Centene Corp (CNC) 2013 Q1 法說會逐字稿

Good morning and welcome to the Centene Corporation's first-quarter 2013 financial results conference call.

All participants will be in listen-only mode.

(Operator Instructions).

After today's presentation there will be an opportunity to ask questions.

(Operator Instructions).

Please note this event is being recorded.

I would now like to turn the conference over to Mr. Edmund Kroll, Senior Vice President of Finance and Investor Relations.

Please go ahead, sir.

Thank you, operator, and good morning everyone.

Thank you for joining us on today's call.

Michael Neidorff, Chairman and Chief Executive Officer, and Bill Scheffel, 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 also be accessed through our website at Centene.com.

A replay of the call will be available shortly after the completion of the call also at our website at Centene.com or by dialing 877-344-7529 in the US and Canada or in other countries by dialing 412-317-0088.

The playback number for both of the call-ins is 1002-6527.

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 most recently filed Form 10-Q dated Tuesday, April 23, 2013 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.

As a reminder our next Investor Day is Monday, June 17, 2013 in New York City.

Please mark your calendars for that.

Also later this morning at 10 a.m.

Central time, we will have a webcast of Centene's annual shareholders meeting available and you can access that link at Centene.com in the investors section of our website.

With that, I would like to turn the call over to our Chairman and CEO, Michael Neidorff.

Michael?

Thank you, Ed.

Good morning, everyone, and thank you for joining Centene's first quarter 2013 earnings call.

During the course of today's call we will discuss our strong first-quarter results, our growth opportunities including the implementation of the Affordable Care Act, ACA, and Centene's business environment.

I will then turn the call over to Bill Scheffel who will provide further detail on the quarter's financial results.

First, a few comments on the quarter's results.

Premium and service revenues increased 53% year-over-year to $2.5 billion.

The health benefits ratio improved 90 basis points sequentially to 90.4%.

Please note the new business HBR improved 260 basis points sequentially to 94.1%.

Flu costs in the first quarter of 2013 were $0.20 higher than in the first quarter of 2012.

This was consistent with our expectations.

Flu costs moderated in February and March after peaking in January.

During the quarter, we experienced a slight reduction in medical trend across our existing business.

This included inpatient, premature births and certain outpatient costs.

The HBR at Hidalgo showed some limited improvement sequentially as our medical management efforts gained traction.

At the same time we feel it is too early to conclude that the lower utilization experienced in the first quarter will continue throughout the balance of the year.

Thus we are maintaining our full-year 2013 medical trend estimates at the previous level.

The G&A ratio improved 150 basis points year-over-year and 10 basis points sequentially to 8.3%.

Importantly, the 8.3% includes a normal level of performance based compensation.

Membership increased 25% year-over-year to 2.7 million lives.

Finally, cash flow from operations was just under 2 times net earnings.

We believe we are well positioned to meet expectations for the balance of the year.

In addition, we feel that we can achieve increased profitability in 2014 upon the commencement of the ACA.

Our future pipeline remains extremely robust at roughly $250 billion through 2016.

Approximately $100 billion of this is within our existing geographic footprint.

We view the Medicaid expansion component of the ACA as a natural extension of our core business.

While not every state will go through with the expansion, we estimate that there is approximately $20 billion opportunity across our existing markets.

Centene's experience with high acuity populations support our ability to compete for the $30 billion dual eligible opportunity within our existing markets.

The exchange market represents the largest growth opportunity for Centene over the next several years estimated at $52 billion in our existing markets.

Our unique experience with hybrid gives us a competitive advantage.

Centene will be selective when executing the initial exchange strategy.

We will focus on providing coverage at the low income level in a subset of the existing states.

Onto the industry tax.

We continue to believe appropriate congressional action will exempt Medicaid from this tax plan.

However, we are engaged in constructive discussions with our state customers to include the tax in our rates should Congress fail to intervene.

Now on for state updates.

Kentucky, we still anticipate exiting Kentucky in July.

Our best judgment is that the premium deficiency reserve currently on our balance sheet is adequate to cover our remaining tenure in Kentucky.

In March, we exhausted our administrative appeals clearing the way for us to pursue our legal actions.

These include the declaratory judgment action on the issues of our right to terminate the contract and the measure of liquidated damages if any.

The court has issued a scheduling order setting a hearing in May.

We recently filed a separate lawsuit in Franklin County Court seeking damages against the Commonwealth for the losses we sustained.

Please note that given these matters on litigation we will comment no further on them.

Texas, the Texas Legislature has completed the necessary steps for supplemental funding of the Medicaid program.

The funding is under review by regulatory bodies including CMS.

The amounts are consistent with the assumptions in our previous guidance.

The appropriate contract amendment should be finalized in the second quarter.

Rate relief currently being processed is intended for deficiencies in the rural service area.

We also continue to work with the state in evaluating overall rate adequacy for the regular September 1 rate adjustment.

Kansas, we commenced operations in Kansas on January 1. We ended the quarter with just under 134,000 members.

We anticipate membership to moderate by 5% to 10% over the course of the second quarter.

We also expect it to remain at that level going forward.

New Hampshire, we continue to work with the state on initiating the managed care programs.

The timing will depend on the status of the ongoing regulatory approvals and resolution of litigation between the states and hospitals.

I would now like to discuss upcoming contract commencements.

Ohio, our successful reprocurement and statewide expansion in Ohio takes effect July of 2013.

In addition, the Ohio dual eligible program is set to commence in September and we will operate in three regions.

We anticipate ending the year with just over 200,000 total lives in Ohio.

Illinois, we were selected to serve dual eligible members in the Greater Chicago area.

We are still engaged in discussions with the state on implementation activities including the start date.

