Centene Corporation (CNC) Earnings Call Transcript & Summary

Good morning and thank you for joining the 2020 Annual Stockholders' Meeting for Centene Corporation. Today's meeting will be conducted by Mr. Michael Neidorff, Chairman, President and Chief Executive Officer. Mr. Neidorff, please begin.

Thank you. Good morning, and welcome to the 2020 Annual Stockholders' Meeting of Centene Corporation. Due to the COVID-19 pandemic, we are meeting virtually today, and I appreciate everyone joining us in this new format. I look forward to the day when we can return to our standard shareholder meeting. As I'd like to say, experience is the sum of experiences, which I don't think any of us have had the experience to prepare us for this crisis. Centene Corporation has acted swiftly and proactively to ensure uninterrupted access and support for our members and providers and to protect the health and safety of our employees. While we maintain operations, we are also keeping an eye to the future and are working with leading epidemiologists to ensure our continued preparedness in these uncertain times. Finally, we remain fully committed to fulfilling our obligation to our stockholders and are pleased to be hosting this virtual annual meeting, which will provide us an opportunity to answer shareholders' questions after we conclude the business portion, obviously. At this time, I am pleased to say that we have each of our directors attending this meeting virtually. These include Orlando Ayala, Jessica Blume; James Dallas; Robert Ditmore; Fred Eppinger; Honorable Richard Gephardt; John Roberts, Lori Robinson; David Steward; Honorable Governor Tommy Thompson; and William Trubeck. I also want to recognize the addition in our senior management team is also on the line. We are also joined by Brian Bell and Dan Rockwood of KPMG; Jay Nouss from Bryan Cave Leighton Paisner, and Nancy Hoffman from Broadridge as our inspector of election. I would now like to advise you that the legal requirements necessary for today's meeting and to explain the procedures we will follow this morning. First, this meeting is held pursuant to the notice dated March 13, 2020, which we mailed to all stockholders as of February 28, 2020, and established record date. An affidavit of mailing this notice has been filed with the company's records. A list of stockholders on the record date is available for your review on the web portal for stockholders. Second, Ms. Hoffman has been appointed inspector of elections. Ms. Hoffman has examined the proxies and reports that there are more than 539 million shares of common stock present in person or through representation by proxy. They represent over 91% of the 586.8 million shares entitled to vote at the meeting. On that basis, we have a quorum, and we can proceed with the transaction of business. Third, stockholders of record may vote today until the polls close during this meeting. If you have previously provided your proxy, your shares will be voted accordingly. If you have not voted or if you've previously voted and wish to change your vote, please log in as a stockholder by entering the 16-digit control number you received with your proxy materials and entering your votes prior to the polls closing during this meeting. Fourth, the voting polls are now open. They will remain open throughout the meeting and will close when the formal portion of the meeting concludes. At the end of the meeting, we will announce the preliminary results of the voting on each matter. The proposals will be presented in the order outlined in the proxy statement. Please note that this meeting is being recorded. However, no one attending the webcast or telephone is permitted to use any audio or visual recording device. At this point, I would like to remind everyone of the rules of conduct for the meeting. A copy of the rules along with an agenda are posted on the web portal. The first matter to be voted on is the election of directors. 4 nominees for election to Class I directors until 2023 annual meeting are: Michael F. Neidorff, Robert J. Ditmore, Richard A. Gephardt, Lori J. Robinson. The nominee for election as Class II director until 2021 annual meeting is William L. Trubeck. The nominee for election as Class III director until the 2022 annual meeting is H. James Dallas. The Board recommends a vote for each of the nominees on the ballot. The second matter to be voted on is the advisory resolution to approve the compensation of the company's named executive officers. The Board recommends a vote for this proposal. The third matter to be voted on is the ratification of the selection of KPMG as the company's independent registered public accounting firm for the current fiscal year. The Board recommends a vote for this proposal. The fourth matter to be voted on is an amendment to increase the number of authorized shares under our employee stock purchase plan. The Board recommends a vote for the proposal. The fifth matter to be voted on is the stockholder's proposal being presented by Friends Fiduciary Corporation. The full text of the proposal is set forth in the company's proxy statement. I understand that Kate Monahan, a representative of the stockholder, will present the proposal, and I'd like to invite her to do so.

