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Executives

Michael Neidorff – Chairman, President and Chief Executive Officer

Eric Slusser – Executive Vice President and Chief Financial Officer

Christopher Bowers – Senior Vice President, Health Plan Business Unit

Jesse Hunter – Senior Vice President, Corporate Development

Edmund E. Kroll - Senior Vice President, Finance and Investor Relations

Analysts

Matthew Perry - Wachovia Capital

Greg Nersessian - Credit Suisse

John Rex - Bear Stearns

Centene Corporation (CNC) Q4 2007 Earnings Call February 8, 2008 7:30 AM ET

Operator

At this time, I would like to welcome everyone to the Centene Corp. fourth quarter 2007 financial results conference call. (Operator Instructions) Mr. Ed Kroll, you may begin your conference.

Edmund E. Kroll

Thank you, operator. Thanks and good morning, everyone. I’m Ed Kroll, Senior Vice President, Finance and Investor Relations for Centene Corporation. Thanks for joining us on today’s call. You should have a copy of the press release we issued this morning. If not, please call Libby Abelt at 212-759-5665 and we will send it to you immediately.

Our press release issued this morning includes a table reconciling our GAAP financial statement presentation to non-GAAP amounts. We’ve included that table for comparability purposes, because it allows us to present our 2007 results excluding the previously announced restructuring charge. We will refer to those non-GAAP amounts at various points during this call.

Michael Neidorff, Chairman and Chief Executive Officer, and Eric Slusser, Executive Vice President and Chief Financial Officer of Centene, will host this call.

Given our need to reschedule to this timeslot on short notice, our call will last no more than 45 minutes so as not to conflict with any previously scheduled conference calls. This call may also be accessed through our website at centene.com.

A replay will be available today shortly after this call’s completion by dialing 800-642-1687 in the U.S. and Canada, or 706-645-9291 outside the U.S. and Canada. The access code for both dial-ins is 34562229.

Any remarks that Centene may make about future expectations, plans and prospects, constitute forward-looking statements for purposes of the Safe Harbor provision under Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene’s Form 10-Q dated October 23, 2007, and other public SEC filings.

Centene anticipates that subsequent events and developments will cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, Centene specifically disclaims any obligation to do so.

Finally, just want to give you a heads-up for our 2008 Annual Investor Day in New York City, please mark your calendars for June 3, 2008 and we will have more detail to follow soon.

Now I would like to turn the call over to Centene’s Chairman and CEO, Michael Neidorff.

Michael F. Neidorff

Thank you, Ed. Good morning everyone and thank you for joining this morning’s call. I will briefly review the highlights of the quarter and then turn the call over to Eric for his comment on the financials.

Consistent with our policy over the last several quarters, we have other members of our senior management team available to answer your questions.

The timing of this call and the circumstances are as unusual as you could expect to find. It is consistent, however, with our approach of providing information as soon as the results are clear. We will return to our normal time for the first quarter call on the fourth Tuesday following the end of the quarter at 8:30 a.m. Eastern Standard Time.

The fourth quarter of 2007 was solid and we continue to demonstrate an ability to navigate the occasionally choppy waters of our industry.

As we alluded to in Monday’s press release, we have been in discussions with our auditors throughout the week regarding the recognition of the Georgia July 1, 2007 rate increase in the fourth quarter of 2007 when we signed the agreement with the state in November of 2007.

The accounting literature allows for recognizing revenue if there was persuasive evidence that an arrangement was in place. While we feel it was clearly there, and the state confirmed it, after much conversation we were advised that the approach we are taking is the most conservative interpretation of SEC rules.

After final review, we determined that this increase of revenue should be recorded in the first quarter of 2008. Had we recognized this revenue in the fourth quarter, we would have posted even stronger top line results and improvement in our Medical HBR from Q3, the G&A improvement and good earnings growth. We also want to point out that we are not permitted to say ‘what if’ and recast the numbers.

Overall, excluding the effects of the Georgia rate increase, HBR performance was good. But we recognize the need to continue to execute on our Ohio ABD, HBR improvement program.

Ohio ABD, HBR along with the non-recognition of the new rates in Georgia, impacted our ability to reach the high-end of our Q4 EPS. HBR will continue to fluctuate, as we’ve previously stated, due to seasonality, the addition of new business to our portfolio and new membership.

