Q2 2022 Molina Healthcare Inc Earnings Call

July 28, 2022

Good day and welcome to the Molina Healthcare second quarter 2022 earnings Conference call.

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Now I'd like to turn the conference over to Joe Mccourt, Cheskey Senior Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Molina healthcare second quarter 2022 earnings call.

Joining me today are Molina, as president and CEO , Joe Dobrowski CFO Mark Tom.

A press release announcing our second quarter earnings was distributed after the market closed yesterday.

They'll go on our Investor Relations website.

Shortly after the conclusion of this call.

A replay will be available for 30 days.

The numbers to access the replay are in the.

Earnings release.

For those who listen to the rebroadcast of this presentation. We remind you that the remarks made are as of today Thursday July 28, 2022 and have not been updated subsequent to the initial earnings call.

In this call we will refer to certain non-GAAP measures.

A reconciliation of these measures with the most directly comparable GAAP measures can be found in our second quarter 2022 press release.

During our call, we will be making certain forward looking statements, including but not limited to.

Statements regarding our 2022 guidance.

Our 2023 outlook.

Our growth strategy and expected growth.

RFP submission.

COVID-19 pandemic.

Acquisition, our future margins embedded earnings power and our long term outlook.

Listeners are cautioned that all of our forward looking statements.

Due to certain risks and uncertainties that can cause our actual results to differ materially from our current expectations.

Advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC as well as the risk factors listed in our Form 10-Q, and form 8-K filings with the SEC.

After the completion of our prepared remarks, we will open the call to take your questions.

I'll now turn the call over to Chief Executive Officer, Joseph Joe.

Thank you Joe and good morning.

Today, we will provide updates on several topics our financial results for the second quarter 2022.

Our full year 2022 guidance in the context of our second quarter results.

Our growth initiatives and the reaffirmation of our strategy for sustaining profitable growth.

An early outlook on 2023 premium revenue and earnings growth.

Let me start with the second quarter highlights.

Last night, we reported adjusted earnings per diluted share of $4 55 for the second quarter with adjusted net income of $266 million and $7 $8 billion of premium revenue.

Second quarter adjusted earnings were decreased by 44 per share for a true up to our 2021 final marketplace risk adjustment transfer payments.

Excluding this out of period items, our adjusted earnings per share was $4.99.

Our 88, 1% total company MCR in the second quarter demonstrates strong operating performance, even as we navigate prolonged pandemic related challenges.

As Mark will describe later the reported MCR included increases related to the 2021 marketplace risk adjustment true up and the accounting impact of a revenue pass through.

As such our underlying pure period MCR was 87, 2%.

Similarly, our reported pre tax margin of four 4% increases to 5%.

Which is at the top end of our long term target range.

For the quarter, we produced 18% premium revenue growth and 34% earnings per share growth.

Our year to date performance highlighted by an 87, 6% MCR, a six 9% adjusted G&A ratio and a four 7% pre tax margin.

Squarely in line with our long term targets.

Adjusting for the marketplace risk adjustment true up and the accounting impact of the revenue pass through our underlying pure period year to date MCR was 87, 2%.

Year to date, we produced 19% premium revenue growth and 21% adjusted earnings per share growth.

Medicaid our flagship business, representing 80% of enterprise revenue continues to produce a very strong and predictable operating results and cash flows.

The rate environment is stable COVID-19 costs have tempered and we are executing on the sound fundamentals of medical cost management.

The ongoing and consistent high earnings quality in the first six months produced at reported MCR of 88, 1%.

Our diversified geographic footprint and mix of products, including management of high acuity members provides us with an excellent earnings balanced.

Our high acuity Medicare niche, serving low income members, representing 13% of enterprise revenue continues to grow organically and outperform our long term target margins.

The year to date reported MCR of 86, 7%, even while still pressured by the cost of Covid related care is below the low end of our long term target range.

Each of our products D. SNP LAPD five D SNP and MMP contributed to this favorable result.

Marketplace at 7% of enterprise revenue is tracking to return to profitability in 2022 on a pure period basis.

We have succeeded in keeping the business small keeping its silver and keeping it stable.

The true up to 2021 risk adjustment is largely due to the surge of special enrollment period membership that we experienced in the last half of 2021.

On a pure period basis 2022 is on track to achieve a low single digit pre tax margin.

In summary, we are very pleased with our second quarter and year to date performance, we executed well and delivered solid operating earnings and continued to deliver on our growth strategy.

Turning now to our 2022 guidance.

We now project premium revenue to be approximately $30 billion or $750 million above our previous guidance.

Our updated 2022 guidance represents a three year, 23% compound annual growth rate since our pivot to growth in 2019.

Excluding the estimated impact of the Redetermination pause our three year compound annual growth rate is 18%.

We are also increasing our full year 2022 adjusted earnings per share guidance to at least $17 60.

Our increased 2022 outlook features strong premium revenue growth of 12%, which includes the impact of our conscious decision to reset the size and scope of our marketplace business.

A pre tax margin at the midpoint of our long term guidance range.

And strong earnings per share growth of 30%.

We have purposely remained conservative in our full year 2022 earnings guidance.

Our year to date underlying performance is highlighted by effective management of medical cost, both COVID-19 and non COVID-19 that were favorable to our expectations.

In this environment, which is still being affected by the emergence of new Covid variance. It is prudent to remain cautious in forecasting medical cost trends.

In the first half of the year for Medicaid and Medicare, which account for 93% of enterprise revenues, we produced <unk> at or below the low end of our target ranges.

We believe it is prudent to project MCR to be within the target range for the second half of the year.

Bear in mind that our target MTR ranges result in industry leading margins.

Yeah.

With that being said, if we were to repeat our first half performance with respect medical cost management in the second half than it is highly likely we would outperform this full year earnings guidance.

Turning now to an update on our long term strategy for sustaining profitable growth.

We remain confident that we will deliver on our long term growth targets of 13% to 15% premium revenue growth and 15% to 18% adjusted earnings per share growth on average over time and sustain 4% to 5% pre tax margins.

