter of 2006 to 86.3% due to the higher effect of premium taxes partially offset by entering our new SSI markets in Ohio and Texas.

Our specialty segment HBR was 79.3% compared to 84.1% in the first quarter of 2006.

The decrease is caused by the diversification of business in that segment which now includes OptiCare effective July 1, 2006 and Bridgeway, effective October 1, 2006.

Turning to general and administrative expenses, our G&A for the Medicaid managed care segment as a percent of revenue increased to 13% in the first quarter of 2007 compared to 11.9% in the same quarter of 2006 because of higher premium taxes offset by the effect of better leveraging of our expenses over higher revenues, especially in our Georgia Health Plan.

The first quarter of 2006 included Georgia implementation costs for which there was no associated revenue until June first of 2006.

Our first quarter 2007 G&A also includes $700,000 of South Carolina startup costs.

In the first quarter of 2007 for specialty services, the G&A ratio was 15.8%, a decrease over last year's same quarter and is attributable to the overall leveraging of expense over higher revenues with the addition of Cardium, OptiCare and Bridgeway in the last three quarters of 2006, as well as the timing of our health plans transition to using US Scripts throughout 2006.

Investment and other income for the first quarter of 2007 increased $1 million primarily as a result of an increase in market interest rates and larger investment balances.

Interest expense increased due to higher debt levels.

Net earnings were $38.2 million including the gain from the sale of our Missouri Plan, a $29.9 million tax benefit from the stock of our Kansas Health Plan, January operations of our Missouri Health Plan and other activity associated with exiting the Kansas and Missouri markets.

Earnings per diluted share were $0.85 including the $0.59 per diluted share of FirstGuard activity compared to $0.20 in the 2006 first quarter.

Balance sheet highlights at March 31st include cash and investments of $562.8 million, of which $71.8 million was free from state regulatory requirements.

The cash that is free from regulatory restriction includes $20 million of excess proceeds from our recent bond offering and a $26 million dividend from the Kansas Health Plan.

Our total debt was $201.4 million and debt to capitalization was 35.3% at the end of the first quarter.

Our medical claims liabilities totaled $276 million representing 46.4 days in claims payable reflecting no change from the prior quarter.

This remains slightly above our guided range of 40 to 45 days.

We expect to move back to our guided range after our Ohio ABD and Texas SSI claims payment patterns for those products mature.

For the quarter cash flow generated from operating activities was $36.0 million compared to net income of $38.2 million.

However, our net income includes the $29.9 million tax benefit that will be realized as our 2007 quarterly taxes come due.

For 2007 we expect normalized cash flows from operations to range from 1.5 to 2.0 times net income.

Lastly, our guidance which reflects the startup costs associated with the Texas foster care program and our operations in South Carolina is second quarter 2007 revenue in the range of $720 million to $730 million and net earnings of $0.25 to $0.28 per diluted share.

For the full-year 2007 we anticipate revenue in the range of $2.9 billion to $3.0 billion and net earnings per diluted share of $1.36 to $1.49.

The startup of our operations in South Carolina is somewhat unique.

Although we expect South Carolina to transition to mandatory care around the third quarter, they will transition membership to managed care on a gradual basis.

That gradual transition will include the membership associated with our acquisition of PhyTrust.

We expect premiums in that state to be slightly above our average revenue per member currently experienced.

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

(OPERATOR INSTRUCTIONS) Josh Raskin, Lehman Brothers.

Good morning.

The first question relates to the Georgia physician costs.

I think you said you were seeing higher-than-expected cost and just curious you guys have talked about accruals sort of based on estimated 90% loss ratios, and I was wondering was it within the range of potential expectations or any other color on what you see maybe even more recently in April.

It is not so much April, but in the first quarter we saw -- it wasn't so much the cost was minimally above our expectation, but it was the frequency of use with physicians versus the specific cost as such.

It was an increased number of visits, and we are trying to in an immature market and the seasonality, we are still doing the analytics on that, Josh to understand it.

But we don't see anything that is going to change our expectations to normalization over the year.

Anything you want to add to that, Per?

No, I think the only comment to add Josh, is inherent in net (technical difficulty) while we booked in 90% throughout 2006 based on the seasonality comment that Michael made in his remarks, as well as the utilization in the physician bucket, you will see that we did book at it MLR in the statutory reports at slightly above 90%.