Year-over-year membership increased as the result of solid contributions from Texas and Ohio, that was particularly offset by declines in Georgia, Indiana and Wisconsin. As a reminder, we stated at the beginning of 2007 that the latter two markets would likely see lower enrollment with better margins in the year.

On a sequential basis, Texas and Georgia were the two primary contributors to the membership growth. We are pleased with the progress that we made in Georgia market over the last two quarters’ enrollment and our HBR is showing continued improvement.

In Texas, in addition to the growth afforded from our existing products and markets, we look forward to the rollout of the Texas Foster Care program, which is scheduled for an April 1 launch.

We remain confident in the long-term prospects for growth in Ohio for both our CFC and ABD products. We have always maintained that pure play Medicaid players have a competitive advantage over commercial HMOs due to our more focused approach.

During the quarter, we launched the coverage of an at-risk membership in South Carolina. While South Carolina continues to be a promising long-term growth opportunity, the current ramp is going a little more slowly than we expected.

In Florida, we are still working with state regulators and expect to convert membership to an at-risk basis during 2008.

Our specialty companies continue to perform well. During 2008, focusing on third-party sales of our specialty company services in the PBM will be a priority.

One final note for those investors who review our statutory filings: As we’ve discussed on prior calls, these filings do not provide a complete picture of our performance, because they do not include or reflect the operations of our specialty companies for our portfolio space.

The margin that would otherwise go to outside vendors of specialty companies is retained by us thanks to our unique multi-line strategy. These inter-company sales are predicated on state approved contracts and all our companies are onshore with full visibility of their results.

Our consolidated results give a more accurate depiction of our numbers, because they capture the margin that we may receive from our specialty companies. It’s important to note that this will be further impacted if Georgia decides that they wish us to recognize the retroactive premium in the fourth quarter for statutory purposes.

With that, I am going to turn the call over to Eric for his financial review.

Eric R. Slusser

Thank you, Michael, and good morning, everyone. Before I recap the highlights of the 2007 fourth quarter, I would like to point out two of the changes in our reporting format.

First, effective with this quarter’s results, we are reporting all activity associated with our former FirstGuard subsidiaries as discontinued operations. All prior periods have been restated to reflect this change.

Finally, as we announced on our last earnings call, our HBR and general and administrative ratios are now presented net of premium taxes. Please note that we have provided a table in our press release that shows our quarterly Medicaid and SCHIP ratios on both a gross and net basis for analytical purposes.

Revenue from continuing operations grew to $777.4 million, which represents 25.8% growth compared to the fourth quarter of 2006. This increase was mainly driven by membership growth in Texas and Ohio, which are two markets that added SSI products in 2007.

Our Health Benefits Ratio, or HBR, in our core Medicaid and SCHIP population was 84% for the 2007 fourth quarter, an improvement of 140 basis points compared to the 2006 fourth quarter, but an increase of 270 basis points sequentially.

This sequential increase resulted primarily from pharmacy and other seasonality increases, and an adverse premium true-up with the state of Indiana of approximately $4.2 million. The HBR would have been lower had we been able to recognize the Georgia rate increase in the fourth quarter.

The HBR for SSI population in the 2007 fourth quarter was 94.5% compared to 92.2% in the 2006 fourth quarter and 92.4% for the 2007 third quarter. The SSI HBR is higher than we expected due to higher utilization in Ohio.

While the utilization in Ohio has contributed to this ratio being out of our guided range, our medical management teams continue to focus on effective case management for high cost members, preventing hospital readmissions and reducing ER visits by providing specialized care to members experiencing behavioral health issues.

We remain confident that the medical management initiatives we have put in place, and the more familiar this population becomes with our managed care approach, will improve the SSI HBR in 2008.

Turning to our general and administrative expenses: The G&A ratio for our Medicaid Managed Care segment for the fourth quarter of 2007 was 11.8%, which includes $9.4 million for our previously announced fixed asset impairment charges, as well as a severance for an organizational realignment.

A non-GAAP reconciliation removing the restructuring charges has been provided in our earnings release. Excluding these restructuring charges, the G&A ratio for our Medicaid Managed segment was 10.5% compared to 10.4% in the fourth quarter of 2006.

Our 2007 fourth quarter effective tax rate for non-GAAP earnings was 24.8%. The decrease from the prior quarter was primarily due to lower earnings and increased percentage of tax-exempt securities in our investment portfolios and lower state income taxes.

