Molina Healthcare Inc

Good day and welcome to the Molina Healthcare second 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 today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Joe Grotreski, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Molina Healthcare's second quarter 2022 earnings call. Joining me today are Molina's President and CEO, Joe Zabruski, and our CFO, Mark Kahn. A press release announcing our second 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 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, our RFP submissions, the COVID-19 pandemic, our acquisitions, our future margins and 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 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 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 will now turn the call over to Chief Executive Officer Joe Zabrowski. Joe?

Thank you, Joe, and good morning. Today, we will provide updates on several topics. Our financial results for the second quarter of 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, and 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 $7.8 billion of premium revenue. Second quarter adjusted earnings were decreased by 44 cents per share for a true up to our 2021 final marketplace risk adjustment transfer payments. Excluding this out of period item, 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 percent. Similarly, our reported pre-tax margin of 4.4% 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 6.9% adjusted G&A ratio, and a 4.7 percent 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 underlying pure period year-to-date MCR was 87.2 percent. Year-to-date, we produced 19 percent premium revenue growth and 21 percent adjusted earnings per share growth. Medicaid, our flagship business, representing 80% of enterprise revenue, continues to produce very strong and predictable operating results and cash flows. The rate environment is stable. COVID 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 a 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 ballast. 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, DSNP, MAPD, FIDESNP, 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 it 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, 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 costs, both COVID and non-COVID, that were favorable to our expectations. In this environment, which is still being affected by the emergence of new COVID variants, 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 MCRs at or below the low end of our target ranges. We believe it is prudent to project MCRs 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. With that being said, if we were to repeat our first half performance with respect to medical cost management in the second half, then 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 remains sound. In Medicaid, our market share is high enough to be relevant to our state-based partners and 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 current footprint. The economy has had a significant impact on the low-wage 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 in successfully retaining the Medicaid contracts that are currently in a re-procurement process. Our RFP responses have been submitted in Mississippi, California, and for Texas Star Plus in our pending evaluation and subsequent award announcement. We are well positioned to retain these contracts due to our track record of operational and clinical excellence, 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 DSNP and low-income MAPD 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 a 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's MLTSS 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 MLTSS business. My Choice Wisconsin serves over 44,000 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 15 cents and 45 cents 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 actionability of our expansive M&A opportunity pipeline. With the addition of My Choice Wisconsin, our enterprise MLTSS business will be attached to over $9 billion in premium revenue and over $6 billion of LTSS benefits paid. Over the past 10 months, between Agewell and MyChoice 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 their earnings accretion targets. Given our track record and a 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 will offer a view of some of the building blocks of our initial outlook for 2023. First, with respect to 2023 revenue, we continue to build the 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 redeterminations, 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 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, two of which are noteworthy. We recently renegotiated and executed a new PBM 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, a 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 in 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 baseline, 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 15,000 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?