Molina Healthcare Inc

Good morning, and welcome to the Melina Healthcare Fourth Quarter 2020 Earnings Conference Call. Please note this event is being recorded. I'd like to turn the conference over to Julie Trudeau, Senior Vice President of Investor Relations at Melina Healthcare. Please go ahead.

Good morning, and welcome to Melina Healthcare's Fourth Quarter 2020 Earnings Call. Joining me today are Melina's President and CEO, Joe Zabreski, our current CFO, Tom Tran, who is retiring later this month, and our current head of transformation and corporate development and CFO elect, Mark Kine. A press release announcing our fourth quarter earnings was distributed after the market closed yesterday and is 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 earnings release. For those who listened to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, Thursday, February 11th, 2021, 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 fourth quarter 2020 press release. During our call, we will be making forward-looking statements, including but not limited to statements regarding the COVID-19 pandemic, the current environment, recent acquisitions, 2021 guidance, and our longer-term outlook. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report for the 2019 year filed with the SEC, as well as the risk factors listed in our Form 10-Q and our Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open up the call and take your questions. I would now like to turn the call over to our Chief Executive Officer, Joe Zabretzky. Joe?

Thank you, Julie, and good morning. Today, we will provide updates on several topics. First, we will cover enterprise-wide financial results for the fourth quarter and full year 2020. Second, we will provide initial earnings and earnings per share guidance for 2021. And lastly, we will conclude with some thoughts on our compelling strategic position and our future growth prospects. Let me start with the fourth quarter highlights. Last night, we reported gap earnings per diluted share for the fourth quarter of 56 cents, with net income of $34 million and total revenue of $5.2 billion, a revenue increase of 22% over the prior year. On a normalized basis, defined as adjusted earnings per share and excluding the net effect of COVID, our earnings per diluted share were $3.29 for the fourth quarter. This is consistent with our performance in the first three quarters of 2020, each of which produced approximately $3 per share after adjusting for the effect of COVID. Two items significantly impacted the earnings in the fourth quarter. The first and most prominent of these items was the net effect of COVID, which decreased net income in the quarter by $3.80 per share. The most significant contributor to this impact was the continuation of rate refunds already in flight and the introduction in the quarter of COVID-related retroactive rate actions in California, Michigan, and Ohio. These refunds taken together more than offset the net effect of modest utilization curtailment and a high level of COVID direct cost of care. The second significant item having an impact in the quarter came from adjustments that produced a combined net benefit of $1.07 in earnings per share. The most significant of these was a net benefit from the proceeds of federal litigation, which was partially offset by a charitable contribution to our foundation. In summary, we are pleased with our normalized fourth quarter performance with respect to both the continued delivery of solid earnings and the focused execution of our growth strategy. All of this was achieved while dealing with the effects of the global pandemic. Now, turning to the full year. We reported full year 2020 gap earnings per diluted share of $11.23. with net income of $673 million and a 3.5% after-tax margin. We generated premium revenue of $18.3 billion, an increase of 13% over 2019, reflecting increased membership. We ended the year with 4 million managed care members, a 700,000-member increase year-over-year, primarily due to growth in Medicaid. Our Medicaid enrollment finished the year strong at 3.6 million members, representing growth of over 640,000 members or 22% over the prior year. This increase reflects strong organic growth of 450,000 members or 15% as the suspension of redeterminations was the major catalyst for our Medicaid membership growth in 2020. growth of 370,000 members related to the acquisitions of YourCare, which closed on July 1st, and Passport, which closed on September 1st. This organic and inorganic growth was offset by the 180,000-member decline related to our planned exit from Puerto Rico. I will now provide additional color on our full-year normalized financial performance. which better expresses the underlying strength of our business by isolating the transitory effects of COVID and adjustments. On a normalized basis, our earnings per diluted share were $12.97 for the full year. Our normalized performance comfortably exceeded our full year guidance of $11.20 to $11.70 per share, which was established in the absence of COVID and is therefore the most relevant comparison. With respect to medical margins, for the full year, our MCR on a normalized basis was 85.9%, compared to 85.8% in the prior year. In Medicaid and Medicare, our performance met