Molina Healthcare Inc (MOH) — Q4 2018 Earnings Call Transcript

Thank you, operator. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the fourth quarter ended December 31, 2018. The company issued its earnings release reporting fourth quarter 2018 results last night after the market closed, and this release is now posted for viewing on the company website. On the call with me today are Joe Zubretsky, our President and Chief Executive Officer; and Tom Tran, our Chief Financial Officer. After the completion of our prepared remarks, we will open the call to take your questions. If you have multiple questions, we ask that you get back into the queue so that others can have the opportunity to ask their questions. Our comments today will contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous risk factors that could cause our actual results to differ materially. A description of such risk factors can be found in our earnings release and in our reports filed with the Securities and Exchange Commission. These reports can be accessed under the Investor Relations tab of our company website, or on the SEC's website. All forward-looking statements made during today's call represent our judgment as of February 12, 2018, and we disclaim any obligation to update such statements, except as required by the securities laws. This call is being recorded, and a 30-day replay of the conference call will be available at our company's website, molinahealthcare.com. I would now like to turn the call over to our Chief Executive Officer, Joe Zubretsky.

Thank you, Ryan, and thank you all for joining us this morning. Last night, we reported earnings per diluted share for the fourth quarter of $3.01, and $10.61 for the full year ending December 31, 2018. For the full year 2018, we produced pre-tax earnings of $999 million and after-tax earnings of $707 million, resulting in pre-tax and after-tax margins of 5.3% and 3.7% respectively on a reported basis. As these results indicate, we have accomplished much over the last year as we executed the first phase of our margin recovery and sustainability plan. The rapid improvement in our operating margin profile has allowed us to shift our focus to driving our profit improvement initiatives for continued margin expansion, while we are quickly pivoting to achieving top-line revenue growth. The quarter itself was very strong with pure performance earnings per share of $3.82 and an after-tax margin of 5.4%. Continuing the momentum, we established early in the year. All in all, we are very pleased with the results for the quarter. The scope of our prepared remarks today will focus primarily on the margin expansion success we have already achieved and our confidence in sustaining it. However, to be clear, we are equally focused on and have already invested in top-line revenue growth and have very attractive lines of business: Medicaid, Medicare and marketplace as well as our existing and potential new geographies. We plan to showcase this growth plan at our Investor Day in May. Now returning to our financial results, in order to provide the context for our 2019 guidance, it is best to focus much of our commentary on recapping the full year 2018, a year in which we produced pure performance earnings per share of $10.83 far surpassing our initial and revised guidance. This result includes, on a consolidated basis, a pure performance MCR of 86.3% and a G&A ratio of 7.1%, both of which enabled a pure performance after-tax margin of 3.8%. Now commenting on 2018 by line of business, the Medicaid business, with $13.7 billion in pure performance premium revenue, ended the year with an 89.4% pure performance medical care ratio and a pure performance after-tax margin of 2.8%, which is within our revised long-term target margin range. Several factors contributed to this result: we were able to skillfully manage medical costs against a backdrop of a reasonable and rational rate environment, and we successfully executed on a variety of profit improvement initiatives including network contracting, frontline utilization control and retaining increased levels of revenue at risk for quality scores. Our $2.1 billion Medicare business comprising our DSNP and MMP products also delivered favorable results in 2018. Managing to a medical care ratio of 84.5%, we produced an after-tax margin of 4.8%. Specifically, on Medicare, we have proven we are adept at managing high acuity members who have complex medical conditions and comorbidities. We have also proven to be proficient at managing approximately $2 billion of long-term services and supports benefits, an important and fast-growing benefit across all of our products. The risk scores of our members continue to improve, resulting in increased revenue that is more commensurate with the acuity of our population. Finally, our marketplace business was a significant contributor to this year's favorable results with $1.9 billion in 2018 pure performance premium revenue and exceptional margins. If you recall, in 2017 and prior, this business was severely challenged and at that time we set a corrective 2018 pricing action of nearly 60% was warranted. With that as the backdrop, the business produced a pure performance MCR of 65% and an after-tax margin of 11.4% in 2018. Several factors contributed to this result: our prices in the market, although they increased significantly over 2017, were still very competitive, thus allowing us to retain a membership profile that could be adequately scaled. Many of the core and routine managed care fundamentals applicable to our other businesses also helped to produce favorable results in the marketplace business. Our ability to capture and forecast adequate risk scores has improved dramatically, and our differentiated strategy of serving the highly subsidized working poor produced the right acuity mix and the right metallic tier mix, all of which worked well within our pricing parameters. Now commenting on 2018 through the lens of our locally operated health plans, we vastly improved the performance and balance of our health plan portfolio during 2018. Our largest health plans, Ohio, Texas, California, Washington and Michigan continue to perform well and established themselves as worthy of winning re-procurements. The underperforming aspects of our portfolio, which we described at the beginning of the year, were much improved in 2018. One year ago, we said that 25% of our revenue was in plans that were not profitable. In 2018, all of those plans were profitable. Florida and New Mexico faced challenges for obvious reasons but performed admirably as they faced the run-off of large portions of business. In Washington, the stage recovery midway through the year has positioned it well to return