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Wellcare Health Plans Inc  (NYSE:WCG)
Q1 2019 Earnings Call
April 30, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to WellCare's First` Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to WellCare's management team. Please go ahead.

Beau Garverick -- Senior Vice President

Thank you all for joining us this morning for a discussion of WellCare's 2019 first quarter results. Today, we will be making forward-looking statements, including but not limited to, the timing of the closing of the merger with Centene. Various risks and uncertainties, such as those described in our SEC filings may materially impact those statements. While these risks and uncertainties may cause our future results to differ from today's statements. We are not undertaking any obligation to update or revise any forward-looking statements.

Certain financial information that we will discuss today, including adjustments to expenses that we believe are not indicative of long-term business operations. Please refer to our news release published this morning and available on our website at www.wellcare.com for a reconciliation of financial measures determined under generally accepted accounting principles to our adjusted measures. We will identify measures that have been adjusted.

Our discussion today will be led by Ken Burdick, WellCare's Chief Executive Officer; and Drew Asher, the company's Chief Financial Officer. Due to the recently announced definitive merger agreement with Centene Corporation, we will no longer be updating financial guidance. The guidance for the full year 2019 remains as of February 5, 2019.

Additionally, we will not be taking questions after these prepared remarks.

I will now turn the discussion over to Ken. Ken?

Kenneth A. Burdick -- Chief Executive Officer

Thank you, Beau. Good morning, everyone and thank you for joining us today as we review our first quarter 2019 results. This morning, I'll review some of the key items from the quarter , discuss some of the opportunities ahead and then Drew will review our financial results in more detail.

We are pleased to report first quarter adjusted earnings per diluted share of $3.69, representing a year-over-year increase of 49%. Additionally, we reported adjusted total revenue of $6.7 billion, a 48% increase over the $4.5 billion reported in the same period last year. The revenue and earnings growth in the quarter is largely due to the acquisition of Meridian in September of 2018 and organic growth across all three lines of business. As we announced just over a month ago, WellCare and Centene signed a merger agreement to form the premier managed care enterprise, focused on government sponsored programs.

The merger will combine best-in-class capabilities with a strong emphasis on providing high quality, affordable healthcare to members in their local communities. We are excited about the long-term opportunities for driving profitable growth as a combined company. In the near term, our focus continues on our commitments to our members, our partners and our shareholders.

Let's review some of the progress that we're making and the opportunities we have, in front of us this year. First, in Florida, our geographic and service expansion in the state is largely complete. We are focusing our efforts on ensuring that our members across all of our programs, received cost-effective, high-quality healthcare. In North Carolina, we're partnering and collaborating with the state to to in short an effective rollout of the new managed Medicaid program. As you may recall, we were selected with the highest overall score to serve members on a statewide basis beginning in November of this year. Our implementation remains on track as we continue building out our local market leadership team and related infrastructure for this program.

Our integration of the Aetna PDP business, is progressing well as we seek to manage the January 1, 2020 transition., to ensure that member disruption is minimized and member retention is maximized for 2020.

Finally, our integration of the Meridian business remains on schedule. In Illinois, our seamless integration of our legacy Harmony business onto the Meridian platform this January was a testament to the hard work and dedication of our market based associates in Illinois and shared service associates in Tampa.

Turning to our financial results. For the first quarter of 2019 all three business segments showed growth in membership, revenue and earnings, driven by a combination of organic and acquired growth. Let's start with Medicaid. Medicaid membership at the end of the quarter stands at over 4.1 million members, which represents growth of over 52% year-over-year. Adjusted Medicaid premium revenue grew by 64% reflecting the acquisition of Meridian and recent RFP wins in Florida and Arizona.

In our Medicare Health Plan segment, premium revenue grew by over 18% year-over-year, driven by a combination of organic growth and our acquisition of Meridian. Through the end of the quarter, our Medicare Advantage membership stands at 558,000 representing year-over-year growth of over 10%.

Finally, our Medicare PDP business showed strong growth and performance in the quarter, through the end of March we served over 1.6 million members, an increase of over 557,000 compared with the first quarter of 2018. This strong growth in membership was primarily due to the launch of our new value script product, the premium and benefit design of this new product has been highly attractive in today's market. As we have stated previously, we continue to see our PDP business perform better than initial expectations with an MBR of 89.5% in the first quarter.

In addition, the risk profile of the members selecting our value script product is in line with our underwriting expectations.

In closing, our performance to the first quarter is representative of the discipline and rigor we placed on running three high performing, profitable, and growing businesses. While we have begun the important task of integration planning with Centene, it is clear to our 13,000 associates that we must continue to focus on delivering on the near-term commitments that we have made to our members, providers, government partners, and shareholders.

I'll now turn the call over to Drew for a discussion of our financial results. Drew?