California, we were recently notified by the state of its intend to award Centene a Medi-Cal contract for recipients in California's rural expansion program.

We expect this program to begin in the second half of 2013.

This is an important win for Centene as it positions us for future opportunities in the largest Medicaid program in the country.

Massachusetts, last month Centurion was notified that it had been awarded a contract to provide correctional healthcare services in the state.

Centurion is a joint venture between Centene and MHM Services, a national leader in providing healthcare services to correctional systems.

Operations are expected to commence in the third quarter of 2013.

Florida, Centene was recommended for a contract in 10 out the 11 regions in Florida's Medicaid long-term care program.

Enrollment is set to roll out by region beginning in August of 2013 through March of 2014.

Switching to the M&A front, we closed our acquisition of AcariaHealth, a comprehensive specialty pharma company on April 1. The acquisition is consistent with Centene's strategy of expanding the breadth of our specialty company offerings.

Specialty pharmacy is an important and growing category within overall health-care spending.

It is especially important to Centene given the growth of our high acuity membership.

In closing, our view of 2013 remains positive and we are maintaining our full-year 2013 earnings guidance.

As Bill will discuss, we have updated our guidance to reflect new contract wins and the closing of the Acaria acquisition.

The new guidance also includes costs associated with each of these items which were not reflected in our prior guidance.

We look forward to updating you on our June 17 investor meeting in New York.

I will now turn the call over to Bill.

Thank you, Michael, and good morning.

For the first quarter of 2013, premium and service revenues were $2.5 billion representing a 53% increase over last year's level of almost $1.7 billion.

This increase of approximately $880 million results from the addition of three new states, Missouri, Washington and Kansas, and from a full three months of revenue related to the 2012 expansions in Louisiana, Mississippi and Texas.

As noted in our press release, our revenue from new business with less than a full 12 months of operations amounted to 35% of premium and service revenues in 2013 compared to 20% in 2012.

Our consolidated health benefits ratio for 2013 was 90.4% compared to 88.2% in 2012.

The increase in our health benefits ratio between years is primarily caused by the higher level of new business which has a higher HBR than our existing business.

For Q1 this year, our HBR for new business was 94.1% compared to 88.4% for our existing business.

Last year our HBR for new business was 90.7% and 87.6% for our existing business.

Our 2013 results include the pharmacy carve-ins in Louisiana beginning November 2012 and in Texas beginning March 2012.

It is important to remember that pharmacy has a higher HBR than our overall HBR causing the consolidated loss ratio to increase when we add additional pharmacy business.

Also during the first quarter of this year, we incurred approximately $27 million of flu costs versus $8 million in the first quarter of 2012.

Over half of the quarter's flu costs were incurred in January and as anticipated, significant declines were in seen in February and March.

We estimate that higher flu costs this year accounted for a 60 basis point increase in our consolidated HBR compared to last year and decreased earnings per share by $0.20.

Sequentially the consolidated HBR decreased from 91.3% to 90.4%.

The decrease is due to the additional cost recognized in Q4 related to the Kentucky premium deficiency reserve and lower medical costs in Q1 across several of our markets.

Both the fourth quarter of 2012 and the first quarter of 2013 had a high level of flu costs.

Our general and administrative expense ratio was 8.3% in Q1 this year compared to 9.8% last year and 8.4% in Q4.

We continue to benefit from the increased leverage resulting from our revenue growth.

We spent approximately $0.09 in business expansion costs in Q1 of this year compared to $0.15 last year and incurred additional performance-based compensation costs this year including both cash and equity based awards of $0.14 per share compared to last year.

Investment income decreased from $5.3 million to $4.5 million between years reflecting the lower level of returns on new investments and reinvestments.

Interest expense increased from $4.8 million last year to $6.6 million this year as a result of the $175 million of senior notes issued in the fourth quarter last year.

Excluding the amounts attributable to noncontrolling interests, our income tax rate was 39.5% in 2013 compared to 33.5% in 2012.

The 2012 rate was favorably impacted by lower state taxes and the favorable tax impact from the exercise of incentive stock options.

Our diluted earnings per share for the quarter was $0.42 compared to $0.45 last year.

Diluted shares outstanding were $54.3 million this year versus $53.5 million in 2012.

At quarter end we had cash, investments and restricted deposits of $1.7 billion including $45 million held by unregulated entities.

We continue to maintain our risk-based capital in excess of 350% of the authorized control level excluding our Kentucky health plan where we are maintaining the state's minimum level.

At quarter end, our total debt was $533 million and our debt to capital ratio excluding our $75 million nonrecourse mortgage note was 31.9% which is a decrease from 32.7% at year end.

We had no borrowings on our $350 million revolver at March 31.

Last month, Standard & Poor's affirmed their rating on Centene of BB and revised the outlook to stable from negative.

Our medical claims liability totaled almost $1.1 billion at March 31 and represented 42.4 days in claims payable which is an increase of 1.3 days from year-end.

In the press release, we presented the roll forward of our medical claims liability for the last 12 months.

That analysis shows positive prior period development related to the March 31, 2012 reserve balance of $2 million, $14 million excluding the impact of the Kentucky retroactive claims.

This is lower than we normally experience and is impacted by additional claims incurred in the Texas expansion areas and for Celtic.

This was a unique situation and our prior period reserve development for the June 30, 2012, September 30, 2012 and December 31, 2012 periods have all developed more consistent with historical amounts and each are in excess of $40 million of positive development at this point.

First-quarter cash flow from operations was $43 million which is 1.9 times net earnings for the quarter.

On April 1, we closed on the purchase of AcariaHealth.

The cost of the acquisition was approximately $146 million and was funded by cash on hand of $55 million and the issuance of approximately 2.1 million shares of common stock.