to target margins on its expanded revenue base. In summary, the health plan portfolio is in excellent shape. Now to recap the full year 2018 from the perspective of the operational improvements we implemented and the operating efficiencies we gained. From a pure efficiency perspective, we continue to improve our G&A profile, managing to our ratio of 7.1% for the full year 2018. We've reduced our headcount by more than 800 FTEs or nearly 7% from the beginning of the year. Importantly, we continue to invest in the business. We improved the performance of our core processes, claims, payment integrity, member and provider services and a host of others, all of which create lasting effect. In 2018, we set the stage for ongoing improvement by making significant progress on a variety of outsourcing initiatives, some recently announced, which benefit 2019 and beyond. Turning now to addressing the 2018 improvements to our balance sheet and capital structure, our improved operating performance allowed us to dividend approximately $300 million to the parent company. This sets us well for producing excess cash flow in the future. We deployed approximately $1.2 billion to retire highly volatile and expensive convertible debt and repaid the outstanding amount drawn on our revolving line of credit. This reduced earnings per share volatility and lowered our debt to cap ratio to approximately 47%. In summary for 2018, across all of our product lines, health plans, operating metrics and with respect to capital management, we are very pleased with our 2018 performance. Now I will address our 2019 earnings guidance. We are establishing our initial earnings per share guidance for 2019 in the range of $9.25 to $9.75. As Tom will describe later, this is on the basis of GAAP reporting. The headline for 2019 is continued margin strength and sustainability, despite the previously announced revenue decline, all without the benefit of anticipating any prior year reserve development. On 2019 revenues, overall, we expect premium revenue to come in at approximately $15.8 billion in 2019, a decrease of approximately 10% due to the contract losses in Florida and New Mexico and the membership attrition as a result of the conservative approach we have taken to marketplace pricing. Despite these revenue challenges, we are encouraged by multiple new revenue foundations we laid in 2018 that will carry into 2019. Specifically, within Medicaid, we invested heavily in new business development, winning three RFPs, the largest being Washington, but also Puerto Rico and Mississippi CHIP. We also submitted what we believe to be a winning proposal in the Texas Star Plus program. The Washington reprocurement award expanded membership in regions where we best hit the competition and the consolidation of health plans, enabling us to participate in the caravan of behavioral health services. In Florida, we recaptured a third of our Medicaid contract and retained approximately $500 million of revenue, positioning us well for Medicare and marketplace expansion. In Illinois and Mississippi, we will benefit from membership gains in 2018 which will achieve full year run rate revenue in 2019. For the 2020 marketplace price filing in early 2019, we will equally focus on growing membership while maintaining profitability. We are forecasting continued strength and sustainability of margins in 2019. The following points are relevant to that forecast. First, given the significant operating leverage in the managed care business, a 10% decline in the premium revenue base is difficult to overcome from a margin expansion perspective, but we are forecasting being successful in doing so. Second, we have taken a cautious view in forecasting the impact of our profit improvement initiatives in our 2019 guidance, although we maintain a high degree of confidence that we will capture them. Third, while the 2018 results included significant prior year reserve development as a matter of policy, we do not forecast any prior year reserve development in our guidance although we maintained a consistent reserving policy throughout the year. Taking these points into account, the after-tax margins in each of our lines of business will remain strong in 2019. Medicaid margins remain flat at approximately 2.8%. Medicare margins are up approximately 20 basis points to 5% and marketplace margins are down slightly but still in double digits at 10.8%. Taken together, we expect a consolidated medical cost ratio between 86.7% and 87%, a consolidated after-tax margin in the range of 3.7% to 3.9%, and net income in the range of $600 million to $630 million. The margin improvement trajectory we've experienced is consistent with both our prior disclosures and the discussion of the profit improvement opportunities we have identified. Recall, in 2018 of the original $500 million projection, we harvested $200 million which is now embedded in our run rate earnings. Earlier this year, we increased our projection of opportunities by $250 million to a total future improvement opportunity of $550 million. Our 2019 guidance includes harvesting over $200 million of the revised profit improvement opportunity which more than offsets the slightly negative spread between trends in yield of approximately $80 million. These ongoing profit improvement initiatives help create nearly $2 of earnings per share benefit in our 2019 guidance. Overall, our margin recovery efforts have been successful to date, and our margin sustainability plan is well established. While we will remain focused on further margin improvement throughout 2019, we have simultaneously pivoted to growth. We are carefully evaluating new geographic opportunities as well as the adjacent product and benefit carbon opportunities in our existing geographies. With such a successful year now behind us, I would like to take a few moments to acknowledge the people who have made all of this happen. The executive leadership team we have assembled has proven their ability to successfully execute on the first phase of our turnaround plan, and I still have confidence that they will likewise be able to execute on the next phase. A special note of gratitude to the 11,000 plus associates on the front lines every day caring for our members and delivering high-quality service. In conclusion, we are very pleased with our 2018 results and the strong foundation we have built. There is still significant opportunity for creating value and we are excited for the future and what awaits us in 2019 and beyond. I look forward to sharing more about our future growth plans and longer-term strategy at our next Investor Day on May 30th in New York City. With that, I will turn the call over to Tom Tran for more detail on the financials. Tom?

