Centene Corporation

2019 Second Quarter Earnings Conference Call. All participants will be in a 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, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Ed Kroll. Please go ahead.

Thank you, Alyssa, and good morning, everyone. Thank you for joining us on our second quarter 2019 earnings results conference call. Michael Neidorf, Chairman, President, and Chief Executive Officer, and Jeff Schwanicki, 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 number for both dial-ins is 1013-2753. 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 recent Form 10-Q filing filed today, July 23rd, and the Form 10-K, dated February 19th of 2019, 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 will also refer to certain non-GAAP measures A reconciliation of these measures with the most directly comparable GAAP measures can be found in our second quarter 2019 press release, which is available on our website at centene.com at the investor section. Finally, a reminder that the Centene third quarter 2019 earnings call will be held on Tuesday, October 22nd, 2019, and our next investor day will be held Friday, December 13th, 2019 in New York City. With that, I'd like to turn the call over to our chairman and CEO, Michael Neidorf. Michael? Thank you, Ed.

Good morning, everyone, and thank you for joining Centene's second quarter 2019 earnings call. During the course of this morning's call, we will discuss our second quarter results and provide updates on Centene's markets and products. We'll also provide commentary around the healthcare legislative and regulatory environment as well as an update on the acquisition of WellCare. Let me begin with second quarter 2019 financials. We are pleased to report another solid quarter marked by robust top and bottom line growth and operating cash flows. Membership at quarter end was 15 million recipients. This represents an increase of 2.2 million beneficiaries, or 17% over the second quarter of 2018. Second quarter revenues increased 29 percent year-over-year to $18.4 billion. The HBR increased 100 basis points year-over-year to 86.7. This was primarily attributable to the marketplace business. As expected, margins have normalized from the favorable performance in 2018. The increase was also attributable to the HIFT moratorium. as well as the acquisition of Fidelis. We reported adjusted second quarter diluted earnings per share of $1.34. This compares to 90 cents reported in the same period last year, representing a 49% increase year-over-year growth. Lastly, operating cash flows came in at $917 million, or 1.9 times net earnings. This is the high end of our previously stated range of 1.5 to 2 times net earnings. These solid results reflect the benefit of our ongoing diversification strategy, which has led us to become a $74 billion enterprise. We're no longer simply a Medicaid healthcare company. One has to look at the totality of this enterprise. as the scale and diversity allows us to absorb the ups and downs in rate cycles, markets, and subsidiary performance. This ensures that no one part of the portfolio can jeopardize our total organization. Jeff will provide further financial details, including updated 2019 guidance in his prepared remarks. A quick comment on medical costs. They remain stable and in line with our expectations in the low single digits. Moving on to markets and product updates, first we'll discuss Medicaid activity. A Medicaid book of business continues to perform well in the second quarter. At June 30, we had 8.5 million recipients representing year-over-year growth of 1.3 million, or 18%. We continue to win Medicaid RFPs in new and existing states, upholding our industry-leading RFP win rate of 80%. Now on to state updates. Oregon. In July, Centene successfully re-procured its Oregon Medicaid managed care contract. We expanded our presence under this new contract adding three additional counties. We will now be operating in six counties, including Metro Portland. Centene currently provides care to 92,000 beneficiaries in the state. The additional three counties will maturely increase our membership in Oregon. We look forward to continuing to work with the state, demonstrating the value of integrated care, focusing on social determinants of health, and maintaining sustainable cost control. The new contract is expected to commence January 2020. and will run through December 31, 2024. Iowa. On July 1, we began operating Iowa's Medicaid Managed Care Program, a new state for Centene. Operations commenced as expected, and we are now providing healthcare to approximately 254,000 beneficiaries. Iowa is committed to operating a sustainable Medicaid Managed Care Program, as evidenced by the recent rate increase which we did anticipate. We expect to achieve a normal margin within a typical ramp-up period for any new Medicaid contract. IR marks Centene's 32nd state of operation. New York. It has been just over one year since we closed the Fidelis acquisition, and we could not be more pleased with the performance. The integration of the company is running smoothly, and we are realizing our synergy and accretion targets. North Carolina. As we have previously noted, Centene won two large regions in North Carolina Medicaid RFP and has an active appeal for the balance of the state. We remain cautiously optimistic regarding our appeal. Texas. Texas recently decided to delay the start of prospect procurement announcement until the end of August. we remain confident in the value we bring to the state. Louisiana has also delayed the announcement of its re-procurement. We now expect to hear late July and remain confident in our prospects there. Next, Medicare. At June 30, we served just under 400,000 Medicare and MMP beneficiaries across 20 states. This represents a year-over-year increase of approximately 55,000 recipients. On a sequential basis, membership increased over 4,500 recipients. As we have previously commented, we expect 2019 MA revenue and membership to be flat compared to 2018. This is net of the actions taken by Fidelis to re-establish their four-star rating, which includes exiting 26 counties in 2019. Next year, we plan to expand into 100 counties and existing states and add one more new state, Nevada. We will begin our