Centene Corp (CNC) 2008 Q4 法說會逐字稿

Good morning.

My name is Tim and I'll be your conference operator today.

At this time I would like to welcome everyone to the CNC, 2008, fourth quarter and year end financial results.

(Operator Instructions)

I will now turn the call over to Ed Kroll, Senior.

Vice President of Finance and Investor Relations for Centene Corp.

Sir, you may begin.

Thank you, and good morning, everyone.

I'm Ed Kroll, Senior Vice President, Finance and Investor Relations at Centene.

Thank you for joining us on today's fourth quarter earnings call.

Michael Neidorff, Chairman and Chief Executive Officer, and Eric Slusser, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call.

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

A replay will be available shortly after this call's completion also on our website at centene.

com, or by dialing 800-642-1687 in the United States and Canada and 706-645-9291 from all other countries and for both you enter access code 81401888.

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 October 28, 2008, 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 our chairman and CEO, Michael Neidorff.

Thank you, Ed.

Excuse me.

Good morning, everyone, and thank you for joining Centene's fourth quarter and full year, 2008, earnings call.

I will briefly review some of the highlights of the fourth quarter and then turn the call over to Eric, who will walk you through the financial results.

Before I comment on what I feel was another solid quarter, I would like to reflect on the new era that the 2008 financial crisis ushered in and what this global realignment and finance and business structure means for Centene.

One, we must balance -- we must be balance sheet managers and continue to be balance sheet managers.

Liquidity and capital adequacy are prerequisites for the success of any business at any time as measured by our RBC levels, debt to total cap and days claims payable.

Secondly.

Our relationship with suppliers, i.e., providers will require collaboration and we will only work with those who effectively balance quality and cost effectiveness.

Thirdly, we will be selective in our pursuit of new opportunities.

Fourth, we will seek or attempt to err on the side of conservative.

And finally, we value systems enhancements that will enable us to be more efficient.

We believe that Centene is well positioned to help states help their citizens maintain access to quality healthcare services in these difficult times when state budgets are a very sensitive and critical issue.

States are more reliant than ever on Medicaid managed care coverage to help them stretch their budget dollars as far as possible.

They are dependent on us to provide their Medicaid beneficiaries with access to quality care in the most quality and cost effective manner.

We believe that Centene's unique multi-line strategy with our specialty companies and breadth of products gives us a compelling, competitive advantage.

For example with Celtic as part of the Centene family, we now have the opportunity to work with states in designing coverage solutions for uninsured individuals and families that do not qualify for traditional government-sponsored Medicaid.

Start-ups individual coverage, Skill Set, both compliments and enhances Centene's Medicaid health (inaudible) expertise and should lead to product innovation and flexibility to meet the diverse needs of different states.

The US House of Representatives recently passed a $118 billion stimulus bill, including $87 billion in state Medicaid funds for two years.

With additional funding for states based on their unemployment levels.

The Senate is currently working on a stimulus bill that also includes an F-map increase that is very similar to the house's version.

While it's too early to gauge the impact and timing of the federal stimulus bill in specific states, its passage serves as a state Medicaid budget stabilizer.

On February 4, President Obama signed the Children's Health Insurance Reauthorization Act of 2009.

This expands the seven million children currently covered under the S-chip program by approximately four million additional children, including legal immigrants.

We look forward to helping our state customers utilize these critically needed new resources in an effective and efficient manner.

We have already anticipated in our guidance as previously given to you, these numbers.

Now, back to our fourth quarter results.

2008 has been a very good year for Centene as we continue to execute our strategic initiatives and provide quality care to our members.

Our continued company-wide disciplined approach to managing the business has led to a significant HBR and G&A improvement this year.

The fourth quarter and full year results we achieved in 2008 gives us confidence that we have laid the groundwork to produce a more predictable profit stream going forward as we look to achieve our future financial targets.

As Eric will indicate in his comments shortly, our balance sheet is strong.

We are well capitalized and our cash flow is robust.

We had a solid revenue growth in Q4 at over 22% year-over-year and revenue for the full year grew over 21% versus 2007.