Thank you, Joe, and good morning. As described in our earnings release, we report fourth quarter earnings per diluted share of $3.01 and adjusted earnings per diluted share of $3.07, excluding the amortization of intangible assets. We reported full year 2018 earnings per diluted share of $10.61 and full year 2018 adjusted earnings per diluted share of $10.86, excluding the amortization of intangible assets. First, I will highlight the non-recurring items that occurred in the quarter, resulting in fourth quarter pure performance earnings per diluted share of $3.82. It is important to note that these items are included in the fourth quarter GAAP reported numbers that we cited in the earnings release. Specifically, we recorded a $52 million previously-tax loss on the sale of our Pathways subsidiary, $8 million of restructuring expenses primarily related to costs associated with our ongoing IT restructuring plan, a $3 million gain as part of the repurchase of the 2020 convertible notes and related medical option termination, and a $24 million pre-tax expense for a retroactive risk corridor adjustment for our California expansion business, primarily related to the state fiscal year ended June 30, 2018. Next, I would like to make some comments on the fourth quarter earnings beat of over $130 million pre-tax or approximately $1.90 per diluted share on a pure performance basis, relative to the top-end of our pure performance guidance range. That beat can be attributed primarily to the following four items. First, we had prior period development of approximately $90 million in a quarter, most of which is in prior year development and therefore is accounted for in our pure performance result for the full year. Second, our marketplace product continues to perform exceptionally well. The seasonal increase in medical costs we have historically seen did not materialize in the fourth quarter and member retention was better than expected. Third, administrative costs were lower than expected due to lower sales and marketing costs associated with open enrollment in Medicare and the marketplace. Lower labor cost was the primary driver of this favorable G&A ratio. Fourth, as a result of improved fourth quarter performance and tax benefits on the loss related to the sale of Pathways, the effective tax rate for the full year 2018 at 29.2% was lower than we expected, resulting in a fourth quarter benefit of approximately $20 million. Turning to our balance sheet, cash flow and cash position for the quarter and a full year, our reserve approach is consistent with prior quarters and our position remains strong. We continue to have favorable year-end reserve development. As we have stated in the past, we intend to include that same level of conservatism in the quarter-end reserve balances. Days in claim payables remained flat sequentially at 53 days. While operating cash flow were strong throughout the year, it was negative in the quarter primarily due to our payment of the health insurer fee on October 1st. As of December 31, 2018, the company has unrestricted cash and investments of approximately $170 million at the parent company. The reduction to parent cash from the end of the third quarter of 2018 primarily relates to the purchase of the 2020 convertible debt. As of December 31, 2018, our health plans had aggregated statutory capital and surplus of approximately $2.4 billion, representing approximately 400% of risk-based capital. I will now quickly discuss capital actions. We have continued to look for opportunities to delever the balance sheet. Our action in the quarter reduced average diluted share outstanding to $66.6 million at year-end from $67.9 million at the end of the third quarter. Finally, while not related to 2018, we recently completed a new $600 million term loan to finance the repurchase conversion and redemptions of our 2020 convertible notes that are currently in the money and eligible for early conversion. This is a temporary facility which allows us to keep our $500 million revolver capacity undrawn. Shifting to 2019 guidance, I will add some detail to bridge our 2018 performance to our 2019 pure performance guidance of $9.50 per diluted share at the midpoint. First, converting our 2018 full year reported results to pure performance, the significant items we called out in our earnings release added $0.22 to our 2018 reported earnings per diluted share of $10.61, leading to pure performance earnings per share of $10.83 for the full year 2018. Second, prior year development, which we do not include in our 2019 guidance, positively impacted 2018 earnings per share by approximately $1.55 per diluted share. Third, we believe that the shrink in overhead and resulting negative operating leverage related to the lost contracts in New Mexico and Florida negatively impacts the earnings trajectory by approximately $0.75 per diluted share. Fourth, the negative spread between trend and yield in Medicaid is projected to impact 2019 by approximately $0.90 per diluted share. Fifth, our projected net profit improvement is forecasted to increase full year earnings per diluted share by $1.87. Combined, we arrive at our guidance midpoint of $9.50. The following points are also important relative to our 2019 guidance. First, 2019 guidance assumes consolidated net margins will remain flat at the midpoint. Specifically, we expect Medicaid to remain flat. Medicare to improve approximately 20 basis points and the marketplace to decline slightly but remain in double digits off our 2018 pure performance basis which includes prior year development. Second, our G&A ratio is expected to increase 50 basis points to 7.6% in our 2019 guidance. This increase is primarily driven by the incremental G&A costs incurred to realize the profit improvement initiatives that will benefit our medical care ratio and result in an overall net profit improvement, as well as the stranded overhead costs due to revenue loss in New Mexico and Florida. Third, 2019 guidance does not assume any impact from prior year development, positive or negative. All things being equal, if we have favorable development as we did in 2018, our forecasted result will be higher, whereas if development is unfavorable, our forecasted result will be lower. You should note that our reserve methodology has been consistently applied. Finally, in conjunction with our earnings release last night, we included a supplemental presentation with additional detail on our financial results and 2019 guidance. Going forward, we plan to provide this additional detail alongside future earnings releases as a way of providing further insight into the business. This concludes our prepared remarks. Operator, we are now ready to take questions.