Our recent performance is supportive of that outlook.

Our model for organic growth remain sound.

And Medicaid our market share is high enough to be relevant to our state based partners. It gives us sufficient scale.

Low enough to provide an environment for market share gains.

Although it has been difficult to measure during the pandemic, we have grown market share in many of our states.

The political landscape remains focused on reducing the uninsured population favoring government sponsored programs and driving underlying growth in our footprint.

The economy has had a significant impact on the low wage service sector as well we.

We continue to believe the post pandemic Medicaid rolls will be higher than pre pandemic levels.

On the RFP front, our past track record gives us confidence and successfully retaining the Medicaid contracts that are currently in a re procurement process.

Our RFP responses have been submitted and Mississippi, California, and for Texas Star plus and our pending evaluation and subsequent award announcements.

We are well positioned to retain these contracts due to our track record of operational and clinical excellence stack.

Standing and reputation innovation and the demonstrated ability to write winning proposals.

With multiple new RFP opportunities over the coming years, we remain confident in our ability to win additional new state contracts.

We submitted our proposals in the states of Iowa, and Nebraska and have many other new state business development initiatives well underway.

In Medicare the rate environment, and demographic trends remain supportive of sustainable growth.

Additionally, we have opportunities to further penetrate our Medicaid footprint in both D SNP and low income MAA PD products.

Our three distribution channels have achieved a high degree of productivity and have lowered our cost of acquisition. Consequently, we are investing heavily in these channels.

In marketplace, our focus is on keeping it small in the context of the overall portfolio and pricing with the goal of achieving mid single digit pre tax margins.

As a result, we will grow this business only as allowed by this pricing strategy.

Moving now to our inorganic growth strategy.

Our M&A platform continues to execute at a high level.

Earlier this month, we announced the acquisition of my choice, Wisconsin, MLT S S and core Medicaid assets for an attractive purchase price of approximately 15% of revenue.

This acquisition is highly complementary to our expanding Wisconsin, Medicaid footprint and our growing <unk> business.

My choice, Wisconsin serves over 44000 members and generates premium revenue of approximately $1 billion.

We expect the acquisition to be immediately accretive to adjusted earnings and deliver first year adjusted EPS of <unk> 15.

45 at full run rate.

In addition to being perfectly consistent with our product and geographic growth strategy.

The acquisition of my choice, Wisconsin, validates the vibrancy and action ability of our expansive M&A opportunity pipeline.

With the addition of my choice, Wisconsin, our enterprise <unk> business will be attached to over $9 billion in premium revenue and over $6 billion.

Of Lts's benefits paid.

Over the past 10 months between <unk> and my choice, Wisconsin, We have announced nearly $2 billion in acquired revenue.

Which will be included in our 2023 premium revenue based on the expected timing of closing both transactions.

We have now announced seven acquisitions since we embarked on our growth strategy.

The five already closed are achieving or exceeding the earnings accretion targets.

Given our track record and our pipeline replete with actionable and strategically focused acquisition opportunities. We are confident in our ability to continue to execute on this important dimension of our growth strategy.

In summary, the company's financial and operational performance validates our long term revenue growth strategy and its value creation potential.

Turning now to our initial outlook for 2023.

While it is far too early to provide specific 2023 financial guidance I'll offer a review of some of the building blocks of our initial outlook for 2023.

First with respect to 2023 revenue.

We continued to build a 2023 book of business throughout this year.

At this early stage, we have line of sight to nearly 10% growth in 2023 from our strategic initiatives and an early estimate of organic growth.

This growth will be partially offset by the impact of Redetermination, which we have spoken about at length, and one or two potential pharmacy carve outs, the timing and extent of which are uncertain.

We are only halfway through 2022, and therefore, additional M&A announcements and new Medicaid procurement wins would add to the 2023 revenue picture.

Now turning to 2023 earnings.

First in 2022, we are carrying approximately $3 per share of embedded earnings power, which we expect to be realized in 2023 and beyond.

This estimate which has been updated since last quarter comprises net effect of Covid and full accretion on M&A earnings offset by Redetermination impacts.

Second we expect our core book of business will grow organically as we have demonstrated in the past when we grow organically, we achieve our target margins.

Third in the quarter, we have finalized or significantly progressed on some major initiatives, which provide earnings upside too.

Two of which are noteworthy.

We recently renegotiated and executed a new <unk> contract with Cvs Caremark, which extends the existing contract term at substantially more favorable pricing.

Since pharmacy accounts for 15% to 20% of our medical cost baseline.

The improved rate structure will substantially improve our pharmacy, economics, and resulting medical cost trend.

The Cvs Caremark relationship has been essential to our delivery of excellent pharmacy service to our customers and members and has enabled strong cost control.

We are very pleased to have extended this relationship.

And secondly, we intend to move permanently to a remote work environment.

Model, we have been working under successfully for nearly two years.

As a result by the end of this year, we expect to formalize a reduction of our real estate footprint by approximately two thirds, yielding substantial and sustainable G&A savings.

These building blocks aggregate to a very attractive earnings trajectory for 2023 and beyond although the timing of emergence for each of these is still evolving.

That being said with 2022 adjusted earnings guidance of at least $17 60 per share.

Embedded earnings power of $3 per share.

The earnings contribution of organic growth and the operational catalyst, we just mentioned.

We fully expect our 2023 adjusted earnings to be at least $20 per share.

Although it is too early in the cycle to provide specific earnings guidance for 2023, we are very confident in this earnings outlook.

We will certainly update this outlook as it evolves informed by our performance in the second half of 2022, and the ongoing execution of our strategic initiatives.

In conclusion in the second quarter, we performed very well across the enterprise.

Our 2022 earnings.

Our growth strategy is working and our early outlook for 2023 is strong.

We are executing on our long term strategic plan and delivering results accordingly.

Of course, we could not do this without our excellent management team and dedicated associates now approaching 15000 strong.

We have produced these results under the difficult and rapidly changing circumstances of the pandemic.

