Centene Corporation (CNC) Earnings Call Transcript & Summary

Great. Good morning, everybody. Happy New Year. Can't believe we're already here again, but glad to see everybody here at 7:30. I'm Gary Taylor, I cover healthcare facilities and managed care for JPMorgan. My pleasure to introduce Centene. Centene is a multiline insurance company, oriented towards government-sponsored programs. Generated over $76 billion of revenue in 2019 with over 15 million of enrollment across Medicaid exchanges, Medicare and Commercial group. And presenting this morning is, Michael Neidorff, who is the Chairman, President and CEO; and then breakout will be in Yorkshire, which is out down and to the left. So Michael, just steam away.

Thank you. Happy New Year. I always have to recognize Howard Cox where he is in the audience. He's one of our founding directors. And he can remember when the wheels almost fell off, more than once, and here we are at $75 billion, Howard. So it's little change. I want to thank you all for being here. Wish you all a very happy New Year, a healthy one. I'm going to provide a brief overview of Centene. Pardon me.

Slides are on the website.

Well, thank you, Ed. The slides are on the website. So you'll be able to do it. And I'm not going to ask Ed to read the forward-looking statement. As we go forward, we're going to talk a lot about diversification, and that we're really now a health care enterprise. We're no longer just a health plan or a Medicaid health care company. It has moved far beyond that. We are in leadership positions. We have significant scale. And the company has a clear vision going forward in 2020 and the years ahead. And you can see from here, just the total: that we're #1 in Medicaid; #1 in Marketplace; #1 in the Long Term Care. So it's -- that's important as we lead. And also, the industry scale, when you see that we're #7 in Change the World. So there's a lot of factors here that we see as very positive. And so it's more -- it's multifaceted. As we look at the diversification, it's important to recognize that, first, we've always said the highest quality is the least expensive. And we prove that again and again. And we're really focused on in. And in this company, we're very clear what we're doing with Medicaid and vulnerable citizens. We say that it's important that they get the same care and quality we would want with dignity and respect, and that drives this company. Now we were a government-sponsored focus. We know the population really well. We've gotten so large I can't say I know them all by their first name anymore. But we're also very deeply local. We've taken a very local approach, which is a differentiator for us. If it touches a member or a provider, a contractor, a regulator, it's local. The diversification in scale is significant. It's so different that investors that have multiple platforms and multiple investments within your portfolios, that no one can have a significant impact. I'm not going to spend a lot of time on this, but this just demonstrates the diversification across products, Medicaid, Marketplace, Federal Services, correctional, Specialty, the geographies that we're in, states. We're in 3 international markets at this point in time and with opportunities there. And then, of course, we have the services and tools that help us grow and help us create new products. And you can expect to see a lot more new products coming out of us going forward. Now I remind people that there was no Foster Care product until we invented it. We're also very proud of the long-term track record that we can show you. We've delivered through different economic, political environments. And what really surprises me continuously is how the political and geopolitical environment can affect the stock and the investments and things from day-to-day. Because our job as we view it, is to manage through those things. And that's really important. We deliver in different economic times, different political environments. We've been able to work with both sides of the aisle and continue to do that. It is because of this and our approach of high-quality care, we're a leading position across all the key markets. Our relationships and systems capability, we believe, are really as strong as you'll find anywhere. And there's a lot of growth through organic growth, not just M&A. You're going to see during the course of the next few minutes that there's more organic growth than M&A, even though people have thought the other way around. And of course, the 10-year CAGR, membership growth, revenue and we're particularly proud of the stock price and what it's been doing, the total shareholder return we've been providing. And we look for long, deep relationships, and we have a lot of concern for the long-term investors. Now let's talk -- I'm going the wrong -- what happened here? Okay. Now we got it. Now Centene today, I think it's really important to look at and compare it when we think about it. We're -- pardon me?

Marcela [indiscernible]

Marcela, I need technical help.

Just -- there we go.

