Q2 2004 AMERIGROUP Corporation Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Welcome to AMERIGROUP Corporation's second-quarter earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder this conference call is being recorded today, Thursday, July 29, 2004. I will now turn the conference call over to Julie Loftus Trudell, Vice President Investor Relations of AMERIGROUP.

JULIE LOFTUS TRUDELL, VP IR, AMERIGROUP: Good morning, everyone, and thank you for joining us. The press release announcing our second-quarter earnings was distributed yesterday after the close of the market. A replay of this call will be available from noon Eastern Time today through August 5, 2004. The numbers to access the replay are in the press release.

The press release and this conference call are intended to be disclosures through methods reasonably designed to provide broad nonexclusionary distribution to the public in compliance with Regulation Fair Disclosure. The Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this call as some of the statements will mentioned today are forward-looking.

We can give you assurance that they will prove (technical difficulty) in the future could differ materially from those we discuss today. I encourage you to read our Form 10-K that we filed with the Securities Exchange Commission on March 9, 2004, for some of the various risk factors that could materially impact the results. At this point I would like to turn the call over to Jeffrey McWaters, our Chairman and CEO. Jeff.

JEFFREY MCWATERS, CHAIRMAN & CEO, AMERIGROUP: Good morning, everyone. Operator, I would just like to check to make sure that we are still connected effectively. We did hear some interference. Are we okay?

OPERATOR: Yes, sir. I apologize. All lines are still connected.

JEFFREY MCWATERS: Okay. Thank you very much. Thank you, Julie, and good morning, everyone. I must admit it's a bit of a stormy morning here in Virginia, but it is still a beautiful day and we thank you for joining us.

10 years ago, we founded AMERIGROUP with a simple vision that better health outcomes for low-income families and effective cost containment for states were not incompatible. We believe that a company devoted exclusively to partnering with state government could successfully bring private sector solutions to bear on America's toughest healthcare challenges.

With a strong business plan and dedication to a vision, the Company was launched and we're now approaching our tenth year of serving our associates, members, states, and shareholders. As a result, this quarter reflects our associates' hard work and the outstanding relationships that continue to build with our state partners and the communities and members we serve. These strong operating results coupled with better visibility into the last half of the year permit us to raise our EPS guidance for 2004, which we will discuss this morning.

This quarter marks our 25th consecutive quarter of profitability. Here are some of the key second-quarter highlights and metrics. Second-quarter net income was 21 million; it was an increase of 16 percent compared to the second quarter of last year. At the close of the second quarter, we serve 902,000 members, which reflects an increase of 83,000 members or 10 percent compared to the prior year. Sequentially, membership increased by 35,000 members over the first quarter.

Quarter-over-quarter total revenue increased 11 percent to 438 million, reflecting year-to-date same-store premium revenue of 7.2 percent. The health benefit ratio was 81.3 percent; while SG&A was 10 percent. All of this resulted in net income margins of 4.8 percent versus 4.6 percent in the prior year. Net income for the second quarter increased 16 percent to 21 million, compared to 18 million in the second quarter of last year. Unregulated cash at the parent was 242 million as of the close of the quarter; and currently we have no outstanding borrowing under our $95 million credit facility.

We are increasing our 2004 EPS guidance and tightening our range from our original guidance of 309 to 314 by 11 cents, to a range of 321 to 325, reflecting net income growth over 24 percent, which of course excludes potential acquisitions. Our EPS guidance increase is based upon the following. Better than expected results in the first half of the year; weighted average rate increases at the high end of our original guidance of 3 to 5 percent, based on rate increases that we receive notification of. John Littel will provide more color on the state-by-state rate increases later.

We expect SG&A to be at the low end of our original guidance of 10.5 to 11 percent as we continue to leverage our expenses with benefits from technology improvements in such areas as our physician portal, electronic claims processing, and 2 state-of-the-art call centers. These improvements coupled with the effect of successful rate increases will enable improved operating margins.

Now, turning to growth. At June 30, we serviced a total of 902,000 members, an increase of 10 percent or 83,000 members when compared to June 30 of last year. Sequentially, as I mentioned earlier, membership increased by 35,000 members or 4 percent. Each market experienced sequential membership growth, with Texas, New Jersey, and Florida leading the pack.

By product, sequential membership growth was strongest in the AMERICAID product, reflecting a pickup in Fort Worth, Dallas, and the Houston markets. Sequential growth in the AMERIKIDS product resulted as the state of Florida begun to fund its SCHIP program and cover members from its waiting list. Impressive sequential growth also occurred in New Jersey. We're on track with our same-store growth objectives year-to-date and remain optimistic.

In existing or developing targeted markets, AMERIGROUP has untapped membership growth potential of over 3.6 million members. For example, the proposed elimination of the PCCM program, growth into new markets, and expansion of the SSI product in Texas represents over 500,000 members that are not currently in managed care today. Florida is moving portions of the non-managed care population into managed care over the next couple of years, which could exceed 380,000 in markets that we currently operate in.

While Illinois is not yet a mandatory state it is taking steps in this direction. This market represents 600,000 members not yet in managed care. Developing markets, such as Georgia and South Carolina, we are continuing our due diligence process. There are another 2.2 million potential members in these 2 states combined. Obviously much of this growth is subject to regulatory changes which we believe are not insurmountable. We will continue to keep you posted on developments in these markets.

Regarding medical cost, the Company's health benefit ratio was 81.3 percent for the second quarter, versus 79.2 percent for the prior year, and compared to 81 percent for the first quarter. The sequential increase in health benefit ratio reflects the state of Maryland's 846,000 premium recoupment, as well as seasonality being slightly lower than usual in the first quarter.

As planned, our SG&A efficiency continues to improve. SG&A expenses were 10 percent of total revenue for the second quarter versus 11.9 percent in the second quarter of '03, and compared to 10.7 percent in the first quarter. The decrease in SG&A is primarily due to investments made in 2003 that did not reoccur in 2004, including HIPAA, as well as operational improvements such as predictive outbound dialing and interactive voice response systems, which has increased the number of calls we handle electronically.

As a result of such enhancements our call volumes in the second quarter decreased by 14 percent to 1 million calls compared to 1.2 million calls in the second quarter of '03. Finally, we have seen self-servicing in our IVR systems improve significantly. The 7 basis points decrease in SG&A sequentially resulted from our pickup in membership revenue coupled with aggressive oversight of our controllable cost and timing differences.

In terms of additional growth into 2004 and beyond, new products, new market expansion, and acquisitions will continue to enable us to achieve our growth objectives as managed care remains the only real mechanism proven to significantly reduce medical cost trends and contain cost for our state partners.

At this time, I would like to turn the call over to John Littel, Senior Vice President, Government Relations. John is an attorney who has been active in health policy and politics for nearly 20 years at both a federal and state level. John joined AMERIGROUP from the Bush administration where he worked as a transition officer. He also served as the deputy secretary of health for Virginia where he had responsibility for Medicaid, welfare, and mental health. Prior to that John worked in the Bush White House for Secretary William Bennett. …