Good day. Welcome to the Molina Healthcare conference call. All participants will be in listen-only mode. Should you need assistance, please signal our 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 and then one on your touchtone 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 Jeff Geyer, Senior Vice President of Investor Relations. Please go ahead. Good morning, and welcome to Molina Healthcare's call to discuss updates to our California Medi-Cal contract awards. Joining me today are Molina's President and CEO, Joseph Zubretsky, and our CFO, Mark Keim. During our call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our California Medi-Cal awards, our projected revenue and earnings growth associated with these awards as now modified, and our overall financial outlook with regard to both fiscal year 2023 and 2024. 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 for a brief Q&A session. We are currently in our quarterly blackout period, we will be taking questions only related to our California Medi-Cal contract award. I will now turn the call over to our Chief Executive Officer, Joseph Zubretsky. Joe? Thank you, Jeff. Good morning. First, some context for what brings us here this morning. By now, you have seen the State of California's announcement with respect to the county-by-county Medi-Cal awards. The timing of the announcement at the start of a long holiday weekend was not ideal. We were not in control of that timing. With our fourth quarter earnings announcement still five weeks away, we believe that sharing our perspective on this matter in the meantime is important. Thanks for joining us this morning. Now, I want to spend a few minutes discussing just what the changes are that pertain to us and the impact of those changes on our company's outlook. Regarding the changes that have been made to the RFP awards that were announced in August, I want to note a few important background points. Our winning RFP proposal has not been rescored or changed in any way. Our five-county win remains a five-county win. The earlier RFP award process, followed by a series of administrative-level protests filed by various plans, has effectively been superseded in its entirety by this new process pursued by the state. The state decided to award Medicaid contracts incepting on January 1st, 2024, using an approach based on multi-party negotiations with the health plans in the state. Molina's geographic footprint remains unchanged, other managed care plans which were not included in the original award are now allowed to participate in the program. This new approach and the resulting awards will have the effect of partially reducing our expected 2024 membership award from the levels announced by the state in August, will still represent a doubling of our California membership and revenue profile versus the status quo of today. In summary, this new negotiated approach to the awards has resulted in the following. First, as noted above, we have been awarded contracts in every county originally awarded to us and in every county in which we bid. Our new geographic footprint remains intact. In Los Angeles County, we have been awarded 50% of the commercial membership, in effect sharing the commercial membership equally with the current incumbent. This membership will be served by us pursuant to a new form of subcontract with the incumbent. We also now have the state's commitment to issue us a contract to offer a DSNP product in Los Angeles County, which we project to be a significant revenue contributor. In Sacramento, we maintain our winning presence. The state has awarded one additional contract, so we will now be one of three commercial plans rather than one of two. In San Diego County, we also maintain our winning presence. Again, the state awarded one additional contract, so we will now be one of three commercial plans rather than one of two. In the Inland Empire, which consists of Riverside and San Bernardino counties, our profile is unchanged. We will remain as the single commercial plan in a two-plan model. With respect to the impact on our previously disclosed outlook for 2024 revenue, we make the following points. We currently have approximately 600,000 Medicaid members in California and approximately $1.9 billion in Medicaid premium revenue. In the original award this past August, the state published its intention for us to have approximately 1.8 million members, which we translated to $5.5 billion in Medicaid premium revenue. Under this new negotiated approach, we now project to have, in 2024, approximately 1.2 million Medicaid members and $3.9 billion in Medicaid premium revenue. When also including the full run rate impact of the valuable D-SNP contract, this projected Medicaid full contract value would increase to approximately $4.4 billion in premium revenue. Under the new awards therefore, compared to the status quo, our California Medicaid revenue more than doubles and will be increasing by approximately $2 billion and $2.5 billion when including the new projected D-SNP revenue. Before I turn it over to Mark for some more detail on our financial outlook, I make one final point as to the growth profile of our entire enterprise. The revision to our California awards does not change the trajectory we have created for significant top line growth while maintaining best in class margins. To that point, we previously announced our new contract wins would produce $5.8 billion in incremental revenue. With this change in California, our new contract wins are now reprojected to produce $4.2 billion