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Centene Corp. (CNC)

2008 Financial Guidance Call

December 6, 2007 8:30 am ET

Executives

Michael Neidorff - Chairman and Chief Executive Officer

Eric Slusser - Executive Vice President and Chief Financial Officer

Ed Kroll - Senior Vice President, Finance and Investor Relations

Jesse Hunter - Senior Vice President, Corporate Development.

Per Brodin - Senior Vice President and Chief Accounting Officer

Analysts

Greg Nersessian - Credit Suisse

John Rex - Bear Stearns

Josh Raskin - Lehman Brothers

Scott Fidel - Deutsche Bank

Carl McDonald - CIBC

Doug Simpson - Merrill Lynch

Matt Perry - Wachovia Capital Markets

Tom Carroll - Stifel Nicolaus

Darren Miller - Goldman Sachs

Operator

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Centene Corporation 2008 Financial Guidance Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions).

Thank you. I will now turn the call over to Ed Kroll, Head of Investor Relations. Please go ahead, sir.

Ed Kroll - Senior Vice President, Finance and Investor Relations

Thank you, and good morning, everyone. I am Ed Kroll, Senior Vice President, Finance and Investor Relations at Centene. Thank you for joining us on today’s 2008 guidance call.

You should have a copy of the press release we issued this morning. If you have not received it, please call Libby Abelt, in our New York office at 212-759-5665, and we’ll send you one immediately. Michael Neidorff, our Chairman and Chief Executive Officer and Eric Slusser, our Executive Vice President and Chief Financial Officer will host this morning's call. The call should last no more than 45 minutes, and maybe, also accessed through our website at www.centene.com.

After our prepared remarks, we will have a question-and-answer session, but we ask that you refrain from any detailed modeling questions on that Q&A session. You can ask those questions offline after the call by contacting me directly. A replay of the call will be available shortly after its completion on our website at Centene.com or by dialing 800-642-1687 in the U.S. & Canada or 706-645-9291 from abroad. The access code is 26510694.

Any remarks that we 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 those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene's annual Form 10-K and quarterly Form 10-Q, the most recent one that was filed October 23rd of 2007, as well as our 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.

With that, I'll turn the call over to Michael Neidorff. Michael?

Michael Neidorff - Chairman and Chief Executive Officer

Ed, thank you. Good morning, everyone, and thank you for joining the call this morning. I'd like to provide a few brief overall opening comments before I turn the call over to Eric, who will walk you through the details of Centene's 2008 financial guidance.

This guidance call marks a change in the timing of Centene's process for giving annual guidance for the following fiscal year and is one to which we alerted you in our Q2 earnings call. We believe that this change make sense due to the growing complexities of our business. It gives us a chance to examine our budget in the context of codes and objectives and allows for more complete data analysis. It also gives us opportunities to refocus our structure in business.

We believe this is a logical step as we continue to expand and manage the changes and growth in our business, in both the health plan and specialty segments. Therefore, this will be Centene's annual guidance timing going forward. However, our quarterly guidance will not change, our quarterly guidance being given for the subsequent quarter and the current quarter's earnings call.

We except 2008 to be another solid year for Centene, as we build upon the progress in growth that we have achieved and are still achieving in 2007. We have successfully grown and managed our business over the past six years being corporate. And it is now time to prepare for our next stage of development.

As part of this development, we will continue to be prospective in the actions we take. This prospective approach has led to our decision to realign some of our processes as we move in to 2008. We believe this is a responsible approach and the way to manage the business by focusing on making sure that we're doing things the right way.

During 2007, we enhanced our management team to strengthen our existing infrastructure and give us more depth. Over the past two years, we have also made significant investments in our technology infrastructure. In 2008 and beyond, our internal focus will be to continue to enhance our systems infrastructure and internal operating processes such as medical management, provider contracting, claims processing and other back-office functions, thereby strengthening our overall foundation to support Centene's next level of growth.

Furthermore, as we enter next year, we will continue to execute on the implementation as our multi-line strategy, which combines our core business with investment in our specialty company. This strategy provides us with a greater flexibility to invest in opportunities in TANF, SCHIP and SSI and for the first time in 2008 SNPs. We also continue to identify opportunities in disease management and other specialty company platforms.

We will continue to test and enhance our compliance systems and risk management programs as we have historically and we will into the future. In addition to the growth previously identified, we will continue to seek opportunities for RFPs and strategic acquisitions to our core businesses and specialty companies that meet our disciplined acquisition criteria.

2007 demonstrated the value of our approach to identify and establish priorities for opportunities such as Foster Care, South Carolina and Florida markets. We are proud of what our team has accomplished in 2007 and look forward to building on that success in 2008 and beyond.

