Good morning, and welcome to the Centene Corporation Fourth Quarter and Year-End 2014 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Ed Kroll, Senior Vice President of Finance and Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us on our fourth quarter 2014 earnings call. Michael Neidorff, Centene's Chairman and Chief Executive Officer; and Bill Scheffel, our Executive Vice President and Chief Financial Officer; will host this morning's call. The call is expected to last approximately 45 minutes and may also be accessed through our website at centene.com. A replay will be available shortly after the call's completion, also at centene.com, or by dialing (877) 344-7529 in the U.S. and Canada, or in other countries by dialing (412) 317-0088. The playback code for both of these calls is 10058403. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene's most recently filed Form 10-Q dated October 28, 2014, and other public SEC filings. Centene anticipates that subsequent events and developments will cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. As a reminder, our next Investor Day is Friday, June 12, 2015, in New York City. Please mark in your calendars. With that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff. Michael?

Thank you, Ed. Good morning, everyone, and thank you for joining Centene's fourth quarter and full year 2014 earnings call. During the course of this morning's call, we will review our strong 2014 performance and provide updates on Centene's markets and products, and recent M&A activity. I will begin with highlights of Centene's 2014 achievement. Our 2014 financial performance was very strong, capped off by the fourth quarter results we reported this morning. In 2014, we added 1.2 million members surpassing the 4 million mark. We grew revenues by almost 50% to $15.7 billion, and diluted EPS by 55% to $4.45. This compares favorably to our initial 2014 revenue guidance of $13.8 billion, and EPS guidance of $3.65 at the midpoint. Note that these 2014 growth rates exceed Centene's 5-year CAGR of 32% for revenue and 18% for EPS. Our shareholders benefitted from this strong financial performance, as Centene's stock increased 76% and our return on equity was 18% in 2014. Our expanding market cap placed us into the mid-cap equity category as evidenced by Centene's inclusion in the S&P 400 MidCap and Russell 1000 indices. We successfully navigated the first year of the key provision of the ACA. Centene selectively participated in Health Insurance Marketplaces in nine states. Consistent with our forecast, we secured reimbursement for 99% of the health insurer fee in 2014. We also enhanced our diversification by product and geography, including our initial entry in international markets. Centene continues to create jobs across its enterprise, the number of our employees increased by over 50% to 13,400 in 2014 alone. Over 85% of these employees are outside Centene's headquarters. This is consistent with our local approach. Next I would turn to market and product updates. First, we will discuss recent Medicaid activity. Louisiana. On February 1, we…

Thank you, Michel, and good morning. This morning I will cover both our fourth quarter and full year 2014 results. On the top-line for 2014, our Premium and Service revenues totaled $15.7 billion, an increase of 49% over 2013. Our fourth quarter Premium and Service revenues were $4.4 billion, a 54% increase over the fourth quarter of 2013. And on the bottom-line diluted earnings per share for 2014 was $4.45 per share compared to $2.87 for 2013, representing a 55% increase between years. And for the fourth quarter diluted earnings per share was $1.74 compared to $0.84 last year. The fourth quarter EPS this year benefited significantly from recording the full year accrual for the revenue from the Texas health insurer fee that we announced on January 2, in a separate Form 8-K. In more detail our Premium and Service revenue grew by approximately $1.6 billion in the fourth quarter year-over-year as a result of expansions in a numbers of our states between years. Full quarter revenues from California and New Hampshire, which began operations in Q4 of 2013, Health Insurance Marketplace revenue which was new in 2014, growth in the carrier health business, and revenue from U.S. Medical Management acquired at the beginning of 2014. In 2014, we benefited from approximately 201,000 members added in Medicaid expansion programs as of December 31. In addition, we experienced membership growth in traditional TANF programs of almost 200,000 members, part of which might be considered as woodwork effect related. For the full year, we recognized $195 million in health insurer fee revenue which represents 99% of the total reimbursement amount for the year. California is still in the process of providing a binding agreement for the reimbursement of the health insurer fee. And we paid $126 million for the health insurer fee…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Joshua Raskin of Barclays. Please go ahead.