Excluding transaction costs of approximately $0.06 a share, we anticipate the acquisition will be neutral to 2013 earnings.

Our 2013 guidance numbers have been updated to include the Acaria acquisition and the RFP awards thus far in 2013 including Florida long-term care, California, Arizona acute care and Centurion in Massachusetts.

We expect premium and service revenues of $10.1 billion to $10.4 billion; diluted earnings per share of $2.60 to $2.90; our consolidated HBR of 88.0%, 89.0%; and a G&A ratio of 8.8% to 9.3%; our effective tax rate 40% to 41%; and the diluted shares outstanding increase to 56.0 million shares to 56.5 million shares.

These numbers are our GAAP estimates and include the Acaria transaction costs.

Our current estimate of business expansion cost for 2013 which includes startup costs for Florida, California and Massachusetts and also the Acaria transaction cost is $0.58 to $0.65 per share.

Operator, you may now open up the line for questions.

(Operator Instructions).

Josh Raskin, Barclays.

Good morning.

A question on the Texas rate increase that you guys talked about.

It sounded like you've gotten legislative approval, etc.

and just looking for [CMS] signoff.

Should I assume therefore that they were not in your opinion completely finalized and therefore there was no retroactive impact?

It looked like in your 10-Q the exhibits pointed to a March 1 retroactive date but did you include any of that in the quarter?

In Texas, it is still going through the process for the rate approval and so we expect that to be finalized in May.

The amendment that was filed really was related to other items in the contract, nothing really to do with rates.

And so there was no rate impact, no rate increase included in the first quarter from what is being considered today.

We received a rate increase September 1 and that has been in there fully for the fourth quarter and the first quarter.

Josh, while it is going through this whole process, it is prudent just not talk a lot about it.

Okay, that is fair.

You guys will have an update in May it sounds like.

Yes, we will.

I assume you guys have in your guidance that the preliminary rate that you have seen are going to be trended forward, right?

I assume that is at least (inaudible).

I think it is fair to say that our guidance numbers all along that we provided in December and February and today have all assumed certain rate adjustments in Texas and that is proceeding consistent with the guidance that we previously provided.

And then just on Acaria, I am just curious how is that going to flow through from an income statement perspective?

Is that considered fee revenue or is some of that in premiums or how should we think about that?

Then just a slight nit, but the share count is up $1.2 million to $1.3 million even if I adjust the 2 million shares for an April close.

I would have assumed it would have been up a little bit more.

Were there some buy back or some change in share count other than that?

With Acaria there is no results of operations for that until starting in the second quarter beginning April 1 and that will be considered primarily service revenue not premium revenue when it is recorded.

So the shares were not issued at March 31 were not outstanding and were not included in our numbers at March 31 for any of the reported results.

They are included -- the estimated impact of having those shares outstanding for three quarters of the year in our guidance number for the use of shares outstanding for purposes of calculating earnings per share.

Yes, no, that is what I was talking about.

I would assume 2 million shares at nine months is 1.5 million shares it seems like a fair count (inaudible) not this much so was there some buy back or something else in there that --?

No buyback.

No, there are certain share activity that occurs primarily from the exercise of options or from the vesting of stock awards that occur and so we don't have any unusual activity other than the stock award activity.

And I remind you that 40% of the purchase price was cash with approximately 60% in stock.

Right and I guess more importantly it sounds like revenues are a little bit higher, MLR unchanged, G&A a little bit better and then the offset from the share count I guess which was the Acaria.

I think you mentioned the startup cost around Acaria making it sort of neutral.

So would you say in terms of the actual guidance that 260 to 290, would you think that within the range you would be trending a little bit better than you were previously just based on the components of guidance?

I guess what we have said is we saw some improvement in trend, a small improvement in Q1 but it is probably very prudent to not anticipate that continuing and so we are going to stick pretty much with that guidance of 260 to 290, Josh, and let it play out another quarter or so.

Okay, that is fair.

Thank you, Michael.

Peter Costa, Wells Fargo Securities.

Good morning.

A question on the disbursement.

Could you clarify a little bit more about the prior period, unfavorable development from Celtic in Texas exactly what caused that and describe that a little bit better for me if you would?

I think what I said was that we gave n our press release the roll forward of the claims liability reserve as of March 31, 2012.

At that point in time the Texas expansion only had one month of results in there and so what we have seen since that point in time is that the prior period development -- let's say excluding the retroactive claims in Kentucky which kind of changes things a little bit -- was only $14 million.

Normally we would see $40 million, $50 million that would occur a year later.

So the positive development that we have is less than what we normally incur and then see.

But as you recall in June of last year, we did record additional reserves for a number of things and pulled down our guidance for all of 2012 and what we are seeing is when we now look at the hindsight analysis with respect to the reserves for June, September and December, they are all developing normally compared to our experience that we have historically seen and the amount of positive development is in excess of $40 million for each of those three periods.

Okay.

Can you talk about how your contracting is going for the exchange membership that you are expecting to get?

You laid that out as one of the bigger opportunities going forward at 52 billion in your markets.

Can you talk about how you're contracting is going with the hospitals there in terms of rates?

I think it is going well.

Maybe Rone, do you want to make a comment on it?

Yes, as Michael mentioned, we do expect to be on the exchanges and a subset of the places where we have health plans today and we are entering into contracts with hospitals in line with kind of the expectations that we set in terms of reimbursement rates.

And I don't think it is appropriate to go into a lot of detail about the specifics of it but we are pleased with where we are landing in line with our expectations in terms of the contracts.

So are those rates relatively close to your Medicaid rates with the hospitals or are they closer to where commercial rates would normally be?