Now, I will turn it over to Eric.

Eric Slusser - Executive Vice President and Chief Financial Officer

Thank you Michael and good morning everyone. Our press release issued this morning sets forth our 2008 financial guidance. This guidance illustrates our expectation to deliver continued growth at Centene for the 2008 fiscal year. Overall, we are guiding to top-line growth approaching 20% before any acquisitions and other opportunities. We also expect to achieve pretax margin expansion of approximately 50 basis points.

Our key opportunities in 2008 include our at-risk entry in the South Carolina market, that April 1, implementation of the Texas Foster Care product, and the expected conversion of our Florida investment to an at-risk fully owned operation.

Our 2008 strategic initiatives include expanding the external business of our specialty company operations and beginning to serve members through Medicare Special Needs Plans or SNPs.

Our revenue guidance of $3.35 billion to $3.45 billion includes those initiatives, as well as overall rate increases in the low single digits, consistent with our past experience. We do not anticipate any changes to our state's historic timing of awarding rate increases, except for an understanding that we will not receive an adjustment to our Texas Foster Care rates until 2009, given the delayed implementation of the program to the second quarter of 2008.

We expect to continue to operate within our previously stated HBR range of 81.5% to 83.5% net of premium taxes. While the HBR may fluctuate from quarter-to-quarter, we expect the overall rate to be toward the middle of that range for the year.

As we work through our '08 planning process, we recognize the need to realign some of our processes and the personnel that execute those processes. Accordingly, our press release this morning, announced that we will incur severance cost related to those realignments.

In addition, as a result of the recent announcement of the plan change in the location for our headquarters expansion, we will record an impairment charge associated with the cost incurred related to the previous plant location. The total charge for all these activities is approximately $12 million, the majority of which relates to the non-cash impairment charge. This onetime charge will be recorded in the fourth quarter and is not included in our previous guidance of $0.46 to $0.51 for the 2007 fourth quarter.

Our focus on leveraging our G&A spend will allow us to target a maximum 2008 G&A ratio of 13.5%. That expectation includes significant investments for the startup costs for Texas Foster Care and our new operations in South Carolina and Florida.

While we are streamlining the organization and implementing systems enhancements through reinvestment, our focus during the planning process on leveraging our G&A spend is enabling us to fund our investments in systems and infrastructure, at the same time that we are ramping up the Foster Care program and entering the two new markets. Furthermore, you should expect to see the G&A ratio mitigate in the second half of the year.

Our EPS guidance of $1.76 to $1.86 reflects an expectation that we will incur dilution of approximately $0.09 for costs associated with our new startup operations, and also reflects the typical seasonality in the 2008 first quarter.

Improvements in earnings in the second, through fourth quarters will reflect commencement of those operations, normal expectations around seasonality and the effect of any premium rate increases.

Finally, to provide you with clarity on a few of our other operating metrics, we expect cash flow from operations of approximately 1.7 to 2 times net earnings and effective tax rate of 38.5%, and diluted shares of 45.5 million shares. Given the volume of our startup operations, we expect days in claims payable to continue to operate slightly above our guided range of 40 to 45 days.

That concludes my comments. And with that, we can open the call up to any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Greg Nersessian with Credit Suisse.

Greg Nersessian - Credit Suisse

Hi. Good morning. My first question was just on the charge just to understand better. I think you said that the majority related to the headquarters impairment, but you said it's about like three quarters of the charge?

Eric Slusser - Executive Vice President and Chief Financial Officer

Give or take maybe just slightly above that.

Greg Nersessian - Credit Suisse

Okay. I guess could you give us a little color on the types of positions that you are eliminating, are those kind of senior-level management or are those service type of personnel or operational?

Michael Neidorff - Chairman and Chief Executive Officer

No. Its really kind of a broad base in terms of those, when I say broad base, there is no one specific area. But it's just looking at various skill sets against what we need to grow into session planning and some of those things. But it's also lower level positions as we continue to enhance the systems. So, I mean, Greg, it's not a lot of people and I don't want to say a whole lot, because we are in the early stages of it today.

Greg Nersessian - Credit Suisse

Right. Okay. That's fair enough. And then, my second question was on the, is there -- could you give us a little bit of color in terms of the percentage of revenue from premium versus fee-based revenue? Would we expect that percentage to change materially next year? Could you give us just a little bit of color on the growth of some of the fee-based businesses?

Eric Slusser - Executive Vice President and Chief Financial Officer

Premium will be somewhat higher, but for the most part we expect the blend to be somewhat consistent.

