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Centene Corp. (CNC)

2008 Financial Guidance Call

December 6, 2007 8:30 am ET

Executives

Michael Neidorff - Chairman and ChiefExecutive Officer

Eric Slusser - Executive VicePresident and Chief Financial Officer

Ed Kroll - Senior Vice President,Finance and Investor Relations

Jesse Hunter - Senior VicePresident, Corporate Development.

Per Brodin - Senior VicePresident 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 CapitalMarkets

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 towelcome everyone to the Centene Corporation 2008 Financial Guidance ConferenceCall. All lines have been placed on mute to prevent any background noise. Afterthe speakers’ remarks there will be a question-and-answer session. (OperatorInstructions).

Thank you. I will now turn thecall 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 Relationsat Centene. Thank you for joining us on today’s 2008 guidance call.

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

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

Any remarks that we may makeabout future expectations, plans and prospects constitute forward-lookingstatements for purposes of the Safe Harbor provision underthe Private Securities Litigation Reform Act of 1995. Actual results may differmaterially from those indicated by those indicated by these forward-lookingstatements as a result of various important factors, including those discussedin Centene's annual Form 10-K and quarterly Form 10-Q, the most recent one thatwas filed October 23rd of 2007, as well as our other public SECfilings. Centene anticipates that subsequent events and developments will causeits estimates to change. While the company may elect to update theseforward-looking statements at some point in the future, we specificallydisclaim any obligation to do so.

With that, I'll turn the callover 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 providea few brief overall opening comments before I turn the call over to Eric, whowill walk you through the details of Centene's 2008 financial guidance.

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

We believe this is a logical stepas we continue to expand and manage the changes and growth in our business, inboth the health plan and specialty segments. Therefore, this will be Centene'sannual guidance timing going forward. However, our quarterly guidance will notchange, our quarterly guidance being given for the subsequent quarter and thecurrent quarter's earnings call.

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

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

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

Furthermore, as we enter nextyear, we will continue to execute on the implementation as our multi-linestrategy, which combines our core business with investment in our specialtycompany. This strategy provides us with a greater flexibility to invest inopportunities in TANF, SCHIP and SSI and for the first time in 2008 SNPs. Wealso continue to identify opportunities in disease management and otherspecialty company platforms.

We will continue to test andenhance our compliance systems and risk management programs as we havehistorically and we will into the future. In addition to the growth previouslyidentified, we will continue to seek opportunities for RFPs and strategicacquisitions to our core businesses and specialty companies that meet ourdisciplined acquisition criteria.

2007 demonstrated the value ofour approach to identify and establish priorities for opportunities such asFoster Care, South Carolina and Florida markets. We areproud of what our team has accomplished in 2007 and look forward to building onthat 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 goodmorning everyone. Our press release issued this morning sets forth our 2008financial guidance. This guidance illustrates our expectation to delivercontinued growth at Centene for the 2008 fiscal year. Overall, we are guidingto top-line growth approaching 20% before any acquisitions and otheropportunities. We also expect to achieve pretax margin expansion ofapproximately 50 basis points.

Our key opportunities in 2008include our at-risk entry in the South Carolinamarket, that April 1, implementation of the Texas Foster Care product, and theexpected conversion of our Floridainvestment to an at-risk fully owned operation.

Our 2008 strategic initiativesinclude expanding the external business of our specialty company operations andbeginning to serve members through Medicare Special Needs Plans or SNPs.

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

We expect to continue to operatewithin 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 rateto be toward the middle of that range for the year.

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

In addition, as a result of therecent announcement of the plan change in the location for our headquartersexpansion, we will record an impairment charge associated with the costincurred related to the previous plant location. The total charge for all theseactivities is approximately $12 million, the majority of which relates to thenon-cash impairment charge. This onetime charge will be recorded in the fourthquarter and is not included in our previous guidance of $0.46 to $0.51 for the2007 fourth quarter.

Our focus on leveraging ourG&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 forTexas Foster Care and our new operations in South Carolinaand Florida.

While we are streamlining theorganization and implementing systems enhancements through reinvestment, ourfocus during the planning process on leveraging our G&A spend is enablingus to fund our investments in systems and infrastructure, at the same time thatwe 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 secondhalf 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 reflectsthe typical seasonality in the 2008 first quarter.