We are especially pleased with the diverse sources of this group, both geographically and with all our states, but for one contributing membership growth.

On the rate front, we maintain comfortable -- we remain comfortable with our assumption of low single-digit average increases across our markets as we currently have final results on 71% of our anticipated 2009 member months.

Our consolidated HBR improves on a year-over-year basis to 82.3% and was up slightly sequentially due to normal seasonality.

The year-over-year improvement in HBR shows that the medical management efforts put in place in Ohio and Wisconsin, as well as other states have gained traction.

In particular, we are pleased with the improvement in Ohio ABD where network streamlining and a back to basics medical management approach helped us achieve a more favorable outcome.

I do want to remind you that from period to period, our consolidation (inaudible) will vary within our stated 82 to 84% range due to normal seasonality.

Turning to our general and administrative expenses, the G&A ratio for the fourth quarter of 2008 was 13.8%, which is 40 basis points sequentially improved.

That reflects our continued focus on better leveraging and reducing G&A.

We expect continued improvement over the next 18 months, as our systems infrastructure investments start to bear fruit.

Before I turn the call over to Eric, I would like to take -- make a few closing remarks.

We will maintain the strong financial and fundamental focus through 2009 and beyond so that we can continue to produce -- improve growth and margins.

We are committed to enhancing profit margins in our long-term target range of between 4 to 6% on a pre-tax basis.

We are dedicated to producing better health outcomes at lower costs and we will continue to work closely with our state's partners.

Our Florida expansion is on track, as we started a conversion process to full risk there this month.

Our South Carolina presence continues to grow as we wrap up our membership, and are on track to close on the purchase of [Merritt] Group there, March 1.

Finally, I remind you that we will not comment on our New Jersey transaction with the Merritt group, as it is our long-standing policy not to comment on active litigation.

Centene's business model is built to grow in both good and bad times and we expect 2009 to be no different.

We appreciate your support and interest in our company.

And with that, I'll now turn the call over to Eric for the financial detail.

Thank you, Michael, and good morning, everyone.

Before I discuss the financial results from continuing operations, I would like to address the impact of reclassifying the New Jersey plan as a discontinued operation to help you reconcile to our previously issued 2008 financial guidance.

As discussed on our December 19, 2008, guidance call, the results of operations for University Health Plans, our New Jersey health plan, are now shown in the financial statements as a discontinued operation as a result of our intent to sell the business.

For fiscal 2008, New Jersey had approximately $147.6 million of premium revenue and earnings from operations that equated to $0.03 of earnings per share.

The $0.03 of earnings from operations for the year were offset by exit and other one-time charges in the fourth quarter of 2008, which equated to $0.05 of loss per share.

Together netting to $0.02 of loss from discontinued operations for the full year.

The New Jersey revenue and earnings from operations amounts for the year were included in our previous 2008 guidance numbers, but have been moved to discontinued operations in our financial statements in accordance with generally accepted accounting principles.

The financial results discussed throughout the remainder of this call will be in the context of continuing operations unless noted otherwise.

For the quarter ended December 31, 2008, revenues net of premium taxes grew to $878.8 million, which represents 22.2% growth compared to the fourth quarter of 2007.

The revenue increase was driven by the following items.

First, full risk membership growth in most of our states.

Second, the April 1 start-up of our Texas Foster Care contract.

Third, the acquisition of Celtic, which closed on July 1.

Fourth, our new Arizona Acute Care contract that commenced during the quarter.

Fifth, average premium rate increases in the low single digits.

And finally, the effects of the 2007 Georgia retroactive rate increase included in the first quarter of 2008 rather than proportionally in the fourth quarter of 2007.

For the year ended December 31, 2008, revenues net of premium taxes grew to $3.3 billion, representing 21.6% growth compared to the year ended December 31, 2007.

You should note that our annual guidance included the 2008 premium revenue of $147.6 million associated with New Jersey, which is now included in the results from discontinued operations.

Thus total annual revenues including revenues from New Jersey discontinued operations were $3.42 billion.

This is slightly above our guidance of 3.39 to $3.41 billion issued prior to our announcement that we were selling New Jersey.