Again, I don't think it is appropriate to go into a lot of detail but we are landing at what we think is good rates with respect to where we are ending up on reimbursement rates and it is certainly not exactly at Medicaid rates but I wouldn't say it is exactly at commercial rates either.

So I think we are pleased with where we are ending up.

Okay, thank you.

Chris Rigg, Susquehanna.

I just wanted to come back to the G&A ratio in the quarter was about 8.3% and then for the rest of the year it looks like you are expecting a big step up.

Can you just sort of help us understand what is driving the big step up in the lighter three quarters of the year and was there anything that was delayed in the first quarter that you had been expecting and that is causing this sort of seasonal shift?

There was nothing delayed.

We have the new businesses that are being brought up in the second and third quarter.

Bill, do you want to add something there?

I think the primary changes you are going to see beginning April 1 is the addition of Acaria and so they will have a different level of G&A costs in that business than we have for the rest of our mix.

So that is certainly one aspect that causes that.

And then with respect to business expansion costs, I think we've said we had $0.09 in Q1 but $0.58 to $0.65 in the rest of the year.

So that will cause there to be a higher level of that in the remaining three quarters of the year.

So I think those are the primary drivers of the increase in our G&A ratio for the whole year versus where we were for Q1.

And closing costs

And closing costs for Acaria $0.06 also get recorded in the second order which is the remainder of the year.

And then just to follow up on Peter's question a little bit on the reserve development, I know you give roll forward.

I just want to make sure I -- can you help us understand what the development was in the first quarter if we just sort of isolate it to one period?

We don't really try to do that on a quarter-by-quarter analysis in the current period.

I think what we are saying is that the reserves were lower in terms of the amount of prior period development at March 31, 2012 but the actions that were taken in the second quarter of 2012 seem to have taken effect so that we are already showing positive development on the June 30 numbers of over $40 million.

So I think that issue related back to that period of time when we were just starting up in Texas and a few issues in Celtic which hadn't risen to the surface really at that point either.

I think -- I know what is important and the technique gives you a good view of what occurred at that period 12 months before in that quarter.

And it said that we were adequately reserved but we did not have the excess.

It also shows that the action we took in the second quarter was appropriate and it has built up and it is where it should be.

So it is really just a way that we test ourselves and you could look at it and say yes, they continue to be adequately reserved historically and it becomes a pretty good metric for you to take a look at it in that regard.

Okay.

Just one last question and I am not sure (technical difficulty) about it.

But when I look at the latest disclosures on Kentucky in the 10-Q compared to what is there in the fourth quarter -- or the 10-K, I guess I just want -- what if the declaratory relief is not granted next month?

Does that (multiple speakers) continue to operate the contract through the term -- through the end?

Let's recognize what litigation and there is nothing to be gained by saying what we will do or not do.

We will be in front of a judge, we will see what he says, we will see what his reasoning and we will work on it from there.

But to say we are going to do this or that before I think if I was the judge I wouldn't want to hear somebody standing in front of my bench saying that.

Fair enough.

Thank you.

Matt Borsch, Goldman Sachs.

Good morning, thank you.

Could you adjust elaborate a bit on the discussions that you are having with states on the industry fee and their willingness to include that in rates in the event that Congress does not take action?

Yes, I think we saw Florida has been [brewing] to add a line for it.

Other states recognize the actuarial soundness.

There has been a lot of press in Washington and elsewhere that it is going to cost the government about $15 billion, so there is going to have to come back into rates and then the state will be billing that back to the federal government again.

So it becomes very circular.

And we anticipate that the states understand that if it is not changed that there is going to be that cost to the state and hence to the federal government when they bill it back.

The states virtually all of them have written letters to their delegations in Congress and elsewhere stating this issue and we will just continue to let it play out.

(inaudible) commercial and we are still cautiously optimistic that it will be resolved.

And I guess I will carry it further, we have not seen where legislatively people tend to do things way ahead of when they have to.

That is not a snide remark that is just a realistic look at what to expect.

They have other bigger things to work on right now.

Yes, the real world.

On a different topic, this softer utilization trend that you alluded to in March, is there any further granularity you can give us on that?

Did you see a decline in hospital days year-over-year or births or outpatient visits?

How did it manifest itself and is there anything you might attribute it to?

Yes, I think I said we saw some slight declines in inpatient.

We saw the premature birth rate decline but we also have Healthy Start for Your Baby, a lot of programs that may be taking hold but I can't say it is going to continue and that but some outpatient services were down.

There was a lot of bits and pieces across the entire market in the various states and that is about as granular as it would be safe to give without misleading.

But I think there is a trend there that yet has to prove itself in another quarter or two.

Okay.

Last question, the Arizona contract loss, have you done any back analysis to figure out where -- if there were metrics on which you could have done better or was it price rate based?

I think anytime you have that situation even when you win you always look back and say I could still have done even better and that is part of the mindset of the Company.

There were rates, there were a lot of different factors.

Arizona is clearly recognized for making a lot of changes and you have seen them across even bigger changes than this.

The fact that this went that direction I could assign a lot of different little things and we are doing that analysis.

Our internal audit department has individuals who are charged with reviewing all RFP responses and seeing where we could still further improve.

So that is an ongoing process, Matt.

Okay, thank you.

Sarah James, Wedbush Securities.

Thank you.

I wanted to get a better understanding of what was impacting your new versus existing business MLR.

So on the existing, I'm trying to come to a run rate.

It has been pretty consistent the last six months 88.4, 88.5 but then that has excess flu costs and positive development.

And I'm not clear if you are putting Kentucky in the existing bucket by now but maybe there will be a step down when that contract ends.