To the entire team I once again extend my deepest thanks and <unk>.

Heartfelt appreciation.

With that I will turn the call over to Mark for some additional color on the financials.

Mark.

Thank you Joe and good morning, everyone.

Today I will discuss some additional details of our second quarter performance, our strong balance sheet, our updated guidance for 2022 and some initial views on the building blocks of our 2023 outlook.

Beginning with our second quarter results.

In Medicaid are reported MCR was 88%.

Normalizing for approximately $350 million of pass through payments in our Texas plan, our reported MCR improves to 87 four.

This strong performance better than the low end of our long term target range was driven by strong medical cost management and lower utilization.

The net effect of Covid in the quarter was a modest 20 basis point increase to our reported MCR.

In Medicare our reported MCR was 86, 9% also better than the low end of our long term target range.

During the quarter the net effect of Covid increased our reported MCR by 370 basis points SBA five and other variance resulted in an increase in patient expense.

This pressure with more than offset by favorable risk adjustment and strong medical cost management.

In marketplace, our reported second quarter MCR of 91, 2% was inflated by a final true up of 2021 risk adjustment transfer payments.

Normalizing for this out of period items, our second quarter MCR was 85, 7%.

Recall, our marketplace business was more than twice the size last year. So the prior year settlement had a disproportionate impact on the current year.

Second quarter pure period results were impacted by higher utilization due to the carryover effects of 2021 special enrollment period membership.

And approximately 50 basis points of net effect of Covid.

We remain on track to return our marketplace business the profitability on a pure period basis in 2022.

In aggregate the net effect of Covid was consistent with our expectations and decreased net income by <unk> 68 per share in the quarter.

The full year outlook for the net effect of Covid remains at $2 50 per share.

Putting it all together with the two adjustments I described our reported second quarter MCR for the consolidated company of 88, 1% improved to 87 two.

Similarly, our reported pre tax margin of four four increases to 5%.

The reported G&A ratio of six 8% with states to seven.

We continue to expect our full year 2022, G&A ratio to be consistent with our long term target reflecting.

Reflecting fixed cost leverage on our growth and ongoing discipline.

Our results as reported and normalized displayed the strong performance of our second quarter and the continuing earnings power of the business.

Turning now to our balance sheet.

Our reserve approach remains consistent with prior quarters, and we remain confident in this reserve position.

Days and claims payable at the end of the quarter normalized for pass through payments, which inflate DCP was 54 consistent with prior quarters.

Our capital Foundation remains strong.

Debt at the end of the quarter was one nine times trailing 12 month, EBITDA and our debt to cap ratio was 45, 9%.

On a net debt basis net of parent company cash this ratio has fallen to one seven times and $43 seven respectively.

Our leverage remains low all bond maturities are long dated on average eight years and our weighted average cost of debt is just 4%.

We harvested $165 million of subsidiary dividends in the quarter.

And we purchased approximately 660000 of our shares for approximately $200 million.

Parent company cash at the end of the quarter was $210 million.

With substantial incremental debt capacity cash on hand, and strong free cash flow, we have ample cash and capital to drive our organic and inorganic growth strategies.

Now a few comments on our 2022 guidance.

We have increased our full year premium revenue guidance by $750 million to approximately $30 billion driven by two components.

Approximately $250 million, reflecting the latest extension of the public health emergency and the related delay in resuming redetermination of Medicaid eligibility.

And approximately 500 million for the second quarter outperformance and some additional Texas pass through revenue.

We also raised our full year 2022 adjusted earnings guidance by <unk> 50 per share to at least 17 60.

The increase is driven by three items.

Second quarter performance above our expectations by about 25 per share.

Margin on the additional revenue from the extension of the public health emergency, which we estimated at about <unk> 15 per share.

An additional net income of <unk> <unk> per share in the second half driven by the recent rise in interest rates.

Normalizing for the out of period risk adjustment item of <unk> 44 per share our second quarter outperformance increases to about <unk> 70 per share.

We have offset any extrapolation of this second quarter outperformance for the rest of the year with some tempered conservativism.

Our first half MCR, it's outperformed the lower end of our long term target ranges in both Medicaid and Medicare.

In the second half we are projecting those same ratios to be more in line with our long term target ranges.

As Joe mentioned, our updated guidance will prove conservative if the strong medical cost management and lower utilization. We saw in the first half continues through the rest of the year.

We expect second half earnings to be distributed fairly evenly between the third and fourth quarters.

Finally, some additional color on the building blocks of our initial outlook for 2023.

Beginning with premium revenue.

Our initial outlook is for the announced pending acquisitions of AGL, and my choice, Wisconsin and organic growth to drive approximately 10% growth off our current 2022 premium revenue guidance.

We expect this growth to be partially offset by redetermination and potential pharmacy carve outs.

Our 2023 revenue outlook will continue to evolve as we make progress on our in flight strategic initiatives, including acquisitions and procurements.

Turning to adjusted earnings.

First our embedded earnings power is now approximately $3 per share.

Comprising 250 net effect of Covid.

Dollars 50 from our closed and pending acquisitions when at target margin.

<unk> offset by approximately $1 from the eventual impact of re determinations.

While it's too early to guide on the emergence of these components, we offer some perspectives on what might impact 2023.

Within the 250 net effect of Covid.

Corridor and just three states are the primary driver.

We expect to see upside here as states terminate these corridors as Ohio already has and the lingering cost of Covid and patient services dissipate to a new normal.

Our.

<unk> typically reached target margin in the second year of operations we.

We feel confident we will see a significant portion of the $1 50 emerge in 2023 as affinity and Cigna, Texas will be in their second year, and AGL and my choice, Wisconsin will make their first year contributions.

We now assume Redetermination will begin in October and we expect to lose approximately half of the 750000 members. We gained since the start of the pandemic.

These membership attrition assumptions yield at 2023 headwind of $1 2 billion in revenue and <unk> 70 per share on EPS.

Several highly credible data points give us confidence that the margin on members lost through Redetermination have a similar profile to our overall membership.