Hi. Thanks. Good morning.

Good morning.

Good morning, Michael. First question just on the retroactive Florida payments. Could you quantify that just so we can get an estimate what the impact was in the fourth quarter?

I don't think I ever gave a specific number. I think we've been working with the State of Florida for some time to try to deal with some of the long-term care rate issues, and we anticipated that we would get that concluded in the fourth quarter in our guidance numbers, and that effect in fact did occur.

Okay. And then, I guess looking at the same store versus the new store MLR, those numbers are actually very similar this quarter, which is little bit surprising in light of the fact that the new membership I would assume is coming in, it's much higher levels of acuity and as you call it, complex care. So my guess is Florida has something to do with that. Is that impacted by the Texas reimbursement as well? I guess I'm just curious as you think about going forward, you guys had a ton of new starts in January, would you expect those MLRs to be similar going forward or would you expect divergence in 2015?

I think that's a good question, Josh. For the fourth quarter, there is no question, for the quarter the new business HBR was much better than we would normally expect it to be because of the Florida retroactive rate increases, which went back for a whole year. So I think that going forward into 2015, we would expect to see a more normal spread between new business and existing business and which we say to be particularly 300 basis points to 500 basis points, so I would expect that to occur going-forward.

And going forward, there will be some impact as the increasing denominator as well. So there will be that to consider.

Okay. Then just lastly, on hep C, with some of the new therapies coming in, I'm just curious how you guys are thinking about formulary management. Are you seeing any discounts from the manufacturers? Are you guys thinking about one drug over the other?

No, we -- we have a -- our distributor of course, the company has exclusive one of the exclusive distributors Acaria, works with all the manufactures, and so we'll take advantage of that based on what our providers are looking for. And this is a good time to remind everybody right now 90%, 90% plus of those costs we have agreements with the state for reimbursement. And so, we work with them on guidelines and we supply some knowledge and information we’ve gleaned from having Acaria as part of us, and we’ll provide that background to states as they develop their guidelines.

That's perfect. Thanks, Michael.

Our next question is from Chris Carter of Credit Suisse. Please go ahead.

Thanks, good morning. Just on the flu, could you give us any color around how much that impacted the 4Q and then maybe what you are assuming in guidance for the first quarter?

Without giving specific numbers, I think flu in the fourth quarter was at a higher level than we saw in the 2013/2014 season, and that season was a relatively normal to below normal year for flu. So, we saw a bounce back up particularly in December, and also in January we've seen that through. But we think it's fairly well decreased at this point in time but it could have small impact on Q1 versus other periods. But I think there’s nothing to impact our overall guidance for the year.

I think the key thing is the guidance for the year is intact. But we're anticipating it could mitigate Q1, depending on how it's spiked. Flu often can spike again and that's the kind of the thing we're considering when we look at Q1.

Okay. And then may be just on that point, I know there's a lot of moving parts this year with the industry fee. I guess how should we be thinking about the EPS progression for 2015, or may be directionally how we should think about 1Q?

I think as we look at that -- the way, if you take the health insurer fee and sort of flatten that out in 2014, I think the relationship of the earnings by quarter and -- by quarter in 2014, will be similar in 2015.

Got it. Okay. Then just last question. The Oregon acquisition, am I right that that's somewhere in the range of $400 million in annualized revenues?

Jesse?

Yes, that's right. So for 2014, it will be a little bit in excess of $400 million in annual revenues based on a combination of their Medicaid and Medicare government business.

Okay. And any thoughts on purchase price there?

We didn't disclose anything on purchase price, and we didn't do in the release and so we're not going to change that position.

No, it was always fair to us and to them.

Okay. All right. Thank you.

Our next question is from Sarah James of Wedbush Securities. Please go ahead.

Hi. This is Michael Ha talking for Sarah James. Thank you for having us. My question I know you talked about the flu, but how much did the flu actually contribute to the increase in existing business MLR, and was that the only driver for the increase?