Our reported consolidated health benefits ratio or HBR, was 82.3% for the fourth quarter of 2008 compared to 82.2% for the 2008 third quarter and 85.3% in the 2007 fourth quarter.

The ten-basis point sequential increase from 82.2% in the 2008 third quarter to 82.3% in the 2008 fourth quarter was due to normal seasonality, which was almost entirely offset by better medical management results in Ohio.

The 300-basis point year-over-year improvement was the result of increased premium yields, medical management efforts, particularly in Ohio and Wisconsin, and the acquisition of Celtic, which operates at a lower HBR than the rest of our business.

However, the launch of the Texas Foster Care and the Arizona Acute Care contracts adversely effected our year-over-year HBR comparison as we book all new contracts at conservative HBR levels until sufficient historical claims data becomes available.

Our Texas Foster Care membership was approximately 33,100 at the end of 2008 and the plan has continued to perform in line with our expectations.

Turning to our general and administrative expenses, the G&A ratio for the fourth quarter of 2008 was 13.8% compared to 14.2% in the third quarter 2008 and 14.9% in the fourth quarter of 2007.

The 40-basis point sequential improvement reflects our continued focus on better leveraging and reducing G&A costs.

The 110-basis point improvement year-over-year is primarily related to the prior year restructuring charge that drove a much higher percent in the fourth quarter of 2007.

Our fourth quarter investment and other income was $6 million, relatively flat over the 2007 fourth quarter and an increase of $3.3 million sequentially due primarily to the approximate $4.5 million investment loss recorded in the third quarter of 2008.

Our 2008 full year effective tax rate was 38.4%.

Earnings per diluted share from continuing operations were $0.53 for the 2008 fourth quarter.

For the full year 2008, earnings per diluted share from continuing operations were $1.90 compared to $0.92 for the full year 2007.

For comparison purposes, when you include New Jersey's operations and exclude one-time charges associated with the planned sale, earnings per share -- excuse me, earnings per diluted share would have been $0.54 for the fourth quarter and $1.93 for the full year.

This compares with our previously issued EPS guidance range for the year of $1.87 to $1.92.

Balance sheet highlights at December 31, 2008, include cash and short-term investments of $480.4 million and long-term investments including restricted deposits of $341.7 million.

We have received a significant portion of the cash from our investment in the reserve primary fund.

At December 31, 2008, our holdings in the reserve primary fund were approximately $13 million.

At December 31, 2008, cash and investments held by our unregulated subsidiaries were $24.1 million.

Our regulated cash and investments were $798 million.

We have estimated our regulated capital and surplus to be in excess of 330% of risk-based capital, or RBC requirements.

Our total debt was $264.9 million and debt to total capitalization was 34.6%.

Our medical claims liabilities totaled $373 million, representing 48.5 days in claims payable, an increase of 0.6 days from 47.9 days at September 30, 2008.

This increase was due mainly to state reconciliations of medical expense.

For the quarter, cash flows generated from operating activities were $95.5 million, approximately 4.1 times net earnings from continuing operations.

The cash flows for the quarter were positively impacted by approximately $50.1 million of September Wisconsin and Indiana premium payments received in October.

That concludes my comments on our fourth quarter and annual results.

Before we open the call up to questions, I would like to update you on our 2009 full year guidance.

We are reaffirming the 2009 financial guidance provided to you in December.

We continue to expect from continuing operations, revenues, net of premium taxes in the range of $3.65 billion to $3.775 billion.

Earnings per diluted share of $1.82 to $1.94.

Consolidated HBR in the range of 82 to 84%.

And a consolidated G&A expense ratio in the range of 13 to 13.5%.

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

(Operator Instructions) And your first question comes from (Operator Instructions) And your first question comes from Daryn Miller from Goldman Sachs.

Miller from Goldman Sachs.

Your line is now open.

Good morning.

Good morning.

Quick question, is it possible to get the enrollment number for New Jersey?

Yes, 55,000 members approximately.

55, and then can you guys talk specifically on Ohio, how much MCR improvement did you see sequentially in the fourth quarter?

In the ABD population?

We are just pulling it out.