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

Finally, to provide you withclarity on a few of our other operating metrics, we expect cash flow fromoperations of approximately 1.7 to 2 times net earnings and effective tax rateof 38.5%, and diluted shares of 45.5 million shares. Given the volume of ourstartup operations, we expect days in claims payable to continue to operateslightly above our guided range of 40 to 45 days.

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

Question-and-Answer Session

Operator

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

Greg Nersessian - Credit Suisse

Hi. Good morning. My firstquestion was just on the charge just to understand better. I think you saidthat the majority related to the headquarters impairment, but you said it'sabout like three quarters of the charge?

Eric Slusser - Executive Vice President and Chief Financial Officer

Give or take maybe just slightlyabove that.

Greg Nersessian - Credit Suisse

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

Michael Neidorff - Chairman and Chief Executive Officer

No. Its really kind of a broadbase 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 intosession planning and some of those things. But it's also lower level positionsas we continue to enhance the systems. So, I mean, Greg, it's not a lot ofpeople and I don't want to say a whole lot, because we are in the early stagesof 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 littlebit of color in terms of the percentage of revenue from premium versusfee-based revenue? Would we expect that percentage to change materially nextyear? Could you give us just a little bit of color on the growth of some of thefee-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 anelement of if there is any risk of that that potentially getting delayed, butassuming you get the April 1 rollout, would you expect that to be a positivecontribution to earnings for the full year incorporating the dilution in thefirst quarter.

Eric Slusser - Executive Vice President and Chief Financial Officer

Yes. It is a positivecontribution and we are, both the state and us are still working to the April 1date 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 profitabilitythat [ramps] up over the course.

Eric Slusser - Executive Vice President and Chief Financial Officer

No, but it is accretive to theyear.

Michael Neidorff - Chairman and Chief Executive Officer

On the whole year it isaccretive.

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. Goodmorning, thanks. Also could you just talk what you guidance anticipates interms of consolidated loss ratios beyond just Medicaid and SCHIP, but lookingat all your risk-based businesses?

Eric Slusser - Executive Vice President and Chief Financial Officer

Hey John, it's Eric. We are notgoing to get into that level of detail on the call.

John Rex - Bear Stearns

I actually kind of looking forhigher level I guess rather than, because you gave us actually a more discretelevel, looking down at the Medicaid and SCHIP population, I was trying to thinkof 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 consistentoverall 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 yourSSI, in your Specialty businesses?

Michael Neidorff - Chairman and Chief Executive Officer

We expect it to fall within therange and continue to normalize, John. So, when you look at the specialtybusinesses it somehow mandated MLR or HBRs what we call it, in behavioralhealth and others. So on that basis we should see it consistent with what we'veseen historically. What we are saying that we see the -- we continue to focuson the core business to big part.

John Rex - Bear Stearns

Okay.

Eric Slusser - Executive Vice President and Chief Financial Officer

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

John Rex - Bear Stearns

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

Eric Slusser - Executive Vice President and Chief Financial Officer

Yeah. I mean very little, 10 to20.

Michael Neidorff - Chairman and Chief Executive Officer

10 to 20 bips maybe I think.

John Rex - Bear Stearns

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

Eric Slusser - Executive Vice President and Chief Financial Officer

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

John Rex - Bear Stearns

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

Michael Neidorff - Chairman and Chief Executive Officer

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

John Rex - Bear Stearns

Can you give us a broad feel forwhat you are expecting?

Michael Neidorff - Chairman and Chief Executive Officer

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

Jesse Hunter - Senior Vice President, Corporate Development.

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

John Rex - Bear Stearns

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

Michael Neidorff - Chairman and Chief Executive Officer

I think it would be fair to saythat we believe we're really well positioned there. But anything we're going togive you at this stage is going to be conservative in nature, John. It has tobe when you are dealing with the new state, they have not laid out all thetimetables. They have a lot of issues they are dealing with that may haveslowed 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 bottomlinestandpoint, 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, butit's going to be conservative.

John Rex - Bear Stearns

Okay. And did you anticipate anyspending on Tennesseein your outlook also?

Michael Neidorff - Chairman and Chief Executive Officer

We haven't commented whether wedecided 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 JoshRaskin with Lehman Brothers

Josh Raskin - Lehman Brothers

Hi. Thanks. Good morning. Acouple of questions as well. First, any just an overall membership number orsort 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 expectingmembership in 1.2 million to 1.3 million range probably. The assumptions arestill pretty close to the middle of that range.

Josh Raskin - Lehman Brothers

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

Michael Neidorff - Chairman and Chief Executive Officer

No, I think we have the samething. 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] populationthat we know should transition into that.