Second the attractive growth of our legacy business and the associated margin, partially offset by potential pharmacy carve outs will yield incremental earnings in 2023.

Third as Joe described we see a combination of new operating drivers that should enhance our 2023 earnings growth, including our recently renegotiated PVM contract, which improves the economics on 15% to 20% of our total medical cost spend.

And our expected real estate reduction we plan to reduce the roughly 2 million square feet of leased office space by approximately two thirds by the end of the year.

Finally, we expect higher interest rates to translate into correspondingly higher net investment income.

These building blocks provide an early view of some of the most impactful components of our outlook for next year.

Our evolving outlook on 2023 will be informed by our performance in the second half of 2022 as well as the ongoing execution of our strategic initiatives.

We now feel confident in setting our initial outlook for 2023, adjusted EPS to at least $20.

This concludes our prepared remarks, operator, we are now ready to take questions.

We will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If you were giving a speakerphone please pick up your handset before thank you Mickey.

If at any time your question has been addressed.

I would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

The first question today comes from Josh Raskin with Nephron Research. Please go ahead.

Hi, Thanks, good morning.

Question on the risk payable risk transfer payable update.

Was that more your membership came in healthier than expected you have codes rejected or something or was it the market was overall sicker and how does that inform your pricing and thoughts around the opportunities for growth next year in the exchanges.

Sure Josh.

Really it was a function of the surge of special enrollment membership we experienced last year. If you recall, we took on 250000 members between March and the end of the year and of course, we had to really gear up and scale up to.

To service that membership including risk adjustment.

So I think part of it was.

Keeping pace with the surge of membership and getting the risk scores I think part of it was the acuity of the membership I think another part of it was just be imprecise nature of actuarial estimations given that unstable environment.

<unk>.

The good news for this year is.

We became aware of this emerging trend early in the quarter.

As we were developing our final pricing in the marketplace and we're able to take.

The current view of the acuity of this population into consideration as we filed our final prices for 2023.

Okay. Thanks.

The next question comes from Matthew Borsch with BMO capital markets. Please go ahead.

Okay.

Matthew perhaps your line is muted.

Okay.

Alright.

You hear me.

Yes, we can.

I apologize that nufarm.

So I was just going to ask about another item in the quarter, which is E. Prior year reserve development. It looks like you've got a little over $100 million.

I'm not saying, it's a net benefit obviously, because you're replenishing reserves, but can you just comment on that because I think in the year ago period was it was it was pretty much zero.

Yes sure Matt Good morning, It's Mark I think you are.

Youre looking at the year over year change we.

We had a little more prior year development. This second quarter than we did a year ago at this time and that's not unusual the way development happens is not always the same year over year the way our providers submit claims and the way our internal operations, including payment integrity work is a little different.

Year over year, so the patterns, a little bit different but what's more important is.

I am reporting are DCP at 54.

Which versus a year ago at 48 is clearly up.

The other thing that you guys look at a lot of times is just the growth in premium versus the growth in reserves <unk> reserves are up 28% year over my premiums are up 18, so I feel really good about where I'm reserved.

I think we're in a good spot.

Okay fantastic. Thank you.

The next question comes from Stephen Baxter with Wells Fargo. Please go ahead.

Yes, hi, thanks for the question.

I hear you talk about the several highly credible data points, suggesting the decremental margin on the lost Medicaid Redetermination membership would be in line with the portfolio average. Obviously this is an area of concern or uncertainty for the market. So would love if you could maybe help us understand if youre looking at to better understand this issue and reach that conclusion.

Thank you.

Sure Stephen I'll kick it to mark for some of the actual numbers, but as a matter of routine.

In the Medicaid business, one needs to understand the duration of its membership our duration could have an impact on the acuity of the populations. So it's something we routinely look at.

I will tell you that.

During the pandemic.

<unk>.

Duration of membership, but length of time people were on the Medicaid roles didn't extend all that much and I will tell you that the differences in acuity as measured by medical care ratios is not that much different.

On short duration members versus long duration members.

We have lots of other actuarial and medical economics data points that suggest that the members that will leave will be that portfolio averages, but I'll turn it to mark for a little more color on that.

Sure just a couple of data points that we track really closely remember within our Medicaid business Theres, a TANF and chip this expansion and Theres Abd so we look at these within each of those.

One of the first things we look is the duration.

What percentage of our members are with us for more than a year.

In TANF chip really didnt change meaningfully Abd didn't really change meaningfully expansion, it's up a little.

Not huge.

Within those populations, though we also then compare what's the MCR for the folks that are maybe two years and longer with us versus the MCR for those less than a year. That's the duration will acuity concept that Joe mentioned.

Flat between those two cohorts in TANF chip, it's pretty flat on Abd that's a really stable population. So it's up a little and expansion.

On the percentage of members with no claims.

Another one that is good to look at TANF chip pretty flat.

Once again flat, we're seeing a little bit more of an expansion.

So could you argue that theres going to be a little bit of pressure with an expansion possibly.

But you know at a third of the overall Medicaid book any impact there. It gets diluted so we really don't see this as a big headwind.

The next question comes from a J Rice with credit Suisse. Please go ahead.

Hi, everybody, maybe just continuing to look at triangulating around the re verification.

Question. So when you are.

Given those numbers for next year.

Are you assuming the full impact of the re gasification plays out next year I know some of your peers have talked about.

States, taking as much as 10 months to gear back up fully and therefore, you would sort of have a partial impact next year.

The full impact annualized in 'twenty 'twenty four can you.

The numbers you threw out.

The full impact or is that.

A partial year and you expect more spillover into 'twenty four.

Two concepts a J as Joe first we always forecast and plan. According to the status quo and foods the pag.

At this point or will end in October .

Our planning assumption, we all expect it to be extended to the end of the year, but that's a separate issue.

As we built up our models on a state by state basis based on conversations with the state and how they plan to execute the redetermination process. So the buildup of what we do is very much bottoms up.

We do in our forecast.

