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Wellcare Health Plans Inc (NYSE:WCG)
Q2 2019 Earnings Call
Jul 30, 2019, 9:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning and welcome to the WellCare Second Quarter and 2019 Earnings Conference Call. [Operator Instructions].

I would now like to turn the conference over to Beau Garverick, Senior Vice President, Investor Relations. Please go ahead.

Beau Garverick -- Senior Vice President, Investor Relations

Thank you all for joining us this morning for a discussion of WellCare's 2019 second quarter results.Today we will be making forward-looking statements, including but not limited to the timing of 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. As we stated in connection with our first quarter 2019 call due to the previously announced definitive merger agreement with Centene Corporation, we are not 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 Burdick -- Chief Executive Officer

Thank you, Beau. Good morning, everyone, and thank you for joining us today as we review our second quarter 2019 results. This morning, I will review key items from the quarter and provide some additional insights into our business and then Drew will review our financial results in more detail. We are pleased to report second quarter adjusted earnings per diluted share of $4.31 representing growth of 17% versus the same period last year.

Additionally, we reported adjusted total revenue of $7 billion, a 54% increase versus the 4.5 billion we reported last year. Our revenue and earnings growth is largely due to the acquisition of Meridian in September of 2018, as well as continued organic growth across all three lines of business. With regards to the pending Centene merger. We continue to pursue regulatory approvals from various state and federal agencies. We were very pleased to see the results from the shareholder votes held last month with shareholders overwhelmingly approving the merger. Our integration planning teams continue to work collaboratively outlining how we will combine our best-in-class capabilities to provide high quality, affordable healthcare to our members with their individual needs in mind.

While we are dedicating resources to these efforts, the vast majority of our associates remain focused on running our business as a stand-alone company in order to deliver on our 2019 commitments. Turning to our financial results for the second quarter of 2019, all three lines of business continue to demonstrate revenue and earnings growth, driven by a combination of organic and acquired growth as well as strong operational execution. At the end of the quarter. Medicaid membership stood at 4.1 million members representing growth of over 46% versus the same period last year. Adjusted Medicaid premium revenue grew by 69% to 4.7 billion, primarily driven by our acquisition of Meridian in 2018 and organic growth in our Florida and Arizona markets. Overall, our Medicaid line of business is performing well with isolated underperformance in one market which Drew will discuss in further detail. Our Medicare Health Plan segment demonstrated strong financial performance in the quarter. Our Medicare MBR was excellent, coming in at 82.5%, premium revenue grew by over 21% year-over-year to $1.9 billion driven by a combination of organic growth and our acquisition of Meridian in 2018. We ended the second quarter with approximately 560,000 members, representing year-over-year growth of approximately 10%. Finally, our Medicare PDP segment continue to demonstrate strong growth and financial outperformance. At the end of the quarter, we served over 1.6 million members, an increase of over 592,000 members, or 56% versus the second quarter last year.

This strong growth in membership continues to be driven by the launch of our value script product reflecting strong market demand due to its attractive premium and benefit design. Our PDP business continues to exceed our financial expectations with an MBR of 81.2% in the second quarter. Now, I'll review two of the key focus areas for the rest of the year. In North Carolina, we're continuing to prepare for the launch of the new statewide managed Medicaid program. Two regions are expected to launch on November 1st with the remaining four regions expected to launch on February 1, 2020. We remain fully engaged with our various state partners to ensure both a smooth program launch and we are ensuring a business that is built with long-term profitable growth in mind. Second, the integration of Aetna PDP business continues to move forward with membership transition occurring on January 1, 2020.

Our efforts remain focused on membership retention as these PDP members have the opportunity to choose a new carrier as they do each and every year. In closing, our performance to the second quarter continues to highlight the dedication and focus our associates place on ensuring that our businesses operate effectively and profitably as a stand-alone company.

Looking ahead to the future as one combined company, we expect to bring a compelling and diversified portfolio with a shared commitment to our local communities with long-term growth in mind. This will in turn provide further opportunities to better serve our members, providers and government partners.

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. I'm pleased to share some of the financial details of our strong Q2 and year-to-date results , as we continue to deliver on our 2019 commitments. As a reminder from our Q1 call, we are not updating 2019 financial guidance since we are under a merger agreement with Centene. For the second quarter of 2019, our adjusted EPS was $4.31 compared with $3.69 in the second quarter of 2018 representing a 17% increase year-over-year. On a year-to-date basis, our adjusted EPS of $8 is 30% higher than the first half of 2018 at $6.16. Adjusted total revenue of $7 billion in the quarter and 13.7 billion year-to-date is 54% and 51% higher than Q2 and the first half of 2018 respectively, driven by our acquisition of Meridian in Q3 of 2018, as well as year-over-year organic growth in all three of our segments.