In Q4?

Yes, yes.

It's sort of hard to hear the question.

Yes.

If you could repeat may be.

Yes, sorry. Let me repeat that. How much did the flu actually contribute to the increase in existing business MLR? And was that the only driver of the increase in Q4?

I think what we said for Q4 was we benefited from certain retroactive rate increases and also performance measure adjustments that we received from some on the states offset by the higher level of flu costs. So I think net it sort of offset each other, but certainly it was there.

We had some transaction cost in there, too, in Q4.

Okay, thank you. Just one more question. Is there any update you can provide on when the Florida formulary can be changed? Initially it looked like it could be done at the beginning of the year; but comments by the Medicaid Director indicated that they thought a delay was being considered.

Well, our people in Florida continue to work with them on what's the appropriate and effective formulary. Growing that like it's –

It's certainly a topic of ongoing discussion with the state. But there is no specific date that we can point to at this point when there might be a change to managed care plan formularies versus the state formulary. So that's the current situation.

And as we did last year I mean we anticipated and we placed that into our guidance.

Okay great. Thank you very much.

Our next question is from Chris Rigg of Susquehanna Financial. Please go ahead.

Hi, good morning. Thanks. Just on premiums for the Medicaid expansion membership, do you guys have any sense for how they are tracking year-to-year? Has there been -- did the states have enough information to adjust rates for 2015 at this point, or is it still too early to tell?

I think that our experience in 2014 was generally very favorable which would indicate that the rates that were originally set for Medicaid expansion business were at the high-end. And so we would expect overtime those rates will be adjusted. Most of those books have been say of minimum HBR calculations that we have to pay back to the state anything below that and we have several states where that in fact did occur. So I think most of the rate adjustments we see in 2015 will probably just be to true-up to where the regular -- the normal run rates would be and would basically offset what we set up as a payback under the minimum HBR calculations.

Okay. And then just with regard to Indiana, the new program there, the new Healthy Indiana -- and this is more of a big-picture question. But what do you guys -- how do you guys think about membership when there's premiums and co-pays? How does that impact utilization in the Medicaid population? And then, do you know if hospitals or sort of other third parties are allowed to pay premiums in the new program? Thanks.

Well, there are two parts to the program, one where there is more cost sharing, one where there is not cost sharing. So it depends a little bit on how the ultimate mix of membership plays out in terms of that. But I think that we don't expect that we're going to see a significant impact on expected utilization one way or the other with respect to how that plays out. So I think that we expect that this pop we have experienced another Medicaid expansion populations around here and we think that that will be a good indicator of what we expect for the Healthy Indiana program as well. I don't think with respect to third parties paying premiums for members, I don't think that that's something that's really contemplated and I haven't heard of that as being anything that's been put in place. That has not -- that was something that was an issue that came up with respect to exchange enrollment and it's really not played out as a significant factor at all in the exchange market.

Okay. Thanks a lot.

Our next question is from Andy Schenker of Morgan Stanley. Please go ahead.

Thanks. Good morning. So just may be on the exchange business here, it sounds like you said it's running -- 2014 ended slightly better on performance than you expected. May be if you could talk about how that may be could carry over into your 2015 expectations for that book of business. And then may be just related to that, any updates about growth in that business as it relates to the de minimis rule for taxes? Thanks.

Well, we do expect that with respect to 2015 our performance on exchanges, we priced to be able to achieve our 3% to 5% kind of pricing margins. So we do think that we're going to see that emerge in 2015. We will have some additional scale which will help us spread some of fixed cost that we think is going to improve our margins a little bit versus 2014 in the product line. And we are -- we do feel that we can manage the growth of this product line and we do intend and stay below the de minimis rule with respect to the tax issue.

Okay, great. And then just a little one here on the favorable reserve development. Just looking at the roll-forward table, it looks like on the trailing 12-month basis it actually declined about $6 million sequentially. Anything just worth mentioning there or driving that change? Thank you.

I wouldn't say there's anything specific. Those are numbers, 12-month development for the reserves and I think they're pretty healthy in general and $6 million swing is nothing of any consequence.