Okay, that makes sense.

And is this contributing to the increase as for the inventory, the claims inventory was up?

Is that physician costs mostly in there, or what was the reason for that?

The inventory dynamic has a couple things going on there.

There was a large -- if you look at our days claims payable roll forward in the press release.

We did have a large volume of payments related to Georgia.

However, we also saw an increase with the startup of our health plans or the SSI programs in Texas and Ohio.

So those are driving the inventory up.

Josh, with the SSI obviously there is bigger premiums, but you will see the frequency of claims from physicians because of the very nature of the illness is larger and the number of claims will be larger.

If you look also at that supplemental financial data in our release, the claims data reflects a period and inventory per member going from 0.23 to 0.3.

That dynamic was largely driven by the addition that volume of claims per member increase for the ABD and SSI population.

They are just inherently right, that population has more claims, obviously.

Right; you have a higher premium and it is not just because their claims are individually higher.

They have a higher volume of claims, as well.

That makes sense.

Just real quick back on the Georgia -- I'm sorry the one last question on that was -- you guys haven't changed your accruals or your estimations in terms of the reserves in Georgia at this point?

You're saying still minimally above.

You expected some seasonality and booked a little bit higher in the first quarter but no changed outlook and no expectation for continuation there?

Correct.

Correct.

Okay.

Thanks.

Bill Georges, JPMorgan.

I am wondering, could you just walk us through in a little more detail the moving parts around the change in guidance, specifically revenue and where you see changes in your cost forecast?

The revenue guidance is solely virtually all related to this gross revenue reporting.

We originally guided on a net premium tax basis, and our expectation is that our premium taxes for 2007 will be approximately $78 million.

It was about $18 million in the first quarter and then our estimate is it is about at a $20 million run rate for the balance of the year.

So that is that driver.

And then the other changes are relative to -- we had previously announced the impact of Texas foster care as that comes on with the startup costs that we will be incurring in the second and third quarter with the go-live in the fourth quarter.

And with South Carolina, with the way that that plan is rolling out we will not, as I alluded to in my remarks, we will not receive a large increase or big hit of membership on the first day of that rollout.

It is more of a gradual rollout as the plan converts to managed care.

We think our expectation is they are going to do that on a county-by-county basis, and it is not yet completely clear which counties are going to convert at which date.

We are expecting announcement on that very shortly.

Yes, we are.

And to that point other than those two changes, we have not changed our overall 2007 guidance.

Okay, so we should expect then for the balance of the year that you are going to continue to report on a, report and forecast on a gross basis, correct?

We are continuing to evaluate it.

As I mentioned, we are waiting for the firms, the large accounting firms to complete their debate on this issue.

At the point in time when we are in a position to begin reporting that we will make that announcement.

Yes, I mean when they approve it, if they approve it mid-year or at some point in the quarter we would make the change but we will give you the comps, the non-GAAP evaluation of what it looks like.

There will be a lot of transparency out.

Okay.

And could you just walk us through your view of the components of cost trend?

And if you could break it down in terms of utilization and price?

I would say overall from a trend standpoint we would see our HBR improving during the year; historically Q1 is our high HBR quarter.

So we would expect to see that HBR moderate throughout the year.

We will see some moderation in Q2, then we would expect to see more moderation in Q3 driven partially by rate increases that we would expect to see in our New Jersey and Georgia markets, and then September first would be the rate cycle for Texas.

G&A, if you would strip out the Georgia implementation cost that we included in the press release, you will see I think a fair amount of consistency there to the first quarter with some improvement later in the year, particularly the fourth quarter as we continue to get more leverage from our increased revenues.

Okay, great.

Thank you.

Scott Fidel, Deutsche Bank.

First could you just walk us through those expected rate increases in the three markets that you mentioned, what your expectations are for rate increases there?

We typically model in at 2, 3, 4% rate increase in our markets and our forecast is consistent with that past.

I want to be very careful because we are in rate negotiations, Scott, and so in some states a smaller amount is acceptable.

In others we need larger amounts.

And so we tend to talk in the 2 to 5% range when it is all consolidated.

Okay, and then just thinking about the claims inventory per member, I know last quarter you had guided to 0.17 to 0.26 area and it looks like it came in at 0.30.