in incremental revenue. In addition, our outlook for 2024 revenue is now $35.5 billion rather than the previously projected $37 billion. With our continuing work on new strategic initiatives, we believe we are still squarely on track to meet our Investor Day commitment of $42 billion of premium revenue in 2025. We also previously announced that the future accretion from all of our new contract wins was $3 per share, which we naturally include in our embedded earnings outlook. Our California membership growth will now be lower than the state had previously intended, our earnings per share contribution from all three new contract wins is now projected to be at least $3.50 per share. Given that we were in the very early stages of all of our new contract wins, in our earlier remarks, we were purposely conservative in our earnings accretion estimates for our new contracts. We now have more confidence in projecting margins at our portfolio target, which we have been successful in achieving historically, while also recognizing modest operating leverage. With that, I will turn it over to Mark for more color on our financial outlook. Mark? Thank you, Joe. Good morning, everyone. Starting with membership. Based on the state's revised award announcement, a conservative estimate of the impact of redeterminations, and an estimate of the announced newly carved in populations for 2024, we project our California Medicaid membership will increase from approximately 600,000 members currently to approximately 1.2 million members in 2024. This compares to our previous projection of approximately 1.7 million members. Our updated membership projection now yields 2024 premium revenue of approximately $3.9 billion, compared to our previous projection of $5.5 billion. The L.A. D-SNP opportunity represents an additional $500 million of upside at projected full run rate. Our total projected 2024 premium revenue growth from recently announced RFP wins in California, Iowa, and Nebraska is now $4.2 billion, compared to our previous projection of $5.8 billion. Reflecting portfolio target after-tax margins at the midpoint of 3%-3.75% long-term guidance and modest operating leverage, we now expect these three new contract wins to add at least $3.50 per share in incremental earnings at full run rate. Recall, our cost structure is evenly split between fixed and variable costs, so the portfolio impact of this meaningful revenue growth provides significant operating cost leverage. With our updated membership in 2024, we now expect the one-time non-recurring implementation costs in 2023 to be lower than the previously projected $0.75 per share, providing modest upside to our 2023 outlook. We intend to provide a full update on our fourth quarter earnings call when we provide detailed 2023 guidance. I'll now turn the call back over to Joe for some concluding remarks. Joe? Thanks, Mark. With this change to our successful California awards, we still have a substantially increased presence in California with little change to our growth trajectory. Had this new result been the one originally awarded in the August award announcement, I can honestly say we would have been nearly as thrilled in that outcome as we were with the original outcome. Our confidence in continuing to win RFPs to create franchise value is unchanged. We have deep and broad capabilities in the Medicaid space, industry-wide reference ability, and leading-edge technological and clinical innovation. We also have a local ground game that is unparalleled in its effectiveness. That has not changed, nor will it. In summary, the overall situation with respect to the California Medicaid awards can be summarized as taking three steps forward, taking one step back, and ending up being two steps ahead. With that, we'll now take your questions. Operator? Thank you. We will now begin the Q&A session. To ask a question, you may press star and then one on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question today will come from Joshua Raskin of Nephron Research. Please go ahead. Hi. Thanks. Good morning. Two questions here. The first one just on the earnings power being $0.50 higher for the combined contract. I'm curious if you just give us a little color on sort of the bottoms up analysis and, you know, what was conservative, which is now more confirmed. I think you said you're now including some overall or modest G&A leverage to the overall company, whereas I don't think you had been previously including that. Kind of why the change? Second question was, as part of this negotiation, excuse me, part of this negotiation, was there ever discussion at the state level around a complete rebid of the contract, or was that never contemplated? Josh, this is Joe. I'll answer your first question and then kick it to Mark for more detail. Obviously in the early stages of RFP wins, you are purposely conservative in the earnings accretion that you predict. We actually, in doing so the first time, haircut our portfolio margins, and so the $3 per share was actually at a portfolio margin less than we've historically achieved. Now we have merely moved it up at what we've been achieving historically. Yes, we did feel at this stage, because now we have a very good view of the membership flows, that we introduced a modest amount of fixed cost leverage. Also bearing in mind that California margins historically have operated just north of the portfolio average. Mark, anything to add? Good morning, Josh. It's Mark. Yeah, if you look at the $4.2 billion of revenue incremental across the three states, at $350, which is where we believe this pencils out at the low end, that implies a little bit less than a 5% after-tax margin. Here's the way I'm thinking about that. The midpoint of our long-term guidance after-tax margin is 3%-3.75%. Call it 3.5% in the midpoint. If this pencils at a little less than 5%, that's, you know, 1.5% after-tax margin on the leverage benefit. Before tax, that's 2%. Here's the way I think about that to put that in context. Our G&A ratio is roughly 7%. What that would say is on these incremental $4.2 billion of revenue, the G&A ratio would be more like a 5%. That's well short of the 50/50 fixed variable leverage that we talked about. I'm pretty comfortable in that earnings power, at the low end of $3.50 on these incremental revenues. Josh, it's Joe again, to your second question. We believe, based on historical experience nationwide, states, Medicaid departments, and healthcare agencies have broad discretionary authority to conduct procurement and re-procurements under the way they see fit. Certainly, starting over, withdrawing the re-procurement and perhaps rebidding it or not rebidding it was certainly a possibility. With that as the understanding, we thought it best for the company, for our membership and for our investors to participate in the negotiation. Certainly, states have broad authority on how to conduct their procurements, which means they could have withdrawn the current process and perhaps started it over, perhaps not starting it over for a while. Measured against the status quo, 1.2 million members is certainly a big step forward for us. Yeah, agreed. Very helpful. Thanks. Our next question today will come from Kevin Fischbeck of Bank of America. Please go ahead. Great, thanks. I just want to maybe ask two questions around timing. The first one, since you have a, I guess, a higher margin expectation, should we be thinking about a longer time to get to that higher margin? Is it like, you know, is this something that would have been done in two years and now is three years, or is it three years now should be four? I guess the second one, you talked about the D-SNP as being a $500 million opportunity. How should we think about the timing of that opportunity? Thanks. Kevin, the D-SNP opportunity will likely be a revenue opportunity for calendar year 2025, as we implement Medicaid for 2024. That was your first question. Mark, you want to take the first question? Kevin, what was the first question? Could you just remind me? Yeah, it's just about the timing. You now have a higher kind of margin target for this, and I guess. Yeah. -is this something that we should be thinking about happening later, to get to that margin target, or is it still achievable within a, you know, two or three-year period? Thanks. No. Both on M&A and new procurements, we've been very successful so far achieving our target margins by the end of the second year. This one's no different because the MOR behavior will be, you know, as a normal one, and on the operating leverage, that's something we have very clear visibility to. Getting there by the end of the second year, feel really good about that. All right, great. Thanks. The next question will come from Nate Fultz of Goldman Sachs. Please go ahead. Hi, good morning. Thanks for the questions. I guess, first, you know, could you maybe talk about why the state chose to use a subcontract relationship in L.A. County, and are there any effective differences, between being a subcontractor in the initial award, either operationally or from a margin standpoint? A quick follow-up, could you maybe just comment on the margin profile of DSNP membership relative to, your kind of portfolio targets as we think about the earnings opportunity from that $500 million DSNP revenue? First, on the on the L.A. County relationship, we can only presume that the reason for this model is because L.A. is a two-plan model, there can only be one commercial health plan, and that would be the current incumbent, and that will be a subcontractor for a commitment for 50% of the commercial membership. We also have it committed by agreement that the relationship will be in form a subcontract, but in substance be every bit as good as a primary contract with respect to operational content and financial profile. Even though structurally, this will be a subcontract to the current incumbent, it'll have full force and effect and the profile of a primary contract. Yes, all the rules that pertain to primary contract holders, we have presumed in projecting our margins will apply to us as a subcontractor. With respect to your comment on DSNP, look, our Medicare business is operating at a pre-tax level portfolio-wide at just north of 6%, and we have every reason to believe that we can maintain that profile wherever we launch DSNP. Now that we will have a very robust network, more robust than we have today with a very limited presence in L.A., we believe that it is really, really fertile territory to grow our DSNP product in L.A. County. The next question today will come from A.J. Rice of Credit Suisse. Please go ahead. Hi, everyone. Happy New Year. A couple of, quick questions here. First, just to understand, because obviously there's some parties that had gotten, less than what they'd hoped for in the original contract award that are now in, and but there's still some others that were, saying they were looking at protesting that are on the outside. Should we think of this as pretty much co-opting all of that, or is there still the possibility that some party could protest this and try to move forward