Okay. Thank you.

Our next question is from Justin Lake of JPMorgan. Please go ahead.

Hi. This is Mike Newshel in for Justin. You said the potential drag from flu in the first quarter doesn't change your full-year guidance. Is that because the impact is small enough to fit within the original range? Or is there something, some new incremental offsetting factors that weren't in guidance before?

I think we anticipated the flu in our annual guidance and we anticipated that while it was sign of peak in Q4 we still anticipate that we could see another spike in Q1 and which could have an impact but not impact the overall annual guidance as we build that in for the year.

So if flu continues to trend down, then you'd -- then it will end up more aligned with your expectations? It wouldn't be a drag in Q1?

Well, as you know, we would still the flu could potentially be what you call a drag where I call anticipated, higher levels it spikes. But it -- what I we can look at it from an annual standpoint and our annual guidance is intact.

Got you. And is the specific timing of Indiana's Medicaid expansion in line with what you assumed in guidance? Or given that it launched so quickly on February 1, is there incremental there?

Are you talking about Indiana or --?

Yes, Indiana, yes.

That we consider that in our original guidance I think that was the plan and they were able to successfully achieve that as they announced recently.

Yes. So the timing is no different from what you assumed?

Correct.

Okay, great. Thank you.

Our next question is from Matthew Borsch of Goldman Sachs. Please go ahead.

Thank you. This is Bo Brandt on for Matt. Just following up on Indiana, can you provide any details on assumptions for market share? Are you assuming that you are going to maintain market share into the Medicaid expansion population?

We're one of three players in the program so that's roughly correct that we would expect roughly the same kind of market share, as we have in the Medicaid program.

Okay, great. And then a quick follow-up. Commentary on the Medicaid rate-setting process. Going into 2015 and beyond into 2016, are the rates going to be continued to be separated regarding the rate negotiations? Or will they eventually combine and you'll start looking at more of a composite rate-negotiation process?

Are you speaking about Medicaid expansion versus the other Medicaid rates that's your question.

Yes, exactly.

Yes. I mean we don't see any signs at this point that there is a movement towards consolidation across Medicaid expansion and the other rates. The populations and the experience I think people will want to track separately and that's our expectation going forward.

The states are reimbursed differently for that book of business so they have to be kept separate for those calculations.

Okay. So that will continue into 2016/2017?

Yes.

Generally, so.

Okay. Thank you.

Our next question is from Dave Windley of Jefferies. Please go ahead.

Sure, thanks. It's Dave Styblo in for Dave Windley. First question was just coming back to the MLRs. Just to make sure I understand all the comments called here, the MLR was close, at the higher end of your guidance range. I heard you say there was an impact of higher flu, and then there's an offsetting factor from rate increase adjustments. Can you reconcile those two a little bit with a finer-tooth pencil there?

Well, I think with respect to the fourth quarter, which I think is what you were referring to, our HBR was 89.3%. And I think when you look at that we benefitted in the fourth quarter from some retroactive rate increases and performance measures that were recognized in several of our states but it was mitigated somewhat by higher flu cost in the fourth quarter. So overall, I don't think the HBR was that far out of our range where our expectations were because those two things offset each other.

Okay. So the net, though, we're just pushing a little bit towards the higher end of your previous full-year guidance range, so --?

Yes. Again, directionally we talked about the complex care revenue and the growth of that part of our business which has a higher health benefits ratio to begin with and certainly you see that over time increasing our consolidated HBR, which is as predicted, and as talked on our Investor Day is a combination of having a higher HBR but a lower G&A ratio.

Okay, that's helpful. And then looking forward on a couple of new businesses coming online, for your acquisition of Agate there, can you talk a little bit more about the rationale? I don't think there is an RFP in the pipeline and expansion has already happened, so is it more of a situation of you improving upon an asset or just trying to expand your geographic scope? And then similarly, on the Arizona contract win, is there any new networks that you're going to have to work through? Or just walk us through the preparation in anticipation of -- I think that's something like $500 million to $600 million of revenue coming online.

