Centene Corporation

Good morning and welcome to the Centene 2018 fourth quarter and year-end financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Ed Krall, Senior Vice President of Finance and Investor Relations. Mr. Krall, please go ahead.

Thank you, Anita, and good morning, everyone. Thank you for joining us on our 2018 Fourth Quarter and Full Year Earnings Results Conference Call. Michael Neidorf, Chairman and Chief Executive Officer, and Jeff Schwaneky, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which can also be accessed through our website at centene.com. A replay will be available shortly after the call's completion, also at centene.com, or by dialing 877-344-7529 in the U.S. and Canada, or in other countries by dialing 412-317-0088. The playback code for both of those dial-ins is 10125. 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, which is dated October 23, 2018, Form 10-K, dated February 20, 2018, 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. The call may also refer to certain non-GAAP that's generally accepted accounting principles A reconciliation of these measures with the most directly comparable gap measures can be found in our fourth quarter 2018 press release, which is available on the company's website at centene.com under the Investors section. Finally, a reminder that our next Investor Day will be on Friday, June 14th in New York City. With that, I'd like to turn it all over to our Chairman and CEO, Michael Neidorf. Michael?

Thank you, Ed. Good morning, everyone, and thank you for joining Centene's fourth quarter and full year 2018 earnings call. During the course of this morning's call, we will discuss our fourth quarter and full year 2018 financial results and provide updates on Centene's markets and products. We will also bring you up to date on the integration of Fidelis and the regulatory and legislative environment. First, let me provide commentary on healthcare legislation legal and regulatory environment. We are hopeful that the divided government leads to greater constructive dialogue from both parties when it comes to healthcare policy. It is clear Medicaid and the services we provide are needed more than ever. Clearly numerous governors from both parties strongly supported Medicaid managed care during the repeal and replace debate. We also have seen Utah, Nebraska, and Idaho by ballot initiative recently passing Medicaid expansion. It also appears from the most recent marketplace enrollment figures, there continues to be consistent demand for affordable, high-quality healthcare coverage. As stated in the 2020 proposed payment notice, we support CMS's goal in the 2020 proposed payment notice we support CMS's goal of maintaining a stable regulatory environment, allowing for greater product predictability. The payment notice is CMS's annual regulatory and financial guidance for the marketplace. Importantly, we support the administration's continued efforts to give states greater flexibility via 1332 and 1115 waivers. This works well with our local operating model where we have strong relationships with providers and regulators. We look forward to working with the states who are on the front lines in making sure all of their citizens have access to affordable, high-quality healthcare. Next, I'd like to recap Centene's highlights of 2018. 2018 was another year of strong growth and accomplishment for Centene, capped off by the robust fourth quarter results we reported this morning. In 2018, we added 1.8 million members, surpassing the 14 million mark. We grew revenues by 24% to $60.1 billion and adjusted EPS by 41% to $7.08. The HBR improved 140 basis points year over year to 85.9%. The adjusted net income margin improved 50 basis points to 2.5%. Cash flows from operations remain strong at 1.4 times net earnings. During the year, we stuck to our business as usual approach. We have not been distracted by ACA legal headlines. As we agree with all the legal experts, it will be reversed. While there has been chatter about possible disruption to the exchanges, Individuals like to have an insurance card with comprehensive coverage. We remain the leader in the AC marketplace. In 2018, Centene successfully entered three new exchange markets and expanded in six existing and better markets. I remind you, in 2018, year over year, our exchange membership increased by approximately 500,000 members, or 52%, to one and a half million. Please note, this is ahead of our initial expectations. In Medicaid, we successfully re-procured contracts in Arizona, Florida, Washington, and Kansas, and won two new Medicaid contracts in New Mexico and Iowa. Overall, our win rate in Medicaid RFPs remains an industry-leading 80%. Also, our medical management efforts and network initiatives continue to gain traction and help drive the improved HBR I previously noted. In addition, it is our strong organic growth we engaged in strategic M&A and investments throughout the year. In 2018, we closed the acquisition of Fidelis, the only statewide health plan in all 62 counties