expectations, while in Marketplace, our performance was below our expectations. Our normalized G&A ratio for the year was 7.3%, compared to 7.7% in 2019, reflecting disciplined cost management and the benefits of scale produced by our substantial growth. We produced a normalized after-tax margin of 3.9%, despite our marketplace business underperforming. We are very pleased that while dealing with the medical cost distortions and operational complexity caused by the pandemic, we produced a normalized margin consistent with our long-term target. Now, I will comment on the item by item effects of COVID on our full year 2020 results. The net effect of COVID decreased pre-tax income by approximately $180 million, or $2.30 per share. This result is the sum of several identifiable positive and negative factors as follows. For the full year, the net benefit from COVID-related utilization curtailment offset by direct care related to COVID patients was approximately $420 million on a pre-tax basis. I should note that while utilization was moderately curtailed in both the fourth quarter and the full year, in the fourth quarter, direct COVID medical costs were higher than in any other quarter of the year. For the year, COVID-related risk-sharing corridors reduced premium revenue and earnings by approximately $565 million on a pre-tax basis. $400 million of this amount was reported in the fourth quarter as the three new COVID-related risk-sharing corridors were enacted, and the corridors already existing at the end of the third quarter remained in effect. For the year, COVID-related activities increased our G&A spend by approximately $35 million on a pre-tax basis. Without question, the effects of COVID created significant distortions to our 2020 operating metrics, but the underlying operating fundamentals and financial metrics remain strong. Turning to our 2021 guidance, beginning with premium revenue. We are very pleased with the rapid activation of our growth strategy. In 2021, we project premium revenue of at least $23 billion, a 25% increase over 2020. This growth is well balanced between a new contract win organic growth, bulk-on acquisitions, benefit expansions in our existing geographies, and greater penetration of our Medicare and Marketplace products into our Medicaid footprint. More specifically, our premium revenue guidance includes a full year of the acquired Magellan Complete Care businesses, which we closed on December 31st, a full year of Kentucky revenue which commenced on September 1st, 2020. A full year of revenue from the YourCare membership in upstate New York, which we assumed on July 1st, 2020. Marketplace revenue growth of 25 to 30% as we begin this year with more than 500,000 members. The full year carbon of the pharmacy benefit in the state of Washington, which is somewhat offset by partial year pharmacy carve-outs in New York and California, and the revenue decrease associated with our planned exit from Puerto Rico. The impact of the affinity acquisition is not included in our premium revenue guidance. We expect the transaction to close as early as the second quarter, so the acquisition could provide $600 million or more in additional premium revenue in 2021. Our guidance includes membership growth relating to the current public health emergency extension set to end in mid-April 2021 with a steady decline over the remainder of the year as redetermination is activated. The Biden administration has recently indicated that it is likely the public health emergency will remain in place for the entirety of the year. If so, states could continue to receive the additional 6.2% FMAP match throughout 2021, which would likewise extend the redetermination suspension requirement for the states. Although we have been adding more than 100,000 Medicaid members per quarter during the redetermination suspension in 2020, it is unclear whether this pattern would continue should the PHE be extended further. Therefore, we have not included in our guidance an estimate of revenue associated with additional volume from potential PHE extensions. However, any extension of the PHE accompanied by redetermination suspension could certainly represent upside to our 2021 revenue outlook. We estimate that for every month the redetermination suspension is extended past April, it could provide additional revenue of approximately $150 million per month. Turning now to earnings guidance. Given our recent and expected continued M&A activity, adjusted earnings per share has become a more relevant measure of our earnings going forward and will be the focus of our comments today. Our initial full year 2021 adjusted earnings guidance is in the range of $12.50 to $13 per share, or approximately 20% growth from 2020 adjusted earnings of $10.67 per share. The upper end of our 2021 guidance range is essentially equal to our 2020 normalized earnings per share of $12.97. Our 2021 earnings profile reflects durable and sustainable operating improvements and earnings growth, which are being temporarily muted by ephemeral industry-wide challenges. Specifically, our 2021 earnings guidance reflects the following positive long-term value drivers. Continued strong performance in Medicaid and Medicare, reflecting an actuarially sound base rate environment. margin recovery