Fourth quarter Ohio was essentially flat from third quarter.

We saw, as we noted, we saw a significant improvement from where we were a year ago at this time, but a lot of that improvement was first quarter to second quarter to third quarter.

Again, it was relatively flat to the fourth quarter.

And that was ABD, or that was the entire population?

That was ABD.

ABD, okay.

And then, looking at what you're seeing so far in 2009 in terms of enrollment growth, can you guys talk about that a little bit?

We -- like I say, we are on our budget plan but we would really like to talk about enrollment at the end of the quarter, Daryn, versus what's occurring in the quarter because it varies from month to month and you're reconciling the premium received with the members.

So I think it might be a little early to talk about that.

Okay, and then just in terms of the period end claims as a per member, continues to come down.

Can you talk about what's driving that down?

Yes.

At the end of December, that's driven a lot by timing of payments, because that's claims that have been submitted for payment.

It just so happened with the timing around year end that all of our plans had a check run at the end of December, around the holidays.

In addition, we had one state that has changed their compliance requirements for processing first claims and they reduced that requirement by nine days.

Those two items together are the main drivers of that reduction.

Which plan pushed that change through?

Indiana.

Indiana.

And then just looking at the trend over the course of 2008, it continued to come down over the year.

What was driving that longer-term trend?

Just -- as we've talked about in all of our calls, we continue to focus on operational improvements and that -- the claims and claim processing area has been a particular focus around process improvements and best practices.

So it is simply a combination of that, combined with timing, and again, a lot of times if you get close to the end of the month, that's an end of month, end of quarter figure, so the timing of your payments will drive that.

But the over the year improvement is a lot of process improvement and focus.

And we're getting more claims electronically as well and in fact, we work with our providers to get (inaudible) electronically because they tend to be more accurate and we can pay that much faster.

So there's a lot of that.

Just following up on that, is -- did you guys implement any new systems, or are more of your providers implementing systems?

Is this a kind of a broader trend we're seeing across Medicaid space?

Well, in the case of our business, we do see more providers, as I said, submitting electronically and we're working with them to help them do that.

Our systems enhancements were starting to kick in, but I would attribute it more to the work we do with the providers to get it in and getting away from the manual side of things.

Okay, great.

Thank you very much.

Thank you.

And your next question comes from [Greg Genova] with Deutsche Bank.

Good morning.

Good morning, Greg.

First, on S-chip, you said that's been factored into your guidance, but can you talk about which states have the most membership there?

And then on the stimulus plan, granted that's not in your guidance and it's a bit early, but as you look at it right now as the way it stands maybe in the house version, let's say, how that will work its way through with rate increases and -- or member, just how we should think about that.

Let's say it gets signed soon.

On the S-chip, I think $2 million of the $4 billion fall within the states we're in, but $1.2 million of it alone is in Texas.

And so we knew it was coming.

It was clear that the S-chip was going to be, so we're putting it in our budget.

We did consider that kind of factors.

We alluded to on the guidance for '09, but it's kind of early to say what the impact will be as we have to see how Texas implements it, what they do about it, as well as the other states.

While its effective now, we -- it needs more definition around it and what we've said is it's kind of the input/output, the puts and takes in our overall guidance when we consider that.

(inaudible) even more so we have to wait and see how it's implemented and the timing of it.

We believe that initially the greatest benefit will be to stabilize the state's costs and the medical expense as they have had increased enrollment from the uninsured and things of that nature.

So we see it initially as stabilizing.

We do not expect additional rate increases as a result of it, but I think it will allow the state to maintain their statute, the adequacy of rates that is required actuarially.

Okay thanks.

Can you run through any rate updates since the last time we spoke, I think maybe Wisconsin, I don't know if that had been finalized or Ohio ended up being on one-one.

Yes, I think as we talked about the year end guidance call, they have been finalized for Indiana, Wisconsin and Ohio and really after that, there's nothing else on the horizon until the July 1st Georgia rate increase that will be out there.

So the three other states were finalized low single digits as we had expected effective January 1.

Okay, and last question, on the days, will that be -- do you expect that to be steady going forward?