Earnings per diluted share from continuing operations, excluding the restructuring charges previously discussed, were $0.20 for the 2007 fourth quarter compared to $0.21 in the fourth quarter of 2006.

Balance sheet highlights at December 31, 2007 include cash and short-term investments of $314.9 million and long-term investments including restricted deposits of $344.3 million.

At December 31, 2007 cash and investments held by our unregulated subsidiaries were $33 million. Our total debt was $207.4 million and debt-to-total capitalization was 33.3%.

Our medical claims liabilities totaled $335.9 million at December 31, representing 49.1 days in claims payable, flat from September 30, 2007.

For the quarter, cash flows generated from operating activities were $37.5 million, approximately 12.4 times net earnings from continuing operations.

That concludes my comments for our fourth quarter results. Before we open the call up for your questions, I’d like to provide guidance for the 2008 first quarter.

We expect revenue in the range of $785 to $795 million net of premium taxes and earnings per share of $0.59 to $0.64. This guidance reflects:

Normal seasonality;

With previously mentioned start-up costs in Texas, South Carolina and Florida of approximately $0.09;

The state of Wisconsin’s decision to carve out pharmacy benefits from our premium effective February 1, 2008;

Premium increases of 1.5% in Ohio effective January 1; 6.3% in Indiana effective January 1; 3.5% in Wisconsin effective February 1;

And the cumulative impact of the rate increase in Georgia retroactive to July 1, 2007.

As we expect to recognize the Georgia rate increase in 2008, our full year 2008 guidance has increased to revenue in the range of $3.37 to $3.47 billion, net of premium taxes, and earnings per share of $2.04 to $2.14.

And with that, we can open the call up to your questions.

Question-and-Answer Session

Operator

Your first question comes from the line of John Rex - Bear Stearns.

John Rex - Bear Stearns

Thank you. I just wanted to understand a few more things about how are you thinking about the impact of retroactivity. So, you are essentially seeing $20 million of retroactivity, looks like. And first, I want to just focus on that number and how one gets there.

When I think about your Georgia premium revenue base and the quarterly premium, that would imply an effective rate increase of something more like 6% rather than the 3.8%. I’m just trying to understand why that seems like a higher percentage than I’m accustomed to in thinking of that premium base?

Eric Slusser

First of all, the 3.8% is an average across many different rate sales in the state of Georgia. The other issue is that as part of this new rate amendment, we are required to provide some additional services. And when you take into account those additional services, that bridges the gap between the 6% and the 3.8%.

John Rex - Bear Stearns

Okay. So effectively you come to the 6% for your guideline, the top line at least.

And then I just want to think about how this looks versus where you had been. If I take essentially adjusting your 4Q report for the benefit of tax rate, so taking the $0.20 to $0.16 for the tax benefit you got, and I bring in half that benefit, so it’s about $0.14 a quarter of benefit. I’m getting to $0.30. I exclude the Indiana impact, I get to $0.36.

So that still implies a pretty big miss from the low end of your guidance range, if I just take a half a quarter impact. Or as I recall, the way you configured this, the low end of your guidance range assumed you got the benefit for the 4Q period, but not the retroactivity for the 3Q period. So why does it looks like such a wide miss from your prior 4Q guidance?

Eric Slusser

I think some of your numbers are right in there. Our previous guidance assumes that we have the full effects of the third and fourth quarter in that guidance for the fourth quarter results.

John Rex - Bear Stearns

But not the low end, as I recall, the way you described it; or is the high end assumed the retroactivity all the way back and the low end assumed only for the 4Q. That was the way it’s always described if I recall correctly.

Michael F. Neidorff

Eric said actually that’s not how we looked at it. I have to avoid these ‘what ifs,’ because there are some very clear regulations on that. So I’ll try and answer as best I can.

The guidance had in retroactivity in the range, we also talked about the Indiana, there was a lot of movement in and out, and Eric has tried to help people walk through that.

So if you take out that, we also said that some of it was also some higher than expected costs on the ABD population impacted it as well. So when you take all that in when we were forecasting guidance, it was within the range, not at the high end of the range.

John Rex - Bear Stearns

No. You were always quite clear, the low end did not include the retroactivity for the 3Q period, only for the 4Q period. You were very clear on that.

Michael F. Neidorff

That’s not how we saw it, John.

