Centene Corp (CNC) 2007 Q4 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the Centene Corp. fourth quarter 2007 financial 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).

Mr. Ed Kroll, you may begin your conference.

Thank you, operator. Thanks and good morning everyone. I'm Ed Kroll, Senior Vice President, Finance and Investor Relations for Centene Corporation. Thanks for joining us on today's call. You should have a copy of the press release we issued this morning. If not, please call Libby Abell at 212-759-5665 and we will send it to you immediately.

Our press release issued this morning includes a table reconciling our GAAP financial statement presentation to non-GAAP amounts. We have included that table for comparability purposes because it allows us to present our '07 results excluding the previously announced restructuring charge. We will refer to the non-GAAP amounts at various points during this call. Michael Neidorff, Chairman and Chief Executive Officer, and Eric Slusser, Executive Vice President and Chief Financial Officer of Centene will host this call. Given our need to reschedule to this time slot on short notice, our call will last no more than 45 minutes so as not to conflict with any previously scheduled conference calls. This call may also be accessed through our website at Centene.com. A replay will be available today shortly after this call's completion by dial 800-642-1687 in the U.S. and Canada or 706-645-9291 outside the U.S. and Canada. The access code for both dial ins is 34562229.

Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provision under 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 October 23rd, 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, Centene specifically disclaims any obligation to do so. Finally, just wanted to give you a heads up for our 2008 annual investor day in New York City. Please mark your calendars for June 3rd, 2008. We will have more details to follow soon.

Now I would like to turn the call over to Centene's Chairman and CEO, Michael Neidorff.

Thank you, Ed. Good morning, everyone, and thank you for joining this morning's call. I will briefly review the highlights of the quarter and then turn the call over to Eric for his comments on the financials. Consistent with our policy over the last several quarters now, we have other members of our senior management team available to answer your questions. The timing of this call and the circumstances are as unusual as you could expect to find. It is consistent, however with our approach of providing information as soon as the results are clear. We will return to our normal time for the first quarter call on the fourth Tuesday following the end of the quarter at 8:30 a.m. Eastern standard time.

The fourth quarter of 2007 was solid, and we continue to demonstrate an ability to navigate the occasionally choppy waters of our industry. As we alluded to in monday's press release, we have been in discussions with our auditors throughout the week regarding the recognition of the Georgia July 1, 2007 rate increase in the fourth quarter of 2007. When we signed the agreement with the state in November of 2007, the accounting literature allows us for recognizing revenue if there was persuasive evidence that an arrangement was in place. While we feel it was clearly there and the state confirmed it, after much conversation, we are advised that the approach we are taking is the most conservative interpretation of SEC rules. After final review, we determined that this review should be recorded in the first increase of revenue should be recorded in the first quarter of 2008. Had we recognized this revenue in the fourth quarter, we would have posted even stronger top line results, an improvement in our medical HBR from Q3, G&A improvement and good earnings growth. We also want to point out that we are not permitted to say what if and recast the numbers.

Overall, excluding the effects of the Georgia rate increase, HBR performance was good. But we recognized the need to continue to execute on our Ohio ABD, HBR improvement program. Our Ohio ABD, HBR along with the nonrecognition of the new rates in Georgia impacted our ability to reach the high end of our Q4 EPS. HBR will continue to fluctuate as we have previously stated, due to seasonality. The addition of new business to our portfolio and new membership.

Year-over-year membership increased as a result of solid contributions from Texas and Ohio. That was particularly offset by declines in Georgia, Indiana and Wisconsin. As a reminder, we stated at the beginning of 2007 the latter two markers would likely see lower enrollments with better margins in the year. On a sequential basis,Texas and Georgia were the two primary contributors to membership growth. We are pleased with the progress we made in Georgia market over the last two quarters enrollment and our HBR is showing continued improvement. In Texas, in addition to the growth afforded from our existing products, and markets, we look forward to the Texas foster care program which is scheduled for an April 1st launch. We are remain confident in the long-term prospects for growth in Ohio for both our CFC and ABD products. We have always maintained that pure-play medicaid players have a competitive advantage over commercial HMOs due to our more focused approach.

During the quarter, we launched the coverage of an at-risk membership in South Carolina. While South Carolina continues to be a promising long-term growth opportunity, the current ramp is going a little more slowly than we expected. In Florida, we are still working with state regulators, and inspectors to convert membership to an at-risk, to an at-risk basis during 2008. Our specialty companies continue to perform well. During 2008, focusing on third party sales of our specialty company services and the PBM will be a priority.

