Molina Healthcare, Inc. (NYSE:MOH) Q4 2022 Earnings Call Transcript
Molina Healthcare, Inc. (NYSE:MOH) Q4 2022 Earnings Call Transcript February 9, 2023
Operator: Good morning, and welcome to Molina Healthcare's Fourth Quarter 2022 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Joe Krocheski, Senior Vice President, Molina Healthcare. Please go ahead.
Joe Krocheski: Good morning, and welcome to Molina Healthcare's fourth quarter 2022 earnings call. Joining me today are Molina's President and CEO, Joe Zubretsky; and our CFO, Mark Keim. 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 of you who listen to the rebroadcast of this presentation, we remind you that the remarks made are as of today, Thursday, February 9, 2023. It has 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 and 2023 can be found in our fourth quarter 2022 press release. During our call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2023 guidance, our projected 2024 outlook and revenue, our recent RFP awards, recent and future RFP submissions, including those in Indiana, New Mexico and Florida, our acquisitions and M&A activity, Medicaid lease terminations, our long term growth strategy and our embedded earnings power and margins. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations.
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 Zubretsky. Joe?
Joe Zubretsky: Thank you, Joe, and good morning. Today, we will provide updates on several topics. Our financial results for the fourth quarter and full year 2022, our initial 2023 revenue and earnings guidance, our growth initiatives and our strategy for sustaining profitable growth, and our outlook on premium revenue for 2024, given our new business successes in 2022. Let me start with the fourth quarter highlights. Last night, we reported fourth quarter adjusted earnings per diluted share of $4.10, representing 42% growth year-over-year. Our fourth quarter 88.3% consolidated medical care ratio, 7.5% adjusted G&A ratio, and 3.9% adjusted pretax margin demonstrate continued strong operating performance. The fourth quarter completes another strong year of operating and financial performance.
For the full year, we grew premium revenue by 15% to approximately $31 billion and grew adjusted earnings per share by 32% to $17.92. Our full year adjusted pretax margin of 4.4% was squarely in line with our long-term targets. Medicaid, our flagship business representing approximately 80% of enterprise revenue continues to produce very strong and predictable operating results and cash flows. For the year, we grew membership by approximately 10% and premium revenue by 21%, driven by the inception of our Nevada Medicaid contract, recently closed acquisitions and organic growth. The rate environment is stable and we are executing on the fundamentals of medical cost management. The full year reported MCR of 88% is at the low end of our long term target range and consistent with pre-pandemic levels, 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 demonstrate strong operating performance. For the year, we grew membership by 10% and premium revenue by 13%. Membership growth was driven primarily by our low income MAPD product, which more than doubled in 2022. The full year reported MCR of 88.5% was modestly above our long term target range, but includes approximately 300 basis points of pressure from COVID-related care. In Marketplace, the smallest of our three lines of business, we repositioned the business both in terms of its size in the portfolio and metallic mix. On a pure period basis, the business performed at roughly breakeven. While the financial performance did not meet our initial expectations for the year, we believe we have positioned our marketplace business to achieve target margins in 2023.
Turning now to the execution of our growth strategy for the year. The successes in 2022 were many. On the M&A front, we closed on the acquisition of Cigna's Texas Medicaid business at the beginning of the year. And the AgeWell acquisition, at the beginning of the fourth quarter. In July, we announced the My Choice Wisconsin acquisition further adding to our market leading LTSS franchise. Our performance on Medicaid RFPs in the year was exceptional. We renewed our contract in Mississippi, doubled the size of our California contract for 2024 and won two new contracts: first in Iowa and then Nebraska for a 100% win rate on RFP responses submitted. In total, we project that these RFP wins for the year will add $4.4 billion in run rate premium revenue.