Greg Nersessian - Credit Suisse

Okay. And then just one more -- your Texas Foster Care contract, assuming you get the April 1 rollout and an element of if there is any risk of that that potentially getting delayed, but assuming you get the April 1 rollout, would you expect that to be a positive contribution to earnings for the full year incorporating the dilution in the first quarter.

Eric Slusser - Executive Vice President and Chief Financial Officer

Yes. It is a positive contribution and we are, both the state and us are still working to the April 1 date and there is no other news otherwise that other than that is the date.

Greg Nersessian - Credit Suisse

Okay, great.

Michael Neidorff - Chairman and Chief Executive Officer

And then there is profitability that [ramps] up over the course.

Eric Slusser - Executive Vice President and Chief Financial Officer

No, but it is accretive to the year.

Michael Neidorff - Chairman and Chief Executive Officer

On the whole year it is accretive.

Greg Nersessian - Credit Suisse

Okay. That's what I meant. Okay, great. Thank you very much.

Operator

Your next question comes from John Rex with Bear Stearns.

John Rex - Bear Stearns

Hi. Good morning, thanks. Also could you just talk what you guidance anticipates in terms of consolidated loss ratios beyond just Medicaid and SCHIP, but looking at all your risk-based businesses?

Eric Slusser - Executive Vice President and Chief Financial Officer

Hey John, it's Eric. We are not going to get into that level of detail on the call.

John Rex - Bear Stearns

I actually kind of looking for higher level I guess rather than, because you gave us actually a more discrete level, looking down at the Medicaid and SCHIP population, I was trying to think of kind of rolling up to the higher, maybe I misunderstood, the higher level deal?

Eric Slusser - Executive Vice President and Chief Financial Officer

Yeah, I mean its consistent overall with what I said.

John Rex - Bear Stearns

Okay. So and maybe go this way. Should we expect meaningful changes in the loss ratio we've been seeing in your SSI, in your Specialty businesses?

Michael Neidorff - Chairman and Chief Executive Officer

We expect it to fall within the range and continue to normalize, John. So, when you look at the specialty businesses it somehow mandated MLR or HBRs what we call it, in behavioral health and others. So on that basis we should see it consistent with what we've seen historically. What we are saying that we see the -- we continue to focus on the core business to big part.

John Rex - Bear Stearns

Okay.

Eric Slusser - Executive Vice President and Chief Financial Officer

Yes. I mean, obviously the majority of our business is Medicaid and that's going to be the big driver of your overall consolidated ratio.

John Rex - Bear Stearns

Okay. And then its been historically kind of if there's been or if you look back just there has been maybe a couple of hundred bips difference between consolidated and where you are in Medicaid and SCHIP?

Eric Slusser - Executive Vice President and Chief Financial Officer

Yeah. I mean very little, 10 to 20.

Michael Neidorff - Chairman and Chief Executive Officer

10 to 20 bips maybe I think.

John Rex - Bear Stearns

Yes. Okay, yeah that's right. And then can you talk about what you built into your expectation for Florida in terms of membership converting in '08 to risk-based. Are you expecting, I guess are you expecting meaningful conversion to risk-based in '08?

Eric Slusser - Executive Vice President and Chief Financial Officer

Well right now, Florida is a work in process, we've included assumptions in the numbers as to where we believe its going to come out at, but there is lot of moving parts right now in Florida.

John Rex - Bear Stearns

If I were to like look at your total book of ASO, is your expectation that less than say 25% of that will be converted to risk-based by the time you exit '08 or are you looking for more than that?

Michael Neidorff - Chairman and Chief Executive Officer

You see its just starting to convert in '08. Okay. And some of that is how fast the state releases it. We have build in some conversion and move in to risk-based management plans, its management plan there, John. But it’s, some of that timing, we build in some timing, some membership of it. But it's a…

John Rex - Bear Stearns

Can you give us a broad feel for what you are expecting?

Michael Neidorff - Chairman and Chief Executive Officer

Jesse or Mary just joined, any comments you want to add to that?

Jesse Hunter - Senior Vice President, Corporate Development.

John, this is Jesse Hunter. I think particularly, we're working through the regulatory process. So it's hard for us to get that specific about when we'll convert. Our interest is to convert as quickly as we can, but there are a lot of steps that we are working with the state on to facilitate that. So we can't give anything more specific than we expect to initiate that conversion to risk in 2008.

John Rex - Bear Stearns

But the topline does include and it's just so important in terms of your [tax] the revenue that your own view obviously, includes an expectation and conversion. I'm just trying to see like is this 25% of the book or 75% of the book, because it's an important swing factor.