Hi. Thanks. Good morning, guys. I wanted to ask a little bit more about the revenue bridge and sort of backing up to the Investor Day, where you guys started with the $15.6 billion of premiums. And I know you've got $500 million back in Florida, you talked about I think Mississippi being about $300 million and then Illinois, Ohio, some other growth, etc. I guess what are the offsets? It looks like only $200 million higher. So, it sounds like some stuff has add, but I don't know how much of that is asset sales versus the exchanges. And then, I think last quarter, you guys were a little bit more optimistic about potential growth in the marketplace, so I just wanted to hear a little bit, I guess within that answer, what changed there.

Well, Joshua, on the revenue bridge, very clearly Florida and New Mexico were a major component of the decline at $2.2 billion. We also note that if you're looking at total revenue, you always have to adjust for the $400 million from the service businesses that we divested in 2018, NMS and Pathways, which had $400 million in revenue, effectively disappearing in 2019 guidance. But we did pickup $900 million of organic growth, and you cited all the reasons: Mississippi, Illinois full-year run-rate of increased membership, calling back to $500 million in Florida certainly helped. Washington, as we outperformed certain competitors in various regions, we will have increased Medicaid membership and behavioral health services. So, all-in-all, $900 million of organic growth is embedded in what was a disappointing year of contract losses and certainly bodes well for our revenue pickup in the future.

Got it, got it. And then just a quick question on the outsourcing you guys announced recently. Could you just walk through a little bit more of the specific functions that were outsourced and maybe how much of that savings is included in guidance?

The contract we just signed, the outsourcing arrangement with Infosys relates to our IT infrastructure, data centers, user services, etc. So, the hardware. We think of it as the hardware. It will result in rebadging certain employees to Infosys that will result in a certain number of position eliminations. But we also have increased the effectiveness of the operation, better uptime, better response times, and just more effective operations. That agreement has already commenced. There is a 90 to 120-day transition period. So, the outsourcing will occur to about until about the middle of the year. The savings in 2019 guidance is modest, but we will ramp the full run-rate in 2020.

Thank you and congratulations. Thank you for all the disclosure. So, can you just help us think about where you would like to get to in terms of a run-rate on the operating cost ratio, if that's even the right way to think about it? I mean I know that there are structural differences depending on how much you grow to the various parts of the business, but I'm just trying to look at your mid-7s guidance for 2019 relative to the low-7s that you achieved in 2018 and then the stranded overhead in the G&A that you're spending to achieve savings.

Sure Matt, while we're not giving a forecast for 2020 and beyond, we certainly believe there is more upside to our G&A ratio than downside risk. You're right about the puts and takes in 2019 that reminded us of how operating leverage works in this business. The lost contribution margin from New Mexico and Florida puts 30 to 40 basis points of pressure on that ratio, but more importantly, we're investing $90 million to $100 million in new G&A to improve medical care and other core business improvements. I believe in the future, as we grow, we'll get positive operating leverage. We'll continue to invest in the business and, of course, you cited the mix effects that we're likely to see depending on how big the marketplace business is in the future. So, while we're not giving a formal forecast, we believe there is room for upside while also balancing potential downside risks.