So can you talk a little bit about where run rate on existing business should be?

Yes, I think that the Kentucky business has been in more than 12 months so it is in the existing business at this point but Kentucky because of the premium deficiency reserve amortization or whatever, really has minimal impact on our overall numbers.

I think as I said, we had about $41 million I think of premium deficiency reserve at 12/31 on our balance sheet to cover the remaining six-month period.

About $23 million of that was used in the first quarter leaving $18 million for the second quarter.

So that is all performing to our expectations at this point.

With regards to an HBR run rate for our existing business, I think it has been -- there is always ups and downs in terms of seasonality, the level of flu that is included in there versus the new business so I wouldn't see anything unusual there.

I will say that Texas will move into the existing business column for the second quarter and we are not anticipating to see a significant -- or we are expecting to see a slight decline in our HBR in the second quarter even with Texas moving into that bucket.

And are you referring to the Hidalgo Star Plus contract there?

That is part of it but we had a large expansion in Texas which was included in the new business until the second quarter that it has been in there for a full 12 months.

And on the Hidalgo contract, was that the primary driver of the decrease in the new business MLR coming down or was there another state and are there any kind of ongoing negotiations with the state around rates for that specific contract?

I will deal with the rates and then turn it over to Bill.

We said I think in my comments I said that we will continue to work with Texas in evaluating the rate adequacy and so this is sitting here at April the next increase is due in September.

We have these real-time dashboards and things and so as time goes along as we get close to September we will be able to look and demonstrate what our trends are on a real-time basis and work very constructively with the state.

So that is the time to really talk about that, Sarah.

Bill, do you want to pick up the driver of the new business and Hidalgo's part of that?

Yes, I think Hidalgo is just one part of the overall Texas expansion and we did get a rate increase in Hidalgo in September 1. So I think as the state has gone through their rate analysis in Texas, there was virtually no rate change in the rural service area on September 1, that is what is currently being considered -- much of what is in the new bill is for the rural service area.

So I think that in the fourth quarter just on our overall HBR versus the first quarter we said we added I think around $10 million of additional premium deficiency reserve for Kentucky in the fourth quarter which we didn't do in the first quarter.

So that causes some of the decline from quarter to quarter.

I wouldn't want you to leave the call thinking things are fully normalized in Hidalgo.

It is still work in progress and as we have said many times it is a matter of doing things on a sustainable basis and balancing our efforts to manage the care in a quality cost effective way and then work with the states where additional rates are still needed.

Thank you.

David Windley, Jefferies.

Good morning.

It is [Barry Steibler] filling in for Windley.

Thanks for taking the questions.

Had kind of a follow-up on the utilization, the soft utilization trends you guys spoke about earlier.

Can you talk a little bit more about when you started to see those, were those consistent throughout the quarter?

Did those seem to soften even as we were heading out?

I think what we've said is across the quarter we saw some consistency in it.

We had the flu cost in January was still high then we saw some mitigation of that as the quarter unfolded and our experience tended to mirror or follow that which the CDC was seeing across the country.

There is a lot of consistency there.

Things like premature birth rates and that, that could get peaks and valleys in any quarter so to say that versus other inpatient versus other outpatient services, it is hard to pinpoint and say that there was a fixed trend where it headed down and was continuing into April.

That is why we are saying that the reason for some of the experience you are seeing in the HBR but it is too early to say that that will continue and so therefore we think it is prudent and appropriate to maintain our expectation of our previous utilization levels.

Okay, that is helpful.

As a follow up if that softer trend that you are seeing continues, is that enough to get you to the upper end of the guidance range or exceed it?

Or how do we think about that in comparison to the other pivotal points that might push it to the lower end or the higher end of guidance?

I suspect those would be from the new business.

I want to be as helpful and as transparent as we can but I would say right now our experience and how we look at it going forward keeps us about where we are in that range.

And that if we see continued improvement or of maintaining a lower level in Q2 or Q3 that would be the time to talk to you about where in the range we would fall or tighten the range.

As I think I said in my comments, it is just too early to declare that based on the Q1 data even though we are looking at some real-time data through our dashboard, it is still just a little bit early.

Okay, that is fair.

Finally, on lowering the SG&A outlook by about 20 basis points, is that more a function of leveraging the new business now that all of the transactions are in and new awards are in or is that more a function of Centene kind of being ahead of plan in terms of just their operating expense run rate?

I think we have said all along our goal is to leverage our incremental volume and we maintain cost reduction programs on an ongoing basis.

And as you are expanding and growing that is the time to focus on what your expenses are, not just adding more and saying more of the same.

What we are really doing is we continue to have everybody focus and just because you have always done something doesn't mean you should continue to and we are using systems and other things to leverage just where we are at across the plans, the specialty companies, everywhere you look.

Great.

Thanks for the color.

Ralph Giacobbe, Credit Suisse.

Thanks, good morning.

I may have missed it, did you guys give what Texas MLR was in the quarter?

No, we haven't given the specific HBRs by state at this point.

Okay.

And then I guess second question if exchanges sort of do shake out higher than Medicaid rates with providers, can you talk about your protection from getting charged that amount on your current book of business?

Will you have a separate carve out exchange product and are you concerned at all around and how do you protect yourself in terms of future negotiations?

The exchange product is very different -- not very different but the rate setting is different for the Medicaid versus the exchange and Rone and his team with the help of Rob and others is already negotiating effective rates for the book of business we are anticipating which we told you is at the lower end of the spectrum.

So it is just a matter of working on it and dealing with it and working with the ACA rules and regulations and figuring out the size, and what is an appropriate range.

And I think with our actuaries, both internal and our external actuaries, we are being very responsible.