Michael Neidorff - Chairman and Chief Executive Officer

I think it would be fair to say that we believe we're really well positioned there. But anything we're going to give you at this stage is going to be conservative in nature, John. It has to be when you are dealing with the new state, they have not laid out all the timetables. They have a lot of issues they are dealing with that may have slowed them down in how fast they can do some things. So, they want us there. We are working very effectively with them, okay. And so from a bottomline standpoint, we always use that 90% MLR when we first convert that business. So, it's within the numbers we gave you. I could say that it's well positioned, but it's going to be conservative.

John Rex - Bear Stearns

Okay. And did you anticipate any spending on Tennessee in your outlook also?

Michael Neidorff - Chairman and Chief Executive Officer

We haven't commented whether we decided to go for that RFP or not.

John Rex - Bear Stearns

Okay. Thank you.

Michael Neidorff - Chairman and Chief Executive Officer

Nice to talk with you.

Operator

Your next question comes from Josh Raskin with Lehman Brothers

Josh Raskin - Lehman Brothers

Hi. Thanks. Good morning. A couple of questions as well. First, any just an overall membership number or sort of a growth rate that you could give for sort of an expected year end '08?

Eric Slusser - Executive Vice President and Chief Financial Officer

Overall, we're expecting membership in 1.2 million to 1.3 million range probably. The assumptions are still pretty close to the middle of that range.

Josh Raskin - Lehman Brothers

Okay. And then within that, I guess, some of the ones are a little bit tougher for us maybe, any expectation or any sense of where you'll be in South Carolina by the end of the year. I won't go back on the Florida topic, maybe Taxes Foster Care?

Michael Neidorff - Chairman and Chief Executive Officer

No, I think we have the same thing. The Foster Care, we expect for one we forecasted.

Eric Slusser - Executive Vice President and Chief Financial Officer

And that should be 31 members, we've had said that previously that’s….

Josh Raskin - Lehman Brothers

Yeah. 31,000.

Michael Neidorff - Chairman and Chief Executive Officer

31,000.

Eric Slusser - Executive Vice President and Chief Financial Officer

The previous [SCHIP] population that we know should transition into that.

Michael Neidorff - Chairman and Chief Executive Officer

So that, that part is there. And with the South Carolina, once again, if we have learnt anything over the years, I think all of us collectively, you all and us is that you don't put your hand in fire what the States tell you they are going to do. So you work on a timetable, you maintain a conservatism as you put the numbers out and you are careful not to say we're going to have an X and Y date, because it will change. So we're being conservative in how we answer your question and how we build the numbers in to the model?

Josh Raskin - Lehman Brothers

Okay. And then also just, the membership, the Florida membership, you are including the overall number ASO plus risk, right?

Eric Slusser - Executive Vice President and Chief Financial Officer

Yeah. Sure.

Michael Neidorff - Chairman and Chief Executive Officer

Yeah.

Eric Slusser - Executive Vice President and Chief Financial Officer

Okay. Obviously those are good. Okay. And then, the next question just on the Georgia, there has been some movement on the rate increase obviously there, so I am curious what sort of MLR you are expecting in Georgia next year at that book, sort of, how long does it take to transition to a normalized MLR versus that 90% range that you guys are using?

Michael Neidorff - Chairman and Chief Executive Officer

Right. There I think, we've said that we are seeing some momentum in MLR by the way rate help, we expect MLR plus our whole book to fall in the 81.5 to 83.5 and towards the middle of it and Georgia is a big part of that business. So we see normalization and continuing to come down if we're going to achieve those kinds of numbers.

Josh Raskin - Lehman Brothers

Got you. So, you would say Georgia is going to be sort of mature market to fall in the range?

Michael Neidorff - Chairman and Chief Executive Officer

Yeah. Over the course of the year, this next year, so we are still and part of its going to be what rate increase we get starting of '08.

Josh Raskin - Lehman Brothers

Yeah.

Michael Neidorff - Chairman and Chief Executive Officer

It's a process we go through to get there.

Eric Slusser - Executive Vice President and Chief Financial Officer

Yeah. We are continuing to focus heavily in medical management initiatives in Georgia and we continue to have expectations that MLR will improve over what we saw in 2007.

Josh Raskin - Lehman Brothers

That makes sense. And just question for you Eric, I know it's only been four, five, six months or so since you joined, but I am curious as you've gone through and done your reviews. Have you sort of fully completed, what you would call a review of may be the general ledger systems, the financial reporting systems, and just sort of how comfortable are you with processes and the procedures that are in place now?

Eric Slusser - Executive Vice President and Chief Financial Officer

Well, very comfortable. I did that due diligence before I got here in some respects, but that was one of the pluses and I have told this to several people I've had that question come up a lot of times compared to a couple of the last places I was at, that was one of the big pluses. I didn't come here to do a financial and internal control clean-up somewhere to my last two stops. So it's a very big plus here that we have strong internal controls, operating controls in the financial process. So, from that perspective I am very comfortable with that aspect of the business.