Thank you, Marcela. As we look at it today, this year, we will be, on a combined basis, a $100 billion company. And when we started with that in the Fortune list is we're joining a verified era. We'll be serving 1 out of 15 Americans, of every 15 Americans on a going-forward basis. And you're going to expect to see further diversification as we do it. And as you see us continue to grow in the Marketplace, we'll be the LTSS leader. Medicare, we've been very unhappy with what we've done at Centene, but we're -- we know that the WellCare has a strong brand there, and we'll be using that. In fact, I would not be surprised to see WellCare trademark become our Medicare brand on a going-forward basis. So it's -- it represents another step of change for this company and it's a transitional combination. The combined national footprint, it's clear. It's large. It's national. And it's 17 states with all 3 products, Medicare, Medicaid, California where we're the largest in the 4 largest Medicaid states in the country. And with Illinois, we'll probably be pushing in the top 5. So it's -- that's all been very important to us. Gary, I'll keep an eye on the clock to keep us smooth. This is one of our favorite charts. It talks about the diversity of the company. There's no 1 state, no 1 contract -- no 2 states or 3 or 4 contracts that can really set us back on our heels. We have over 350 different contracts across our states. And there's still room to continue to grow organically by adding more products and more dots. Now the darker blue ones are the things we're picking up with the WellCare. So you can see the amount of organic growth that will continue once we've put this all together. And it's really just keeps giving us an ever-growing presence. On the update, it's moving along very well. We have all 27 states signed off by the states. We have -- the states have been -- agreed to the Form As for the companies that are buying some of the markets that we had to sell some of the products. In Missouri, Illinois -- Missouri and Iowa, by example, we had 2 of the 3 when we combined it, so we sold them, and that's gone very well. And the states have signed off on that. We're now working through the final steps with the Department of Justice. And I may sound a little bit different than others have said, but we find them to be very constructive and willing to listen and work with us in a very effective basis. And while we have said it will be the first half of the year, we are cautiously optimistic, and I want to be very careful not to change the expectations too much, we'd not surprise you if it happens sooner than that. So it's all moving in a way that you want it to, in a way that everybody can be comfortable with it. Most importantly, when we did this, we set the goal that we have to be in a position to integrate it January 1. Now we knew it wouldn't be January 1. But if you are ready then, you know that when it does, it is time for integration, you'll be in a very strong position to do so. And that's really where it is now. We've announced top line organizations. We've worked through it. It's going to be a very smooth integration. I will also tell you now that some of the systems will take 1 or 2 years to get done, but that's okay. We've now -- we're now in a position to say year 1 will be no less than breakeven. You recall, originally, there was a small single-digit losses we had anticipated. Now we're saying there won't be anything less than breakeven. And the second year, mid- to upper single digits is still very achievable. Net synergies year 2, $500 million and a $700 million run rate. Those things are clearly in sight, and we know where they're coming from. So it's all where it needs to be, the activities, the teams, it's -- we're very pleased with it. The secular trends drive long-term opportunities. 60% of our population is under 400% of Federal poverty level. That's our population. Of -- the fundamental facts are that, once again, high quality, low-cost care. We want to be a total low-cost producer. We focus on outcomes and value. They are underpinned by the need for better data analysis, and our systems are really becoming quite superb. And we're getting more and more recognized. We pay the average doctor in 6 days or less, with 98.6% accuracy, and that's important. And we'll continue to work on it. So those kinds of things. But what's important there is until the claim's adjudicated, it's not in a warehouse, you can't use it for analysis. So it's -- that all comes together really well. We're working on a Model One, which is a risk-based contract. But we now have the systems that I could see a doctor tomorrow and give him data of how his performance has been through last Friday in real time. That's how you effect change and how you get the kind of performance you want. And so we'll -- the only area we -- as I said, we're going to continue to work on is Medicare. I have not been pleased with it, we have not been pleased with the performance there. But we acknowledge that, and we know what has to be done to fix it. We're positioned to address the industry challenges. Our industry has specific challenges with Medicaid cost trends, the contracting, the things we're doing there. We'll bring that under control. The physician compensation is really important. Model One puts the primary care doctor back in charge of how medicine is practiced. And we're getting a lot of compliance. And that you want to bring pharmaceuticals or things under control, share the risk with the providers. And it's having a very positive powerful impact on that. And we want to ensure we have sufficient access to care. And we're using our CMG, which we acquired, the clinic model in Florida. So if there's an isolated pocket where we need additional coverage, we can do it, we can move them in -- we're not into buying a lot of practice in these. We've taken the approach that there's equity in contracts. And it's working very well for us. A value-based contract and delivery of care and we're working with some PBM innovations with RxAdvance, that we're going to try and bring cost down. And I'm still committed to moving to direct pricing away from rebates. I think that's where it needs to go, and we're going to -- and we're still working hard to get to there. It's going to take some time. A chart we used to use in the very early stages. So we like to remind people when we talk about Medicaid, and we talk about geopolitical and political risk, this business is good in all economic cycles. When there's recessions, there's more people joining the roles of Medicaid. In good times, the states may be able to expand coverage. So even right now, while we see them making some adjustments, yes, we have a higher acuity in the population but we also have the data to show the states, and they are in their redeterminations, adjusting the rates for us. So it's the right kind of thing in having the systems, the information to show it to them in real time has made all the difference. Because you can't sit there and say, here's some 3 months, 6 months old data we're trending. We're saying this is what it looked like as of last month, and we can give them a dashboard to look at, and they can see it. It's making a major difference in what we're doing. This just shows that the national coverage for Medicaid and how it continues to grow and will continue to grow, and we see a lot of new product opportunities. As I said, we're in the 4 largest states, we're #1, consistently strong 5-year approach. Our medical trends are strong. We've been averaging 1% to 2% cost and trends and you always have an isolated pocket of state here and there where there's an issue, but you deal with it. And we like to say we're managers, not victims. And when you're a manager, you have an issue, you deal with it and fix it as opposed to all the states did this to me. I've been -- CEOs can't say the state did this to me, I'm going to say, "What have you done to overcome it and fix it?" Brief summary overview of the Medicare. I've said several times there, the growth hasn't been what we want. The objective is to enhance it. We're developing more joint. We're going to be working with the WellCare, which has a strong platform there. But we also have Ascension and other groups that are working on JVs. That's going to help sort it. And it's going to give us some entry, we're talking a small group last night, in some new markets. So I'd say too, we're not satisfied until we achieve what we're looking for, but it's a significant long-term growth opportunity. And I want to remind you that 2/3 of the population on Medicare are at 400% of the Federal poverty level or below. And that's our sweet spot. So that's why, as we get it right and get the right network, we'll be in good shape there. Health Insurance Marketplace, it's clear, we're #1. We have been #1. I've said many times, you make your decisions based on the facts as they are today, that's all the states will do this or that, and this is a good example of that. And even in -- there's been some shrinkage in the market, small percentage. But I've said for years now that there was a study on Cambridge out of the PIMs group by learning Consumer Package Goods that in a shrinking market, the leaders grow. And we continue to demonstrate that. We are saying in this next year, we expect to see between 150,000 to 250,000 increase from peak to peak. So it's going to continue to have strong growth there. And we continue to expect the margins to be in the 5% to 10% level. So there's been no change there. The demographics are the same. What I do to the slides? I bumped something. My technology is...