Thank you.

Thanks. Good morning. So, the focus shifts to the top-line growth just hoping you can walk us through any kind of early view of your exchange strategy for 2020 as well as any key RFPs or opportunities for state membership transactions that could fuel revenue growth into next year?

Sure, Justin, on the exchanges, as we said in a public forum just about a month ago, we plan to grow this business. We actually think we can double our size and still have a proportional relationship between our exchange business and our Medicaid business in the states where we do business. Obviously, that won't come in one year, and the interesting thing about this business is, as you know, the prices are in relation to the competitors. So, we've done a very exhaustive pricing elasticity study. We know where our prices stand against the competition, and we plan for 2020 to ease up on price. We're committed to achieving 50% pre-tax margins and 10% after-tax margins. We believe we can grow the business while moving the MCR from the mid-60s to 70% maybe into the low 70s, maintain a high single-digit margin without ever tripping the minimum MLR. So, we're feeling really good about the growth prospects of this business and our ability to grow it while maintaining profitability.

Any Medicaid opportunities?

Right now, the early lead I can give you on growth for 2020 beyond would be in Medicaid and Medicare. In DSNP, we plan to file a Notice of Intent to participate in 170 additional counties in DSNP alone, two states of which would be brand new: Ohio and South Carolina. With respect to Medicaid, there are $30 billion of opportunities coming into the market in our estimation over the next three years, with Wave 1 including Louisiana, Minnesota, Hawaii, Kentucky and possibly Pennsylvania; Wave 2 including Tennessee, West Virginia and Indiana. We have a newly developed business development team; we're venturing our key teams on the ground in many of these geographies doing feasibility studies, analyzing the regulatory environment, assessing the competition, and building networks. So, we're actively working on the growth phase of this turnaround.

Thanks.

Hey, thanks! Good morning. Congrats on 2018, a great performance, and I just wanted to question about what you put out in January, which I thought was a very logical presentation on your opportunities to grow. But when you kind of look at the Medicaid if you start with Medicaid benchmarking again, the commentary and performance you're seeing from near the national competitors doesn't look like it's that easy to expand margins. Neither United nor Centene have shown great performance on margin expansion there, and trends seem to spread pressure. While I can look at all of your margin expansion drivers and they're on the expense side, is there any read across? Why does it look like you can do so much better than your peers?

Well, I think Ana, I think the first thing I like to remind folks is that the cost structure that is built into the rating structures is the entire market. If you can create a cost structure that is both your G&A profile and your medical costs profile that is better than your competitors, you get the lifting rates from the market cost structure. Whether it's sustainable or now, we have to prove that. But to your point about Medicaid, we broke through the 90% barrier on pure performance Medicaid for the year at 89.4%. But I would remind everybody that ABD is still at 91%, that's $5.5 billion of premium in 2018 alone. So, I do believe there is still modest room for improvement in our Medicaid line, which is a significant line of business for us.

Okay. All right. And then just following up on the earlier question related to marketplace margins and growth. It's going to go from low-double to very high-single and this year, you'd see, you're not going into 2019 and margins look like they are a bit under pressure. The overall exchange book is down a bit year-over-year and there policy changes and competitive forces at play. Do you think that will remain a big growth driver? I mean, looking at 2019, it seems challenging to me to see that happening.

Well, I think our market niche is very differentiated. We are servicing, as I mentioned in my prepared remarks, the working poor: 20% of our membership are fully subsidized, another 70% are partially subsidized. We get to leverage our Medicaid network, not only the network itself but the cost structure in the network to give us a very, very competitive cost structure. So, for 2019 at this time last year, we were compelled nearly to put trend into the market on top of our 2018 rates. We didn't know at this time last year that 2018 would have turned into a 15% pre-tax year. So, we put trend into the market on top of what were already very rich rates and we are paying for it on the membership line coming into 2019. That is not going to be the phenomenon in 2019 or 2020. We now know exactly where we sit with our membership. We know the acuity. The churn of members is very low. 80% of these members have been with us in prior years, so we're feeling really good about the stability of our book of business, and our ability to now put a more reasonable price point in the market to begin growing again.

Thanks, Joe, for the color; very helpful.

You're welcome.

Hi. Thanks. Good morning. Just the first question, I just wanted to get a little more detail on the negative spread that you discussed that you're building in for 2019 in Medicaid. Can you call out which markets in particular where you're seeing rate costs upside down? Is it just a few markets, or are you seeing that more widespread?