In summary, our full year 2022 enterprise results continue to demonstrate our ability to produce excellent margins, while expanding our franchise by growing premium revenues. Turning now to our 2023 guidance. You can easily see the results of the repeatable earnings pattern we have created. We built new store contract backlog and harvest the earnings as the contracts and acquisitions mature. Meanwhile, we continue to focus on the operating fundamentals and drive operational improvements, which allows us to grow the core business at attractive margins. With regard to our 2023 guidance, we project 2023 premium revenue of $32 billion, representing a 19% compound annual growth rate since our pivot to growth in 2019. The 2022 earnings per share of $17.92 serves as a solid high margin earnings jump-off point.
We expect that $1 per share of prior embedded earnings will emerge into 2023 earnings. We expect to produce $1.50 per share of core growth and operational improvements. We expect all of these elements will combine to produce 2023 core earnings per share of at least $20.40, offset by $0.65 per share of one-time contract implementation costs, which results in our 2023 adjusted earnings per share guidance of at least $19.75. The operating improvements supporting the margins in our guidance are durable. The various elements which could impact earnings, COVID, flu, RSV, any margin impacts from redeterminations have been considered informing our guidance. The metrics implied by guidance are squarely in line with our long-term target ranges. As our guidance produces a 4.7% pretax margin, with a growth rate of 14% in core earnings and 10% on a reported adjusted basis.
This is an attractive growth profile in a model that is repeatable. In addition to the growth within our guidance, we continue to build an earnings base for the future in the form of our embedded earnings profile, which provides a forward view of our earnings potential beyond 2023. The new store component of our embedded earnings defined as earnings from achieving target margins on acquisitions and new Medicaid contract wins is now at least $4 per share. The ongoing net effect of COVID, which at this point is the continuing earnings impact from the three remaining risk corridors, adds $2 per share of additional upside to this figure. This latent earnings growth estimate does not take into consideration any future organic growth or future strategic initiatives.
Turning now to our growth strategy. We have taken major strides toward our $42 billion 2025 premium goal. At this early stage, we already have a clear line of sight to $35.5 billion in 2024. The key to our strategy is balanced, a stellar record of new contract wins, Kentucky, Nevada and now filling in the middle part of the country. The doubling of the size of our California business, including significant expansion in Los Angeles County, preserving and securing all of our incumbent state contracts and no large reprocurements in the near-term, continuing to build the M&A pipeline as this aspect of our strategy has already produced seven transactions for $10 billion. in revenue. Not to mention, organic growth, one member at a time by focusing on greater member attraction and retention and overcoming the regulatory headwinds of redeterminations and pharmacy carve outs.
With that as the backdrop, I will now provide an update on some specific in flight opportunities related to our long term growth strategy. At the end of January, the Texas Health and Human Services Commission posted a notice on its website indicating that it was issuing a notice of intent to award our Texas Health Plan, a contract for all of our existing eight service areas in the state. We expect to be able to provide more of an update once these contracts have been finalized and signed. Our RFP response for the Indiana LTSS program has been submitted, it is pending evaluation and subsequent award announcement. In New Mexico, the state announced it has terminated the RFP that was in process and according to their press release, intends to issue an expedited reprocurement as soon as possible.
We have many other new state business development initiatives well underway, including the potential for expanding to our former nearly statewide footprint in Florida. Our growing Medicaid footprint still only represents half of the 41 states with managed Medicaid. With multiple new state RFP opportunities over the coming years, and our demonstrated capabilities, referenceability and track record, we remain confident in our ability to win additional new state contracts. Our acquisition pipeline remains replete with actionable opportunities. While the timing of transactions remains difficult to predict, the strength of our pipeline and our track record of success gives us confidence in our ability to drive further growth from this important element of our growth strategy.
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In summary, we are very pleased with our business performance and the progress made in 2022 on our growth strategy, which has created a solid and growing financial profile. At least $20.40 of core earnings per share and $19.75 per share of adjusted earnings in 2023. Current new store embedded earnings power of at least $4 per share with an additional $2 of upside, if and when the few remaining COVID era corridors are eliminated. And $35.5 billion of identified premium revenue in 2024. 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 in heartfelt appreciation. With that, I will turn the call over to Mark for some additional insight on the financials. Mark?