One final note, for those investors who review our statutory filings, as we have discussed on prior calls, these filings do not provide a complete picture of our performance because they do not include or reflect the operations of our specialty companies for our portfolio states. The margin that would otherwise go to outside vendors of specially companies is recurring by us thanks to our unique multiline strategy. These inter-company sales are predicated on state approved contracts and all our companies are on shore with full visibility of their results. Our consolidated results give a more accurate depiction of our numbers because they capture the margin that we may receive from our specialty companies. It is important to note that this will be further impacted if Georgia decides that they wish us to recognize the retro active premium in the fourth quarter for statutory purposes.

With that, I am going to turn the call over to Eric for his financial review.

Thank you, Michael. And good morning, everyone. Before I recap the highlights of the 2007 fourth quarter, I would like to point out two other changes in our reporting format. First, effective with this quarter's results, we are reporting all activity associated with our former FirstGuard subsidiaries as discontinued operations. All prior periods have been restated to reflect this change. Finally, as we announced on our last earnings call, our HBR and general and administrative ratios are now presented net of premium taxes. Please note that we have provided a table in our press release that shows our quarterly Medicaid and S Chip ratios on both a growth and net basis for analytical purposes.

Revenue from continuing operations grew to $777.4 million, which represents 25.8% growth compared to the fourth quarter of 2006. This increase was mainly driven by membership growth in Texas and Ohio, which are two markets that added SSI products in 2007. Our health benefits ratio, or HBR, and our core Medicaid and S Chip population was 84% for the 2007 fourth quarter, an improvement of 140 basis points compared to the 2006 fourth quarter. but an increase of 270 basis points sequentially. The sequential increase resulted primarily from pharmacy and other seasonality increases, and an adverse premium true up with the State of Indiana of approximately $4.2 million. The HBR would have been lower had we been able to recognize the Georgia rate increase in the fourth quarter.

The HBR for our SSI population in the 2007 fourth quarter was 94.5%, compared to 92.2% in the 2006 fourth quarter, and 92.4% for the 2007 third quarter. The SSI HBR is higher than we expected due to high utilization in Ohio. While the utilization in Ohio has contributed to this ratio being out of our guided range, our medical management teams focus on effective case management for high cost members, preventing hospital readmissions, and reducing ER visits by providing specialized care to members experiencing behavioral health issues. We remain confident that the medical management initiatives we have put in place, and the more familiar this population becomes with our managed care approach, will improve the SSI HBR in 008.

Turning to our general and administrative expenses, the G&A ratio for our Medicaid Managed Care segment for the fourth quarter of 2007 was 11.8%, which includes $9.4 million for our previously announced fixed asset impairment charges, as well as a severance for an organizational realignment. A non-GAAP reconciliation removing the restructuring charges has been provided in our earnings release. Excluding these restructuring charges, the G&A ratio for our Medicaid Managed segment was 10.5% compared to 10.4% in the fourth quarter of 2006. Our 2007 fourth quarter effective tax rate for non-GAAP earnings was 24.8%. The decrease from the prior quarter was primarily due to lower earnings and increased percentage of tax exempt securities in our investment portfolios and lower state income taxes. Earnings per diluted share from continuing operations excluding the restructuring charges previously discussed were $0.20 for the 2007 fourth quarter, compared to $0.21 in the fourth quarter of 2006.

Balance sheet highlights at December 31st, 2007 include cash and short-term investments of $314.9 million and long-term investments including restricted deposits of $344.3 million. At December 31, 2007, cash and investments held by our unregulated subsidiaries were $33 million. Our total debt was $207.4 million, and debt to total capitalization was 33.3%. Our medical claims liabilities totaled $335.9 million at December 31st, representing 49.1 days in claims payable, flat from September 30, 2007. For the quarter, cash flows generated from operating activities were $37.5 million, approximately 12.4 times net earnings from continuing operations. That concludes my comments for our fourth quarter results.

Before we open the call up for your questions, I would like to provide guidance for the to 2008 first quarter. We expect revenue in the range of 785 to $795 million, net of premium taxes, and earnings per share of $0.59 to $0.64. This guidance reflects normal seasonality, the previously mentioned start-up cost in Texas, South Carolina and Florida of approximately $0.09, the State of Wisconsin's decision to carve out pharmacy benefits from our premium, effective February 1st, 2008, premium increases of 1.5% in Ohio, effective January 1st, 6.3% in Indiana effective January 1st, 3.5% in Wisconsin, effective February 1st, and the cumulative impact of the rate increase of Georgia retroactive to July 1, 2007. As we expect to recognize the Georgia rate increase in 2008, our full-year 2008 guidance has increased to revenue in the range of excuse me, 3.37 to $3.47 billion, net of premium taxes and earnings per share of $2.04 to $2.14.