and either delay it or get another change? What's your perspective on that? You mentioned, as you thought about the original award, that, the leverage potential as well as the membership, growth were swing factors that were a little uncertain, and you'd taken a conservative view. As you look at the new award, is there any area of swing factor that you're looking at and saying, "Hey, there's still some uncertainty on how that will play out," or do you feel like you've got pretty good visibility on membership cost trend and your ability to get leverage? A.J., it's Joe. I'll answer the first question first. With respect to the environment around protesting, I can only tell you what we've committed to in this negotiated settlement. Obviously, nothing to protest because we've agreed to the membership allocations that the state has now articulated, in addition to waiving other types of legal rights that one would normally have. I can only presume, I do not know, I can only presume that everyone who agreed to this settlement has agreed to that same fact. Others that haven't agreed to it, I couldn't speculate as to what they would do or wouldn't do, but I can tell you that the state seems very determined and very committed to executing a January 1st, 2024 Medi-Cal program that has the configuration that was just announced. couldn't speculate on what-. Okay. they might or might not do if they didn't agree to the settlement, we believe the state is very committed and determined to launch the Medi-Cal program on January 1st, 2024 with this configuration. With respect to the margins, look, we were purposely conservative when we started, and we're actually still somewhat conservative as I said, California is still operating above the portfolio average, and we're just giving you the portfolio average. I'll hand it over to Mark to talk about the operating leverage. The operating leverage is real, as demonstrated by the fact that we have driven down our SG&A ratio as we've grown by 10, 20, 30 basis points a year for the past three years, and we'll continue to do so. Mark? Yeah, A.J., I feel pretty good about the drivers of the margin. You know, on the MOR side, it's the usual actuarial soundness, which works very well for us. On the G&A side, I talked through my math how, you know, the portfolio average of 7%, we only need 5% on the incremental revenue to hit the numbers I'm talking about. Again, with a 50/50 fixed variable split, getting to 5% is very attainable here. I feel very good about the outlook for at least $350 million on these incremental revenues of $4.2 billion. Okay, thanks a lot. Our next question today will come from Michael Ha of Morgan Stanley. Please go ahead. Hey, thank you. Just wanted to come back to the L.A. County membership contracting, just specifically economics, the profit arrangement around those lives. I know you mentioned earlier that the margin profile shouldn't be too dissimilar from the prior. Is this a similar sub-capitation arrangement as your current, I believe 80,000-90,000 lives that Molina subcontractors, I'm assuming that? How should we think about, are subcontracted arrangements subject to minimum MLR threshold? Basically, I'm trying to understand if there's potentially greater margin capture opportunity in subcontracted life. Michael, it's Joe. In answer to your first question, the answer is no. This subcontract will be starkly different from the one we currently have, and I won't talk about the features of our current contract. Our current contract literally is a subcontractor under a sub-capitated arrangement. We have an agreement and a commitment with the state and the incumbent that the subcontract that we will now have for our 50% membership will be in form a subcontract, but in substance, will have the operational and financial profile of a primary contract. All the services that can legally and regulatorily be conducted by Molina in serving this membership will be, and any services that have to be served by the primary contractor will be. You need to think of this as a much different arrangement and one that has the full force and effect of a primary contract in substance, although in form, it'll be a subcontract. With respect to minimum MLRs and any other features of the program, we have assumed, because we think it is true, because of the nature of the contract, that all the rules that apply to a primary will apply to us as a sub, including a minimum MLR, which was fully contemplated in the margins that we just talked about. Got it. Thank you. Our next question today will come from Gary Taylor of Cowen. Please go ahead. Hi, good morning. Thanks. I just had a couple of questions. I think I'm the first one. I'm probably getting it now, but I was just gonna ask if the dynamics or the rules around attribution, network, care management, all that sort of thing in the L.A. County contract, if those were established at this point. It sounds like that's all to come and to be developed. Is that correct? I would say, Gary, that in concept and in principle, the agreement is that this subcontract will have all the content that a primary relationship has. I will say that that needs to be papered, and it'll be papered here over the next number of weeks. By agreement, our relationship will have all the clinical operational activities that a primary contractor has, and that is by commitment. Thanks. Just my follow-up would be, can you just refresh us on your latest thinking around Kaiser and their statewide contract? Our understanding was in counties where the plans were competitively