Centene Corporation (CNC)

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Centene Corporation (CNC)

2013 Guidance and Investor Meeting

December 14, 2012 8:30 am ET


Edmund E. Kroll - Senior Vice President of Finance and Investor Relations

Michael F. Neidorff - Chairman, Chief Executive Officer and President

William N. Scheffel - Chief Financial Officer, Executive Vice President and Treasurer

Jonathan Dinesman - Vice President of Government Relations

Donald G. Imholz - Chief Information Officer and Executive Vice President

Mary V. Mason - Chief Medical Officer and Senior Vice President

Robert T. Hitchcock - Executive Vice President of Health Plan Business Unit

Jesse N. Hunter - Chief Business Development Officer and Executive Vice President

Keith H. Williamson - Executive Vice President, General Counsel and Corporate Secretary


David A. Styblo - Jefferies & Company, Inc., Research Division

Joseph D. France - Cantor Fitzgerald & Co., Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Sarah James - Wedbush Securities Inc., Research Division

Matthew Borsch - Goldman Sachs Group Inc., Research Division


Edmund E. Kroll

Okay. Good morning, everyone. I'm Ed Kroll, Head of Investor Relations for Centene. Thank you for joining us at for our 2013 financial guidance meeting. We'll have 2 Q&A sessions. You can see on your agendas that are at your seats. And of course, for those of you in the room, we'll have microphones available for you to ask your questions. For those of you out on the webcast that want to ask a question, you can either email it to questions@centene.com or simply send it to me, and my email is ekroll@centene.com.

And now I'll read the obligatory forward-looking statement. During the course of this presentation, we may make projections or other forward-looking statements regarding future events or the future financial performance of our company. Any remarks that Centene may make about future expectations, plans, prospects, constitute forward-looking statements, for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. We wish to caution you that such statements are just predictions, and actual events or results may differ materially. We also refer you to our SEC filings, Form 10-K and the quarterly form 10-Q that we filed with the SEC, the K on February 21 of this year and the latest Q on October 23 of this year, and also the 8-K we filed this morning, December 14. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

Our company's policy is that the company undertakes no obligation to update its earnings guidance other than part of the quarterly or yearly earnings disclosure, and that silence on guidance by the company or company officials should not be interpreted that guidance has or has not changed. No updated guidance would ever be given that is not previously or simultaneously disclosed in an SEC filing or other broad, non-exclusionary means. Further, it is our policy to generally not hold discussions with investors commencing 2 weeks prior to earnings releases. That's known as a quiet period, of course. And that concludes the reading of the statements.

And with that, I'll now turn the meeting over to our Chairman and CEO, Michael Neidorff.

Michael F. Neidorff

Thank you, Ed. Good morning, everyone, and welcome. Throughout the course of this morning's program, we will update you and share with you the confidence we have for the continuance of Centene's success story. We will provide you with one, more detail on 2013 guidance; two, the details for the revision of our 2012 guidance; and three, an update on our full RFP pipeline; and finally, a discussion of our strategic priorities and those things that we think are competitive advantages. We will also introduce you to the latest additions to our senior management team, who will play a central role in executing these endeavors.

As we indicated in our press release, guidance for 2013 is in the range of $2.60 to $2.90, with including approximately 20% revenue growth. In addition, we revised guidance for 2012, which reflects higher medical costs associated with an earlier and more intense flu season in our largest markets, the off-cycle transfer in Texas of higher acuity members from another health plan and higher-than-anticipated utilization in our Texas STAR and Medicaid Rural Service Areas business.

In addition, we increased our previously disclosed premium deficiency reserve for Kentucky due to higher medical costs, which are also impacting our competitors in this market. During today's presentations, we will provide more detail related to these challenges and the corrective actions we have taken to improve performance. As I mentioned, Centene's senior management team continues to increase in breadth and depth to keep pace with our growing business. We have created a broader operating group, a group of partners, who are individually running important segments of the business. Collectively, we are managing the whole business.

As part of the management realignment, on December 4, we announced and please allow me to introduce Rob Hitchcock, Executive Vice President, Health Plans. Rob? Rone Baldwin, newly appointed Executive Vice President for our insurance group. Rone? Dave Minifie, our newly appointed Executive Vice President and Chief Marketing Officer. They will be joined in a newly created operations group, and these are in alphabetical order: Jason Harrold, our EVP for Specialty Companies; Jesse Hunter, Executive Vice President, Chief Business Development Officer; Don Imholz, our Chief Information Officer and Executive Vice President; and, of course, Bill Scheffel, our Executive Vice President and Chief Financial Officer.