Eric Slusser

When we gave and reconfirmed guidance in December, the full effect of the third quarter and fourth quarter rate was in that guidance.

John Rex - Bear Stearns

Okay. And you just didn’t update us that you have changed it to include retroactivity for the 3Q also at that period, at that point?

Michael F. Neidorff

Would you repeat that?

John Rex - Bear Stearns

So this is the first time that I am hearing in a public forum that the low end of your guidance range assumed retroactivity for the 3Q. This is the first time.

Michael F. Neidorff

We are saying that the range we gave assumes as recognizing when we gave it in December were the fixed rates, but there are other moving parts in there as well.

John Rex - Bear Stearns

But you didn’t tell us that.

Michael F. Neidorff

We didn’t tell you what?

John Rex - Bear Stearns

You did not tell us that the low end of the guidance range assumes retroactivity to the 3Q?

Michael F. Neidorff

If you and I talk about this maybe offline; we don’t want to take time from everybody else because there is a time constraint. But we gave guidance in total with that in there and guidance takes into it many factors, and that’s why there’s a range.

John Rex - Bear Stearns

Okay.

Eric Slusser

The additional point here is that we had always in our annual guidance had that in there also, and if you take these numbers and get to where that would be with that Georgia rate increase, you will see that the annual guidance would have been in our expectations also.

John Rex - Bear Stearns

Okay. So essentially you are saying is we should add back the full $0.28 and the $0.06 from Indiana to get to $0.50.

Michael F. Neidorff

We cannot comment on a ‘what if.’ I’d like nothing better than (inaudible), but the regs are very clear on what we can say, John.

John Rex - Bear Stearns

Okay.

Michael F. Neidorff

I can’t say, do not determine them. I am not going to...

John Rex - Bear Stearns

As an analyst community we are just trying to assess how you performed versus where you had thought you would perform, and so I’m not sure how we make that leap.

Michael F. Neidorff

I wish the regs allowed us to say more than we can. They are what they are. We have said we believe we had, and I said upfront, a solid performance in Q4.

John Rex - Bear Stearns

All right. Thank you.

Operator

Your next question comes from the line of Greg Nersessian - Credit Suisse.

Greg Nersessian - Credit Suisse

Good morning. First of all, I think I have to agree with John here. Your guidance was pretty clear that it did not include the retroactivity in the low end of the range, and in fact the 8-K that you issued in November when you got the rate increase, suggested that you hadn’t even finalized a retroactive rate increase in the third quarter.

So I still like to understand that. As I look at the change in the 2008 guidance, is there anything else going on besides the Georgia rate increase in the first quarter that would lead to the $0.28 boost in guidance? What are the other moving pieces?

Michael F. Neidorff

We are quiet, because we are trying to be very careful. When we say we have spent a day being instructed on what we can and can’t say. It’s our tendency to want to say a lot and we’ve been instructed, that’s why there’s moments of silence because we are trying to think what we could say, Greg.

Eric Slusser

Greg, the 2008 guidance has been adjusted to reflect the movement of this revenue from the retroactive rate adjustment into our 2008 guidance.

Greg Nersessian - Credit Suisse

Okay. And there’s nothing else that you want to highlight in the $0.28 beyond that?

Eric Slusser

No.

Greg Nersessian - Credit Suisse

Okay, fair enough. And then on the restructuring charge, I think you mentioned $12 million, and then was the $9.7 million just the asset impairment?

Eric Slusser

And the severance.

Greg Nersessian - Credit Suisse

The severance is on top of that, or that’s included in the $9.7 million?

Eric Slusser

Included in that number.

Greg Nersessian - Credit Suisse

So you are taking a smaller charge than you originally indicated?

Eric Slusser

Yes. When we worked through the elements of the severance piece of that, the number came in less than we had estimated.

Greg Nersessian - Credit Suisse

Okay. And then the Wisconsin rate, 3.5%, is that net of the pharmacy carve out?

Christopher Bowers

Yes, that rate increase is net of the pharmacy carve out, correct.

Greg Nersessian - Credit Suisse

Okay. So you would have had a much larger increase ex- the pharmacy. Is that going to influence your specialty revenue, your PBM revenue now and your PBM margin? How is that going to impact the cost of services line?

Michael F. Neidorff

That’s going to be out of there.

Eric Slusser

Yes. It will impact that business.