Michael Neidorff - Chairman and Chief Executive Officer

I want to add, just that, it's been a real addition on his part, because you also heard that, now the G&A numbers I think reflect process improvements we're building in for next year and I think a lot of that's been driven by Eric and recognizing the need, not just for where we've been, but where we except to be over the next three to five years. So I think its been, not just a current but a future focus as well Josh.

Josh Raskin - Lehman Brothers

Okay. Now that helps. And I Eric, you've been through two quarterly closes at this point. So, I am assuming if there is any changes to be made, it doesn't sound like there is any material changes that you see necessary in future?

Eric Slusser - Executive Vice President and Chief Financial Officer

No material changes and certainly thing we are doing that would impact financial matters have of all been taken into account as we've gone through this 2008 planning cycle and develop the underlying numbers that support what we issued this morning.

Josh Raskin - Lehman Brothers

Okay. That's perfect. Thanks a lot for the helping.

Operator

Your next question comes from Scott Fidel with Deutsche Bank.

Scott Fidel - Deutsche Bank

Thanks. Good morning. First question, can you just talk about how you are modeling your SCHIP enrollment for 2008 just given some of that uncertainty we have here around the broader SCHIP legislation in Washington?

Ed Kroll - Senior Vice President, Finance and Investor Relations

Those kind of - Scott its Ed Kroll. May be we can take that one offline as a modeling question like that. I'll catch up with you the offline after this.

Scott Fidel - Deutsche Bank

Okay that's fine. Then also just taking into a bit bigger picture in terms of and how you might think about the slowing economy impacting the business in 2008 and would you actually see that may be a scenario that could drive some upside in enrollment if on unemployment levels continue to rise?

Michael Neidorff - Chairman and Chief Executive Officer

Yes I think, we saw historically that in, when there was economy down turns this business even if there is more unemployed and more people on the rows and it was up, good times to see straight find ways to cover more than insured and the SCHIP type thing. So it is in election year and so I think we will see continuing process and either way we don't want to see a downturn. We don't need a downturn to do well. But I don't think we'll have a negative impact on this either.

Scott Fidel - Deutsche Bank

Okay. And then, if you can give an update just on Wisconsin. And I know there has been some changes in provider contracting there. And just how you see that, I guess impacting the Wisconsin business and maybe enrollment next year?

Michael Neidorff - Chairman and Chief Executive Officer

Yeah. We are working through those issues as we speak. It will be fair to say that there is a potential for some reduced enrollment, while there has been some providers that have said they may not want to renew contracts or we've added some new providers. So we're sorting through what that mix is and we'll be in a better position to give more specific guidance at the end of the year, with our next call.

Scott Fidel - Deutsche Bank

Okay. Then just a last question. Eric, I know in your prepared remarks you talked about some initiatives the company has underway in the services, specialty business, maybe if you can elaborate on, which maybe products or geographies you're thinking there?

And then just more broadly, if have a view around what type of revenue growth you're expecting for the specialty business and sort of how you expect margins to trends there relative to 2007?

Eric Slusser - Executive Vice President and Chief Financial Officer

Well, let me cover it in a high-level, because we typically don't get into individual specialty company businesses. But our focus next year in specialty, no different than the rest of the business is to really focus on process and margin expansion. And particular to the specialty companies, we are focused on the external growth and external revenue sources that those businesses bring to the overall Centene consolidated financials.

So kind of a high-level answer, but there is focus there. We do have growth year-over-year, but I don't want to talk about that company at this point versus what we're expecting for the rest of the business on a bottomline number.

Michael Neidorff - Chairman and Chief Executive Officer

And obviously the companies we're thinking about from an M&A standpoint, I don't want to make it more expensive by talking about it.

Scott Fidel - Deutsche Bank

And just thinking about pharmacy piece specifically, I know you had been, sort of, internally focused there over the last couple of quarters and sort of focusing on the efficiency, would you say that those approaches at this point have been completed and you're looking for growth in that business or is that process the rationalization process over time?

Michael Neidorff - Chairman and Chief Executive Officer

They clearly have an '08 objective of growing the business outside of the Centene. That's one of their objectives.

Scott Fidel - Deutsche Bank

Okay. Thank you.

Operator

Your next question comes from Carl McDonald with CIBC.

Carl McDonald - CIBC

Thank you. I just want to get a little bit more color on the Georgia rate increase and how the state went through that process? Did they give rates specifically to you and then move on and decide to give rates to other plans at later dates or was the rate given to basically all the participants in Georgia?

Eric Slusser - Executive Vice President and Chief Financial Officer

Yeah. The rate was given to all participants at the same time across the board.