Jesse.

We'll talk about that. Thanks for the question. We'll talk about Oregon first. I think first of all, we're not generally in the business of buying in the turnaround situation so that continues to be the case here. Agate is a well performing business and it really is about giving both geographic expansion but it's a large Medicaid market but it's fragmented and it's got a unique model. So when we do or kind of tours, if you will around the country, the Oregon model is something that comes up all the time. And so participating directly in that model will give us some unique credibility to speak to what makes sense and what doesn't make sense in terms of best practices or the best fit with Medicaid programs for other states and other products around the country. So on Arizona, we have been in the behavioral health of the Reeboks in Arizona for a number of years. So you will call it 10 years. And so we have got a lot of experience there. The State has kind or re-architected that program in a couple of ways. One is geographically into the different regions and we've obviously been successful in the southern region, but also in terms of the program design integrating some of the physical health coverage into the program. So the changes that we're working on, there is some geographic expansion opportunity and we will be working with as we indicated our joint venture partner with the University of Arizona and we will also be working to expand services to integrate the physical and behavioral health for the people who need it most.

Yes. And the other thing I would add is incrementally we have about $250 million of behavioral health business already in Arizona. So it would be the $300 plus or minus million increase starting in the fourth quarter.

Thanks.

Our next question is from Scott Fidel of Deutsche Bank. Please go ahead.

Hi, thanks. This is Shawn Bevec on for Scott. Do your state agreements to cover the industry fee carry over into 2015? Or is this a process that will need to be repeated for this year?

We believe that all of our state agreements are -- we have covered 2015 also.

So the revenue recognition should be more linear in 2015 as opposed being as lumpy as it was in 2014?

Correct. The only thing we have outstanding at this point still is California.

Okay. Thank you.

Our next question is from Kevin Fischbeck of Bank of America. Please go ahead.

Hi. This is Steve Baxter on for Kevin. I have a question about operating cash flow. For the full year it was 4.6 times net earnings; historically, it hasn't been anywhere near as high. So I guess, can you provide a little color on why it was so high this year, and what you think a more sustainable ratio is going forward?

I think that the biggest impact this year is increase in our just general business to revenue. So we have a large increase in our medical claims payable amount and some of the other payables that were associated with the minimum HBR that we have to pay back as return premium so that was the growth really drove that as much as anything else. I think over a long haul, we don't really expect to be at the 4.6 times net earnings level. We said 1.5 times to 2 times is our target but actually we've been beating that for the last several years. And I think a lot of that has to do with the growth. So we have a heavy growth year, we'll probably be in excess of two. And if we had 15% growth, it might be 1.5 times to 2 times but we haven't seen 15% growth in a long time.

Okay, thanks. Then just another question on USMM. When you guys were joined through the deal you talked about it being $0.20 to $0.25 accretive in 2015. I guess, how is that tracking versus your expectations?

I think that the objective in buying USMM to direct those activity there are Medicate businesses in process. And we expect within 2015 they will perform as we anticipated, basically when we went through our analysis on buying the company and how it would perform.

Okay. Thank you.

Our next question is from Ana Gupte of Leerink Partners. Please go ahead.

Yes, thanks. Good morning. First question, I was just curious on the G&A guidance for 2015. You did see about a 70 bp year-over-year improvement with the OpEx leverage, and I get that you had the business expansion costs. But is there any conservatism there, or something unique about 2015 that you might not see that with the kind of revenue growth you are projecting?

I think we continue to see that we'll have the benefits of leverage from the revenue growth there. Two things that went the other direction were obviously the acquisition of USMM, which has a higher G&A ratio because it -- does not help benefits ratio. And then also from the impact of the exchange business which has a higher G&A ratio. So those two items increased our G&A ratio versus the benefits of scale and leveraging and as we go forward into 2015, I would think that we'll have growth in the other -- in all of those areas so we expect to still see benefits but they just may not be as significant.

I mean the higher acuity populations we've said before also impacts the G&A.