And of course we have always said we want to always return to it is not how big you are but we would rather be a little smaller and profitable so we are willing to do that but we believe we are well positioned.

Rone has done a lot of work and the analysis work with everybody to get us where we need to be in the ranges.

Okay.

Have you actually locked in contracts with providers at this point in terms of an exchange?

Yes.

And then just my last one, can you help us maybe parse out the revenue components maybe by contract if at all possible for the increase in that full-year premium guidance?

So obviously the premium guidance went up so just trying to get a sense of the components of what potentially has shaken out better or incremental to what you knew sort of last quarter?

I think the primary item that is new is the Acaria revenue for three quarters of the year and then we are making estimates with respect to the start dates and the membership levels and premium levels for some of the newer business coming on in the second half of the year including in Ohio and in California and so -- and the Florida long-term care which will start in August I think it is but will come in region by region for over a period of I think eight or nine months.

So I think that it is our normal estimation process of what we think those numbers will be and membership levels will be which is included in our revised revenue guidance that we have given.

Okay, thank you.

Justin Lake, JPMorgan.

First question, I just wanted to get some clarity on Texas specifically can you give us the level of those rates?

I apologize if you mentioned it before and I missed it.

I am sorry, the level of the rate --?

What was the rate increase that we should expect you to get in Texas?

We haven't really given a specific number at this point in time.

The states are still working through their process.

We have our own estimates of what that is going to be which is factored into our guidance numbers but I think until the process is completed, we don't have a rate amendment for example yet from the state.

That won't occur until May so we have done our own analysis on what they have been talking about but until that point in time, I think we are not quoting a specific percentage.

It is not wise to front run anything and future rates or rates people work on, that is doubly true.

There is a whole process they go through, our actuaries their actuaries.

It is a very constructive process in Texas.

They want to ensure there is adequate and I think they know that we ask for what is really needed and trying to see how high we can push it.

And we have demonstrated that to them over many years and they've demonstrated to us that they are going to act in a very responsible way over a lot of years so that is why we have a good relationship down there.

We have a lot of respect for the Director of Medicaid and others down there who work hard to get it right and it is not always the easiest political environment they have to work in but they worry about the quality of care for the recipients and that those that are providing it get adequately reimbursed.

And what you have said is that the rates -- the way you understand them are in line with what you had built into the original guidance.

Is that correct?

Yes, that is correct.

Okay.

And the retroactivity, how far retroactive are they going to go back so when they come out --?

We are talking to them, they understand the issues, they understand where we have had rate issues versus utilization and Bill wants to add something to it.

I think what they are doing is looking at a particular fiscal year and then making budget decisions on paying additional rates for a certain period of time.

They are talking about June, July and August to make payments which apply to a greater period.

But without any details of a rate amendment or anything right now, we are just assuming that that is going to be part of the June, July and August revenue that we receive.

And really the safest thing is let them go through their process.

They are responsible, they do a good job, and as quickly as we know and can responsibly report it, we will try and let you know.

We will be meeting again early June, which seems a long way off but we all know it is really tomorrow.

So I would hope that we have some resolution at that time.

Okay.

Then last question on Texas.

As you think ahead, I think you mentioned that the typical rate cycle starts in September.

So you are negotiating not only this retroactive look-back, but also the forward rates for September.

Is there an expectation that the more they give you early on or what they are giving you (multiple speakers)?

I think they will look to us for some real-time utilization information off our dashboard and other things.

And to talk now today about what we are looking for in September, I think we need to let the other adjusters come in, settle in, look at what that does to the total cost picture and revenue picture.

And then as we get into the late July, August period, that is the time to be sitting down and getting very serious about what the data looks like.

Because there will be enough in there to tell.

To try and go now, I think with our real-time systems we have an advantage that we don't have to take 3, 6-month-old data and trends it as much as you would if you didn't have it.

So I think we are in a position, the actuaries in ours, to use that real-time data to be more realistic at the time we are setting the rates.

The state obviously will look at the rates for the entire state and all of the managed care organizations and then their process.

We're one piece of that; we provide our input and work with their actuaries to give them the data that we are seeing from trends and everything to make sure that is taken into account.

But it will really be the state, obviously, working through their normal process.

As we have said historically, the state works constructively and I think the activity you have seen since last September continues to demonstrate that.

Absolutely.

Thanks for the color there.

One last question, your commentary on exchanges, specifically your commentary around your product set that is going to look to address a lower income population or targeted to that population.

I am just not aware of any way to specifically target lower income populations.

I understand that you can offer certainly a very narrow network product, but beyond that is there a way to target let's say 250% or less of the FPL, or is that just who you are going to market to or is that where the hospitals are going to be in places where there is a lot of that population?

Can you explain that to me?

I think as we have covered in the December Investor Day and introduced a little bit of our exchange strategy, we viewed it as an extension of our focus on uninsured, uninsured people particularly with the Medicaid base.

So there are people that do turn out of Medicaid in terms of losing eligibility and then are looking for a private market solution so there is a natural affinity in terms of our strategy for exchanges and the type of people that we have historically served and will come out and be looking for potential exchange solutions out of our Medicaid base.

That is one lever.

Certainly network is a second one.

We are building our network on the same set of providers that are providing people with care to our Medicaid members.

So that is another way that basically again you tend to attract our target population with respect to things.

We will be in initiating certain marketing efforts and certain sales efforts that will again be built upon the types of people that have traditionally provided support and guidance to people that are looking for Medicaid solutions that will again be weighted more towards the lower end of the income continuum.

And with respect to how we are looking at our product design, we are looking at a product that is going to provide a comfortable transition from what people have historically had their care through Medicaid in terms of not being used to co-pays, not being used -- or large co-pays not being used to large deductibles and co-insurance levels again try to offer a product that offers people a comfortable transition from that type of care or reimbursement to what will be offered on our exchange product.