Greg Nersessian - Credit Suisse

Okay. Roughly how much of pharmacy revenues in Wisconsin did you recognize? How much of the PMPM was pharmacy?

Eric Slusser

We have estimated that this will have an approximate $50 million revenue line impact.

Greg Nersessian - Credit Suisse

Is it the annual or the 11 months?

Eric Slusser

The impact to 2008.

Greg Nersessian - Credit Suisse

Okay. And, then, the Ohio ABD, would you characterize that as the only driver here of the higher SSI MLR in the quarter and what level of confidence do you have in that the rate increases in Ohio are sufficient to get you down to the MLR that you are targeting there, given some less rosy commentary from some of the competitors that are there.

Michael F. Neidorff

I think two things. One, we still have confidence that if we can manage that population and managed care as a whole program in place as we have done elsewhere, it works effectively. And it was the primary driver; the thing that would have the greatest impact on the shift in the MLR plus our various plans.

Secondly, the rate increase alone absent the medical management programs we are putting in would not be enough to bring it down in line; seldom would rates alone do that.

Greg Nersessian - Credit Suisse

Okay.

Michael F. Neidorff

So it’s a combination of the rate increase. That helps obviously, but then we have these other programs. I also want to point out that from our perspective we’ve had them maybe the full 60 days of being able to manage them...

Unidentified Corporate Participant

Right.

Michael F. Neidorff

There was a period of time when we couldn’t.

Unidentified Corporate Participant

Right. There was a grandfather period where we were not allowed to move patients from their current drugs over to our preferred drug list.

Greg Nersessian - Credit Suisse

Right.

Unidentified Corporate Participant

We are able to do that, we were able to get very nice downward trends in pharmacy, same with other services that have been authorized. But now with aggressive case management, aggressive leveling program not only looking at the in-patient, but also looking at the skills, nursing facilities, looking at the rehab days, we are very confident that working together as a team with our specialty companies we will be able to control these costs.

Greg Nersessian - Credit Suisse

Okay. Thank you.

Operator

Your next question comes from the line of Matthew Perry - Wachovia Capital.

Matthew Perry - Wachovia Capital

Good morning. Just a couple of questions. First, can you go into a little more detail on this Indiana true-up? What exactly was that and will it recur at any point in 2008 or is it done?

Eric Slusser

No. That was a one-time item that was trued-up in the fourth quarter related to previous quarters and a duplication error that was discovered by the state of Indiana in their premium payment process.

Matthew Perry - Wachovia Capital

So it’s simply a refund of an over-payment?

Eric Slusser

Yes, absolutely.

Michael F. Neidorff

Yes.

Matthew Perry - Wachovia Capital

Okay. And, then, Texas Foster Care, you are still expecting that to start on April 1. Do you feel like you have very good visibility into that, given the fact it’s been delayed? What am I asking is, what are the chances it gets pushed back?

Unidentified Corporate Participant

I don’t expect at all that this thing will be pushed back. I will use your terms. We have great visibility into the process at this point in time and we are very confident that we are going to go live with the program and implement on April 1.

Matthew Perry - Wachovia Capital

Okay. You often discussed start-up expenses and even quantified them for new markets. And I am not quite sure for how long you consider something in a start-up mode. If I look at South Carolina, you have been in there nine months or so. Yet you are talking about start-up expenses in 2008. Can you just talk to me about how you think about that?

Jesse Hunter

Typically when, like in South Carolina, for example, we included the start-up expenses until we were licensed on a full-risk base. So that’s typically what the cut-off point would be. Once we go live on a full-risk, it will be continuing operations as opposed to start-up operations. So I expect the same to be true for Foster Care as of 4/1. Florida once we start the conversion process, et cetera.

Matthew Perry - Wachovia Capital

And any discussion around the number of members you might be able to pickup in 2008 in Florida?

Jesse Hunter

We haven’t talked about that. Our goal is to initiate the conversion processes in 2008.

Matthew Perry - Wachovia Capital

Okay. That’s all I had. Thank you.

Operator

At this time, we have no further questions. Presenters, do you have any closing remarks?

Michael F. Neidorff

We just thank you and I will comment by saying, I am looking forward to returning to 8:30 Eastern Time in April. Thank you very much.

Operator

This concludes today’s conference call, you may now disconnect.

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Source: Centene Corporation Q4 2007 Earnings Call Transcript
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