awarded, the number of competitive slots excluded whatever would be potentially allocated to Kaiser. I just wanted to make sure I understood whether or not Kaiser could or cannot be in L.A. County, just broadly, in your other counties, any updated thinking around what sort of market share growth or risk Kaiser might represent? I think in our projections, again, trying to be very careful with our words here, being one of two plans in Sacramento and San Diego now being one of three, also assumes that Kaiser has a slot. That was always presumed. It was presumed originally, and it's presumed now. The same situation exists in L.A. I mean, we can all debate what kind of market share they are likely to have. We've made certain assumptions based on historical norms. We're very comfortable with the projections we've given you. We have a commitment to have 50% of L.A. membership on day one. I don't think that point was made in our earlier remarks. On day one, this is not gonna be a slow migration. There will be a membership migration in total of 50% of the commercial membership on day one, 1/1/2024. That's the launch date. We've made certain market share assumptions. Kaiser, yes, has a slot in both Sacramento, San Diego and L.A. Our market share assumptions sort of assume that they would maintain the market share they have today. Thank you. Our next question today is from Justin Lake of Wolfe Research. Please go ahead. Thanks. Good morning. Just wanted to circle on a couple of things. One, you've given a 2022 number for revenue, and you've given a 2024 number. I don't recall you giving a 2023. Maybe I missed it. You know, I think it's 30.5 going to about 35. Can you tell us where you think 2023 revenue will shake out first? In terms of the margins of the business, especially in the Medicaid side, there's some uncertainty around, you know, as redeterminations play out and the risk pool changes, could there be, you know, some pressure on margins as we go through 2023 into 2024 now that we know redeterminations are gonna start? Just anything you've kind of assumed there, or do you feel like you'll be able to kinda keep chugging along and actuarial soundness will reign and all that? Thanks. Sure. Justin Lake, I'll kick it over to Mark Keim on the revenue side, bear in mind that the contract that we're talking about here in steps in 2024, so 2023 was largely unaffected by it. Mark, why don't you... Absolutely. Per our previous guidance for 2022, we're looking at about $30.5 billion of premium revenue for 2022. I'll update my outlook and eventually guidance for 2023 when we're together in February. It'll be up a little from that. We've still got some moving pieces coming together as our outlook for redetermination evolves here and a few other dynamics. It'll be up modestly in our new guidance for 2023. Justin, to the last point, you know, I'll answer it more generally. You know, L.A. County is an incredibly rich Medicaid environment. It just is. Obviously, there's a large not-for-profit plan there that's anchored there, but with 50% of the commercial membership. Look what's happening. You know, we forget the fact that on January 1st, 2024, the undocumented population from 25, age 25 and below and from 50 and above is already in the Medicaid population. From 25 to 50, it's coming in at January 1st, 2024. Whatever redetermination process is used, you can probably assume that, you know, California will be very deliberate in its redetermination process, given the way they view Medicaid. We have not taken those liberties in our membership projection, but I think you can assume that L.A. County is going to have a very robust and rich Medi-Cal population now and in the future and likely growing. We have 50% of a number that's likely to grow in the future. Great. Thanks. Our last question today will come from Stephen Baxter with Wells Fargo. Please go ahead. Hey, good morning. Thanks for all the color. Just to follow up on one of the previous questions, what is your understanding of how this process plays out in the future? For example, if L.A. County remains a two-plan model, do you think the subcontracting model is something that's sustainable when the next RFP comes up? I guess I ask because you could look at it and say in spirit, the new configuration is not necessarily what the county elected for in the two-plan model. I know that's a long time from now, and I know there's been subcontracting before at a smaller scale, but appreciate any early thoughts you have there. Thank you. Stephen, hard to say. You asked me a futuristic question, it's hard to predict. I will tell you that in all our deliberations, the state really wants us to be operating in L.A. with full force and effect of a primary plan. That is their intent. Our view is as long as we continue to perform as well as we are today, that I have no reason to believe that this model wouldn't be sustainable. If in the future, they took the legislative and administrative action to change a two-plan model in L.A., well, so be it. Right now, we believe their intention is to have, two commercial plans, and as long as we continue to perform, there's no reason to believe that this presence in L.A. County wouldn't be sustainable, whether it's a subcontract relationship in the future or whether they open up the two-plan model to something larger. Okay. Thank you very much. Ladies and gentlemen, at this time, we will conclude our Q&A session and also conclude the Molina Healthcare conference call. We thank you for attending today's presentation, and you may now disconnect.