Good morning, Mr. Chairman, members of the Board and fellow shareholders. My name is Kate Monahan, and I am the Shareholder Engagement Manager at Friends Fiduciary Corporation. I hereby move Proposal 5, which asks our company to provide a report on its direct and indirect contributions made to influence the outcome of elections at the federal, state and local levels. As long-term shareholders of Centene, we support transparency and accountability and corporate electoral spending. We commend the company on its political contributions policy released last year, which established Board oversight of election spending and PAC contributions, an important first step in ensuring appropriate risk management of these expenditures. However, we believe the second step, disclosure of political contributions, is necessary, and that transparency is in the best interest of the company and its shareholders. Publicly available records show Centene has contributed at least $15.5 million in corporate funds since the 2010 election cycle. However, relying on publicly available data does not provide a complete picture of the company's electoral spending. For example, payments to trade associations that may be used for election-related activities are undisclosed and unknown. This proposal asks the company to disclose all of its electoral spending, including payments to trade associations and other tax-exempt organizations, which may be used for electoral purposes. This would bring Centene in line with a growing number of leading companies, including Express Scripts, UnitedHealth Group and Humana, which present this information on their websites. This is especially important for a company such as Centene, which routinely engages government-sponsored health care entities as part of its business model. Disclosing contributions, as many other companies do, would help mitigate the potential legal or reputational risks posed to Centene by these relationships. Our request for disclosure is a call for transparency and accountability in the spending of shareholder resources, and we urge shareholders to vote for this proposal.

Thank you, Ms. Monahan. We appreciate your interest in our company. For the reasons set forth in the company's proxy statement, the Board recommends a vote against the proposal. The sixth matter to be voted on is a stockholder proposal being presented by John Chevedden. The full text of the proposal is set forth in the company's proxy statement. I understand that James McRitchie, a representative of the stockholder, will present the proposal, and I'd like to invite him to do so.

Thank you. This is James McRitchie, representing John Chevedden for simple majority vote, Proposal #6. Shareholders request the Board take each step necessary so that each voting requirement in the charter and bylaws that calls for a greater than simple majority vote be eliminated and replaced by a requirement for a majority of the votes cast in compliance with applicable laws. Supermajority requirements are used to block initiatives supported by most shareholders but opposed by status quo management. Shareholders are willing to pay a premium for shares of companies that have excellent corporate governance. Supermajority voting requirements have been found to be 1 of 6 entrenching mechanisms negatively correlated to company performance according to academics. This proposal won from 74% to 88% support at Alcoa, Waste Management, Goldman Sachs, FirstEnergy and Macy's. Currently, the vote of shareholders is downsized because management can simply ignore an overwhelming shareholder vote. Please vote for simple majority vote, Proposal #6. And thank you very much.

Thank you, Mr. McRitchie. We appreciate your interest in our company. For the reasons set forth in the company's proxy statement, the Board recommends a vote against the proposal. If any stockholder would like to submit a question regarding any of the proposals, please submit your questions through the web portal. Please note that we will be closing the polls at the conclusion of any questions. So if you have not yet voted and would like to, please do so in the next few minutes. I believe we have a -- we do have a question, and it's regarding -- so I -- do you want me -- should I read the question, Taytie?

Yes. Yes, the first question. Mr. Chairman, the Carpenter Union Pension Fund, with combined assets of $70 billion, have a collective ownership position of 655,144 shares of the company's common stock. As long-term shareholders, we appreciate the company's effort to address the difficulties faced by employees, customers and other important stakeholders during the COVID-19 pandemic. Audit firm independence is critically important to the integrity of our financial reporting system. Could you or representatives of KPMG describe the lead partner rotation process and the decision-making in the selection of a new lead partner?

May I ask our representatives of KPMG to please respond to that?