Mark Keim: Thanks, Joe, and good morning, everyone. Today, I will discuss some additional details on our fourth quarter and full year performance, our strong balance sheet and our 2023 guidance. Beginning with our fourth quarter and full year results, our consolidated MCR for the fourth quarter was 88.3%, reflecting continued strong medical cost management. For the quarter, flu, RSV and COVID-related medical costs in total were largely in line with our expectations, but the impact varied by line of business, with Medicare being disproportionately impacted. Our full year consolidated MCR was 88%. This result was consistent with our expectations and was driven by the continued strong performance of our flagship Medicaid business.
In Medicaid, our fourth quarter reported MCR was 87.3%. This strong performance was driven by effective medical cost management, and favorable retroactive premiums. The net effect of COVID in the quarter was a modest 30 basis points within our reported MCR. Our full year Medicaid MCR of 88% was at the low end of our long term target range and consistent with pre-pandemic levels. In Medicare, our fourth quarter reported MCR of 91.8% was driven by higher COVID, flu and the mix effect of our significant growth in MAPD. During the quarter, the net effect of COVID was 300 basis points within our reported MCR. Our full year Medicare MCR was 88.5% modestly above our long term target range and was similarly burdened by 300 basis points of net effect of COVID.
In marketplace, our reported fourth quarter MCR was 93.8%. The MCR was impacted by normal seasonality and increased utilization in a handful of markets. The net effect of COVID was approximately 50 basis points within our reported MCR. In the quarter, we also settled some provider balances dating to prior years, which disproportionately impacted our Marketplace MCR by approximately 300 basis points. Our full year Marketplace MCR of 87.2% exceeded our long-term target range and includes approximately 120 basis points of net effective COVID, as well as approximately 130 basis points from the impact of a 2021 risk adjustment true-up recorded in the second quarter. Additional drivers of our strong fourth quarter and full year results include a 7.5% fourth quarter adjusted G&A ratio, which was in line with expected seasonal expenditures related to open enrollment and spending on community and charitable activities.
Our full year adjusted G&A ratio improved year-over-year to 7.1% as we remain focused on delivering fixed cost leverage as we grow, even while making the appropriate investments to sustain our growth. Fourth quarter and full year results also feature higher net investment income as expected from recent increases in interest rates. Turning now to our balance sheet. Our reserve approach remains consistent with prior quarters, and we continue to be confident in our reserve position. Days in claims payable at the end of the quarter was 47%, about three days lower sequentially. The decline was driven by the increased mix of LTSS claims, which settled more quickly, resulting from the closing of the AgeWell acquisition as well as an additional payment cycle in the quarter.
Our capital foundation remains strong. Debt at the end of the quarter was 1.8 times trailing 12-month EBITDA, and our debt-to-total cap ratio was 44.9. On a net debt basis, net of parent company cash, these ratios fall to 1.5 times and 40.7%, respectively. Our leverage remains low. All bond maturities are long dated on average eight years and our weighted average cost of debt fixed at just 4%. In the quarter, we harvested $268 million of subsidiary dividends and repurchased approximately 590,000 of our shares. Parent company cash at the end of the quarter was $375 million. With substantial incremental debt capacity, cash on hand and strong cash flow to the parent, we have ample dry powder to drive our organic and inorganic growth strategies.
2022 full year operating cash flow was lower compared to the prior year, primarily due to the cash settlement in 2022 of large prior year marketplace risk adjustment and Medicaid risk corridor payments. Normalizing for the timing of these payments, 2022 operating cash flow was $1.6 billion. Turning now to our 2023 guidance, beginning with membership. In Medicaid, we expect organic growth, the midyear inception of the Iowa contract and membership from our My Choice Wisconsin acquisition to be largely offset by the second quarter resumption of redeterminations. We expect this to result in 2023 year-end membership of approximately 4.7 million members. In Medicare, based on our performance in the annual enrollment period, we expect to begin the year with 160,000 members and continue to grow during the year, ending 2023 with total membership of approximately 175,000 members.