Well, Scott, we don't really like to talk about rates and the strength of rates in individual markets. But I would tell you that it's marginal across all markets, 20 basis points here, 50 basis points there. You're always having debates about trend components. How is pharmacy trending? Sometimes when benefits are carved-in and carved-out, how much premium is a state taking away on a carved-out benefit and how much premium are they putting on our carved-in benefit? So, I would just say all in all, these are the normal puts and takes of the rating environment. Right now, at about 100 basis points of negative spread this year, it's very stable and rational, and we will always have profit improvement initiatives, always have an inventory of profit improvement initiatives of 150 to 200 basis points of premium. That is the way you need to run this business to ensure that in a year where we're presented with a negative spread, we can offset it and keep our margins whole.

Okay, and then just one follow-up. Just interested in what you can update us at this point, just around some of the recent headlines coming out of Ohio on them discussing potentially rebidding the Medicaid contract. Given some of the scrutiny of the PBM servicing the Medicaid plans in that market.

Sure. We were fully expecting Ohio to reprocure, to drop an RFP perhaps late in 2019 for an effective date in 2020. So, we're fully prepared for that. The new administration always brings changes, so you never know what their plans will be. The new administration in Ohio does seem to be preparing for reprocuring the Medicaid program, so we're fully prepared to deal with that. Given the scope of our business, our market share, and the way we perform, we're extremely confident about prevailing and even possibly growing in that reprocurement. With respect to PBM and pharmacy, Ohio has been particularly scrutinizing the pharmacy industry. Pharmacy trends where they are, are putting pressure on cost and everybody knows that. I would say this, we have enough flexibility in our contract with CVS Caremark that if whatever Ohio decides they want for a pharmacy benefit carved in, carved out, separate PBM or carved in PBM, we would be able to accommodate that and put a proposal that would meet their requirements both in medical and pharmacy.

Okay, thanks.

Hi, good morning. Thanks for taking my question. Joe, you mentioned that the Infosys contract, it sounds like will ramp through the balance of the first half of this year and not generate a lot of savings for 2019, I wondered if you could put a ballpark number on what you expect the total savings to be over time, and is that part of the remaining overall cost savings bogey that you have laid out recently, or is that somehow separate from that?

David, this is Tom. We're not going to disclose specific cost savings with the Infosys contract, but it would be fair to say that it's quite significant compared to our current base of operating expenses. And that it's really a multi-year contract, so you should expect to see that to be lasting over several years. It is embedded in the $550 million of savings that we have put out at the last JPM conference.

Good morning, guys. Just two questions for me. I think on the first one, just thinking about some of the thought processes around tax reform and Medicaid rates last year, I think it all suggested that tax reform benefits would find their way back to Medicaid rates. Just wanted to get your updated thoughts on that; are you seeing any actions from the states in that front? Is that maybe part of the related to the trend discussion or how are you all thinking about that now?

No, the discussion about the tax regime really enters into rate discussions. Most discussions are around debates about different cost components and how they are trending, and the rate take-up or take-out for benefits carved in and carved out, but very rarely if ever is there a discussion specifically about taxes.

Great, okay. So broadly more sustainable now. And, I guess just the other one that I had was wondering if you could give us a little more specificity on sort of the savings that are baked into 2019 versus 2020. In the slides for the call, it looks like you stated there was a portion of the $550 million of remaining profit improvement opportunity. If you can maybe size what you expect to sort of book in 2019 in the context of the guide and maybe provide clarity on what you expect to drive your annual G&A run rate down by about that amount exiting 2019 into 2020.

Sure, if you look at the $1.87 of earnings per share we put in the guidance bridge, let's pull that apart. It's about $150 million pre-tax. That number is $250 million of gross profit improvements offset by $90 million to $100 million of hard G&A cost to produce them. We were very precise by including all of the costs to produce those benefits but were also cautious in forecasting the benefits that will actually emerge in the P&L. So that $150 million of net profit improvement is $250 million of gross profit improvement offset by $100 million of the hard cost to produce them. We still consider that conservative and that will build into the run rate that we'll project forward into 2020.

Perfect. Great. Thanks for all the clarity.

You're welcome.

Thank you. So great guidance for 2019, obviously a very impressive margin profile. Can you help us understand or break out parts of that that may be unsustainable? Help us understand what part of that is in different products or various lines?

Sarah, as we look at the margin guidance, let's keep it simple: after-tax margin is probably the easier metric to look at. We're maintaining a 3.8% after-tax margin consolidated in an environment where revenues are declining by 10% and where the 2018 margins included $137 million pre-tax or $1.55 of favorable development. Maintaining that level of margin in that environment, particularly compared to 2018, we think is a solid forecast to project forward. So, we expect 2.8% Medicaid, 5% in Medicare, and still double digits in marketplace. That’s a very attractive margin profile and, in this environment, we believe it’s a good start to the year.