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

(OPERATOR INSTRUCTIONS). we will pause for a moment to compile the Q and A roster. Your first question comes from the line of John Rex with Bear Stearns.

Thank you. I just wanted to understand a few more things about kind of how we think about the impact of retroactivity. You are essentially saying there's $20 million of retroactivity it looks like, and I guess first I want to just focus on that number, and kind of how one gets there. When I think about your Georgia premium revenue base, that would imply a, in the quarterly premium, that would imply an effective rate increase of something more like 6% rather than 3.8%. I am just trying to understand why that seems like a higher percentage than I am accustomed to in thinking of that premium base.

This is Eric Slusser. First of all, the 3.8% is an average across many different rate sales in the State of Georgia. The other issue is that we were required to provide as part of this new rate amendment, we were required to provide some additional services. When you take into account those additional services, that bridges the gap between the 6% and the 3.8%.

Okay. So, it is effectively it comes to 6% for you guys on the top line at least. Okay. And then, I just want to think about how this looks versus where you had been, I mean so if I take essentially adjusting your 4Q report for the benefit of tax rate, so taking the the $0.20 to $0.16 for the tax benefit you got, and I bring in half that benefit, so it is up $0.14 a quarter benefit, I am getting to $0.30, I exclude the Indiana impact, I get to $0.36. So, that still implies a pretty big miss from the low end of your guidance range if I just take half a quarter impact. As I recall, the way you configured this, the low end of your guidance range assumed you got the benefit for the 4Q period but not the retroactivity for the 3Q period. Why does it look like such a wide miss from your prior 4Q guidance?

Yes, John, I think some of your numbers are right in there. Our previous guidance assumed that we had the full effects of the third and fourth quarter in that guidance for fourth quarter results.

But not the low end as I recall. The way you described it, the high end assumed the retroactivity all the way back, and the low end assumed only for the 4Q. That was the way it was described if I recall correctly.

I don't think, that's not how we looked at it. I think the only thing, had we had the, and I have to avoid these what ifs because there's very clear regulations on that. So I will try and answer it as best I can. The guidance had in the retroactivity in the range, we also talked about the Indiana. There was a lot of movement in and out. So if you take out that, we also said some of it it was also some added, some higher than expected costs on the ABD population impacted as well. So we take all of that in when we were forecasting guidance, it was within the range not at the high end.

No, but I mean you were always quite clear, the low end did not include the retroactivity to the 3Q period, only for the 4Q period. I mean you were very clear on that. I mean.

That's not how we saw it, John. When we gave reconfirmed guidance in December, the full effect of the third quarter and fourth quarter rate was in there, in that guidance.

Okay. You just didn't, you just didn't update us that you had changed it to include retroactivity for the 3Q also at that period, at that point?

Would you repeat that?

So, this is the first time that I am hearing in a public forum that the low end of your guidance range assumed retroactivity for the 3Q. This is the first time.

We are saying that the range we gave assumed that recognizing when we gave it in December, we were, there were other moving parts in there as well.

But you didn't tell us that.

We didn't tell you what?

You did not tell us that the low end of the guidance range assumed retroactivity for the 3Q.

We.

In fact you said.

I would say, john, I think we were, you ed and I talk about this maybe offline, take time from everybody else because of time constraints. But we gave guidance without -- in total with that in there and guidance takes into many factors. That's why there's a range.

Okay.

Additional point here is that we had always in our annual guidance have that in there also. If you take these numbers and get to where that would be with that Georgia rate increase, you will see that the annual guidance would have been in our expectations also.

Okay. So you are saying, so essentially you are saying that the vast majority. What we should do is add back the full $0.28 and the $0.06 from Indiana to get to $0.50 is that what.

We cannot, because we try to say, we cannot comment on the what if. So I mean I just, I would like nothing better than a pro forma all of this but the regs are clear, what we can say, John. We can say I am not going to.

I mean, as an analyst community we are trying to assess how you performed versus where you had thought you would perform. And so, I am not sure how we make that leap.

I wish that the regs allowed us to say more than we can. They are what they are. We have stated we believe we had and I said up front a solid performance in Q4.

All right. Thank you.

Your next question comes from the line of Greg Nersessian with Credit Suisse.

Good morning. I guess first of all, you know, I think I have to agree with John here. Your guidance was pretty clear that it did not include the retroactivity in the low end of the range and in fact the 8-K that you issued in November when you got the rate increase suggested that you hadn't even finalized a retroactive rate increase for the third quarter. I would still like to understand that. As I look at the change in the '08 guidance, is there anything else going on besides the Georgia rate increase in the first quarter that would lead to the $0.28 boost in guidance? What are the other moving pieces?

There would be.