Most of the impact is 2023 some of it spills over into 2024. The key numbers are $3 $2 billion of Medicaid revenue gained as the 750000 membership growth occurred.

It will ultimately settle at one 6 billion and that will rollout mostly in 2023 at $1 2 billion, a 400 million spilling over into 2024.

Mark any color that yes, a J I, just always remind people to do the member months, Matt because it gets complicated right.

If the pag ends in October the stipulation is that states have a year from the end of <unk> to be done so they've got to be done next October but if you look at the member months, It's as Joe mentioned I've got one or two of headwind in for 'twenty three and another 400.

For 2024.

Okay, great. Thanks, so much.

The next question comes from Nathan Rich with Goldman Sachs. Please go ahead.

Hi, good morning, if I could ask a two part question on the 2023 guidance that you gave.

For the 10% growth in premium revenue.

And obviously that excludes redetermination.

You back out the impact of acquisitions, it looks like low single digit revenue growth could you maybe just talk about how that breaks down by line of business and then you mentioned.

Having industry leading margins.

I think doing the quick math on the premium revenue outlook and earnings look like you are kind of continuing to be at the top end of that range. So could you maybe just talk about <unk>.

Margin potential from here as we think about the next several years.

First on the on the growth assumptions we've included.

A modest but early view of our organic growth or trajectory for next year. If you look back at our Investor day.

Our models are in.

In Medicaid, we say that just by being in Medicaid with premium yield and and additions to the Medicaid rolls, we're expecting 4% growth in Medicare that same phenomenon yield and growth in the Medicare population, both on <unk> and penetration of managed care.

We will add about 7% so when we talk about organic growth, we're talking about merely yield and the growth in the market.

And if you weight that at 80% and 13% of revenue are you talking about perhaps 5% growth just by being in those markets. Then of course, we have our strategic initiatives, which are only halfway done and we're only halfway through 2022. So we have far more to do on building the book of business for next year.

We're really happy that at this early stage between our strategic initiatives and an early view of organic growth, we're already accounting for 10% over the 2020 to baseline.

Your second question again, just on the margins, yes, sorry, just on the margin opportunity given that the business is kind of operating today at the high end of the long term target.

Well one of the reasons why.

We settled in at $17 64, our guidance is yes.

Framework, we are we just printed two $5 quarters.

Revenues growing at 18% earnings per share growing at 34%.

On a both a six months and a three month basis, our pre tax margins are 5%. After tax margins are at $3 70, we did that by outperforming.

The ranges of our MCR, which produce best in class industry margins sort of continue to forecast that level of outperformance going forward.

We thought was a bit imprudent, and perhaps too aggressive. So we were purposely conservative to merely forecast the rest of the year as operating within.

Our long term target MCR ranges.

We're going to end the year at four 5% pre tax margin of three 3% after tax.

The MCR is squarely in those long term targets, which again produce best in class industry margins.

We're always looking for ways to improve the performance of the business. We mentioned two very significant operational catalyst going forward that renegotiating renegotiation of our pharmacy contract and the fact that we're moving to a permanent permanent.

<unk> strategy. So we're constantly working the system to try to find ways to.

Attain fixed cost leverage drive down our G&A ratios and performed at the top end of our long term ranges for the MCR.

Thank you.

The next question comes from Kevin Fischbeck with Bank of America. Please go ahead.

Great. Thanks.

I guess, one quick clarification and then.

And the actual question when you said, 10% revenue growth for next year, then you said partially offset by.

Let me determinations and carbon was that 10% number including those or are you, saying it was 10% and kind of give us a sense of how you are normally grow but then net it will be a little bit less than 10 because of those other items.

Hey, good morning, it's Mark the 10% is the announced but not closed acquisitions of <unk> and my choice, Wisconsin as well is that organic growth concept that Joe described the 4% and Medicaid more like 7% and Medicare the other items that are adjustments, but theyre a little vague at the moment, we're still working through those.

Okay.

Something that's correct to think about it right now okay.

And then I guess as you think about.

The Covid impact I guess I'm struggling a little bit with how you talk about the COVID-19 impact because it seems like it's a little bit different than how some of your peers are talking about the COVID-19 impact because like with Q2, you seem to be saying that COVID-19 was a headwind.

But that you were able to offset it with medical management, where most of the companies seem to kind of be saying.

For whatever reason volume.

Come back the way that it normally does in Q2 and.

They're being cautious on the back half of a year. So you are still being cautious on the back half of the year, but just trying understand exactly what you think happened in the quarter was it an industry wide phenomenon or do you kind of view like you are controlling trend below.

And it's kind of more outperformance, which might be more sustainable versus maybe a blip and how people utilization during COVID-19 troughs and peaks in.

And therefore, maybe a little bit less clear about what happens in the back half thanks sure Kevin.

We're pretty disciplined in how we measure the COVID-19 impacts both the direct cost of Covid related to care and the offsetting curtailment, it's been uncanny.

As COVID-19 infection rates Spike and therefore, the direct cost of Covid care increase.

The offset of utilization curtailment has pretty much offset the direct cost of Covid related care now youre never sure whether that's going to continue to be that highly correlated but as I look back over every quarter.

During the pandemic that has basically been the case.

So for the most part our Covid cost is.

Is about two thirds the corridor the three remaining corridor and one third the net effect of Covid direct offset by curtailment.

Yes, just to build on that our definition of the net effect of Covid has been consistent across the two and a half years here of the pandemic.

Joe mentioned, it's about.

About two thirds corridors and then the rest is COVID-19 and patient direct which we can measure and then the offsetting curtailment of certain services, where we're just not seeing that.

We're seeing that relationship be very consistent.

We laid out the different impacts.

On a business by line of business, you saw our Medicaid and marketplace businesses had a relatively light impact Medicare with a little higher at 370 bps.

Been typically tracking more around 200 bps. So that one is just a little bit higher line of business or line of business it bounces around but across the portfolio, it's pretty much tracking where we would expect we're still at that $2 50 for the full year.

Okay. My final quick.

Please go ahead Jeff.