Operator, if you can please unmute the lines of Dan Rockwood and Brian Bell of KPMG.

This is Brian Bell with KPMG. I've been the lead partner on the Centene audit for the past 5 years. Our firm's partner rotation policies follow those of the Securities and Exchange Commission, which require rotation every 5 years. So I completed my fifth year, and they mentioned Dan Rockwood. Dan will be succeeding me as the next engagement partner. And the decision for him to succeed me was vetted with the Audit Committee of the Board of Directors. And maybe I'll pause there and see if that answers your question.

Okay?

Thank you.

Is that okay, Michael?

Yes, that's fine. Thank you. Any another question?

There's another question. Which directors, if any, have served on the Board for 10 years or more?

There are 7 directors that have served for 10 years or more. You want the specifics?

At this time, I see no further questions.

Thank you. This concludes the business items on the agenda of the annual meeting. The polls are now closed. We now have the preliminary results of the meeting, which I will ask Ms. Hoffman to read.

The preliminary reports of the results of the meeting shows that each of the nominees named in the proxy statement has been elected. The advisory resolution to approve executive compensation has been approved. The selection of KPMG as the company's independent registered public accounting firm for the current fiscal year has been ratified. The amendment to increase the number of authorized shares under the employee stock purchase plan has been approved. The stockholder proposal on political spending disclosures has been approved. The stockholder proposal on the elimination of supermajority voting provision has been approved.

Thank you, Ms. Hoffman. We will be reporting the final vote results on our Form 8-K to be filed within 4 business days. As there is no further business to come before the meeting, the formal part of the meeting is now adjourned. I will now invite Jennifer Gilligan, Senior Vice President, Finance and Investor Relations, to review the safe harbor positions, after which, I will present my Chairman's report and answer appropriate questions from stockholders. The slide referenced in the Chairman's report can be found in the meeting material section at the bottom of this virtual meeting website.

Please note that various remarks we make today may constitute forward-looking statements. Actual results may differ materially from those indicated by these statements as a result of various important factors, including those discussed in the documents referenced on the slide you see in front of you and the Risk Factors section of our most recent quarterly report. These forward-looking statements represent our expectations as of today, and we disclaim any obligation to update them. Our company's policy is that the company undertakes no obligation to update its earnings guidance other than as part of its quarterly and yearly earnings disclosure. And that silence on guidance by the company or company officials should not be interpreted that guidance has or has not changed. In any event, no update -- no updated guidance would ever be given that is not previously or simultaneously disclosed in an SEC filing or other broad non-exclusionary means. Further, it is company policy to generally not hold discussions with investors commencing 2 weeks prior to earnings release.