Michael Neidorff - Chairman and Chief Executive Officer

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

Josh Raskin - Lehman Brothers

Okay. And then also just, the membership,the Floridamembership, 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 somemovement on the rate increase obviously there, so I am curious what sort of MLRyou are expecting in Georgia next year at that book, sort of, how long does ittake to transition to a normalized MLR versus that 90% range that you guys areusing?

Michael Neidorff - Chairman and Chief Executive Officer

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

Josh Raskin - Lehman Brothers

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

Michael Neidorff - Chairman and Chief Executive Officer

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

Josh Raskin - Lehman Brothers

Yeah.

Michael Neidorff - Chairman and Chief Executive Officer

It's a process we go through toget there.

Eric Slusser - Executive Vice President and Chief Financial Officer

Yeah. We are continuing to focusheavily in medical management initiatives in Georgia and we continue to haveexpectations that MLR will improve over what we saw in 2007.

Josh Raskin - Lehman Brothers

That makes sense. And justquestion for you Eric, I know it's only been four, five, six months or so sinceyou joined, but I am curious as you've gone through and done your reviews. Haveyou sort of fully completed, what you would call a review of may be the generalledger systems, the financial reporting systems, and just sort of howcomfortable 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 didthat due diligence before I got here in some respects, but that was one of thepluses and I have told this to several people I've had that question come up alot of times compared to a couple of the last places I was at, that was one ofthe big pluses. I didn't come here to do a financial and internal controlclean-up somewhere to my last two stops. So it's a very big plus here that wehave 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'sbeen a real addition on his part, because you also heard that, now the G&Anumbers I think reflect process improvements we're building in for next yearand I think a lot of that's been driven by Eric and recognizing the need, notjust for where we've been, but where we except to be over the next three tofive 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 ifthere is any changes to be made, it doesn't sound like there is any materialchanges that you see necessary in future?

Eric Slusser - Executive Vice President and Chief Financial Officer

No material changes and certainlything we are doing that would impact financial matters have of all been takeninto account as we've gone through this 2008 planning cycle and develop theunderlying numbers that support what we issued this morning.

Josh Raskin - Lehman Brothers

Okay. That's perfect. Thanks alot for the helping.

Operator

Your next question comes fromScott Fidel with Deutsche Bank.

Scott Fidel - Deutsche Bank

Thanks. Good morning. Firstquestion, can you just talk about how you are modeling your SCHIP enrollmentfor 2008 just given some of that uncertainty we have here around the broader SCHIPlegislation in Washington?

Ed Kroll - Senior Vice President, Finance and Investor Relations

Those kind of - Scott its EdKroll. 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 justtaking into a bit bigger picture in terms of and how you might think about theslowing economy impacting the business in 2008 and would you actually see thatmay be a scenario that could drive some upside in enrollment if on unemploymentlevels continue to rise?

Michael Neidorff - Chairman and Chief Executive Officer

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

Scott Fidel - Deutsche Bank

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

Michael Neidorff - Chairman and Chief Executive Officer

Yeah. We are working throughthose issues as we speak. It will be fair to say that there is a potential forsome reduced enrollment, while there has been some providers that have saidthey may not want to renew contracts or we've added some new providers. Sowe're sorting through what that mix is and we'll be in a better position togive 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 thecompany has underway in the services, specialty business, maybe if you canelaborate on, which maybe products or geographies you're thinking there?

And then just more broadly, ifhave a view around what type of revenue growth you're expecting for thespecialty business and sort of how you expect margins to trends there relativeto 2007?

Eric Slusser - Executive Vice President and Chief Financial Officer

Well, let me cover it in ahigh-level, because we typically don't get into individual specialty companybusinesses. But our focus next year in specialty, no different than the rest ofthe business is to really focus on process and margin expansion. And particularto the specialty companies, we are focused on the external growth and externalrevenue sources that those businesses bring to the overall Centene consolidatedfinancials.

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

Michael Neidorff - Chairman and Chief Executive Officer

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

Scott Fidel - Deutsche Bank

And just thinking about pharmacypiece specifically, I know you had been, sort of, internally focused there overthe last couple of quarters and sort of focusing on the efficiency, would yousay that those approaches at this point have been completed and you're lookingfor growth in that business or is that process the rationalization process overtime?

Michael Neidorff - Chairman and Chief Executive Officer

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

Scott Fidel - Deutsche Bank

Okay. Thank you.