of New York. During the year, we began integrating Fidelis, now our New York health plan, into our enterprise. We are very pleased with how the integration is going. For example, on January 1, we moved all the Fidelis employees to Centene's HR systems without incident. Fidelis has also been on our general ledger since the day we closed the transaction. We remain on track to achieve the accretion and synergy targets. We anticipate high single-digit percentage accretion to adjusted EPS in the first 12 months following the closure and low to mid-teens percentage accretion to adjusted EPS in the second full year following the close. We are also anticipating generating approximately $25 million in pre-tax net synergies in the first 12 months following the close and $100 million in total pre-tax net synergies in year two. On a run rate basis, we expect Fidelis to add approximately $12 billion in revenue and over $515 million in adjusted EBITDA, including net synergies. In addition to Fidelis, we completed the acquisition of MHS Services, a national provider in healthcare and staffing, to correctional systems and other government agencies. MHM was previously our joint venture partner in Centurion. We are now providing correctional services in 15 states with 32 contracts. We also completed the acquisition of Community Medical Group, CMG, a leading at-risk primary care provider in Miami-Dade, Florida. CMG has 15 clinics that focus on low-income beneficiaries with an expertise in social determinants. We increased our ownership in Interpreter, a technology company focused on clinical and geomic data, as well as real-time analytics. Our total ownership is now 80%. We made an investment in RxAdvanced technology-based pharmacy benefits management platform. We support a shift towards a more transparent PBM model that is sustainable with higher quality and lower cost for consumers. Over the past year, we have been advocating for net pricing versus rebates. Lastly, Centene purchased a controlling stake in University Hospital of Torreon in Madrid. This is an important addition to our Rivera Salud model, which sets the standard for successful public-private partnerships in healthcare. As a final point, we introduced Centene Forward a transformative program to enhance key parts of our enterprise. We expect Centene Forward to realize up to $500 million in savings over a multi-year period. It is important to note that this is not a short-term effort to have savings immediately go to the bottom line in 2019. Rather, it is a self-generating effort to reinvest capital into additional capabilities and technologies that better position-setting for long-term growth, increased margins, and profitability. Moving on to market product updates. First, we'll discuss Medicaid activity. Florida. In December, as part of a successful re-procurement, we continued providing physical and behavioral health care services to the state's Medicaid program. We are now statewide in all 11 regions, Importantly, this large geographic footprint results in additional membership and revenue from our previous contracts. Kansas. On January 1, our Kansas health plan renewed its contract to continue providing managed care services for the state's Medicaid program. This was a successful re-procurement of an existing contract. We currently serve approximately 130,000 recipients in the state. New Mexico. Last month, Santum began serving recipients enrolled in New Mexico's Medicaid Managed Care Program. We currently have approximately 65,000 members while still early in the process. The launch is progressing as expected. Pennsylvania. In January, we began serving over 30,000 beneficiaries enrolled in Pennsylvania's Long-Term Care Program in the Southeast Zone. We launched the Southwest Zone in January of 2018. We now serve over 50,000 long-term members in the state. The third and final zone will be implemented by January of 2020. Our participation in this major program reinforces our national leadership position in long-term care. North Carolina. We are pleased to be selected in two regions in the North Carolina Medicaid Managed Care Program. These two regions are among the largest in the state. Our joint venture Carolina Complete Health is the only provider-sponsored winner in the RFP. This will result in better health outcomes for members at a lower cost for the state. The contract is set to commence February 1, 2020, as this was only awarded yesterday, we will provide more details on our first quarter earnings call. I do want to highlight, however, that we believe that the state did not fully understand our innovative approach with providers in North Carolina. However, we believe our partnership with the North Carolina Medical Society and the FQHCs will be proven to be the right model for success in that market. We are a believer in a provider-led entity approach for growth and quality, and we expect to be the best partner the state has in its Medicaid program. We are currently considering an appeal and helping them to understand what this innovative