So through a series of those sorts of levers we feel that we are going to pull in and attract that lower income population that is eligible for subsidies on the exchanges.

I think I would remind you we have some practical experience with the hybrid product in three, four states so that we have an understanding how some things -- how -- kind of what works in that area so I won't say any more than that from a competitive standpoint.

Okay, so you don't want to share with us what may be a reasonable target I mean I the bids are due I know in a couple of weeks you don't want to share with us a reasonable target in (multiple speakers)?

Let's not get ahead of ourselves.

After years we were doing -- there are some things there is no advantage to getting ahead of yourself but thank you for the question.

Kevin Fischbeck, Bank of America Merrill Lynch.

Okay, great.

Thanks.

I wanted to go to flu for a second.

It sounds like you said that flu -- there is no real difference between flu and a new markets and existing markets.

Is that correct?

I think that we incurred that across the country.

Texas was our largest market and the largest market where we saw flu so I think that we haven't attempted really to split the flu out between the two that much.

Mary, anything you would add, Mary?

I would agree with what you said earlier, Michael, that really our experience mirrored the CDC.

Was there anything as far as the product design as far as ABD because the ABD and Medicare MLR improved pretty significantly certainly compared to the (inaudible) increase in MLR.

I wanted to see if there was some thought about flu disproportionally impacting the (inaudible) versus the ABD and Medicare?

I don't think you could make that, I don't think that is the case.

Okay.

And then moving over to the Illinois duals, last quarter I think when you gave the update on Illinois you kind of gave Q4 the implementation date and then this quarter you said that the date was still kind of under review.

Do you feel like that might slip into Q1 next year?

When you are working with states it is very difficult to pinpoint it and I think the approach we took in giving that information was really where it needs to be.

Okay.

And then just following up on the exchanges, can you give a little bit more color on the states that you are targeting and then since you are talking about your experience in the hybrid program has given you a leg up I mean the hybrid program membership has been declining.

Can you just remind me is that just the repricing that you started last year?

It is a combination of things but we have been using that as kind of a test market so to speak and you are trying different things which can move the membership up, down as you try them.

And it would never be great big significant membership we knew that so it gave us that opportunity.

And let's just say that in terms of what states we are working through those and when we file, it is going to be a subset of the current states.

It won't be all 18 but there is a subset and I think in some investor days you have seen -- we have talked about where the intensity in membership is and the larger shares of market that would be there.

That would probably be a good way to start, look at which states have the largest potential market and go from there.

All right, great.

Thanks.

Ana Gupta, Dowling & Partners.

Thanks, good morning.

So just continuing on the medium-term growth drivers, a number of your states have expressed some ambivalence about doing the Medicaid expansions.

So as you are planning are doing scenario planning so you can operationalize some of this and it is not that far ahead, can you give us some color on how you see the potential addressable market assuming they do go for Medicaid expansion assuming they do nothing or they opt for the hybrid and to what extent is your (multiple speakers)?

I think part of it is -- we know those states have announced they are going to do it and where we are in that market, so be it.

We know that other states are still looking at innovative approaches and the innovative approaches require CMS approval.

In some cases we are talking to states on how we might assist them in doing that if that is what they want to do.

But there is a lot of political and other business issues that states are dealing with that will determine which states do it and where they are doing it -- we will be there if it is one of our states.

And do you think the Celtic type offering is it portable in that if you ended up doing the Arkansas model to [cull] for example, would your profitability be in line with what you would like it to be and how would that compare?

I think that we are very capable of doing the Arkansas type model.

I mean if we are going to be in the exchanges we are going to be at the low end of exchanges and that is really what you are talking about.

That is something that would be a sweet spot for us.

Okay, great.

Thanks.

And then on the duals, there has been some talk on the baseline rate in California and some actuarial concerns around what that might be.

Can you comment on that at all?

What sort of margins are being targeted in Ohio and Illinois?

Is that likely to have any impact?

Jesse, anything you want to add on that?

I think it is fair to say there is a lot of discussions going on around the country with respect to rates for duals so those conversations are starting obviously between CMS and their respective states and then extending into the plans in certain markets.

So I think it is premature to kind of comment on those as it works through.

But I think our understanding and expectation is there will be a balanced discussion on rate adequacy amongst those three parties, CMS, the states and the plans.

And that goes also with the forward expected trajectory of savings?

Do you think that is going to go in line with what you all think is achievable?

I think obviously it is going to depend on what we need to get more visibility on expectations both kind of in the initial year and in the out years but yes, I think everybody has an interest in achievable savings and a sustainable program.

Great, thank you.

Scott Fidel, Deutsch0e Bank.

Thanks.

First question just if you can maybe give us some thoughts on the trajectory of the MLR in the 2Q relative to the back half and specifically are you thinking the MLR can get back to within the guidance range in the second quarter as the Texas rate increase starts to materialize or do you think that more of a 3Q event?

I think that from a seasonality standpoint, Q2 is usually one of our better quarters and so I think as we are looking at this, our overall HBR that we are looking at for the remaining three quarters falls more into the guidance range that we have indicated.

And that will obviously benefit from certain rate increases that we have assumed that will occur starting in the second and third quarter in Texas.

But overall, we do think it will be the remainder of the year fall within the range.

Okay.

Then just a follow-up question just wanted to get some more color on the disclosure that you included in the Q on contributions to the subs relative to capital.

And it looks like you are forecasting that you are going to have around $270 million of capital contributions over the remainder of the year to the subs.

Maybe if you can just give us some color on are there any particular subs where you are expecting to direct most of that capital?