And you explained some of the factors there but should we think about that coming down given that you paid out some of the claims in Georgia or because of the new mix of SSI business or we can actually see a trend more towards the 0.30 level over the next couple of quarters?

I think with the addition of the SSI and ABD membership, because we will continue to see some growth as the Ohio membership continues to roll on that we are going to be closer to that 0.03% ratio.

Okay.

Then I am just a little confused looking at the GAAP versus non-GAAP reconciliation that you included.

Just can you help me understand the investment in other income?

Did you include the investment in other income from FirstGuard in your non-GAAP estimates, or because it looks like actually the non-GAAP number is higher than the GAAP number there.

The non-GAAP number, when we stripped out the FirstGuard activity in connection with our abandonment of the FirstGuard Kansas stock, there was $1.6 million of regulatory capital that was left in that entity.

So when we exclude it or pulled out the FirstGuard activity that $1.6 million is reflected on that other income line.

So that is why we that, we have pulled that out.

I see.

Last question just know that there is the Maricopa Behavioral contract and that should be coming out soon; just any expectation that you have around that and possible outcomes?

I think very consistent; there are three players.

I give ourselves a one-in-three chance.

Okay.

Thank you.

That would be very conservative.

Daryn Miller, Goldman Sachs.

Thank you.

Since South Carolina wasn't an RSP I wonder if you can give us a little more color on how membership allocation is determined there for different players and who the players are and how that will be determined.

At this point in time the membership will be auto assigned.

It is a non-RFP state and that is one of the reasons why you saw that we incurred startup costs.

We had talked about in late 2006 our interest in entering that market.

And since it was a non-RFP we put people on the ground to start negotiating contracts, getting our COA and doing what we needed to do to be in a position to accept membership when they go to mandatory managed care.

So when they make the announcement about the rollout dates, that is when they will then start assigning what we believe will be by county membership.

As Michael alluded to in his comments that market is currently estimated at about 650,000 eligibles, track record sometimes of original estimates of eligibles is a little overstated as we saw in Georgia, so that could come down.

But that is why we see the membership coming in slowly over time.

Great.

Thank you and one other question on the non-GAAP reconciliation.

The 6.6 in revenue, is that purely premiums or is there any service component to that?

That is purely premium.

Okay.

Thank you.

Doug Simpson, Merrill Lynch.

Could you just walk us through the South Carolina market?

Why you guys are interested in moving, why you are interested in this deal and kind of your thoughts over the next two years for this.

It is a -- there are 650,000 -- let's be conservative -- 600,000 to 650,000.

Every time we get numbers from the state they seem to get mitigated a little bit.

The (inaudible) non-RFP is (inaudible) as commented.

We went, filed, got a COA, did some things to move ahead there.

Where you have a state that you know and through conversations we know we are going to mandate and roll it out.

We looked at the premium adequacy.

The models and all the typical things we do to make a determination.

And it appeared the appropriate state; it gave us an opportunity to go in as a more de novo startup.

And this initial acquisition just gave us some critical mass of 30,000 lives.

And without talking a whole lot more about that deal, but it was just a combination that we think will allow us to be a number one, number two player over the next 12 to 18 months.

And the fact it was a non-RFP everybody knew that, and we just took advantage of that.

And we have been looking at it probably for about 24 months.

And if you will, in our conferences we talk about how we have this -- we break our business into three categories -- seed, growth and mature.

And this has been one of those seeds we have been sowing for the past 24 months.

Okay, and maybe just to follow on the question earlier about the FirstGuard, could you just the investment income looks like it was about $1.6 million from FirstGuard that was included in the $0.26.

Is that if you tax -- it is about $0.02 of the $0.26.

Is that right?

That's how that would compute.

And what exactly is the 1.6 again?

Just as you were taking the capital that was sitting at FirstGuard and you are bringing it back to the parent.

Well, I guess a couple issues there.

I will speak to the last one first.

The regulatory capital that was in excess of our estimated liabilities was dividended to us before we abandoned that stock.

So that was the $26.5 million that I alluded to in my comments.

So that was formerly within the regulated entity of FirstGuard Kansas and now was dividended, is free from regulation at the parent.

The $1.6 million was an amount that for regulatory purposes we had to leave behind due to claim, open claims and those type of things.

And so since we abandoned the stock we no longer have access to that cash or asset, and therefore we had to write that off.