Operator

Your next question comes from CarlMcDonald with CIBC.

Carl McDonald - CIBC

Thank you. I just want to get alittle bit more color on the Georgiarate increase and how the state went through that process? Did they give ratesspecifically to you and then move on and decide to give rates to other plans atlater 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 allparticipants at the same time across the board.

Carl McDonald - CIBC

Okay. So rate increases among theplans 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, alsoit's based on your original bid on the RFPs and what you're awarded in thatlevel. So rates, there can be variability across that for all of those factors.

Carl McDonald - CIBC

Got it. And then on the TexasFoster Care, the assumption of positive earnings in 2008, I know generally whenyou go into new market you typically accrue to that 90% medical loss ratio. Isthere something different about this contract that's going to cause you to usea 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 thingsdifferent. This is, first of all a very well planned effort between the stateof Texas andour Texas Health Care plan and our Behavioral Health business. So from thatperspective, it's the fact that you are not ramping something up. You'reliterally picking up and transferring as we mentioned earlier, this is a prettywell-known population of around 31,000 members that transfers day 1. So you getthe full benefit day 1 against your costs. So, when you look at all of thatcombined you get slightly better expectations.

Michael Neidorff - Chairman and Chief Executive Officer

I think when you know you aregetting them all, you're not worried about selection. You also have had enoughdata, long enough to be able to plan the case management of it, and so much ofit is the improved systems, there is medical passport we are giving them. So weare able to look at this differently, because of the totality of it and thetiming 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 isvery, very heavy on the Behavioral Health management content, and here isanother example of, because we have our Behavioral Health specialty company, wecan take advantage of having that specialty business to support this product.So, that's another one that supports the slightly lower MLRs related to thatbusiness.

Carl McDonald - CIBC

Okay. Thank you.

Operator

Your next question comes fromDoug Simpson with Merrill Lynch.

Doug Simpson - Merrill Lynch

Hey, good morning, and Iapologize if you covered this. I hopped on a little bit late. But I just -- inyour guidance, the range of MLR is pretty wide, about 200 basis points. Can youjust walk us through what would drive you to the lower end versus the upper endin 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'vealways used that width of range.

Doug Simpson - Merrill Lynch

Well, no I know. I'm justwondering is there anyway you can comment as to what would maybe push you toone 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 moresense now, you're -- the book seasoning it would seem to be, maybe you couldtighten that up a little bit.

Eric Slusser - Executive Vice President and Chief Financial Officer

Well, obviously biggest driversis mix, but more so the impacts in new markets as we’ve said in the past, wehave 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 areentering 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 costinitiatives, 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 thatrange on an actual realization basis.

Michael Neidorff - Chairman and Chief Executive Officer

We’ve talked in that past, thereis a lot of, there are some external variables and I haven’t never found, Ihave not been able to find a nine -- a way to say is that it seems to be fewthreats, there is always lot of snowstorms in the colder countries. We see morebirths 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 andestablish that expectation Doug.

Doug Simpson - Merrill Lynch

Okay. And then maybe just one, Ididn’t know. Is that $12 million, this is just a fact check. Is that $12million 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 MattPerry with Wachovia Capital Markets.

Matt Perry - Wachovia Capital Markets

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

Eric Slusser - Executive Vice President and Chief Financial Officer

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

We had incurred some significantdevelopment cost related to that project along with the acquisition of a coupleof properties that we would need in order to expand. Because of thatannouncement about 9, 10 weeks ago about our change in plans to move todowntown, the Ballpark Village. With thatchange, the accounting rules require us to write-off those costs that don'trelate to the new project.

So as we've gone through and madethat commitment to change that location, that's what that represents. But as Iindicated 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 andthings 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 withthis next one where we don't have all those issues. So, we are being verycareful, because deals are never done in this kind of things until they aredone. So one should not just assume anything.

Matt Perry - Wachovia Capital Markets

Is it your belief that this isthe 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 tothat activity.

Matt Perry - Wachovia Capital Markets

Okay. And then Eric, it lookslike you expect to generally pretty substantial operating cash flow in '08. Iam 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 Italked about in the notes, we've obviously got some new businesses to investin, as far as new markets, we are investing internally. We talked about, we'rebuilding our systems infrastructure up. So we have some plans around that thisyear.

But beyond that it's going to beconsistent with the needs and opportunities that arise as we move through theyear and potential any acquisition, merger opportunities that might arise touse it. But for the most part, it will be consistent with the past years ofinvesting in the new markets, the conversions for our new markets and our systemsinfrastructure.