I was going to say the final proof point is our effective medical cost management actually contained utilization in areas that were unaffected by the COVID-19 infection rate, which would suggest that.

Our utilization routines, our payment integrity routines, all the things we do too.

Effectively medically manage a population are working in areas that were unaffected by COVID-19.

<unk>.

We are operating well and managing medical costs, very very well in areas unaffected by Covid.

Okay, Great and I guess, I think I understand about the corridor.

Because if you are at or above your target margin in Medicaid, but youre, saying that when corridor go away then.

That we should think about you permanently being able to operate.

Above the Medicaid business.

It seems like you're already at your peak margin in Medicaid. So as quarters go away, then you'd be and that's the base to be thinking about going forward there could be permanently above that so I just.

I am just talking a little bit with kind of.

How do you think now corridor being the net Covid, we understand the math behind that simple math is if you take our embedded earnings and just converted to actual earnings it would suggest that the margins.

Slightly north on a pre tax basis of the top end of our range, but two things one our embedded earnings isn't guidance and two it doesn't all emerge at one time or within one year.

Now with respect to the quarters Theres only three that matter that remain in one of them has already been eliminated for October .

The two that remain our Mississippian, Washington, NFA persist beyond the pandemic vendor part of the earnings baseline and we'll live with them for a longer period of time, but we have.

We're pretty optimistic that they'll fall away over time, and Kevin just to put a point on that that means that 15 of our 18 Medicaid states are not constrained by corridors and that's part of where our margin story.

Alright, great. Thanks.

The next question comes from Michael <unk> with Morgan Stanley . Please go ahead.

Hey, Thanks, guys. So just real quick first on the risk corridor 16 out of 18 that aren't constrained.

So you don't have any long standing risk corridors that are pre COVID-19 and any of those other systems.

We do that last conversation with specifically around the net effect of Covid and Covid related corridors pre pandemic a number of states had different mechanisms that did constrain some profitability, but that's more of our legacy profile. So we're talking here, specifically about Covid era corridor.

Yeah.

Got it but presumably you're in a net payable position.

Another 15 stage and some of them right.

Due to a small degree, yes, and that changes year to year.

Okay got it thanks, and then my real question. So it looks like you guys are now expecting low single digit margins with Jeffrey exchange, but heading into the quarter and I guess, even the generic shifts with silver focused pricing efforts there seemingly a lot of confidence in improving to mid single digits, but MLR this quarter even.

Without the risk adjustment payable with so much higher than the street at 85% and now year to date you guys are tracking in the mid <unk> just curious what happened there you mentioned higher core utilization what are the dynamics youre seeing and I was just trying mispricing related to that.

Well I mean.

In summary.

We're two to 300 basis points off on 7% of our revenues are putting it in perspective, which we're not happy about we want to operate in the low eighties. The business breaks even at 85, and we're projecting to do 84, better for the year, which would be modest profitability.

First and foremost we repositioned that book of business that was the tall order for 2020 to keep it small 7% of revenue keep it silver 75% of our membership is now silver membership keep it stable two thirds of our membership is now renewal membership when that was completely the opposite in prior years. So we have to book a.

The book of business positioned very very well now we'll work on that two to 300 basis points of pressure there.

That is pressuring our MCR and with the pricing we put in for 2023 on average 13% to 14% and some states higher we feel good about getting to those mid single digit target margins.

Got it thank you.

The next question comes from George Hill with Deutsche Bank. Please go ahead.

Yes, good morning, guys and thanks for taking the question I guess I was just going to ask you about the new contract with Cvs I don't know if theres any chance that you can kind of quantify savings opportunity looks like or if theres any meaningful change in the scope of the services that are being provided.

No change in the scope of services, we have a very good balance between.

What we operate and what they operate no change in that.

The agreement withstand extended through 2026, we're.

We're not going to talk about the pricing of it we obviously wouldn't have mentioned it if it wasn't an earnings catalyst.

But 15% to 20% of our of our medical cost is pharmacy related.

And the pricing decrement, we received was and argue.

Noteworthy to discuss as an earnings catalysts through 2023 and beyond but at this point, we're not going to actually size the pricing.

Okay.

Maybe sizing the pricing isn't the right way to think about it but as the <unk>.

If we use that range is there a way to think about how we should think about like what the change to MLR can be as it flows through the income statement or I guess, just kind of any way to kind of quantify the earnings contribution to you guys not necessarily the pricing on the contract.

Right.

As I said at this point in time.

As the size of the contract $4 billion to $5 billion, a year pharmacy spend but now we're not we're not yet prepared.

When we give 2023 guidance.

The Cvs caremark contract would likely be a meaningful contributor to that guidance and will potentially talk about it specifically then.

Okay.

Thank you.

The last question today comes from Steven Valiquette with Barclays. Please go ahead.

Hey, Thanks, Good morning, guys, Hey, it's also going to ask about the exchange business, but a lot of that was covered I guess a follow up question around that though Joe and you kind of mentioned those 13% to 14% premium increases that you put in place how does that stack up relative to your.

Yes medical cost trend expectation for exchange book for next year.

And so I think it would be mainly focused on margins, but I guess do you expect profit growth within that book the way. It stands right now for 'twenty three I just want to confirm that thanks.

Our.

Our strategy for the marketplace business is to target mid single digit pre tax margins and let the revenue float up and down accordingly pursuant to that pricing strategy based on the early read where we actually now have seen competitive pricing the price increases we put in in a handful of markets remained very competitive.

If we are number one or number two or a close number three or four in the market. We've maintained that position. So the early read only in a handful of markets is that not only do we believe our pricing is appropriately captured trend, but we've maintained our competitive position. So the book of business shouldn't materially change.

The only thing I'd add to that is now that we understand current year performance.

The base period that we're jumping up we feel much better about so we're pricing in a trend.

That we feel good about going into 2023, Joe mentioned, the 13% average rate that we're putting into the market. The only other thing that maybe is an obvious as you build your model.