Is there any impact for New Jersey that should cause that to shift since that's discontinued, or is that factored in to the current days and that should be pretty steady?

Yes, the current day's metric, as you see in the press release, is a continuing operations.

So one of the things, if you notice the rate or the days as of September 30 that are in there changed slightly, that's due to taking New Jersey out of there.

So throughout the press release, everything has been moved to continuing operations, which excludes New Jersey.

I would expect as we have been, we will continue to see days claims payable in that range that we've been at, the 49, give or take, half a day in there.

Great, thank you.

And your next question is from Joshua Raskin with Barclays.

Thanks, good morning.

First question, just relates to your expectation for 2009 membership growth.

What sort of organic membership growth I guess are you looking for?

We haven't talked specific organic growth, Josh.

That's something we got away from because as we cross-sell products, it can become a very contingent number so it's something that several years ago, we said, look, we'll give you revenue, we'll give you -- I mean you look at Florida conversion and things of that nature.

It becomes -- it could become misleading.

I guess you've given your sort of rate expectations and given the revenue so we can back into an organic membership number, but I guess my question may be directionally then, is there any increase in expectations due to the economy and how should we think about that?

Yes, we expect some growth and planned for that, just as you saw in the numbers this past year.

We just saw membership grow, absent Wisconsin, so we expect some growth, but we also have new products we're talking to the states about.

Okay.

That's why it gets difficult to talk specifically organic growth.

Got it..

Maybe Eric, what was the days claims payable in the New Jersey plan specifically?

Oh, days claims payable in New Jersey, averages around 70 days.

It's driven by regulatory requirements there and they also have a significant SSI population, which tends to have a much longer claims processing time.

So, give or take, it's right around 70 days average.

Okay, perfect.

That makes sense.

I guess just last question, why is New Jersey discontinued?

Well, it's -- we have a what we believe is a valid contract, which is now being litigated.

Until such time as those results, sound practices say you leave it in discontinued under the accounting.

As I indicated in my comments it, is our intent to sell the business and under generally accepted accounting principles around discontinued operations, that requires us to now classify it as discontinued because of our intent.

Okay.

So we should assume that despite the sort of termination or whatever, the litigation with the Merritt group may be there's a process still in place to sell those assets -- is that what we should assume?

Or is that still based on the contract with the Merritt group?

It's really the -- we have what we believe to be a valid contract with Merritt group.

I will leave it at that.

Okay, and then I'm sorry.

Last question, New Jersey, what is the expectation for the discontinued operations in 2009?

Is that going to be a positive or a negative contributor?

We addressed that on the guidance call and right now given the activities going on with New Jersey, and the litigation, we're not going to give out any further information related to New Jersey.

Okay.

We did tell you we had a penny profit in June.

We showed $0.03 of profit, excuse me, for '08 fiscal year.

Penny in Q4.

Penny in Q4.

All right.

So we can use those as run rates maybe with lack of any sort of additional -- okay, thanks.

And your next question is from Greg Nersessian with Credit Suisse.

Hey, good morning.

Guess the first question was just on the reserve roll forward.

Looked like there was an increase sequentially.

I know you guys do this on a rolling 12-month basis, but was there a bolus of favorable reserve development this quarter or was there something that rolled off as of the last quarter?

If you could just talk to that a little bit?

Sure.

Yes, and I -- it's pretty well a blend throughout the quarters.

At any one time in this business, the reserves are an estimation process.

You're going to see both positive and negative prior period development, but there's no -- significant portion of that that fell in any one particular quarter.

Again we-- every quarter throughout plan see positive, negative development against our estimates.

As Eric just said, Greg, its throughout the course of the year.

If I look at the third quarter number, it was $7 million over four-quarter period and this quarter was almost $19 million.

So $12 million, delta in one quarter, I'm just trying to figure out how much of that was related to an increase.

I mean typically in the fourth quarter you don't see that much favorable reserve development.

So I'm just trying to figure out how much was this quarter versus something that happened a year ago that rolled off.

I think you have to look at it, it was some of both because you have to look at the base year four quarters back, which could have been lower.