Second, just to clarify, so if we take those segment margin profiles that you talked about in the 3.8 in 2019, are you seeing that this is a sustainable net margin profile for the company? So, I'm thinking back to the 2.3 to 2.7 laid out for 2020. But as you move through some of the cost savings initiatives, is this where the company looks like it's going to be going forward?

We believe high-twos for Medicaid is certainly sustainable. We believe that mid-single digit for Medicare is certainly sustainable. As we described previously, we believe that as we grow our marketplace business, the margin will drop from low double digits to high single digits. Our conscious effort to move the MCR up from the mid-60s to 70% will not trip the minimum MLR but allow us to grow the profit pool rather than focusing just on the percentage margin.

Great. Thanks. So, related to that exchange comment, is that transition to that new margin profile expected to happen in 2020 or is that just a multi-year move for you?

It's an analysis of the elasticity, the pricing elasticity of the product and how much growth you think you can put on the books for the level of margin that you're willing to give up to do it. It's market-by-market, geography-by-geography. We know where our competitors fit; we certainly know their strategy for the metallic tiers. They know ours as well. But with our new marketplace management team, now that we have a book of business that is 80% repeating, we think we have very good visibility on our marketplace business to grow it at high-single digit rates and never trip the minimum MLR. It is a multi-year effort. You never like to grow any book of business too quickly.

Okay. And then you've mentioned that you still have $350 million of cost savings out of the 550 beyond 2019. How should we think about the ramp of those savings over the next few years?

We're just now getting past the point where we've planned for 2019. We'll probably give the market an outlook on that at our Investor Day in May, which will also give a glimpse of the 2020 growth rate. So, you can just wait for that point in time; we’ll provide a good view of how the profit improvement will emerge over the next couple of years and how the top line will grow in the next couple of years. But it's there; we put it out there for public disclosure so we understand it, and we have models that strongly suggest that it's real, tangible, and actionable to offset a wide range of rate erosion in the marketplace and help sustain our margins.

Thanks. Good morning and congrats on a great 2018. Want to ask about the $1.35 higher developments: just to clarify, it sounds like your reserving methodology is similar for 2019; is there anything in that $1.35 we should think about as unusual as we think about 2019 might progress?

I wouldn't say there is anything unusual in the sense that our reserve methodology has been very consistently applied quarters-over-quarters. We saw that development coming out, and we have the same approach through 2019. We're not predicting any favorable or unfavorable development, but certainly if you follow that methodology, you can draw your own conclusion. What we see in the first quarter so far is that flu effect has been somewhat attenuated, which could signal a positive sign for potentially a mild seasonal effect of a seasonal high medical cost that we see in winter.

Okay, that's helpful. Thank you. And that leads to my second question on seasonality. It seems in 2018, you kind of bucked traditional seasonality, probably given you have a lot of different things going on with profit improvement opportunities. Is there any way you can help us think about seasonality for 2019, given you're also reharvesting additional opportunities or any other way to think about the progression throughout the year?

Medicare and Medicaid books are pretty evenly distributed from a seasonality perspective. Marketplace is generally backend loaded, but last year in 2018, it wasn't. We think we had more chronic members; that doesn't mean they were bad members, but they were just chronic members utilizing services throughout the year. This year, you'll see a pretty even seasonality pattern; marketplace could be a little backloaded but Medicare and Medicaid should be pretty evenly distributed.

Okay, great. Thank you.

Hi. Good morning. Two-part question: one, you provided GAAP guidance without mention of intangibles, which I think was roughly $0.30 last year. I know a little bit of that goes away with the acquisitions. Do you have an update or estimate for 2019?

We disclosed that in a table in our earnings release on amortization of intangibles for 2018. For 2019, you're right, it's going to be lower and we estimate it to be in the neighborhood of about $0.20 EPS.

Thank you. And the second part of my question, can you help us understand a little bit about Florida? You talked about the impact on your cost structure in Florida and your big strategy there. Can you just talk about enrollment and changes in Florida? Does the impact from Florida on the Medicaid perspective have an impact on the Florida exchange enrollment?

Yeah. So, Florida, I would say the Medicaid contract we lost in certain regions started transitioning in the late fourth quarter. When you look at membership that we disclosed, you'll see that 10-F membership declined quarter-over-quarter. The big chunk of that is really from the Florida market decline and membership transitioning to regions that we will exit. From a viewpoint of impact on change, the two really don't have that much effect; they are not related. In fact, we do see membership growth for the hit's membership in the State of Florida.