Matt Perry - Wachovia Capital Markets

And just philosophically, I guessif 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 tryingto understand why that is, I mean is that mostly related to specialtybusinesses 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 animportant diversities what I am trying to say. So, yes, some of its right, wecontinue to invest in the infrastructure.

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

Matt Perry - Wachovia Capital Markets

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

Michael Neidorff - Chairman and Chief Executive Officer

I would say we are getting ourfeet -- we are proud of our conservatism some time and we are in four differentmarkets and it's a county-by-county thing. If we -- as we get the, as wesatisfy ourselves, we have the confidence to manage these special needs, youcan expect us to expand the products with some dispatch. But right for now, wesee it as something we need to understand, learn better and not assumesomething 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 abouttwo more, operator.

Operator

Okay. Your next question comesfrom 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 foreseeanything else. Our G&A leverage going forward is going to be more of just arigorous management of our spend and spend levels, but I believe that theone-time charges, we've taken care of those in '07 and short of any unforeseenevent 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 muchin a process. If you do some like this, there shouldn't be another shoe tofall, particularly of SNPs. So we really like to try and get it right and telleverybody okay, its time to move forward.

Brian Wright - Jefferies & Co

Right. Thank you. And then, areyou 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'tdiscuss anything further on the fourth quarter until we release year endearnings.

Operator

Okay. Your next question comesfrom Tom Carroll with Stifel Nicolaus.

Tom Carroll - Stifel Nicolaus

Hey, good morning. Couple ofquick questions for you here. Can you provide some comment on your Ohio market, which lookslike 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 SNPquestion, I see you are making some changes with Cardium and AirLogix, puttingthem together, is this change in any way, a hint that moving perhaps intochronic special needs plans in the future, and I don’t think you are approvedfor any chronics in '08. I think its just duals mostly on Ohio, but maybe a little more clarity onthat, if you could provide to us? Thanks.

Eric Slusser - Executive Vice President and Chief Financial Officer

Okay. I will answer the firstpart, Michael will take the second question. As far as Ohio goes, we have seena rise in Ohio MLR as we've launched the ABD product there and as we are seeingwith any market in ABD, you take on a chronically ill population, you tend tosee higher MLRs, and then you start to manage that through your medicalmanagement processes to bring it down.

So, a lot of what you are seeingin recently in Ohiohas been driven by that ABD population, but we do, we continue to monitor andmanage it. We are very aware of those trends in Ohio and again have people on top of it andmanaging 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. Consistentwith normal timeframes of the past, and again, in all -- like all things lowsingle digits is our expectations.

Tom Carroll - Stifel Nicolaus

Okay.

Michael Neidorff - Chairman and Chief Executive Officer

Including Cardium and AirLogixchanging it’s the name et cetera was all part of the longer-term plan. They areworking on prevention programs, sort of, premature birth, which enhance thename 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 predictivemonitoring et cetera that they are working on.

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

Tom Carroll - Stifel Nicolaus

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

Michael Neidorff - Chairman and Chief Executive Officer

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

Tom Carroll - Stifel Nicolaus

Okay. And just lastly, and youmay 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 lastquestion then we'll have to end the call.

Operator

Okay. Your last question comesfrom Matthew Borsch with Goldman Sachs.

Darren Miller - Goldman Sachs

Good morning. This is DarrenMiller sitting in for Matt. You commented that you -- at this point have madeno comment whether you are going after the RPF in Tennessee. What would be the factors thatyou 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 tounderstand -- I am not going to get into too much detail, first of all, as wetalked about these things. But so I won't make any comment specifically about Tennessee. But for allof our markets, Mary, we've talked historically about the discipline we have interms of financial expectations.

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

Michael Neidorff - Chairman and Chief Executive Officer

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

Darren Miller - Goldman Sachs

Right. Thank you. And onefollow-up. I guess you comment on this already, is there a retro component onthe Georgiarate increase back to July 1.

Eric Slusser - Executive Vice President and Chief Financial Officer

Yeah. Right now, we are still indiscussions with the state of Georgiaaround that portion of the rate increase. As our press release indicated, wehave received rate increases for the fourth quarter, but what will or won'thappen is still being discussed and work through with the state for the thirdquarter 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'sconference call. You may now disconnect.

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Source: Centene Corp 2008 Financial Guidance Call

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