Thank you. Pardon me. Thank you. Now we would like to -- I'd like to give you my presentation, and you can find this on the bottom of the website. And we'll go from there. If you look at it, the first chart is one of my favorites. It shows you that just what this company is all about. We have close to 70,000 employees. We're #51 on the Fortune 500 list, and that's based on 2018 revenue. We expect significant growth when they report early or mid-May on the 2019 results, where we were #168 on the Fortune 500. There was $21.4 billion in available -- in terms of cash and investments. We're in all 50 states. We have 3 international markets that are growing and doing very well. We're covering in excess of 23 million members. That's -- in the United States, 1 in every 15 individuals are covered through a Centene policy in practice. And there are over 400 different products and states involved, which says we're highly diversified, which gives investors added protection. I thought it important to take a moment and highlight to our shareholders that when we're looking at the COVID-19, we will break it initially into 2 sections, supporting members and communities. And there, we've been covering the cost for testing and treatment of the COVID. We're addressing the social determinants in the broadest possible sense with meals and other gift cards to help people in need. We're supporting telehealth as a way to ensure people get coverage when none -- no other is available. And we have support for the disability community, which has very special needs in this environment. Providers, the FQHCs, the safety net providers, we've been providing them with PPE and other materials that are needed. We're giving financial support and PPE. The technology enablement, telehealth, more emphasis on that. We support the applications for the small business and helping people and applying for it. And we've waived prior authorizations while not sacrificing the right of responsibility to take a look back on medical necessity. We're supporting our employees. We've covered the COVID cost. We're providing medical leave. We're allowing employees to take leave and support their interest in trying to help where there are flu -- or COVID hotspots, virus hotspots. We, in 3 days, we have 66,000 employees or 90% of our employees to work at home. And we have an ongoing hiring to fill positions. I think we have filled 1,000 jobs in the past 6, 8 weeks. So the business continues to operate as one would expect it to. We're also proud of the results we've been delivering to the shareholders. We had total revenues over the last 5 years, a CAGR of 35%. You've seen the adjusted diluted EPS in spite of all the record -- with all the investment made to get the revenue growth, still delivered 30% increase. And the stock price has a 19% increase. Just capping 2019. Total revenues were $74.6 billion, which was a 24% increase. Diluted EPS of $3.14 reflected a 39% increase. Adjusted diluted EPS of $4.42 was 25%. And membership, we've added 1.1 million lives between the 2 years, or 8%. Just a quick review of what we heard earlier today. The first quarter results closed the WellCare acquisition, was for $19.6 billion. So we're very pleased that we moved through the process in a timely fashion, which we did, virtually, in 10 months from announcement to final Justice Department approval. There's a 41% year-over-year growth in total revenues to $26 billion and a 61% year-over-year growth in membership to 23.8 million beneficiaries. Now when you look at WellCare in day 1 and beyond, the transition, the agreements are in place, similar presence in market integration with -- working through that with the states. In some cases, the states have delayed it because of the COVID, which we understand. And the operating model adjustments, we're working through all the functional areas and all the markets. So it's progressing well. It's a normal course of work. We're working with Centene Forward transformation, the organic growth, our mergers and acquisitions program is very active. And we're working now on what we call NextGen, which is the new systems, an enhancement of systems that are required to manage what's going to be this year, $110 billion enterprise. I think what's also important to our shareholders is we have continued growth opportunities. There is a $266 billion targeted pipeline. And that cuts across Medicaid, Medicare, we have the dual eligibles, the marketplace, correctional health is a growing business within the company, federal services and our international business. We are clearly, in summary, a growth company. We have demonstrated ability to convert opportunities to revenue for Centene Corporation. Opportunities across markets, product specialties and M&A. So we focus on organic growth first with M&A. And we've had significant organic growth, and that continues to be a priority of this company. We have a compelling combination of continuing building shareholder value. And we clearly recognize, with WellCare and the things we're doing, the importance of building shareholder value, and are fully committed to it. And as you can -- there is availability of the non-GAAP conciliation, which I'm not -- reconciliation, excuse me, which I am not going to go into. We would now like to address shareholders' questions, and we'll take questions that are being entered in today's portal website, web portal. Please note, we will attempt to answer as many as time allows, but only questions that are germane to the meeting will be addressed, as noted in the rules of conduct. Is there any questions?

Michael, there is 1 question today. What percentage of employees are not working? And what percent of employees can work mostly from home? And also, has the Board transitioned to virtual meetings, and how many shareholders have accessed this meeting through the meeting website?

Okay. One, we have -- as I said, we have 90% of our employees -- all employees are working. We have 90% of our employees working at home, and we achieved that very quickly. We -- the 10 -- the other 10%, we have provided them with all the possible safety precautions to ensure that they are working at home -- I say work at home. The Board is participating fully through virtual meetings, and we had a virtual committee meetings yesterday. And following this, we'll have our Board meeting. It was in Zoom. It will be fully virtual, as is appropriate for this. Our staff meetings, et cetera, continue to be virtual. And the exception is a few of us came in the office today to better conduct this meeting to benefit the shareholders.

And Mike, I can confirm that there are 23 shareholders registered in this meeting today.

Okay. We now can answer that there are 23 shareholders who have registered to this meeting.

At this time, there are no further questions.

Having then recognize there are no questions, our 2020 annual meeting has now been concluded. I want to thank you, and we look forward to another challenging, but clearly, what will be another successful year for this company. Thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.