model means and how we can help manage costs and improve quality. Next, Centurion. Florida in December In December, Centurion began operating under an additional new contract, providing comprehensive healthcare services. Operating under an additional new contract, providing comprehensive healthcare services. This new contract covers an average of 1,425 detainees in Valencia County detention facilities. With the addition of this new contract, Centurion is now statewide in Florida. New Mexico. In February, Centurion began providing comprehensive healthcare services to detainees in the Metropolitan Detention Center in Albuquerque. Centurion is providing a wider range of healthcare services to an average detainee population of 1,550. Arizona. In late January, Centurion was notified by the state of Arizona of its intent to award a contract to provide healthcare services to inmates housed in the state's prison system. The contract is expected to begin in July of 2019. Under the agreement, Centroia will provide healthcare services to an average daily population of approximately 34,000. Now, health insurance marketplaces. Our marketplace business continued to perform well in the fourth quarter. At year-end 2018, we served approximately $1.5 million exchange members in 16 states for 2019 our continued focus on providing high quality affordable health care led to a very successful open enrollment in a national market that shrunk almost three percent and better grew approximately 15 percent and now has approximately 20 percent national market share we achieved this while maintaining our pricing disciplines we began offering exchange products in four new states in 2019. We also expanded our footprint in six of our existing Ambetter states. In January, we had almost 2 million paid members across 20 states. This represents a year-over-year increase of 250,000 legacy Ambetter members, as well as 80,000 Fidelis members. The $250,000 increase is well ahead of our most recent estimate of $150,000 to $200,000. As you recall, the initial estimate we provided on December Investor Day was $50,000 to $150,000. The key demographics of these members remain consistent with the comments we made on December Investor Day, excluding Fidelis, approximately 90% are eligible for subsidiaries. Meadowtier and other demographics are consistent with prior years. Our retention rate is maintained at 80%. We expect to have another strong year of operations in our industry-leading marketplace business. On to Medicare. At year-end, we served approximately 417,000 Medicare and MMP beneficiaries. This represents year-over-year growth of approximately 83,000, or 25%. Consistent with our growth strategy, we have expanded our geographic footprint and are in 21 states in 2019. We continue to take targeted approach to growing our Medicare Advantage business. As we commented on December Investor Day, we priced for margin stability in 2019, recognizing the headwinds that came with a lower star rate. As a reminder, we expect first quarter 2019 MA membership. to decrease by approximately 20,000 members. This is due to a reposition in Fidelis to get back its four-star rating. We continue to expect 2019 MA revenue and membership to be flat compared to 2018. We will return to a four-star MA parent rating for the 2020 plan year. We expect this will have a positive impact on multiple new plans, including the joint venture we announced with Ascension Healthcare. This should allow us, along with other product enhancement efforts, to accelerate growth in MA in 2020 and beyond. I remind you, it is not how fast, but how well one grows. Shifting gears to our rate outlook. For 2018, our composite Medicaid rate increase was 1%. We are expecting a composite Medicaid rate increase of 1.5% in 2019. Separately, CMS issued the 2020 advance notice last week, and preliminary Medicare advantage rates appear to be in line with our expectations. We continue to see, as well as anticipate, overall stable medical cost trends, including flu, consistent with overall stable medical cost trends, including flu, consistent with our expectations in the low single digits. In conclusion, 2018 was another successful year for Centene. Our strong 2018 results reaffirmed our growth momentum for 2019 and beyond. Our pipeline of growth opportunities is robust, and we remain focused on margin expansion. We are raising our 2019 guidance to reflect a higher than expected open enrollment for Marketplace, the Centurion win in Arizona, and the win in Madrid or the acquisition of the Madrid Hospital. Before I turn the call over to Jeff, I would like to remind you that the approved two-for-one stock split will be distributed tomorrow, February 6th. The split stock enhances liquidity for shareholders in line with Centene's market cap growth. Importantly, it moves our float to a level appropriate for an enterprise of our size. Thank you for your interest in Centene. Jeff will now provide you further details on fourth quarter and full year 2018 financial results as well as our increased 2019 guidance.