Unitedhealth Group, Inc., Q3 2007 Earnings Call, Oct-18-2007 - NYSE:UNH

NYSE:UNH

During the UnitedHealth Group Third Quarter 2007 Earnings Conference Call, Stephen Hemsley, the President and CEO, covered a wide range of topics related to the company's performance and future outlook. Here is a detailed summary of his remarks:

General Overview:

• Earnings Performance: UnitedHealth Group earned $0.95 per share in the third quarter of 2007, marking a 19% increase over the same period in 2006. The company projects fourth-quarter earnings to be in the range of $0.91 to $0.92 per share.
• Full Year Earnings: Projected full-year earnings for 2007 are $3.49 to $3.50 per share, representing an 18% increase over 2006.
• 2008 Outlook: For 2008, UnitedHealth anticipates earnings in the range of $3.95 to $4.00 per share, with an expectation of balanced growth and stronger operational execution.

Financial Highlights:

• Operating Earnings: Increased 16% year-over-year to more than $2.1 billion.
• Operating Margin: Expanded by 110 basis points to 11.5%.
• Operating Cost Ratio: Increased 50 basis points year-over-year to 14%, reflecting business mix and investments in performance improvement.
• Cash Flows: Normalized cash flow from operations was $2.1 billion for the quarter, with a strong ratio of 1.6 times net earnings.

Share Repurchase and Financial Position:

• Stock Repurchase: UnitedHealth repurchased $2 billion in stock in the third quarter, bringing the year-to-date total to nearly $4.5 billion.
• Debt-to-Capital Ratio: Approximately 28%, with $1.5 billion in available cash.
• Return on Equity: Exceeded 24% in the quarter.

Operational Improvements:

• Network Expansion: Added 20 new hospitals and 19,500 net new physicians and healthcare practitioners.
• Product Innovation: Continued to lead in product innovation, particularly around quality care, with 15 million consumers having access to premium designation programs and 85% having access to differentiated hospital quality and efficiency data online.
• Service Enhancements: Improved claim service and financial accuracy, with call quality and accuracy significantly stronger compared to 2006.
• Service Guarantees: Improved results in service performance guarantees provided to brokers and employers.

Business Segment Updates:

• Public and Senior Market Group:
  • Gained 95,000 seniors, with growth in Medicare Advantage, Medicare supplement, and stand-alone Part D plans.
  • Strongest AmeriChoice earnings quarter with the lowest medical care ratio in several quarters.
  • Optimistic about the 2008 Medicare selling season, with competitive products, expanded geographic footprints, and improved execution.
• Individual and Employer Markets:
  • Membership declined by 115,000 people, with a conscious decision to prioritize profitability over top-line growth.
  • Expectation for commercial risk membership to decline in January 2008 and then strengthen modestly in the second half of the year.
  • Introduction of new innovative products to engage consumers and make effective health choices.
• Enterprise Services Market:
  • Solid growth and profitability for Ingenix, Exante, and OptumHealth.
  • Rapid expansion of Exante and strong demand for Ingenix services.
  • External pharmacy benefit sales across the company, including significant contracts with state employees and private health benefit systems.

Relationship Building Efforts:

• Hospital and Physician Partnerships: Working with a cross-section of hospitals and physician groups to streamline and improve transactions processes.
• Regulatory Assistance: Assisting with troubled health benefit systems at the request of regulators.
• Shareholder Engagement: Designing a process for meeting with long-standing shareholders to discuss executive compensation.
• Executive Development: Regular movement of talented leaders to gain experience in new roles.

Summary:

• UnitedHealth has refocused to improve fundamental execution, expand and enrich its network, and address specific year integration issues.
• Reengineered marketing and sales approach for the Medicare sales season, expecting significant performance improvements.
• Strengthened discipline in pricing to cost across the commercial benefits market, even at the cost of membership growth.

Conclusion:

• UnitedHealth is positioned to deliver a solid fourth quarter and grow and expand its business in 2008, with a focus on accelerating Medicare Advantage business, stronger service performance, new product launches, and continued commitment to pricing discipline and responsible capital management.

During the UnitedHealth Group Third Quarter 2007 Earnings Conference Call, William Munsell provided the following comments:

1. On the AARP Contract and Branding:

   • He noted that the company will go to the market with the only Medicare Advantage product carrying the AARP name.
   • He expressed excitement about the immediate and long-term potential of the exclusive alliance with AARP through 2014.

2. On the Economics of the AARP Contract:

   • When asked about the changes in economics related to the AARP contract, he stated that the company has economics attached to all Medicare Advantage lives for the full year.
   • He did not delve into the specifics of the economics over the life of the contract but emphasized the importance of the AARP brand in the Medicare space and the trust it embodies.

These comments were made in response to analyst questions during the Q&A session of the earnings call.