And they're on a risk adjustment right. Those are the three big drivers trend changes in risk adjustment for the underlying acuity of the population and of course price you put those things together and we feel very well positioned for the return to that mid single digit pre tax next year.

Got it okay alright. Thanks.

This concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.

Okay.

[music].

Good day and welcome to the Molina healthcare.

Current quarter 2022 earnings conference call.

All participants will be in a listen only mode.

Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

You ask a question you May press Star then one on the Touchtone phone to withdraw your question. Please press Star then two please.

Please note this event is being recorded.

Now I'd like to turn the conference over to Joe <unk> Senior Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Molina healthcare second quarter 2022 earnings call.

Joining me today are Molina, as president and CEO , Joe Dobrowski, and our CFO Mark Tom.

A press release announcing our second quarter earnings was distributed after the market closed yesterday.

Available on our Investor Relations website.

Shortly after the conclusion of this call a replay will be available for 30 days.

The numbers to access the replay are in the <unk>.

Earnings release.

In this call we will refer to certain non-GAAP measures.

Conciliation of these measures with the most directly comparable GAAP measures can be found in our second quarter 2022 press release.

During our call, we will be making certain forward looking statements, including but not limited to.

Statements regarding our 2022 guidance, our 2023 outlook.

Our growth strategy and expected growth.

RFP submissions.

COVID-19 pandemic.

Acquisition, our future margins embedded earnings power and our long term outlook.

Listeners are cautioned that all of our forward looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations.

Advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC as well as the risk factors listed in our Form 10-Q, and form 8-K filings with the SEC.

After the completion of our prepared remarks, we will open the call to take your questions.

I'll now turn the call over to Chief Executive Officer, Joseph Joe.

Thank you Joe and good morning.

Today, we will provide updates on several topics our financial results for the second quarter 2022.

Our full year 2022 guidance in the context of our second quarter results.

Our growth initiatives and the reaffirmation of our strategy, we're sustaining profitable growth.

An early outlook on 2023 premium revenue and earnings growth.

Let me start with the second quarter highlights.

Last night, we reported adjusted earnings per diluted share of $4 55 for the second quarter with adjusted net income of $266 million on seven 8 billion.

<unk> revenue.

Second quarter adjusted earnings were decreased by 44 per share for a true up to our 2021 final marketplace risk adjustment transfer payments.

Excluding this out of period items, our adjusted earnings per share was $4 99%.

Our 88, 1% total company MCR in the second quarter demonstrates strong operating performance, even as we navigate prolonged pandemic related challenges.

As Mark will describe later the reported MCR included increases related to the 2021 marketplace risk adjustment true up.

And the accounting impact of a revenue pass through.

As such our underlying pure period MCR was 87, 2%.

Similarly, our reported pre tax margin of four 4% increases to 5%.

Which is at the top end of our long term target range.

For the quarter, we produced 18% premium revenue growth and 34% earnings per share growth.

Our year to date performance highlighted by an 87, 6% MCR.

Six 9% adjusted G&A ratio and a four 7% pre tax margin is squarely in line with our long term targets.

Adjusting for the marketplace risk adjustment true up.

And the accounting impact of the revenue pass through our.

Our underlying pure period year to date MCR was 87, 2%.

Year to date, we produced 19% premium revenue growth and 21% adjusted earnings per share growth.

Medicaid our flagship business, representing 80% of enterprise revenue continues to produce a very strong and predictable operating results and cash flows.

The rate environment is stable COVID-19 costs have tempered and we are executing on the sound fundamentals of medical cost management.

The ongoing and consistent high earnings quality in the first six months produced at reported MCR of 88, 1%.

Our diversified geographic footprint and mix of products, including management higher acuity members provides us with an excellent earnings balanced.

Our higher acuity Medicare niche, serving low income members, representing 13% of enterprise revenue continues to grow organically and outperform our long term target margin.

The year to date reported MCR of 86, 7%, even while still pressured by the cost of Covid related care is below the low end of our long term target range.

Each of our products D. SNP LAPD five D SNP and MMP contributed to this favorable result.

Marketplace at 7% of enterprise revenue is tracking to return to profitability in 2022 on a pure period basis.

We have succeeded in keeping the business small keeping its silver and keeping it stable.

The true up to 2021 risk adjustment is largely due to the surge of special enrollment period membership that we experienced in the last half of 2021.

On a pure period basis 2022 is on track to achieve a low single digit pre tax margin.

In summary, we are very pleased with our second quarter and year to date performance, we executed well and delivered solid operating earnings and continued to deliver on our growth strategy.

Turning now to our 2022 guidance.

We now project premium revenue to be approximately $30 billion.

Our $750 million above our previous guidance.

Our updated 2022 guidance represents a three year, 23% compound annual growth rate since our pivot to growth in 2019.

Excluding the estimated impact of the Redetermination pause our three year compound annual growth rate is 18%.

We are also increasing our full year 2022 adjusted earnings per share guidance to at least $17 60.

Our increased 2022 outlet features strong premium revenue growth of 12%, which includes the impact of our conscious decision to reset the size and scope of our marketplace business.

A pre tax margin at the midpoint of our long term guidance range.

And strong earnings per share growth of 30%.

We have purposely remained conservative in our full year 2022 earnings guidance.

Our year to date underlying performance is highlighted by effective management of medical costs, both COVID-19 and non COVID-19 that were favorable to our expectations.

In this environment, which is still being affected by the emergence of new Covid variance. It is prudent to remain cautious in forecasting medical cost trends.

In the first half of the year for Medicaid and Medicare, which account for 93% of enterprise revenues, we produced <unk> at or below the low end of our target ranges.

We believe it is prudent to project MCR to be within the target range for the second half of the year.

Bear in mind that our target MCR ranges result in industry leading margins.

Yeah.

Turning now to an update on our long term strategy for sustaining profitable growth.

Our recent performance is supportive of that outlook.

Our model for organic growth remain sound.

And Medicaid our market share is high enough to be relevant to our state based partners. It gives us sufficient scale.