Carl McDonald - CIBC

Okay. So rate increases among the plans could be different based on mix and all of that, but they all…

Eric Slusser - Executive Vice President and Chief Financial Officer

Absolutely, based on region, based on mix the state rate increase process is very complex. It's done by, what they call, rate sale and every rate sale can be different. And so, also it's based on your original bid on the RFPs and what you're awarded in that level. So rates, there can be variability across that for all of those factors.

Carl McDonald - CIBC

Got it. And then on the Texas Foster Care, the assumption of positive earnings in 2008, I know generally when you go into new market you typically accrue to that 90% medical loss ratio. Is there something different about this contract that's going to cause you to use a lower loss ratio on Texas. I wouldn’t think as it would.

Eric Slusser - Executive Vice President and Chief Financial Officer

Again, a couple of things different. This is, first of all a very well planned effort between the state of Texas and our Texas Health Care plan and our Behavioral Health business. So from that perspective, it's the fact that you are not ramping something up. You're literally picking up and transferring as we mentioned earlier, this is a pretty well-known population of around 31,000 members that transfers day 1. So you get the full benefit day 1 against your costs. So, when you look at all of that combined you get slightly better expectations.

Michael Neidorff - Chairman and Chief Executive Officer

I think when you know you are getting them all, you're not worried about selection. You also have had enough data, long enough to be able to plan the case management of it, and so much of it is the improved systems, there is medical passport we are giving them. So we are able to look at this differently, because of the totality of it and the timing and when you don't know who is going to choose you.

Eric Slusser - Executive Vice President and Chief Financial Officer

Yes. And this population also is very, very heavy on the Behavioral Health management content, and here is another example of, because we have our Behavioral Health specialty company, we can take advantage of having that specialty business to support this product. So, that's another one that supports the slightly lower MLRs related to that business.

Carl McDonald - CIBC

Okay. Thank you.

Operator

Your next question comes from Doug Simpson with Merrill Lynch.

Doug Simpson - Merrill Lynch

Hey, good morning, and I apologize if you covered this. I hopped on a little bit late. But I just -- in your guidance, the range of MLR is pretty wide, about 200 basis points. Can you just walk us through what would drive you to the lower end versus the upper end in that. Just give us a sense for the sensitivity around that number.

Michael Neidorff - Chairman and Chief Executive Officer

We have historically Doug...

Eric Slusser - Executive Vice President and Chief Financial Officer

No go ahead, finish it first.

Michael Neidorff - Chairman and Chief Executive Officer

I am sorry, historically we've always used that width of range.

Doug Simpson - Merrill Lynch

Well, no I know. I'm just wondering is there anyway you can comment as to what would maybe push you to one side or the other given that your book is a little bit more mature than its. And you had a lot of huge contracts coming on and I think it made a little more sense now, you're -- the book seasoning it would seem to be, maybe you could tighten that up a little bit.

Eric Slusser - Executive Vice President and Chief Financial Officer

Well, obviously biggest drivers is mix, but more so the impacts in new markets as we’ve said in the past, we have a policy during the launch in the new markets that we book a higher MLR, because we don’t have the historical basis to do anything differently. We are entering new markets next year and so that will tend to drive the higher rate. What drives it lower is, as we have talked about medical management cost initiatives, we continue to focus on those. And as I said earlier in my remarks, while that's our range we believe we’ll probably be towards the middle of that range on an actual realization basis.

Michael Neidorff - Chairman and Chief Executive Officer

We’ve talked in that past, there is a lot of, there are some external variables and I haven’t never found, I have not been able to find a nine -- a way to say is that it seems to be few threats, there is always lot of snowstorms in the colder countries. We see more births of babies and things. I mean and all those things, and also there is little -- things of nature that sometimes just drive it, so why not give the range and establish that expectation Doug.

Doug Simpson - Merrill Lynch

Okay. And then maybe just one, I didn’t know. Is that $12 million, this is just a fact check. Is that $12 million pre-tax or after-tax?

Eric Slusser - Executive Vice President and Chief Financial Officer

Pre-tax.

Doug Simpson - Merrill Lynch

Okay great. Thank you very much.

Operator

Your next question comes from Matt Perry with Wachovia Capital Markets.

Matt Perry - Wachovia Capital Markets

Hi. Good morning. I was wondering if you could just give a little bit more detail on the nature of the headquarters impairment charge.

Eric Slusser - Executive Vice President and Chief Financial Officer

Sure. Prior to about two months ago, the company had been working on through a process that had been going on for the last couple of years around a significant headquarters of expansion here in downtown Clayton, where we are currently located.