and growth in our marketplace business, which we target to achieve mid-single-digit pre-tax margins for 2021 as a result of our intense focus on operational improvements and continued competitive prices in product designs and accretion from the Magellan Complete Care businesses and our Kentucky and Passport installations. Our earnings guidance also considers the following industry-wide environmental challenges, including another net negative impact from COVID, although at a reduced level, due to the continuation of many of the risk-sharing corridors that existed in 2020 and the direct cost of COVID-related patient care offset by moderate utilization and curtailment, and lower-than-expected Medicare risk scores which are an industry-wide challenge that will pressure results. Our risk scores do not fully reflect the acuity of our membership, as in 2020, seniors reduced their access to healthcare services, and therefore, risk score capture was more challenging. Referencing these catalysts and challenges, we now quantify the progression from our 2020 normalized earnings of $12.97 per share to the midpoint of our 2021 adjusted earnings guidance of $12.75 per share. We expect strong core performance to contribute approximately $1.25 in adjusted earnings per share growth, emerging mostly from marketplace as Medicaid and Medicare margins are near optimal. And accretion from our acquisitions, along with share repurchases, will positively impact adjusted earnings by approximately $1 per share. Offsetting these positive factors are two industry-wide environmental challenges that temporarily pressure earnings. Specifically, we expect the net effect of COVID consisting of utilization curtailment and direct cost of care offset by risk-sharing corridors to continue to negatively impact earnings, but in 2021 by approximately $1.50 per share. And the temporary Medicare risk for shortfall phenomenon will pressure results by approximately $1 per share. All of these items, when combined with the initial performance of recent acquisitions operating below target margins, impact our 2021 MCR by approximately 200 basis points when compared to 2020 normalized. This corresponds to a 90 basis point impact on the net income margin. Our 2021 guidance represents solid underlying earnings growth, but it is a constrained picture of the embedded earnings power of the company. The financial profile that we can develop when COVID and industry-related headwinds abate and when our acquisitions achieve their full run rate potential would include First, the net effect of COVID and the Medicare risk score disruption have created approximately $2.50 of adjusted earnings per share overhang. We would expect this overhang to disappear as COVID abates. Second, once we attain our targeted margins on Magellan Complete Care and Kentucky, and once Affinity is closed and synergized, we would expect to achieve additional adjusted earnings per share of at least $1.50. In short, our pro forma run rate after the natural relaxation of these temporary constraints would produce an after-tax margin of approximately 4%, which is in line with our recent performance, and produce adjusted earnings per share comfortably in the mid-teens. I will now provide a few concluding comments that frame the compelling strategic position we have created. The execution of our margin sustainability and revenue growth strategy has allowed us to create a very attractive financial profile. Despite all of the near-term distortions caused by COVID, the achievement of our 2021 guidance implies generating EBITDA of $1.2 billion with adjusted EBITDA margins in excess of 5%. Producing a return on equity of nearly 40%, which is a function of our attractive margin position and disciplined deployment of growth capital. Projecting contribution margin upside, as we soon expect to achieve our target margins in our acquired businesses. Generating excess cash flow, which, when combined with leverage, gives us the continued ability to acquire businesses in our core, producing a two-year compound annual growth rate of 20%. And to summarize, with the durable earnings catalysts being sustained and as the temporary earnings challenges dissipate, our operating profile would produce mid-teens earnings per share. Despite the challenges and near-term distortions caused by the global pandemic, our confidence in the growth, earnings power, and resilience of our business remains high. The inherent growth characteristics of these businesses are exceptionally strong, and we will execute and harvest growth through winning new states, growing market share in our existing states, increasing penetration in high-acuity populations, and actioning accretive acquisitions in our core business. We will continue to sustain best-in-class operating metrics and margins, drive at top-line growth, and remain relentlessly focused on our value-creating mission. I will note that despite the vicissitudes of the economy and despite the pandemic, our management team and our associates have demonstrated a tenacity, a determination, and an ability to deliver. We are in the right businesses with the right people at the right time. our future is very bright. With that, I will turn the call over to Tom Tran for some additional color on the financials. Tom.