There we go.

Thank you. When you look at what our growth drivers are, organic growth. And there's been a lot of talk about that, but all products, all markets. Operational efficiency is incredibly important to us, and we'll talk about Centene forward and what that's doing for us. And then there's M&A as well. And what's nice, we're at a scale and size now that we can buy smaller M&A companies, don't even have to talk about it, through M&A. I had 1 man, we acquired the company, and he said, I'm so glad you don't have to announce it because now my family is not going to come after me for some of this money. So there's a real advantage to that. The pipeline, $266 billion. I used to say, I want 10%. Now we will have a lot more. So it's a great opportunity across all our product lines. And what's driving the organic growth across the portfolio? Medicaid, but we have an 80% plus win rate in RFPs and continue to do that. And so much of it is the systems and some of the capabilities and techniques. It's really fun. Every time we win an RFP, somebody goes to get a copy of our RFP response. Some of it's redacted. But when everyone realizes we've already moved past that and have some new things we're building into the next one. Medicare, we're going to return to the 4 stars in 2020, and we're working to see what we can do to make sure that in 2021, it could fall back because of the way they do things. But we have a whole team working to make sure we not only get 4 stars but start to focus on 4.5 because if you reach for the stars, you'll never come up with a handful of mud. The health insurance, we're entering 118 new counties in 10 existing states in 2020. We continue to see growth there. And we've continued to see people staying with the product. We've sold to politicians, people like the ACA. They like having a card. Federal Services, we're one of the largest, longest-serving ones with TRICARE, that's successful. International, we've been contrarians. We went into Spain when the economy, the high unemployment, and it's worked out incredibly well for us. We're [indiscernible] is something people are asking around the world. We made some investments, small investments. These are not capital-intense, in England, and we have a little lab, reference thing in Slovakia, just to get some experience in that part of the world. But I want to emphasize, it's not capital-intense for us. It's capital-light, and we're organized in such a way that nothing we do in ex U.S. will detract from the opportunities we're focused on here, will not affect it. But I also maintain if you're going to be a global leader, you have to have a global perspective. And there's things we've learned from [indiscernible] we're bringing back to U.S. and taking to other countries as well. I want to come back to the organic growth for a minute. Over the past 10 years, 64% of our growth has been organic growth, 44% acquisition. That says that $44 billion has been through organic growth. And you can see the number of new opportunities we entered there. [indiscernible] but it's -- so it's very clear that organic growth continues to be a focus for this company. Another issue that's important to us is technology. We're becoming, in many ways, a technology company that does health care. But we also have Centene Forward. And Centene Forward is an internal system where we're looking at all our cost structure, continuous improvement. We've seen too many companies where their growth hides inefficiencies they develop. And we have said, no, we're going to repurpose people. We're focused on how we do it. We've identified $500 million of savings there that's being reinvested in new systems and things that will generate improved margins in subsequent years. So you will see it starting to fall through the bottom line through that system and it's just very clearly a focus, and we're not stopping. We have new work streams continuously. It's made up with our CFO, our CIO, and our Human Resources. So 3 of them make the team that are driving this. And we're repurposing our people. We woke up one day, we had like 7,000 openings and said, time out. Let's stop that and let's repurpose people because just we've -- we have a sign in our boardroom that says, but we've always done it that way. That's not a reason to do anything. We like to talk about disciplined growth, existing core businesses, the differentiated capabilities we have and we do, international and technical and services. Those are the M&A priorities. We should be bringing in new capabilities through M&A. It's not just a matter of adding more markets. The WellCare was very essential in terms of critical mass, scale and some of the new capabilities we think it's going to bring us. As we look at 2019, significant achievements across all the pillars. Organic growth alone in 2019 was close to $7 billion which we think is very -- and the operational efficiencies I just talked about, the $500 million we've identified, and we're moving forward. We've executed very well on the M&A. WellCare's Fidelis, the other ones we've done have been very well and I'm very proud of what the team has been able to do there. We talk about the allocation of capital. It's very disciplined, and you can expect to see more now. I also want to be quick to point out the capital we got, we're receiving for having sold some of the plans, we're going to possibly allocate some of that to share repurchase and some to debt retirement. But that's a case of a calculation because if you reduce your capital base too much by buy buying back stock, you could, in fact, net increase your debt to cap, and that's not our objective. It's to keep our debt to cap in the 30s. And so we're working to do that. And finally, I just want to add, we've added some significant Board members. We're very pleased that General Lori Robinson has joined us. She's one of the first 2 female 4-star generals. And she's in the Air Force. She had 52% Pacific region, 52% of the Air Force, responsibility. She one time oversaw all 50 state Air National Guard. And her last assignment was NORAD where her bosses were the President and the Prime Minister. She told me she used to sleep with her cell phone on her chest, never knowing when she was going to get a call that there was something to worry about. I also understand she delegated to the 2 Star General, tracking Santa Claus, so -- this past year. So that was all good. We've also added William Trubeck from the WellCare Board. We agreed to add 2. He has a great, strong CFO experience, was an EVP at H&R Block and other companies, had had some turnaround experience there, which we don't need, but can help us identify things that need to be looked at. And finally, James Dallas who was the Medtronics CIO and brings about a strong -- So with the remaining 1/10 of a second, we're a growth company, folks. We've demonstrated ability. We're in a good spot, and we look forward to showing you some more results next year. Thank you.