Centene Corporation

Welcome and thank you for standing by for the first quarter 2019 earnings call. At this time, all participants are in a listen-only mode. During the question and answer session, please press star 1 on your touch-tone phone. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Joe Bogdan.

Good morning, and thank you for joining Magellan Health's first quarter 2019 earnings call. With me today are Magellan's Chairman and CEO, Barry Smith, and our CFO, John Rubin. The press release announcing our first quarter earnings was distributed this morning. A replay of this call will be available shortly after the conclusion of the call through June 2, 2019. The numbers to access the replay can be found in the earnings release. For those who listened to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, Thursday, May 2, 2019, and have not been updated subsequent to the initial earnings call. During our call, we will make forward-looking statements, including statements related to our 2019 outlook. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the risk factors discussed in our press release this morning and documents we filed with or furnished to the SEC. In addition, please note that Magellan uses certain non-GAAP financial measures when describing our financial results. Specifically, we refer to segment profit, adjusted net income, and adjusted EPS, which are defined in our FCC filings and in today's press release. Segment profit is equal to net revenues less the sum of cost of care, cost of goods sold, direct service costs, and other operating expenses. and includes income from unconsolidated subsidiaries but excludes segment profit from non-controlling interests held by other parties, stock compensation expense, special charges or benefits, as well as changes in the fair value of contingent consideration recorded in relation to acquisitions. Adjusted net income and adjusted EPS reflect certain adjustments made for acquisitions completed after January 1, 2013. to exclude non-cash stock compensation expense resulting from restricted stock purchases by sellers, changes in the fair value of contingent consideration, amortization of identified acquisition intangibles, as well as impairment of identified acquisition intangibles. Please refer to the tables included with this morning's press release which is available on our website for reconciliation of GAAP financial measures to the corresponding non-GAAP financial measures. I will now turn the call over to our Chairman and CEO, Barry Smith.

Barry? Thank you, Joe, and good morning, everybody. In today's prepared remarks, I will summarize the financial results for the quarter, provide an update on our margin improvement plan, share our perspective on the current regulatory environment, and comment on the recent settlement agreement with Starboard. For the first quarter of 2019, we reported net revenue of $1.7 billion, net income of $0.4 million, and EPS of $0.02. Our adjusted net income was $9.6 million, and adjusted EPS was $0.40, and we achieved a second profit of $45.6 million. Overall, our healthcare results were solid, and our pharmacy results for the quarter were impacted by some unfavorable out-of-period and timing items related to network costs. Given the non-recurring nature of the items affecting pharmacy this quarter, we believe we're still on track to achieve our full year earnings target. We are affirming our 2019's earning guidance ranges, but modestly lowering our revenue guidance to a range of seven to 7.2 billion. John will provide more details on the first quarter results and our 2019 guidance later on the call. As a company, we remain focused on our multi-year margin improvement plan initially outlined this past December. During the quarter, we made progress in each of our three major initiatives in healthcare, pharmacy, and at the enterprise level. Our long-term goal is to increase our adjusted mid-income margin to over 2%. Within our healthcare segment, we continue to strengthen our managed care fundamentals by lowering our cost of care while improving quality. In Magellan Complete Care of Virginia, we made progress with our care initiatives, including the appropriate utilization of behavioral health outpatient and physical health inpatient services. Our claim payment integrity reviews are also providing recovery opportunities. Overall, we reported MLR in the mid-90s, consistent with our medical action plan. In Magellan Complete Care of New York, we posted a small profit in the corner and we expect further improvement in margins for the remainder of the year as we realize the benefit of anticipated rate increases, quality incentive payments, and care management initiatives. As we mentioned in the fourth quarter call, we are continuing to dialogue with the state regarding a potential retrospective risk adjustment for the state fiscal year ended March the 31st, 2019. Finally, our behavioral and specialty health portfolio performed well. with care management in line with our expectations. In our pharmacy segment, we continue to focus on the retention of our specialty carve out contracts, growing our PBM, and lowering our cost of goods sold. Let me provide you with some additional depth on each of these items. Our new comprehensive sales approach to selling our carve out specialty pharmacy solutions is resonating in the market and helping us build deeper relationships and create more savings for our customers. This includes bundling services such as medical pharmacy with formulary management and leveraging our clinical expert network to support clients with rare disease management. We're pleased that our work to solidify the Specialty Carve-Out Book of Business is on track. In addition, our PBM posted a record number of new members through sales at the start of 2019. While the previously announced loss of a health plan customer due to an acquisition in our plan reduction in Medicare Part D resulted in a sequential decline in total net membership, we believe that our PBM's level of service, flexibility, and clinical expertise will continue to fuel growth. Finally, we are continuing to improve the cost of goods sold for our pharmacy customers. We recently executed a new drug wholesaler deal effective April the 1st and are finalizing negotiations with our major retail network pharmacies to improve supply chain economics. From an enterprise perspective, we remain committed to driving continuous operational improvements for administrative efficiency. We are realizing these savings through both organizational redesign and process optimization. For example, We flattened the organization by increasing span of control and consolidated customer care teams to leverage best practices and increase scale. From a technology perspective, we've also been active. For example, we've enhanced quality monitoring systems to promote first call resolution and to eliminate rework in support areas. We've also improved our workforce management system for resource planning and forecasting. and increased self-service on calls and web tools for both providers and members. We are confident that these efforts will help us to remain competitive and contribute to our multi-year margin improvement plan. With the start of the presidential campaign, we believe Medicare for All will remain an issue but not likely a congressional legislative initiative. We are concerned over the disruption that some of the proposals would cause but we share the common objective that all Americans should have access to affordable and comprehensive health insurance. At this point, we do not expect any material impact on our operations for the foreseeable future. Congress and the White House have also given a great deal of attention to the issue of high drug costs and drug pricing. We believe the current proposals do not address the fundamental issue of high drug prices, which will result in significantly increased cost based on CMS's estimates and face a difficult legislative process. As a result, we expect any near-term changes to be modest. On March the 29th, we announced an agreement with Starboard Value regarding the composition of our board of directors and creation of a strategic committee of the board. The committee is working with management towards the goal of creating an incremental shareholder value. Relative to board composition, under the terms of the agreement, four new independent directors joined the Magellan Health Board in March. Following the annual meeting, the board also intends to decrease its size from 13 down to 10 directors. Our four new directors bring financial, operational, technology, and healthcare experience that we believe complement our existing board, and we are already benefiting from their perspectives and contributions. In addition, our directors Matt Simas, Aran Broshi, and John Aguinobi notified the company of their intention to retire from the Magellan board as of the company's upcoming 2019 annual meeting on June the 21st. I want to personally thank Matt, Aran, and John for their dedication and service to Magellan. I am pleased with the continued focus of our leadership team and our progress to date, on our multi-year margin improvement plan. I remain confident in our mission, our team, and our ability to deliver sustainable growth and value creation over the long term. I'll now turn the call over to John to provide a more detailed financial review of the quarter. John?