We are try to go be very careful. With have spent a day being instructed on what we can and can't say. It is our tendency to want to say a lot. We are been instructed. That's why there's moments of silence. We are trying to think of what we can say. Go ahead.

Yes, Greg, the '08 guidance has been adjusted to reflect the movement of this revenue from the retroactive rate adjustment into our 2008 guidance.

Okay. And there's nothing else that you want to highlight in the $0.28 beyond that?

No.

Okay. Fair enough. And then on the restructuring charge, I think you mentioned $12 million, and then the quarter, was the $9 million just the asset impairment and then the what is it, 9.4, 9.7 million is the asset impairment.

And the severance.

The severance is on top of that or that's included.

That's included in that number.

So you are taking the smaller charge than you had originally indicated.

Yes, when we worked through the elements of the severance piece of that, the number came in less than we had estimated.

Okay. Okay. And then the Wisconsin rate, 3.5%, is that net of the pharmacy carve out?

Yes, that rate increase is net of the pharmacy carve out, correct.

Okay. So you would have had a much larger increase thanks to pharmacy. Did that influence your, is that going to influence your specialty revenue, your PBM revenue now and your PBM margin? How is that going to impact the cost of services line?

That's going to be out of there.

Yes, it will impact that business.

Okay. But roughly how much of pharmacy revenue in Wisconsin did you recognize? I guess maybe what, how much of the PMPM was pharmacy?

We have estimated this will have an approximately $50 million revenue line impact.

$50 million revenue impact. And is that the annual or the 11 months?

That's the, the impact to '08.

The '08 impact. Okay. Okay. And then the Ohio ABD, would you characterize that as the only driver here of the higher SSI on the quarter and what level of confidence do you have in the, in that the rate increases in Ohio are sufficient to get you down to the MLR that you are targeting there given some less rosy commentary from some of the competitors that are there?

I think two things, one, the we still have confidence that if we can manage that population and Mary here has a whole program in place as we have done elsewhere. It works effectively. The second half of your question, and it was the primary driver, the thing that would have the greatest impact on the shifts in the MLR plus our various plans. Secondly, the rate increase alone absent the medical management program would not be enough to bring it down in line. Seldom would rates alone do that.

Okay.

It is a combination of the rate increase, that helps obviously but then we have these other programs. I also want to point out that from our perspective we've had them, 60 days, maybe the full 60 days of being able to manage them.

Right.

There was a period of time we couldn't.

Right. There was a grandfather period where we were not allowed to move patients from their current drugs over to our preferred drug list.

Right.

We were able to do that, we were able to get nice downward trends in pharmacy. Same with other services that have been authorized. But now with agressive case management, aggressive leveling program, not only looking at the in-patient but also at the skilled nursing facilities, looking at the rehab days, we are very confident that working together with our specialty companies we will be able control these costs.

Okay.

Your next question comes from the line of Matt Perry with Wachovia capital.

Hi, good morning. Just a couple of questions, first, can you, go into a little more detail on this Indiana true up, what exactly was that and will it recur at any point in '08 or is it done?

No, that was a one-time item that was trued up in the fourth quarter related to previous quarters and a duplication error that was discovered by the state of Indiana in their premium payment process.

Oh. So it is simply a refund of an overpayment?

Yes, absolutely.

Okay. And then Texas foster care, you are still expecting that to start on April 1, I mean do you feel like you have very good visibility into that, given the fact it has been delayed, I guess what I am asking is what are the chances it gets pushed back income.

I don't expect at all that this will be pushed back. We have, I will use your terms. We have great visibility into the process at this point and I am confident we will go live with the program and implement on April 1st.

Okay. And then just one last question, I mean, you guys often kind of discuss you know, start up expenses and even quantify them for new markets. I guess, I am not quite sure for how long you consider something in a start-up mode. I mean if I look at South Carolina, you have have been in there nine months or so, yet you are talking about start-up expenses in '08. Can you talk to me about how you think about that?

That is -- I apologize for my voice we typically, when we like for south Carolina for example, we included the start up expenses until we were licensed on a full-risk basis. That's typically what the cut off point would be. Once they two live on a full-risk, it will be continuing operations opposed to start up operations. I expect the same to be true for foster care, as in Florida once we start the conversion process, et cetera.

And any discussion around the number of members you might be able to pick up in '08 in Florida?

We haven't talked about that. Our goal is to initiate the conversion process in '08.

That's all I have. Thank you.

Thank you, Matt.

At this time we have no further questions. Presenters do you have any closing remarks?

No, we just thank you and I will comment by saying I look forward to returning to a 8:30 eastern time in April. Thank you very much.

This concludes today's conference call. You may now disconnect