But it was a positive 1.6?

No.

There was a write off of $1.6.

There were also some earnings of FirstGuard that we stripped out that were in the FirstGuard entity in Q1 so that we look at and present the non-GAAP measures, let's say on a core basis such that you can see what the earnings would be Q1 excluding any FirstGuard activity.

So the FirstGuard activity I want to make sure I close the loop here, FirstGuard, it looks like FirstGuard lost $1.4 million on operations.

Is the earnings operations number but then below it it contributed a $1.5 million investment income.

And that piece I am trying to -- that $1.5 million positive, what exactly was that?

The reason it looks positive is because the $1.6 million write-off increases the GAAP so that when we get to the non-GAAP because the GAAP includes a decrease of $1.6 million.

Okay.

There is a negative inherent in that number in the GAAP column that you then add back to get to the 2.885 in the non-GAAP.

Okay, and then it looks like FirstGuard -- you give revenues here, I do not know the breakup between premiums and fees, but assuming that is largely premiums it looks like the MLR is over 100%.

Is that just kind of exit true ups, or just if you could characterize that.

That was primarily the experience we had within that month of January and some of it was a little bit of true up.

But most it was just the FirstGuard Missouri operations in January.

Okay.

Thanks.

Matt Perry, Wachovia Securities.

Good morning.

I just wanted to make sure I understand the changes in your full-year guidance now.

You added in some startup costs.

Now I want to make sure I understand that is related to your entrance in the South Carolina market, not your recently announced acquisition of PhyTrust.

Is that right?

It is.

I would characterize it as the net effect of our entry into South Carolina.

So it included within that would be the way that PhyTrust operations are expected to perform as part of our Company.

PhyTrust is a medical home.

Said another way is one of the reasons we looked at this acquisition is due to the ramp in rollout of South Carolina, the potential dilution of the startup would have been greater were we not able to achieve a larger scale for this type of an acquisition.

Okay.

We are -- it is a medical home versus an at risk health plan at this point in time.

The revenues and things associated is not what you typically see, Matt.

But it does say that when they roll over the counties we expect the majority of that membership to roll into our business as an at risk health plan.

And if you look at South Carolina based on it would seem like based on the startup costs you are forecasting, you've probably made some estimate of how many of the total eligible members you might capture over a year or 18 months.

So what is the total opportunity for Centene out of these 600 to 650,000 members?

Well, we -- it depends on the timing and how they roll it out.

But we typically look at a market in the first year that we like to get, let's be conservative and say a 10 to 20% marketshare initially in the first year.

Okay, and is it the case that you already have a contract with the states so you are certain you will be entering the state and it is just a matter of how many members you are able to get?

We have a license to operate as an independent company.

We have this company, as well.

That has the membership.

So we will be operating in South Carolina.

And once they announce their rollout and what counties and when and the timing, by the next call we hope to be able to give you a lot more clarity on what it will look like this year and next year.

But it is a good opportunity.

We know a lot of people are looking at it and we wanted -- this really gave us and its not unlike what we've talked about.

As we move through while we are prepared to do acquisitions of our FirstGuard we have learned from that and this has that nice balance of a de novo startup but the ability to roll in some members.

Do you expect the South Carolina market to be accretive by the fourth quarter, or is that more likely to be an '08 accretion?

It's more likely to be an '08 accretion because there are no bulwarks of memberships coming in.

And then in Georgia you talked about a little bit higher medical costs, but you are still booking at 90% or a little bit above.

With that added -- was Georgia additive to first quarter earnings?

Yes, they are still contributing to us.

They are, okay.

And then lastly I understand the change in the way you're going to have to report premium taxes or versus what you had expected to do.

Is there no change in your kind of core G&A assumptions other than the startup expenses?

Has that estimate changed at all?

No, it is consistent.

I am glad you asked that because I want to being webcast gives me a chance to say this.

I can talk about it subsequently that we continue to look at the when we leverage our G&A.

But with the growth curve we are on and investment we're making in systems and improving the processes and things of that nature, we intend to -- we see the G&A maintaining that kind of level mid net of the tax impact, Matt, for the balance of the year as we continue to leverage the growth.

But at the same time continue to invest in the systems and the processes.

If we need to routinize a lot of these processes so that as a bigger opportunities come up they get kind of plugged-in that much easier.