Okay. So, which states would have had the largest exchange decline for 2019?

The largest membership decline we had in the exchange was in the State of Texas. We did see a decline there, which was the main driver of membership decreases from 2018 to 2019. We have reentered some new spaces; the former states that we exited, Utah and Wisconsin, saw some level of membership growth there, though nothing significant. Overall, there were fluctuations up and down in the remaining markets; some we gained, some we lost. I mentioned we gained some membership in the fourth quarter. Some markets were fairly stable, for example, the State of California. Overall, there is a definite decline from approximately 360,000 at the end of 2018 into January, where we are around 325 to 330.

Okay. Thank you.

Thanks, and good morning, everybody. So, Joe, I don't want to beat the exchange topic to death here, but just coming back to your investor presentation from last month and again that slide that shows Molina marketplace growth scenarios where you talk about the marketplace revenues for Molina growing to either $2.6 billion or $3.6 billion. You touched on the margin component of that slide already. But again, just for the revenue side, I want to clarify whether those revenue numbers were intended to be actual targets for Molina. What's the timeframe, if there is one, or again, was the revenue portion of that slide more just illustrative purposes?

It was for illustrative purposes. To be very clear, we're not giving a specific outlook or forecast until our Investor Day in May. But it was really to make the point that if we were to return the business to its original size, which was $4 billion, knowing what we know about our pricing competitiveness, knowing what we know about administrative cost leverage, can we produce high-single digit margins and grow the business back to that original state? So, it was less illustrative; we do believe it's doable over some period of time, and how that manifests itself in our ongoing forecast will be showcased at our Investor Day in May.

Okay, got it. Thanks.

Thanks. I know you touched on some specific dates, but can you just break down the exchange loan results for the year? Between the same market declines versus gains you saw in new markets.

We're not going to go into specifics by state here. But Michael, I mentioned before that Texas represented roughly about 55% to 60% of our membership in 2018. We did see a decline there, so that's the main driver of membership decline from 2018 into 2019. As you know, we have reentered some new spaces; the former states that we exited, Utah and Wisconsin, did see some level of membership growth there, but nothing significant. Overall, there were fluctuations: some markets gaining membership, some losing. I mentioned we gained some in the fourth quarter; some markets remained stable—for example, the State of California. Overall, there is a decline, from approximately 360,000 at the end of 2018 into January right now, we are around 325 to 330.

Okay. How about, can you signal the impact of the investments that are in the bridge from 2018 to 2019? I think you said Pathways and NMS may have been a slight contributor; is the net impact material at all there?

I would say that there was about $0.10 impact.

Hi, guys. Good morning. Congrats on the quarter. Really want to talk to a bigger picture about what's going on with RFPs in Medicaid in general. You saw the North Carolina quality scores that came out, and you've seen other recent scores that have come out. Have you seen anything that has given you more positive or less positive views on your Texas bid? In particular, beyond that, do you think there's something that you guys are missing or that you need to have to acquire that would make you look better for some of these RFPs which seem to be favoring more population health and things like that?

So, Peter, we're still very optimistic based on everything we know about our RFP bid on Star Plus in Texas. No news has emerged that makes us any more or less confident. We've always been very confident in the outcome. We think our strategy and building capabilities internally and our rent-to-own strategy is the right balance. We really don't believe you need to acquire the equity of a company in order to import an integrated capability. You've seen us announce major partnerships with world-class partners, and you'll see more of that for esoteric and niche capabilities that we think couldn't possibly be scaled adequately or capably in order to deliver into our operating platforms for service delivery. We're building capabilities internally on core capabilities, looking for co-sourcing partners, and it's about having a fully integrated model. We believe our products can win in the marketplace and continue winning RFPs. We have no reason to believe that they can't.

Okay. So, we shouldn't expect any further acquisitions regarding especially capabilities or anything like that?

At the front, I'd always welcome an opportunity to look for a bolt-on membership opportunity, particularly in a current state where we can gain some good operating leverage. But no, we are not spending capital on EBITDA multiples for capability plays.

Thanks, good morning. So, thanks for the extra question. Just wanted to ask a numbers question on investment income. It looked like you guys were guiding to about $195 million. I think there might be other stuff in there besides investment income, but a big step up in that number, so just wanted to get some clarity on that.

Justin, the $70 million increase in investment and other revenue is due to two things. One is higher investment income; I would say that roughly about 40% of that change. The rest is really the full-year effect of the ASO fee for the pharmacy benefit, or carve out in a state of Washington whereby employers pay when they saw us manage that program for the state. Last year, it was only a half-year effect, while 2019 is a full year. So, hope that clarifies the changes there.

Thanks for the color.