Molina Healthcare Inc

Good day and welcome to the Molina Healthcare third quarter 2022 earnings conference call. All participants will be in listen-only mode. Since 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 your touchtone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Joe Kaczewski, Senior Vice President, Investor Relations. Please go ahead, sir.

Good morning, and welcome to Molina Healthcare's third quarter 2022 earnings call. Joining me today are Molina's President and CEO, Joe Kaczewski, and our CFO, Mark Kahn. A press release announcing our third 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, October 27, 2022, and have not been updated subsequent to the initial earnings call. On this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures for 2022 can be found in our third quarter 2022 press release. We are unable to provide a reconciliation of our adjusted earnings outlook with GAAP measures for the years beyond 2022 without unreasonable efforts due to the difficulty of predicting the timing and amounts of various items within a reasonable range. During our call, we will be making certain forward-looking statements. including but not limited to statements regarding our 2022 guidance, our long-term growth strategy, our recent RFP awards and RFP submissions, and the projected revenue and earnings growth associated with these awards, our outlook with regard to both fiscal year 2023 and 2024, our acquisition and M&A activity, the COVID-19 pandemic and redeterminations, and our current and future competitive earnings power and margins. 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 our 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 third quarter 2022. Our full year 2022 guidance in the context of our third quarter results. Our growth initiatives and our strategy for sustaining profitable growth. Our outlook on 2023 premium revenue and earnings growth. And lastly, given our recent new business success, an early outlook on premium revenue for 2024. Let me start with the third quarter highlights. Last night, we reported third quarter adjusted earnings per diluted share of $4.36, representing 54% growth year over year. Our earnings growth reflects strong premium revenue growth, sustained target margins, and the realization of a meaningful portion of our 2021 embedded earnings. Our third quarter 88.4% consolidated medical care ratio, 6.9% adjusted G&A ratio, and 4.3% pre-tax margin demonstrate strong operating performance even as we navigate prolonged pandemic-related challenges. Our year-to-date performance, highlighted by an 87.9% MCR, a 6.9% adjusted G&A ratio, and a 4.5% pre-tax margin, is squarely in line with our long-term targets. This reported pre-tax margin increases when normalized for the effects of revenue pass-through payments and the marketplace prior year risk adjustment drew up previously reported. Medicaid, our flagship business, representing approximately 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 year-to-date reported MCR of 88.2% is at the lower end of our long-term target range, reflecting the underlying strength of our diversified portfolio and our focused execution. Our high-acuity Medicare niche, serving low-income members representing 12% of enterprise revenue, continues to grow organically and demonstrates strong operating performance. The year-to-date reported MCR of 87.4%, even with sustained cost pressure from COVID-related care, is squarely in line with our long-term target range. Marketplace, at 7% of enterprise revenue, continues to track towards a 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. In summary, we are very pleased with our third 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 our 2022 premium revenue to be approximately $30.5 billion, or $500 million, above our previous guidance. From the time of our pivot to growth in 2019, this updated 2022 revenue guidance represents a three-year 23% compound annual growth rate. Excluding the estimated impact of the redetermination pause, our three-year compound annual growth rate is 19%. In addition, we have increased our full year 2022 adjusted earnings per share guidance to at least $17.75. This represents a 75 cent per share increase compared to our initial 2022 guidance, despite absorbing an additional 50 cents per share from the net effect of COVID and 44 cents per share for the prior year marketplace risk adjustment true up. As we prepare to head into 2023, we have a very solid earnings baseline off of which to grow. Turning now to an update on our long-term strategy for sustaining profitable growth. We are executing well on the many dimensions of our growth strategy. On the RFP front, we continue to build on our track record of success in both retaining our existing Medicaid contracts and winning new ones. The quarter's highlights were many. In Mississippi, Molina was selected to continue serving Medicaid members across the entire state. In California, we not only retained our current footprint, but were also selected to serve the important county of Los Angeles, which will add significant membership and premium revenue. In Iowa, we were awarded a new statewide contract, entering as one of three managed care organizations serving a total managed Medicaid population currently at 800,000. And we were awarded a new statewide contract in Nebraska as one of three managed care organizations serving a total managed Medicaid population currently at 360,000. Once it commences in January 2024, the California Contract Award is projected to provide membership growth measured on current membership roles in excess of 1.2 million members. as well as the associated significant premium revenue growth. This projection is based on the state's own published county by county Medi-Cal membership count. We were one of two plans selected in each of Sacramento County and San Diego County, which are