Drew Asher -- Executive Vice President and Chief Financial Officer

Thanks, Ken. As you saw in our press release, we are not updating 2019 guidance since we're under a merger agreement with Centene. However, I'll cover our first quarter results in enough detail, so that you can understand our strong results and that we are delivering so far in 2019.

For the first quarter of 2019, our adjusted EPS was $3.69 compared with $2.47 in the first quarter of 2018, representing a 49% year-over-year increase. In addition, adjusted total revenue grew by 48% compared with Q1 of 2018 driven by not only the Meridian transaction in September of 2018 but also organic growth in all three lines of business. Let's go deeper into each line of business.

Our Medicaid business was right on track in the first quarter with very strong growth and an adjusted MBR, consistent with our expectations. The 64% growth in adjusted Medicaid premium revenue versus Q1 2018 was driven by our acquisition of Meridian, along with organic growth in Florida and Arizona. As expected, these newer businesses carry a higher adjusted MBR than our mature Medicaid businesses, which is the primary driver of the 120 basis point year-over-year increase. This is consistent with the Medicaid roadmap we provided you in our December '17 guidance presentation. As Ken mentioned, we are on track with our very important Medicaid operational activities, including the integration of Meridian, geographical expansion in Arizona and Florida, and the implementation of our new SMI and children's medical services contracts in Florida. The implementation of our North Carolina State wide contract is well under way and on schedule for November 2019 launch of two regions, with the remaining regions scheduled for Q1 of 2020. We will identify for you start up spending for North Carolina as we incurred during the remainder of 2019.

Our Medicare Health Plans revenue grew 18% year-over-year driven by organic growth and our acquisition of Meridian. We grew a little bit less than expected during the combined Annual and Open Enrollment Periods but we are able to sell our DSNP products year round and we typically experienced the majority of our annual growth outside of the Annual Enrollment Period.

Our Medicare business had a strong financial quarter with an MBR of 84%, matching Q1 2018's 84% MBR. In a year without an ACA fee, this is a very good result and was better than our expectations. With regard to the final 2020 rate from CMS that was published on April 1st, WellCare's rate increase is anticipated to be about 3%, which includes the benefit of our star score progression, where approximately 42% of our members are in 4-star contracts. This pure rate change is before risk score trend and the impact of the ACA fee which is expected to return in 2020. WellCare is looking forward to bringing our Medicare Advantage tools, talents, and experience to the combined Centene WellCare enterprise.

Our PDP business had an outstanding first quarter. We grew 557,000 members year-over-year, representing 52% membership growth driven by our Value Script product. Furthermore, the PDP MBR was meaningfully ahead of our expectations and was within 80 basis points of Q1 2018 and you'll recall that 2018 was an outstanding year for our PDP MBR. As you heard on the Centene conference call, they look forward to leveraging our pharmacy cost structure and what WellCare has been able to accomplish in the pharmacy arena, especially in Medicare and PDP. Accordingly we are proceeding with our RFP process to procure the best possible pharmacy cost structure set of flexible terms, division of responsibilities, and PBM partnership. In the PDP area we are equally focused on standing up the acquired Aetna PDP business and trying to retain as much of that membership as we can for our 1/1/20 effective date.

Regarding other elements of the first quarter, the adjusted SG&A ratio was right on track at 7.3%, down 50 basis points from Q1 2018, driven by continued leverage from growth. Prior year favorable development was a $108.2 million in the first quarter, up from $71.5 million in Q1 of 2018. Of course, we're a larger company than a year ago. Days in claims payable was at 49.5 days, slightly down from 50.2 days in Q1 of 2018, this slight decrease is consistent with our volume adjusted claims inventory levels. Given the typical seasonality drop from Q4 to Q1, it's best to view this metric on a same quarter year-over-year basis.

Our investment and other income in the quarter was strong at $37 million compared to $20 million in Q1 of '18. Our adjusted effective income tax rate at face value may appear low in Q1 but that is due to the seasonality of certain discrete items in the quarter, including the benefit associated with the annual Q1 vesting of equity compensation. Our annual adjusted effective income tax rate is still expected to be around 24%. We have plenty of liquidity with just under $300 million of cash on hand apparent and $1.1 billion available on our credit facility as of March 31.

And finally, net cash used in operating activities in Q1 2019 was $30 million versus cash provided of $445 million in Q1 of 2018. The primary driver of this change was the timing of premium-related payments from CMS, and a few of our state partners. We are pleased to get off to a strong start for 2019 and maintain our focus as a stand-alone company while we look forward to the next chapter of success for WellCare. We have started the integration planning work with Centene as we map out how to best form the premier government programs franchise in the first half of 2020.

Beau Garverick -- Senior Vice President

Operator, that concludes WellCare's First Quarter 2019 Conference Call. Thank you all for participating.

Operator

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

Duration: 16 minutes

Call participants:

Beau Garverick -- Senior Vice President

Kenneth A. Burdick -- Chief Executive Officer

Drew Asher -- Executive Vice President and Chief Financial Officer

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