Got it. Got it. Okay. So there is not as much upside --

Well there is a floor at some point too, yes.

Pardon me.

So should one interpret this as there is upside but not as much expansion or improvement as 2014?

No, the denominator keeps getting larger so that's going to impact it.

Right, yes, they have a 70 basis point improvement is a little more difficult going forward because there is a minimum level you'll still have.

And on Agate, just follow up on someone else's question earlier. Was this opportunistic that there was Medicare Advantage in there? Or is there something in there around the potential ability of a plan that MA and Medicaid to have better dual margins?

Well, we have probably expressed our interest in MA. So the fact that they had MA was a positive and that is something we continue to look at it and find the appropriate entry point.

Okay. So this end will may be more targeted from a geographic perspective and you look -- does that seem to have been your strategy? Not turnaround assets, more local within the state, private?

Exactly.

Okay. Got it. Then finally, are there any update on the Georgia rebid? The ABD population does not look to have been included there. I was just wondering what you think might happen on the existing contract as far as the bidders that have been qualified. Will there be one or two? And how will that transition occur? And then any timing on ABD?

Well, it was supposed to have been out and they have delayed it. And I'd rather not speculate what their plans are and how they're going about it, regardless of what they do we'll be ready for it.

Okay, all right. Thanks so much.

Our next question is from Brian Wright of Sterne Agee. Please go ahead.

Thanks. Good morning. In the press release announcing the Agate acquisition, it seemed to indicate there were some other businesses that weren't Medicaid and Medicare. Just wanted to understand if there was anything of significant size in that, and exactly what those other businesses may be.

Yes, Brian, it's Jesse. I think our target is really a holding company for a couple of different pieces and I'd say that for purposes of kind of the analysis and the go-forward really we're thinking about this as primarily a health plan opportunity. There are a couple of other pieces that are more kind of historical in nature than perspective in nature. So former kind of IPAs tied into the provider community and the like. But most of the go-forward opportunity is going to be centered around their government health plan business.

And then could you just give us a -- how was the transaction structured? How is that going to be financed?

I think we expect it to be closed in the third quarter. And we're looking at specifically how we want to finance those payments.

We have debt capacity, as we decide to use it.

Yes, that's right. We have $75 million drawn on our revolver at year-end on our $500 million line so. We have flexibility.

So it's solely debt and nothing -- no stock on to the Agate shareholders, then?

I think that's some we will continue to look at and determine over the next six months before we close how we optimize the consideration.

Okay, okay. Thank you.

Our next question is from Tom Carroll of Stifel. Please go ahead.

Hey, good morning. Just a quick question on seasonality. With all the new growth that you've had in chronic population, duals, and the like, the adjustment to taxes, et cetera. I wonder if -- how would you expect quarterly EPS to progress in 2015? Should we expect any changes? May be you could provide some details in terms of how much is coming in first half, back half, or whatever, however you'd like to characterize it. Thanks.

Sure, Tom. I think the basic, what I would do is take 2014 actual adjust it for the health insurer fee and normalize that. Once you do that that percentage of our earnings in each quarter in 2014 is an amount that I would think would be reasonable to look at it for 2015.

It's a good starting template.

Okay. And so nothing -- I just wonder if there is any saying in future quarters that you've kind of already on your radar screen right now that just could help us build out the year?

Again normally what we would see is more rate increases in the second half of the year. So we get some lift in the second half versus say the first half. You have flu in the first quarter, which you really don't have again until a little bit in the fourth quarter, which we did see this past year. So the second and third quarter benefit from better seasonality in that regard. So I don't think there's anything new that I would throw in a mix for the quarterly calculations.

I mean it's fair to say when we constantly are looking at things and as soon as something is consummated we'd announce it and what the impact is. And it's not to say we're not looking at things but nothing in yet we have announced that should be included in the quarters.

Great, thank you.

[Operator Instructions].

Well, if there is no further questions, we thank everybody for participating in this call and look forward to talking you in April and reviewing the first quarter. Thank you.