We had incurred some significant development cost related to that project along with the acquisition of a couple of properties that we would need in order to expand. Because of that announcement about 9, 10 weeks ago about our change in plans to move to downtown, the Ballpark Village. With that change, the accounting rules require us to write-off those costs that don't relate to the new project.

So as we've gone through and made that commitment to change that location, that's what that represents. But as I indicated in my notes and my speech, I'll remind you that that is all non-cash, just so everybody is clear on that.

Michael Neidorff - Chairman and Chief Executive Officer

There are a lot of legal fees and things and it's just.

Eric Slusser - Executive Vice President and Chief Financial Officer

Legal fees, development fees…

Michael Neidorff - Chairman and Chief Executive Officer

At this time…

Eric Slusser - Executive Vice President and Chief Financial Officer

Planners.

Michael Neidorff - Chairman and Chief Executive Officer

Yeah. I can assure as we go with this next one where we don't have all those issues. So, we are being very careful, because deals are never done in this kind of things until they are done. So one should not just assume anything.

Matt Perry - Wachovia Capital Markets

Is it your belief that this is the full extent of a charge, there is nothing coming maybe in '08?

Eric Slusser - Executive Vice President and Chief Financial Officer

No. This is everything related to that activity.

Matt Perry - Wachovia Capital Markets

Okay. And then Eric, it looks like you expect to generally pretty substantial operating cash flow in '08. I am just wondering what your priorities on the uses of that cash might be?

Eric Slusser - Executive Vice President and Chief Financial Officer

Same as the past. Obviously, as I talked about in the notes, we've obviously got some new businesses to invest in, as far as new markets, we are investing internally. We talked about, we're building our systems infrastructure up. So we have some plans around that this year.

But beyond that it's going to be consistent with the needs and opportunities that arise as we move through the year and potential any acquisition, merger opportunities that might arise to use it. But for the most part, it will be consistent with the past years of investing in the new markets, the conversions for our new markets and our systems infrastructure.

Matt Perry - Wachovia Capital Markets

And just philosophically, I guess if I look at your Centene's capital expenditures over the last couple of years, much higher than some other companies that are of similar size. I am just trying to understand why that is, I mean is that mostly related to specialty businesses you either bought or tried to grow?

Michael Neidorff - Chairman and Chief Executive Officer

It is a combination of things. When we say we like to be around 2% net of real estate of revenue. But yes, we've been -- we have diversified business and that's multi-line gives us an important diversities what I am trying to say. So, yes, some of its right, we continue to invest in the infrastructure.

We have said we are committed to expanding the margins. I think we've started to demonstrate how we're doing that. Now, we'll grow over the course of the year. And the restructuring things, saving there are being put back into the business, because with our growth it does require that and the risk is not being in a position to manage it well versus having spend that capital.

Matt Perry - Wachovia Capital Markets

Okay. And just last question from me. Can you look maybe at '08 and beyond and talk about how large an opportunity, the SNPs opportunity is?

Michael Neidorff - Chairman and Chief Executive Officer

I would say we are getting our feet -- we are proud of our conservatism some time and we are in four different markets and it's a county-by-county thing. If we -- as we get the, as we satisfy ourselves, we have the confidence to manage these special needs, you can expect us to expand the products with some dispatch. But right for now, we see it as something we need to understand, learn better and not assume something that we don't have experience.

Matt Perry - Wachovia Capital Markets

Okay. Thank you.

Ed Kroll - Senior Vice President, Finance and Investor Relations

We're just going to take about two more, operator.

Operator

Okay. Your next question comes from Brian Wright with Jefferies & Co.

Brian Wright - Jefferies & Co

Hi, thanks good morning. On the -- as you evaluate kind of SG&A leverage opportunities going forward, should we think about any other charges come in as in '08 as a result of those?

Eric Slusser - Executive Vice President and Chief Financial Officer

At this point we don't foresee anything else. Our G&A leverage going forward is going to be more of just a rigorous management of our spend and spend levels, but I believe that the one-time charges, we've taken care of those in '07 and short of any unforeseen event why, we don’t expect anything else in '08.

Brian Wright - Jefferies & Co

Great. Thank you.

Michael Neidorff - Chairman and Chief Executive Officer

Brian, we take them pretty much in a process. If you do some like this, there shouldn't be another shoe to fall, particularly of SNPs. So we really like to try and get it right and tell everybody okay, its time to move forward.

Brian Wright - Jefferies & Co

Right. Thank you. And then, are you willing to talk a little bit about fourth quarter HBRs or…

Eric Slusser - Executive Vice President and Chief Financial Officer

No. Not at this point. We won't discuss anything further on the fourth quarter until we release year end earnings.

Operator

Okay. Your next question comes from Tom Carroll with Stifel Nicolaus.