And in fact we just spent a lot of time at our Board dinner last night talking about that, how to get things standardized and routinized so that these tuck-ins and others become even simpler.

And I guess when you say maintain the current G&A level you mean as a ratio, like maintain that ratio?

Okay.

And just last question, Texas and Ohio ABD, those new markets, could you just comment maybe a little qualitatively how those have run versus expectations?

Are they still on track to get the kind of positive contribution you're expecting for the year?

I don't think we've seen anything that says no.

At this point it is very early.

We are still confident that because particularly these are markets we are in and that have some skills and knowledge and it's a matter of ramping up to manage a little different productline, which we have done over the years from New Jersey forward.

So I don't -- Per, you may want to comment or someone else but I just don't see any.

No, I think from an internal standpoint that as we contrast this to a big startup in a market where we had previously not had operations, noise level is pretty low.

It is early, but from our perspective the transition seems to be going well.

And we are looking forward to the additional members we will be bringing on as the rollout of the additional Ohio membership continues.

I think, Matt, what we want to do is we want to continue -- that's why I mentioned G&A -- to just do things in a very sustainable way.

And we are really focusing on being able to sustain things and see if we something adjust for it, manage it and just move ahead more predictively.

With a lot of focus on analytics.

Okay, thanks.

That's all the questions I had.

Melissa Mullikin, Piper Jaffray.

I just have a couple questions here, some clarification on your guidance for Q2 and also for the full year.

Your guidance indicates $0.06 costs associated with South Carolina and Texas foster care.

I am assuming that includes the previously disclosed $0.02 costs that you already talked about for the Texas startup.

Correct.

So it is just an additional $0.04 for South Carolina?

Correct.

And the same applies to your full-year guidance, that you talked previously about $0.09 costs for Texas offset by $0.03 to $0.04 accretion, so that would be a net $0.05 to $0.06 cost for Texas.

The difference here in the $0.12 to $0.15 would be purely related to South Carolina?

You're not changing your Texas cost outlook at all?

Right.

Okay my second question is in your PhyTrust acquisition, are there specific counties in which PhyTrust currently operates that you have what you would consider to be real critical mass in those counties and which counties would those be?

They have critical mass.

They operate in important counties, and I wish I had my geography of South Carolina down better for you.

But we can get that for you off-line.

But it is in public domain and information so I can give it to anybody any time; I just don't have that in front of me.

That would be great if I can get that off-line.

And then lastly last quarter you talked about that I think continuing -- some continuing issues with physician and pharmacy costs in Indiana.

You didn't talk about that this quarter.

Can we assume, then, that you feel like you have those under control in Indiana?

We've seen improvement there.

I think one of the things that we mentioned on the previous call was the rate increase we received in 2007, and therefore we believe that we are getting reimbursed an appropriate rate and there have been some other changes made with respect to pharmacy costs.

So we believe we are back on track in that state.

Great.

Thanks.

That's all I have.

Joe France, Banc of America Securities.

Thank you, Mike.

I just had one question regarding the SSI enrollment, which was up to 50,000 lives in the quarter.

What was the big pickup, and do you expect continued growth like this for the balance of the year?

The biggest piece of that was in the Texas market, and the other piece of that was Ohio.

We would expect that the Texas rollout was more of a date in time immediate hit.

The Ohio rollout is happening over time, region by region, while we only have one more region to go live in the second quarter they are taking more of the rollout approach where you really don't achieve all your membership until 60 or 90 days after what they consider the go live date.

So we expect to see some more increase in SSI membership in Ohio, but not in Texas.

They are doing it very carefully.

You have that whole, there is an assessment period.

Have the members assigned, they give you time to do an assessment and you do the up front assessment on managing their care for continuity of care, Joe, so it is a longer-term process.

But I don't think you will see that the extent of that growth, but it will still continue to grow.

If I could just ask one more question following up on Melissa's I was trying to figure out the $0.04, how we got the $0.04 for South Carolina if you wouldn't mind walking through that again.

We had the $0.05 or $0.06 startup costs in Texas that you get out in the middle of March, but where did the rest of the numbers in Texas come from?

Well, the incremental is I will associate with South Carolina so the Texas is the -- that guidance remains the same, the amounts we had disclosed previously in connection with achieving that contract.