existing Molina counties, but where we now expect additional membership in 2024. We were also selected to be the sole commercial health plan in Los Angeles County. which is a two-plan model county. Finally, we also won awards in both San Bernardino and Riverside counties, known as the Inland Empire, where we expect our current membership levels to remain the same. With awards in each of these five California counties, we were successful in being selected in every county on which we bid. We are very confident in our ability to operationally prepare for this expansion. We have a deep knowledge of the Medi-Cal program, and we have an existing long-term presence in Los Angeles. We have already commenced the 15-month build-out for this significant expansion. In combination, all of these contracts will expand our Medicaid portfolio to 20 states. These new contracts are expected to add approximately $5.8 billion in annual premium revenue and at least $3 of earnings per share. once we achieve full run rate margins. Looking forward, our RFP response has been submitted for Texas Star Plus. It is pending evaluation and subsequent award announcement. We believe we are well positioned to retain this contract due to our track record of operational and clinical excellence, standing and reputation, cutting edge innovation, and the demonstrated ability to write winning proposals. With multiple new state RFP opportunities over the coming years, we remain confident in our ability to win additional new state contracts. We have submitted our proposal for the LTSS contract in the state of Indiana and have many other new state business development initiatives well underway, including the potential for returning to New Mexico and expanding to our former nearly statewide footprint in Florida. In summary, our track record of success validates our long-term revenue growth strategy and its value creation potential. Before I turn to some further particulars regarding our outlook for both 2023 and 2024, I want to briefly put a point on the magnitude of the company's achievements in the third quarter and what those achievements mean for the future of our company. Stated at a high level, the new business wins will have a profound impact on our company over the next few years. As a matter of year-by-year sequencing, in 2023, we will be busy scaling our proven operating infrastructure to service this new revenue, incurring front-end implementation costs. In 2024, we expect to achieve full run rate contract revenue with earnings beginning to emerge from this significant new revenue. And finally, in 2025, we expect to achieve our full one rate target margins. Against the background of this sequencing and high-level view, I will now provide some color regarding our 2023 outlook. 2023 will be an important year as we prepare for our new revenue growth. We will be hiring and training additional staff to expand our already expert teams and extending our systems to ensure ample capacity. We expect that the one-time non-recurring expense in 2023 associated with this robust growth will be 75 cents per share. Given our strong current performance, we are raising our 2023 core earnings outlook, the earnings that would have been produced by our company before these recent wins, from at least $20 per share to at least $20.25 per share. This core earnings outlook, a meaningful measure of underlying performance, represents 14% growth on today's updated 2022 guidance of at least $17.75 per share. When we include the one-time non-recurring $0.75 per share implementation costs, our reported earnings per share outlook for 2023 is now at least $19.50. Turning now to our premium revenue outlook for 2024. While it is far too early to provide specific financial guidance for 2024, we do have line of sight to many of the premium revenue growth drivers that we expect to materialize in 2024. First, we expect to continue to grow organically in our current geographic footprint. Second, we expect our recent RFP wins in California, Iowa, and Nebraska, as well as our AgeWell and MyChoice Wisconsin acquisitions to be operating at or near full run rate revenue. And third, we expect that these growth drivers will be partially offset by the impact of redeterminations and two potential pharmacy carve-outs. Combined, these revenue building blocks create an attractive growth trajectory and path to at least $37 billion in premium revenue in 2024. With over a year to go, additional M&A announcements and new Medicaid procurement wins would add to this already attractive 2024 premium revenue picture. A few words on our embedded earnings profile, which provides a forward view of our earnings potential beyond 2023. As previously described, The $5.8 billion in incremental revenue in 2024 from our recent RFP wins adds at least $3 per share in incremental earnings. These earnings are anticipated to begin to emerge in 2024 when all of our new RFP wins will then be operational. With this $3 per share addition, our total 2023 embedded earnings power is now nearly $6 per share. This is strong latent capacity to achieve our near and long-term earnings objectives. In summary, we are very pleased with our business performance and the exciting developments over the past few months. Combined, this has created a solid and growing financial profile. At least $20.25 per share of core earnings in 2023. $37 billion of premium revenue in 2024. 2023 embedded earnings power of nearly $6 per share, and all of this is before any impact from the continued execution of our growth initiatives. Of course, we could not accomplish all of this without our excellent management team and dedicated associates, now approaching 15,000 strong, who, in concert with our hallmark proprietary operating model and management process, have produced these results. 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 insight on the financials. Mark?