joint venture with Ascension in four geographies in 2020. Further, Ascension will return to a four-star MA parent rating and the addition of WorldCare's high-performing MA portfolio will bolster our MA platform. Going forward, this should accelerate profitable long-term growth in the 2020s and beyond. Now, health insurance marketplace. The marketplace business continues to perform well, consistent with our expectations. At June 30, we served approximately 1.9 million exchange members across 20 states. This represents a sequential decline of 58,000 recipients, which is lower than our historic attrition rate. We continue to see higher member retention than in prior years, which we previously noted. Importantly, the key demographics of our membership remain in line with our previous remarks on this subject. Consistent with our previous comments our marketplace margins continue to be in the 5% to 10% range. We continue to anticipate another strong year of operations as the national leader of exchange products and expect to continue to grow this business in 2020. Next, international. In late June, we purchased an additional 40% ownership in Rivera Salud from Banco Sabadell, expanding our stake to 90%. We believe our knowledge and skills, along with our leading edge IT systems, has further enhanced an already strong business in Spain. We continue to look for opportunities to expand our international business. Please note, our growing international business will not distract us or impede our ability to pursue the growth opportunities in the US. I'll now provide an update on the healthcare legislative and regulatory environment. Although there appears to be little desire in Washington to revisit comprehensive healthcare reform, Congress and the administration continue to explore ways to improve healthcare delivery systems. We support the administration's decision to withdraw its rebate proposal to eliminate the existing safe harbor protection within Medicare and Medicaid. While the Senate still needs to take up the matter, the House recently voted on a very bipartisan basis to eliminate the health insurance fee. Importantly, there are opportunities in which we can work together to bring down not only pharmaceutical costs, but costs across the entire healthcare delivery system. The administration's approach to dealing with the rebate rule is another example demonstrating how sentient does not focus on short-term headline volatility. We focus on the facts as we know them today. We continue to advocate for greater price transparency, which includes moving towards net pricing in pharmacy. In this same light, we commend Congress on their bipartisan effort to take steps to reduce the amount of money Americans pay out of pocket for their healthcare costs by ending surprise billing. We continue to see efforts built in Washington State that further stabilize the marketplace. The administration's final rule allowing employers to offer HRAs as an option to pay for marketplace coverage provides an opportunity to have a positive impact on premiums. Also, pending waivers in Utah and Georgia aim to stabilize the marketplace to provide affordable comprehensive coverage to those between 100% and 250% of the federal poverty level. This has the potential to improve affordability for those with and without subsidies. As exemplified by Georgia, states are taking the lead with meaningful discussion on how to improve and expand government health care programs. They are focusing on seeking private sector solutions to enhance quality and lower cost of healthcare. We're well positioned to be supportive of these efforts. We are encouraged by anything that moves us back from politics to policy. Centene is committed to working with both parties on bipartisan solutions that strengthens the nation's healthcare delivery system. I would now like to provide an update on the acquisition of WellCare. We are pleased shareholders of both Centene and WellCare voted overwhelmingly to approve the acquisition on June 24th. We appreciate the mandate of our investors as they recognize the value of this transaction. Regulatory discussions are well underway and have been very constructive. Both companies are currently working through the state insurance approval process required for the completion of the transaction. The required form A's and E's have been filed in 27 states. Conditional approvals have been obtained in eight states, which is ahead of schedule. Where applicable, the divestiture process is underway and we are pleased to be seeing a great deal of interest in potential acquirers. Centene and WellCare have each received a request for additional information and documentary materials from the Department of Justice. This was expected given the size of this transaction. Both companies continue to work expeditiously and cooperatively with the DOJ. Integration planning is well underway. Our teams are doing extensive work to ensure a smooth and seamless combination of the companies. Both companies are fully engaged and the integration planning is progressing well. We remind you that the combined company will have estimated pro forma 2019 revenues in excess of $100 billion and EBITDA of $5 billion. We are comfortable with our previously communicated synergy and increasing targets. We continue to be comfortable that we will receive all necessary approvals to close the deal in the first half of 2020. Given the progress of activities to date, there may be an opportunity to close earlier in 2020. Shifting gear to our rate outlook, we expect a composite Medicaid rate increase of approximately 1.5% to 2% for 2019. In summary, Centene continues to be a growth company both organically and through M&A. Our targeted pipeline remains robust. We continue to focus on margin expansion and are already realizing benefits from our Centene Forward transformation project. The Pennywell acquisition firmly solidifies our 2020 vision of maintaining our industry-leading position in the highly competitive government-sponsored healthcare market. We look forward to leveraging the strength each company brings in terms of providing high-quality healthcare at lower cost to our recipients and state customers. We thank you for your continued interest in Centene, and I'll now turn it over to Jeff.