Our Medicare membership growth for 2023 is expected to be evenly split between our D-SNP and MAPD products. In Marketplace, based on open enrollment, we expect to begin 2023 with approximately 290,000 members, reflecting our pricing strategy to achieve target margins in this business for 2023. Accounting for a limited SEP and normal levels of attrition through the year. We expect to end 2023 with approximately 230,000 members. We continue to treat any marketplace membership from Medicaid redeterminations as upside to these projections. Moving on to premium revenue. Our 2023 premium revenue guidance is $32 billion, representing 4% growth from 2022 Our revenue guidance is comprised of several items, $1.2 billion for the full year impact of AgeWell and expected revenue from the My Choice Wisconsin acquisition when closed.
$1 billion of organic growth in Medicaid and Medicare and $900 million for the midyear inception of our new Iowa contract. Several offsetting items include: $600 million for the known pharmacy carve-outs, $500 million for the impact of the resumption of redeterminations beginning in April, $600 million for the lower Marketplace membership, and $300 million in 2022 pass-through revenue that we don't expect to recur in 2023. Turning to earnings guidance. We expect full year adjusted earnings to be at least $19.75 per share. Our EPS guidance reflects the realization of approximately $1 per share of 2022 embedded earnings, consisting of the contribution from acquisitions and a portion of the net effect of COVID partially offset by the impact of redeterminations.
To this, we add $1.50 for the underlying organic growth plus several operating levers, including our real estate reduction strategy, the full year effect of our PBM contract and net investment income, partially offset by the negative impact of known pharmacy carve-outs. These drivers combined to deliver core earnings per share of at least $20.40. Recognizing the one-time non-recurring implementation costs in 2023 for our new contract wins that we now project to be $0.65 per share, yields our 2023 earnings per share guidance of at least $19.75. Moving on to select P&L guidance metrics. We expect our consolidated medical care ratio to be approximately 88%, consistent with our 2022 results. We expect our adjusted G&A ratio to fall slightly to 7%, even while absorbing the impact of the one-time non-recurring implementation costs for our new contract wins.
This reflects disciplined cost management and fixed cost leverage from our revenue growth. Excluding the new contract implementation costs, our adjusted G&A ratio would have improved year-over-year to 6.8%. The effective tax rate is expected to be 25.3%, adjusted after-tax margin is expected to be 3.5%, well within our long-term target range. Weighted average share count is expected to be 58.1 million shares. And we expect our quarterly adjusted earnings per share profile to be fairly flat over the year, with the first two quarters of the year at roughly $5 each. As Joe mentioned, our 2023 new store embedded earnings power is at least $4 per share and is comprised of at least $3.50 from our three recent new contract wins, and $0.50 per share for AgeWell and My Choice Wisconsin acquisitions, achieving full accretion.
We continue to carry approximately $2 for COVID era risk corridors providing additional potential upside to be at least $4 of new store growth embedded earnings. I'll now turn the call over to Joe for some concluding remarks. Joe?
Joe Zubretsky: Thanks, Mark. In looking back over the past five years, we pause briefly to reflect on our company's accomplishments. We won $5 billion in new Medicaid awards over the period and defended all of our existing contracts. We acquired $10 billion in profitable revenue. In short, we doubled the revenue base. We have produced industry-leading margins in our core products, averaging 4% to 5% on a pretax basis. The top line growth and margin expansion allowed us to grow earnings per share from a loss in 2017 to nearly $20 per share in 2023 guidance. We've ascended to Fortune 125 status and were promoted into the S&P 500. We have a pure-play government managed care franchise to grow and build on. We only take this retrospective journey to express our excitement, enthusiasm and energy for the next five years.
There are so many more opportunities to continue to grow and expand our franchise. As we say here at the company, reaching milestones is not a cost for celebration, but a cause for consternation as reaching one merely marks the point in time to set new aspirational goals. We plan to share our view over the next five years with you at an Investor Day later this year. This concludes our prepared remarks. Operator, we are now ready to take questions.
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