Let's go deeper into each line of business. Our Medicaid business experienced significant year-over-year adjusted revenue growth of 69% driven by our acquisition of Meridian along with organic growth in Florida and Arizona. As previously discussed, these newer businesses carry a higher adjusted MBR than our mature Medicaid businesses but nonetheless contribute a higher absolute level of Medicaid earnings year-over-year. Both Florida and Arizona Medicaid businesses were consistent with our expectations in the quarter. The reported adjusted Medicaid MBR of 91.3% in the quarter was higher than our original expectation, driven primarily by two factors. Factor number 1, Illinois; as we've reported in prior quarters, we've been working on the improvement of our Illinois Health Plan, which more than tripled in size when we closed the Meridian transaction last September. While improvement is steady, it has been too slow. Therefore during early Q2, we committed additional resources to bring to bear all of the capabilities and best practices of the broader company to position this Illinois business for long-term profitability.

Given the size of our Illinois business within our Medicaid portfolio, it's continued improvement remains one of the Company's top priorities with all hands on deck. Factor number 2, quality; we continue to focus on Medicaid quality related activities through our health plans and in particular, we saw a higher portion of new quality and clinical engagement spend in our new Florida Medicaid and Meridian businesses. This actually has a favorable impact on our SG&A rate, so merely a classification trade-off between medical expense and SG&A. Other than the progress we want to make in the Illinois market, we are pleased with the contributions of our Medicaid business as a whole so far in 2019.

As you can see in the press release tables, year-to-date Medicaid gross margin contribution to the enterprise was 26% higher than in the first half of 2018 helping drive our earnings growth. As Ken mentioned, the implementation of our North Carolina Statewide Contract is well under way and is expected to commence in November of 2019. The start-up spending for North Carolina was just beginning to ramp in Q2 as we incurred $2.9 million pre-tax or minus $0.04 of adjusted EPS during Q2. Those costs are embedded in adjusted earnings.

Our Medicare Health Plans contributed to the strength in Q2 earnings. The absolute MBR was very strong at 82.5% and you'll notice it was actually lower than Q2 2018 despite the absence of the ACA fee. Our year-to-date MBR of 83.3% is favorable and bodes well as we look ahead. Membership is at 560,000 members up from 510,000 a year ago. We continue to be excited about our ability to bring Medicare Advantage tools, talents and experience to the combined Centene-WellCare enterprise upon closing. The strength in our PDP business continued from both the membership and MBR perspective. We grew 592,000 members year-over-year representing 56% membership growth driven by our value script product. Furthermore, the PDP MBR continues to track ahead of our expectations .

We're excited about the PDP business as we look toward 2020 on multiple fronts. First of all, the run rate of the business is strong. Second, in June we submitted 2020 bids to CMS for both our legacy WellCare and the legacy Aetna products and look forward to providing value to PDP recipients through our portfolio of basic and enhanced product. We continue to work on the integration of the Aetna PDP business and take the appropriate steps in 2019 to maximize the retention of that business for 1/1/ '20. Third, we are in an RFP process whereby we expect to make a multi-year PBM commitment on our Medicare and PDP pharmacy spend and procure the best possible pharmacy cost structure set of flexible terms, division of responsibilities and PBM partnership effective January 1, 2021. Included in the RFP will be the optionality for other lines of business, including Medicaid, We expect to wrap up the RFP by the fourth quarter of 2019. And fourth, we continue to work with Centene on integration planning and as you've heard Centene say publicly, they look forward to leveraging our pharmacy cost structure and capabilities once the transaction closes.

Regarding other elements of the second quarter, the adjusted SG&A ratio at 6.8% in Q2 was the lowest point in at least the last 10 years at WellCare, driven by continued leverage from growth with help from the quality spend discussed earlier. Prior year favorable development was $103 million in the second quarter, consistent with $102 million in Q2 of 2018. Year-to-date favorable development stands at $211 million versus $173 million in the first half of 2018. Days in claims payable was at 48.8 days, slightly down from 49.5 days last quarter.

Our investment and other income in the quarter was strong at $41 million compared to $26 million in Q2 of 2018 . Our adjusted effective income tax rate was 24.9% in the quarter, bringing the year-to-date rate to 22.5%. We had $249 million of cash on hand apparent and $1.15 billion available on our credit facility as of June 30th. And finally, we generated $536 million of cash flow from operations versus $331 million in Q2 of 2018. In summary, we are progressing nicely through the first half of 2019 as we concurrently maintain our focus as a stand-alone company, while working on integration planning with Centene.

We look forward to forming the premier government programs company in the first half of 2020. Thank you for your interest in WellCare.

Operator -- Executive Vice President and Chief Financial Officer

[Operator Closing Remarks].

Questions and Answers:

Duration: 16 minutes

Call participants:

Beau Garverick -- Senior Vice President, Investor Relations

Kenneth Burdick -- Chief Executive Officer

Drew Asher -- Executive Vice President and Chief Financial Officer

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