Also, that also is going to be driven by pulling New Jersey out of there.

Ah, okay.

So you may have had some negative reserve development last year in New Jersey or something like that?

Possible.

Okay.

I don't have that in last year's figures in front of me.

Okay, and then I forget if you mentioned this on the guidance call, but the cash flow from operations expectation for 2009, it came in a little higher than expected in '08.

Is there anything, any payments that were accelerated this quarter -- was there any reason -- I guess what's your expectation for '09 CFFO genetic up ratio?

I don't have a 2009 number here, but as we indicated, we expect to continue to see strong cash flows in the business.

It has been historically, again, it was for 2008 and we expect that trend to continue.

We have seen throughout the year, state payments, as I indicated here, that may lag rather than at the end of a month to the beginning of the following month, which impacts your quarter to quarter metrics.

But the year in total, again, we saw strong cash flows and we would just expect that trend to continue.

We see nothing out there that would cause us to believe otherwise.

It's typically been 1.5 to 2 times.

2 times range

(inaudible) net income.

Of course as we highlight in this quarter, it was a function of (inaudible) from a couple states.

And then I was a little curious why the Arizona business was classified as a the long-term care business, I guess the Bridge Way business, was classified as, under your specialty services.

I mean that seems like mostly a premium-based business.

Definitely --

We've had the long-term business in Arizona since October 1, 2006 classified in the specialty segment.

The acute care, which we added on October 1 is the 14,000 some odd members is folded into Bridge Way as part of our operations there.

So we continue to classify that there and that's really more of an administrative convenience at this point than really a technical point.

It's 14,000 members.

It's half population available.

We didn't see any swings back and forth across it and it's being managed by Bridge Way is what Bill's really saying.

$14,000 was not mature enough to start breaking it out.

Was that the main driver, the specialty MLR was up significantly this quarter, or did something happen with Celtic?

I think there's a combination of both adding Celtic in and the acute care business.

As we said in the comments, in the first six months particularly of a new line, we are very conservative and what we put into reserves and so that would apply obviously for the fourth quarter of 2008 for the acute care business.

Okay, great.

And just a final question, do you intend to break out your Celtic either membership or revenue or anything going forward, any--

We have been talking about it probably as it continues to grow, becomes more material, we would -- we need that insurance segment.

Right now it was not that material to start breaking it out.

But I expect as it starts to grow, there will be reason to expect that at some point, Greg.

Okay.

Okay.

Thanks.

And your next question is from Tom Carroll with Stifel Nicolaus.

Hey, good morning.

I jumped on late, so I apologize if this has been discussed already and just tell me and so I'll refer to the transcripts.

But I guess two quick things.

From discontinued operations in '07, I'm seeing that $0.72 number.

Maybe you could just refresh our memory on why that just seems very high.

And then secondly, your accounts payable doubled into '08.

I'm wondering if we could get color on that.

That certainly helped cash flow from Ops quite a bit in 2008.

Thanks.

Yeah, on the first question last year, that discontinued operations and the sizable number related to our First Guard operations that we had abandoned in the previous years, that operation is pretty well gone, as the claims have tailed out.

But it had a significant impact in those prior years.

Okay.

That's what I was thinking.

As far as the payables, let me just get my number here.

I -- so that we're both looking at the same number.

So you're talking -- just so we're clear, you're talking about the accounts payable and accrued expenses line?

Yes.

Okay.

So several things in there, big drivers.

One is the consolidation of Celtic that's driving that.

Second thing is that the end of any period we have checks that have been submitted, but not turned in to the bank.

So those drafts get reclassified as payables.

There's been $35 million that's attributable to that.

Ongoing, just increases and payroll accruals that, just as a timing of payroll versus your year end, et cetera, and beyond that, those are most of the largest drivers of it.

Again, a lot of it's just timing of year end and payment activity versus when our cycles are et cetera.

Okay.

Thank you very much.

Thank you.

And at this time, there are no other questions in queue.

Well, if there are no other questions, then we thank you all for participating and look forward to the Q1 call in April.

Thank you, everyone.

This concludes today's conference call.

You may now disconnect.