The operational realignment ensures an already strong team of leaders and builds on it. Through the general management development program, we will be rotating jobs, allowing each member to become knowledgeable in all aspects of Centene. This greater bandwidth further allows us to successfully manage our rapidly growing business in both existing and new markets.

With the Presidential election and Supreme Court decisions behind us, several elements of uncertainty have been reduced. However, states continue to face budgetary pressures. The trend to move recipients out of fee-for-service and into managed care remains compelling from a qualitative and effective standpoint.

We hope to leave you today with a better understanding of Centene's solid growth trajectory and the reasons for our success. What I want you to take away from today's presentation is that we have addressed the challenges in 2012 and are poised to resume to growth in profitability in 2013. After Bill's address, where he talks more about 2013, I'll be back with some updates on the various aspects of our business.

But before I turn the podium over to Bill, I just probably want to acknowledge the State of Texas Commissioner, his staff in the health and human services area, who have been so effective in working with us in overcoming the issues, if you saw from the press release and one -- and part of the letter we quoted that they recognize what the issues are, they're working with us on a going-forward and basis and helping us to put those things that created some of the issues that created volatility and frustration for all of us behind us. So I just wanted to publicly thank them for that. Bill?

William N. Scheffel

Thank you, Michael, and good morning. As noted in our press release this morning, we have revised our 2012 earnings guidance to $0.10 to $0.20 of earnings per share. The revision in guidance is due to 3 primary factors. First, we are experiencing higher-than-anticipated costs associated with the flu. Flu tests and drugs have increased over 400% from the third quarter of 2012 and are higher by about the same percentage compared to the prior year. Our current estimate is that the flu will be approximately $0.15 to $0.18 per share higher in the fourth quarter than originally predicted. The largest cost increases have been primarily in our Texas market.

Second in Kentucky, we are experiencing higher claims volumes for older dates of service, going back as far as the inception of the program, and that we believe are driven primarily by a 1-year timely filing requirement and the notice of our intent to exit the Kentucky market. We anticipate increasing our Kentucky premium deficiency reserve by approximately $10 million or $0.11 per share during the fourth quarter.

And third, in Texas, we are experiencing higher medical costs of approximately $0.17 to $0.20 per share, associated with the off-cycle transfer of high acuity members in the Hidalgo service area, and additionally, we are experiencing higher-than-estimated utilization, primarily for inpatient services, in our Hidalgo Star and the Rural Service Areas.

A significant portion of Texas' issues were addressed with the premium rate adjustment effective September 1, 2012. However, the rate adjustment did not adequately consider the high utilization levels in the Rural Service Areas and the transfer of new members in Hidalgo. More recently, our discussions with the state have intensified, and we have had a long partnership with the state to try to mutually solve the problems that we have together. And they have been a good partner. The state has committed to us to rectify these matters as soon as possible, and we anticipate that any such adjustments will be made in the first quarter of 2013.

Now I'd like to turn to 2013 guidance. At a high level, we expect Premium and Service revenues at $9.7 billion to $10 billion, a year-over-year increase of approximately 20% at the midpoints of the ranges, and earnings per share guidance of $2.60 to $2.90, which compares to our revised 2012 GAAP earnings guidance of $0.10 to $0.20 per share. I will provide some detail on the assumptions utilized in our guidance numbers, and will then take questions before proceeding with the additional presentations.

The primary components and assumptions used in our Premium and Service revenue estimate of $9.7 billion to $10 billion are as follows: our new health plan in Kansas, Sunflower State Health Plan, begins operations on January 1, and we've added revenue from expansion in existing states. In Mississippi, the managed care program expanded from approximately 50,000 members to 150,000 members effective December 1. And in Illinois, there was an expansion of the managed care program through additional benefit categories beginning in the first quarter of 2013. We currently anticipate that the Illinois duals program will not start until the fourth quarter of 2013. In Ohio, we expect the statewide Medicaid expansion to be effective in the third quarter of 2013 and the duals program to start in the fourth quarter of 2013. And in New Hampshire, we anticipate operations to begin in the middle of 2013.

We will also have a full year benefit of programs started or expanded in 2012, including our Louisiana health plan, which started up in phases beginning February 1 and added pharmacy benefits effective November 1; the Texas expansion, which started March 1, with additional membership added several times after that; our Missouri and Washington health plans, which began operation July 1. And we also anticipate a decline in revenue from Kentucky, where we expect our -- to end our participation in the managed care program effective July 5, 2013, and a decline in revenue from the individual health business for Celtic Insurance as a result of lower membership levels.

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