Then just in terms of financing that, it looks like highlighted using the revolver to fund a portion of that so just interested in maybe the mix of the financing of that between the revolver and from unregulated cash flows?

We have strong cash flows and we have more than adequate capacity within the revolver and again, our current forecast did not show us drawing down the revolver or anything close to it.

Right.

We have been fortunate in that our internally generated funds have really covered most of the increase that we have funded over the last year and a half or so in terms of the increase in revenues from 2012 of almost 60% and 25% or so we are looking for this year.

So we will have put in over $1 billion in capital in that period most of which we put in $220 million I think in this first quarter already and the revolver balance is zero.

So I think we have shown the ability to self fund most of that and we do have the revolver out there to fund the remaining.

We did issue the $175 million in notes in the fourth quarter of last year but that has really been the only issuance that we have had.

We are very comfortable with our debt to cap ratio at this point in time given the low cost of debt so we would expect to continue down that path.

Okay.

Then just one last question.

Just on Kentucky can you remind us whether you did end up getting a rate increase?

I think some local media had said that all the plans did get rate increases when some of your peers had cited that.

But I'm not sure if you guys have publicly talked about that yet so just interested if (multiple speakers)?

We really have not talked publicly beyond saying where we are in the courts and the administrative review, Scott.

We did not get a rate increase in 2013 in Kentucky.

Those were separate contract amendments for the other two plans and we do not have a contract amendment.

Okay, that is what I was looking for.

Okay, thank you.

Tom Carroll, Stifel Nicolaus.

Good morning.

So just a couple of quick ones.

Could you update us on how much remains in the PDR that was established?

And Bill, I think you said there was $41 million at year-end, kind of where is that today?

Secondly, with the visibility on all the new business, I mean my question was going to be do you anticipate having to raise more capital.

But based on your answer to the last one, it sounds like that is no but maybe just some clarification on that.

Thanks.

Sure.

The remaining premium deficiency reserve at March 31 is about $18 million which is consistent with our expectations that we had at the end of the year when we revised our numbers and filed our 10-K so that is proceeding according to plan at this point in time.

The other question with respect to the new business, it takes about 12 months of revenue for that to run out before all of the capital that you need for a new area is -- needed to be fully deployed so our current projections are as we add this new business particularly we added Kansas on January 1 and we will add some other states in the second half of the year in programs.

That gets factored in quarter by quarter and our current projections certainly allow us to cover that through internally generated funds and the use of our revolver.

I also remind you that we have said at several different occasions that acquisitions for stock would be a way of adding equity to the balance sheet and Acaria is probably a good example where we started that and obviously any acquisition we do won't be for that purpose.

It has to be something that strategically we want to move into but that is another way to add the equity without being dilutive to earnings.

Thanks.

Carl McDonald, Citigroup.

Specialty margin looked like it was 26% this quarter which seems unsustainably high.

So could you just talk about what drove the specialty results this quarter and where you think a sustainable margin would be for specialty after you factor in the Acaria deal as well as the new Massachusetts contract?

Yes, let me try to address that.

I saw your note early.

I think that with regard to our income statement if you are looking just at service revenue and cost of services, that is a fairly small number, $33 million in revenues for the quarter.

And I think that the improvement in our margin with respect to services really comes from a number of our separate specialty companies including Nurtur and Cenpatico and OptiCare.

And so I think it is actually a $3 million difference so percentages are not necessarily indicative of the whole trend.

In our segment footnote in the 10-Q when you look at our earnings from operations divided by our revenues, I think we improved our margin from 4.4% to 4.7% year-over-year so I think that is more indicative of the additional volume that we have received from the membership gains over the year and increase in the revenue from the health plans where we serve those same customers at the specialty side.

And so would you view the current earnings stream as being a good run rate for go forward?

I think that the current run rate that we as shown particularly in the segment footnote is reasonable and appropriate for going forward.

Okay, thank you.

Brian Wright, Monness, Crespi, Hardt.

Thanks.

Good morning.

A couple of real quick questions.

Can you give us the just G&A ratio for Acaria specifically?

We don't give those specific ratios but let's just say it is higher obviously than our average of 8% or 9%.

In the 20s range?

We don't give that, Brian.

It is just that it is a whole new business for us so it is kind of --?

Let's let it settle down as our business falls in and what we see now and where it is as the revenue grows will be different.

So let's give it some time before we start.

Maybe -- I want to be careful, you can mislead by giving too much granularity too soon.

That is something that I want to stay away from.

Okay.

Just as far as Kansas that is a new market, is that kind of in your typical 90% kind of range for a new market?

I think each market is different and the 90% that we talked about in the past with regard to -- when reserves are 90% in the first period of operations probably is closer to 92% today when you consider our reclass of medical management costs that we did a couple of years ago.

Having said that, Kansas in the first six months of operations where we have some continuity of care provisions and have margin build, we are running in the high 90s.

Okay.

And that is just the first six months?

It has only been up for three months so.

That was backed out for the first six months?

The first quarter was, yes.

Okay.

And then just lastly on Kentucky, you ended the last year with a 255 I think RBC ratio there.

I would think with the premium deficiency reserve kind of buckets, is it reasonable to think that you are still in the same range then for Kentucky?

I think we will probably be in excess of 200%, how much above that I don't really know at this point. --

That is great.

Okay, that is it.

Thank you.

Ladies and gentlemen that will conclude our question-and-answer session.

I would now like to turn the conference over to Centene Corporation's Chairman and CEO, Mr. Michael Neidorff for his closing comments.

I just want to thank you all for tuning in and we look forward to talking with you at the Investor Day and at the end of Q2.

Take care.

Thank you.

The conference has now concluded.

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