So the incremental amount is simply the additive effect of South Carolina.

You are just saying $0.04?

This quarter, for South Carolina.

Okay, thanks.

Brian Wright, Jefferies & Co.

I just wanted a clarification on the -- you said on a stat filing basis in Georgia you would be at a little north of 90% in the first quarter.

Is that correct?

Yes.

(inaudible) being consistent with talking about our net of premium taxes so that really translates to between 87 and 88, down in that range.

That is net of premium tax so gross is what?

Gross is down in 87-ish percent.

So is that 87-ish percent comparable to the 85.1% on this filing in the fourth quarter?

Yes.

How do we think about -- you said overall you had overall development was not negative.

But because of the issues you saw in Georgia and kind of what you were booking in Georgia on the fourth quarter relative to the first quarter, was there any unfavorable development in Georgia specifically?

No, as Michael alluded to we really saw more of a utilization issue in the first quarter as opposed to development coming from '06.

So no, we did not have development from '06.

And then if we look at your rolling four quarters roll forward on the medical claims liability it shows you got about $367,000 of favorable prior period development, and that is kind of down meaningfully from 11.3 in the first quarter last year.

Is there anything kind of going on that if you could help us kind of figure out what the differential is on that?

That is driven by the $9.7 million of adverse development that we saw in Q2 of 2006.

So that is the 9.7?

Yes, the rolling four quarters --.

So now that effect is rolling in there.

You will see that if we added that back it would be up at the 10 million range which would be consistent -- more consistent with prior periods.

Okay, thank you.

Tom Carroll, Stifel Nicolaus.

A couple quick questions.

Back on Georgia, I was wondering if you could comment on how your OB and NICU expenses are trending relative to your expectations now that you got another quarter of operations under your belt.

I think it will vary from region to region, Tom.

In Atlanta it is where we would expect it to the.

The central region it is starting to approach that.

And the new Southwest region its higher than the other two.

But you also expect that in the early days of a new program.

Those members only started rolling in in October, November, December of last year.

So we don't have the same period of time to see the normalization.

So I would expect that to be higher.

Great.

Thank you for that.

It sounds like no real surprises there.

And secondly, on your --

I want to be just for absolute transparency and clarity, any given month or period in any of these markets you can see some swings in (inaudible) and that is just the nature of our business.

But what we are doing now is we are putting all these programs we've talked about historically to try and get ahead of that curve, and that is not an instant, but not to discount what I just said.

Relative to what one would expect in the period we just reported it is consistent with expectations.

Thank you for that.

On Ohio ABD specifically, where do you guys expect to end the year on enrollment there?

Could you give us a little more guidance on that, if you would?

There is about 60,000 members in the four regions in which we will operate.

So if you take one-third of that to a little less, 18 to 20,000.

Okay, perfect.

That's great.

Thank you very much.

Sean McMahon.

My question has been answered.

Thank you.

Matt Perry, Wachovia Securities.

Just had a follow-up and I apologize if you might have talked about this early on the call on the cash-flow statement.

$36 million in operating cash flow for the quarter, how much of that if any was related to FirstGuard?

The biggest piece, Matt, is that $29.9 million tax benefit.

That is a big component.

So if you think about the net income of 29.9 and then my remark what I alluded to that we will realize that over the next several quarters as we make our 2007 estimated tax payments, that $29.9 million is included in the net income number.

But there is no effect of that in cash flow from operations because that is essentially coming back out in the income tax receivable.

Okay, so that is the big change in the other current asset line?

Absolutely, that is the sole driver there.

Okay, and you said that -- or did I hear correctly that you expected full-year kind of adjusted or non-GAAP or cash flow to be 1 to 1.5 times non-GAAP net income, or was it 1.5 to 2?

I said 1.5 to 2.

1.5 to 2.

Okay, so if I just was to kind of back the envelope look at what you might show in net income somewhere around 60, $65 million so based on that your operating cash flow would be 90 to 120, something like that?

Correct.

That's all I had.

Thanks.

Remember people as you dig in behind this and start doing all your numbers, everyone, that we historically always in the first quarter have a lower ratio and then it builds throughout the balance of the year.

At this time there are no further questions.

Are there any closing remarks?

I just want to thank everybody.

I remind you again of our investor conference in New York.

We look forward to seeing you then.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.