But low enough to provide an environment for market share gains.

Although it has been difficult to measure during the pandemic, we have grown market share in many of our states.

The political landscape remains focused on reducing the uninsured population favoring government sponsored programs and driving underlying growth in our footprint.

The economy has had a significant impact on the low weight service sector as well.

We continue to believe the post pandemic Medicaid rolls will be higher than pre pandemic levels.

On the RFP front, our past track record gives us confidence and successfully retaining the Medicaid contracts that are currently in a re procurement process.

Our RFP responses have been submitted and Mississippi, California, and for Texas Star plus and our pending evaluation and subsequent award announcements.

We are well positioned to retain these contracts due to our track record of operational and clinical excellence.

Pending and reputation innovation and the demonstrated ability to write winning proposals.

With multiple new RFP opportunities over the coming years, we remain confident in our ability to win additional new state contracts we.

We submitted our proposals in the state of Iowa, and Nebraska and have many other new state business development initiatives well underway.

In Medicare the rate environment, and demographic trends remain supportive of sustainable growth.

Additionally, we have opportunities to further penetrate our Medicaid footprint in both D SNP and low income MAA PD products.

Our three distribution channels have achieved a high degree of productivity and have lowered our cost of acquisition.

Sequentially, we are investing heavily in these channels.

In marketplace, our focus is on keeping it small in the context of the overall portfolio and pricing with the goal of achieving mid single digit pre tax margins.

As a result, we will grow this business only as allowed by this pricing strategy.

Moving now to our inorganic growth strategy.

Our M&A platform continues to execute at a high level.

Earlier this month, we announced the acquisition of my choice, Wisconsin, MLT, SaaS and core Medicaid assets for an attractive purchase price of approximately 15% of revenue.

This acquisition is highly complementary to our expanding Wisconsin, Medicaid footprint, and our growing MLP asset business.

My choice, Wisconsin served over 44000 members and generates premium revenue of approximately $1 billion.

We.

The acquisition to be immediately accretive to adjusted earnings and deliver first year adjusted EPS of <unk> 15, and.

45 at full run rate.

In addition to being perfectly consistent with our product and geographic growth strategy.

The acquisition of my choice, Wisconsin, validates the vibrancy and action ability of our expansive M&A opportunity pipeline.

With the addition of my choice, Wisconsin, our enterprise <unk> business will be attached to over $9 billion in premium revenue and over $6 billion.

Of Lps as benefits paid.

Over the past 10 months between <unk> and my choice, Wisconsin, We've announced nearly $2 billion in acquired revenue.

Which will be included in our 2023 premium revenue based on the expected timing of closing both transactions.

We have now announced seven acquisitions since we embarked on our growth strategy.

The five already closed are achieving or exceeding the earnings accretion targets.

In summary, the company's financial and operational performance validates our long term revenue growth strategy and its value creation potential.

Turning now to our initial outlook for 2023.

While it is far too early to provide specific 2023 financial guidance I'll offer a review of some of the building blocks of our initial outlook for 2023.

First with respect to 2023 revenue.

We continued to build a 2023 book of business throughout this year.

At this early stage, we have line of sight to nearly 10% growth in 2023 from our strategic initiatives and an early estimate of organic growth.

This growth will be partially offset by the impact of Redetermination, which we have spoken about at length, and one or two potential pharmacy carve out the timing and extent of which are uncertain.

We are only halfway through 2022, and therefore, additional M&A announcements and new Medicaid procurement wins would add to the 2023 revenue picture.

Now turning to 2023 earnings.

First in 2022, we are carrying approximately $3 per share of embedded earnings power, which we expect to be realized in 2023 and beyond.

This estimate which has been updated since last quarter comprises net effect of Covid and full accretion on M&A earnings offset by Redetermination impacts.

Second we expect the core book of business will grow organically as we have demonstrated in the past when we grow organically, we achieve our target margins.

Third in the quarter, we have finalized or significantly progressed on some major initiatives, which provide earnings upside too.

Two of which are noteworthy.

We recently renegotiated and executed a new <unk> contract with Cvs Caremark, which extends the existing contract term at substantially more favorable pricing.

Since pharmacy accounts for 15% to 20% of our medical cost baseline.

The improved rate structure will substantially improve our pharmacy, economics, and resulting medical cost trend.

The Cvs Caremark relationship has been essential to our delivery of excellent pharmacy service to our customers and members and has enabled strong cost control.

We are very pleased to have extended this relationship.

And secondly, we intend to move permanently to a remote work environment.

Model, we have been working under successfully for nearly two years.

As a result by the end of this year, we expect to formalize a reduction of our real estate footprint by approximately two thirds, yielding substantial and sustainable G&A savings.

These building blocks aggregate to a very attractive earnings trajectory for 2023 and beyond although the timing of emergence for each of these is still evolving.

That being said with 2022 adjusted earnings guidance of at least $17 60 per share.

Embedded earnings power of $3 per share.

The earnings contribution of organic growth and the operational catalysts, we just mentioned.

We fully expect our 2023 adjusted earnings to be at least $20 per share.

Although it is too early in the cycle to provide specific earnings guidance for 2023, we are very confident in this earnings outlook.

We will certainly update this outlook as it evolves informed by our performance in the second half of 2022, and the ongoing execution of our strategic initiatives.

In conclusion in the second quarter, we performed very well across the enterprise.

Our 2022 earnings.

Our growth strategy is working and our early outlook for 2023 is strong.

We are executing on our long term strategic plan and delivering results accordingly.

Of course, we could not do this without our excellent management team and dedicated associates now approaching 15000 strong.

We have produced these results under the difficult and rapidly changing circumstances of the pandemic.

To the entire team I once again extend my deepest thanks and heartfelt appreciation.

With that I will turn the call over to Mark for some additional color on the financials.

Mark.

Thank you Joe and good morning, everyone.

Beginning with our second quarter results.

In Medicaid are reported MCR was 88%.

Normalizing for approximately $350 million of pass through payments in our Texas plan, our reported MCR improves to $87 four.