Tom Carroll - Stifel Nicolaus

Hey, good morning. Couple of quick questions for you here. Can you provide some comment on your Ohio market, which looks like its proving to be somewhat challenging here in the earlier year and then -- or in the first year, rather. And then secondly a follow-up to the SNP question, I see you are making some changes with Cardium and AirLogix, putting them together, is this change in any way, a hint that moving perhaps into chronic special needs plans in the future, and I don’t think you are approved for any chronics in '08. I think its just duals mostly on Ohio, but maybe a little more clarity on that, if you could provide to us? Thanks.

Eric Slusser - Executive Vice President and Chief Financial Officer

Okay. I will answer the first part, Michael will take the second question. As far as Ohio goes, we have seen a rise in Ohio MLR as we've launched the ABD product there and as we are seeing with any market in ABD, you take on a chronically ill population, you tend to see higher MLRs, and then you start to manage that through your medical management processes to bring it down.

So, a lot of what you are seeing in recently in Ohio has been driven by that ABD population, but we do, we continue to monitor and manage it. We are very aware of those trends in Ohio and again have people on top of it and managing that impact.

Tom Carroll - Stifel Nicolaus

Any sense of rate increases in Ohio?

Eric Slusser - Executive Vice President and Chief Financial Officer

I think preliminaries are out. Consistent with normal timeframes of the past, and again, in all -- like all things low single digits is our expectations.

Tom Carroll - Stifel Nicolaus

Okay.

Michael Neidorff - Chairman and Chief Executive Officer

Including Cardium and AirLogix changing it’s the name et cetera was all part of the longer-term plan. They are working on prevention programs, sort of, premature birth, which enhance the name changes necessary so they can broaden their platform. And beyond that Tom, I can't say a lot, but there is a whole series of things with predictive monitoring et cetera that they are working on.

And we're very hopeful that longer-term, it's not something that happens overnight, because of the time it takes to develop these programs and the systems to support it. But if they identify an opportunity in chronic care they'll -- I am sure they'll take advantage there as well.

Tom Carroll - Stifel Nicolaus

So it's necessarily a deliberate strategy to rollout chronic specialties players?

Michael Neidorff - Chairman and Chief Executive Officer

Well, I'd say it's a deliberate strategy to be in a position that if we want to do that we could.

Tom Carroll - Stifel Nicolaus

Okay. And just lastly, and you may not want to comment. Will Per remain with the organization?

Michael Neidorff - Chairman and Chief Executive Officer

Per, you are sitting here now, right?

Per Brodin - Senior Vice President and Chief Accounting Officer

Still here.

Tom Carroll - Stifel Nicolaus

Very good. Thanks.

Ed Kroll - Senior Vice President, Finance and Investor Relations

Operator, we will take one last question then we'll have to end the call.

Operator

Okay. Your last question comes from Matthew Borsch with Goldman Sachs.

Darren Miller - Goldman Sachs

Good morning. This is Darren Miller sitting in for Matt. You commented that you -- at this point have made no comment whether you are going after the RPF in Tennessee. What would be the factors that you would consider if you are going to pursue that or not?

Michael Neidorff - Chairman and Chief Executive Officer

Jesse, why don't you do that?

Jesse Hunter - Senior Vice President, Corporate Development.

Sure. Obviously, we want to understand -- I am not going to get into too much detail, first of all, as we talked about these things. But so I won't make any comment specifically about Tennessee. But for all of our markets, Mary, we've talked historically about the discipline we have in terms of financial expectations.

Probability of outcome is clearly something that we think about significant scale, the ability to integrate with all of our internal systems, thinking of market leadership position. So the things that we've talked about in the past with respect to M&A and other growth activities would apply to RFP's as well. And so you could expect that to extend Tennessee.

Michael Neidorff - Chairman and Chief Executive Officer

Yeah. I will just add, we have a lot of RFPs we can look at, both specialty companies and core businesses. So it's really a mater of looking it over, Matt, and which ones do we think provides the best strategic and financial opportunities for us.

Darren Miller - Goldman Sachs

Right. Thank you. And one follow-up. I guess you comment on this already, is there a retro component on the Georgia rate increase back to July 1.

Eric Slusser - Executive Vice President and Chief Financial Officer

Yeah. Right now, we are still in discussions with the state of Georgia around that portion of the rate increase. As our press release indicated, we have received rate increases for the fourth quarter, but what will or won't happen is still being discussed and work through with the state for the third quarter of this last year.

Michael Neidorff - Chairman and Chief Executive Officer

We like to thank you everybody, and we'll talk to you in early February with our yearend numbers. Thank you.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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Source: Centene Corp 2008 Financial Guidance Call
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