Molina Healthcare Inc (MOH) 2005 Q1 法說會逐字稿

Welcome to the Molina Healthcare first-quarter 2005 conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, April 28, 2005. I would now like to turn the conference over to Juan Jose Orellana, Director of Investor Relations. Please go ahead.

Good afternoon and welcome to our first-quarter 2005 earnings conference call. Joining me here today are Dr. Mario Molina, our President and Chief Executive Officer, and John Molina, our Chief Financial Officer. In today's call we will review Molina's financial results and accomplishments for the first quarter ending March 31, 2005, discuss our guidance for 2005 and field questions at the conclusion of our remarks.

Before we begin I would like to caution everyone that our comments today contain forward-looking statements. Except for the historical information referred to in this conference call, all forward-looking statements are predictions by the Company's management and are subject to numerous risks and uncertainties that may cause actual results to differ materially from management's current expectations.

Such factors include the Company's ability to accurately predict and effectively manage health benefits and other operating expenses; potential reductions in funding from Medicaid and other government-sponsored healthcare programs; the successful renewal of the Company's government contracts; the Company's ability to accurately estimate incurred but not reported medical costs; the implementation of announced rate increases or budgetary proposals; the Company's ability to obtain regulatory approvals for its pending acquisitions or to successfully integrate its completed acquisitions; competition; changes in healthcare practices or technologies; changes in federal or state laws or regulations or the interpretation thereof; risks associated with the Company's operations in states; inflation; disasters or major epidemics; and other risks and uncertainties as detailed in the Company's reports and filings with the Securities and Exchange Commission.

All forward-looking statements in this release represent the Company's judgment as of April 28, 2005. The Company disclaims any intent or obligation to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations. As a reminder, this call is being recorded and a 30-day replay of the conference call will be available over the Internet through the Company's website at www.MolinaHealthcare.com. Our earnings press release was distributed at approximately 4 PM Eastern time today and you may also view it at our Company website.

At this time I will turn the call over to Dr. Mario Molina.

Thank you, Juan Jose. Good afternoon and thank you for joining us today. As our first-quarter numbers reflect, 2005 is off to a good start as our Company continues to deliver positive results. These results are consistent with the execution of our business plan and thus in line with our internal expectations. In addition, signs of favorable market conditions and trends in our existing states as well as other states have only confirmed our optimism about the potential for growth in our industry.

During today's call I will discuss our progress this quarter, highlight some of the trends we've observed and summarize our efforts in response to those trends. John will address our financial progress in greater detail during his remarks.

Let me begin by discussing membership growth. During the quarter our membership has grown from 788,000 to 803,000 members. Sequential quarterly growth was strong with overall enrollment gains fueled primarily through organic growth despite difficult enrollment environments in some of our states. As expected we experienced some membership attrition in New Mexico and Michigan.

Membership decreased in New Mexico because the state moved to redetermination of eligibility from annually to every six months. There was also some attrition of membership in Michigan as the wellness plan members transitioned to our Michigan health plans. However, these reductions were more than offset by strong membership gains in California, Washington and Utah.

In California our health plan has consistently gained membership over the last few quarters and should benefit from the additional membership anticipated from our two pending transactions. Washington delivered strong enrollment growth in the first quarter. Our Utah health plan increased its membership as a result of the open enrollment in the SCHIP program.

As we've discussed in the past, converting our subsidiaries to one common information platform is an important part of our business strategy. It enables us to achieve greater efficiency and hold down costs. We are pleased to report that in March our New Mexico subsidiary began operating on our corporate information system just like all of our other health plans.

Another key component of our strategy is our commitment to quality. During our year-end conference call we said that our Utah health plan was undergoing a site visit by the National Committee on Quality Assurance. In February Molina Healthcare of Utah received NCQA accreditation, achieving an excellent status for quality healthcare services. An excellent status is NCQA's highest accreditation and is granted only to those health plans that demonstrate levels of service and clinical quality that meet or exceed NCQA's rigorous requirements.

All of our health plans currently eligible for NCQA accreditation have been accredited. The only one that is not accredited is Molina Healthcare of Indiana which became operational this April and is expected to undergo accreditation in the future.

I would now like to talk about our current business environment. Lately there has been much discussion of state budget problems. Historically budget pressures prompted state officials to implement changes to their Medicaid and SCHIP programs. A common measure implemented by officials has been the tightening of eligibility requirements or eligibility redetermination which temporarily limits enrollment. Since 2002 38 states adopted changes to Medicaid eligibility. In 2004 alone 21 states reduced or restricted eligibility.

Despite this Molina's membership has increased 11% over the last two years excluding our acquisitions. These changes in enrollment policy are par for the course in our industry and do not reflect new developments. It is important to point out that managed care remains a solution to state Medicaid budget needs. Last year, for example, we talked about our California health plan faced similar changes as a result of redetermination efforts by the state. Today our California HMO has recovered from the churning that resulted from the state's initiative and returned to historical enrollment levels.

Forcing patients to reestablish eligibility more frequently may actually cost states money. A report funded by the California endowment shows that approximately 60% of children of all ages were disenrolled from California's Medicaid program or reenrolled within four months. Although a state may experience a temporary drop in its Medicaid rolls, there is an increase in cost to the state for processing and reprocessing the same eligible individuals.

These challenges are not new, and we continue to respond to these challenges by implementing creative solutions that support our growth strategy, improve our operations and take advantage of technology. We are optimistic that current market trends will add to the opportunities in our industry as a whole and that Molina will capitalize on these trends from four perspectives.

First, the federal and state governments are expanding managed care to new populations. We anticipate the migration of elderly and disabled patients from fee for service to managed care. For some time now we've told investors of our interest in serving elderly and disabled Medicaid beneficiaries. As previously announced, effective January 1, 2005 Molina began serving elderly and disabled patients in the state of Washington as part of the Washington Medicaid integration project. With the inception of this program Washington joins our other states in serving the elderly and disabled populations through managed care.

In addition to this project Molina has recently initiated efforts to serve Medicare beneficiaries who also receive Medicaid benefits in four states. These patients are known as dual eligibles or Medi-Medi's. Changes to Medicare regulations now allow Molina to offer medical services to this population.

Second, in some states the government has plans to extend managed care to TANF patients residing in counties where mandatory enrollment in managed care does not exist. California, Indiana, Ohio and Washington are evaluating or implementing such measures.

Third, the Medicaid managed care market is a consolidating market. In the last 12 months we have witnessed a number of consolidating transactions in the space. Despite these announced transactions our pipeline of potential opportunities remains full. We have also demonstrated our ability to execute on transactions and to integrate the new business we have acquired into our existing operations.

Fourth, quality is becoming a basis of competition. A number of states are adopting economic incentives related to quality. As discussed earlier, all of our health plans eligible for NCQA accreditation are accredited.

All of these trends fuel our enthusiasm for growth prospects for our Company. We will remain disciplined and proactive about identifying and executing on growth opportunities. While on the topic of growth I would like to update you on some of our expansion initiatives. As you may recall, we signed two definitive agreements in California to acquire the Medicaid and SCHIP management of Sharp Health Plan and Universal Care health plan in San Diego County. The proposed transfer has received regulatory approval and we anticipate closing these transactions in June.

On the startup front, Molina Healthcare of Indiana began operations on April 1, 2005 with 5,000 members. In March the state of Indiana announced that it would implement mandatory managed care enrollment for the TANF population across all counties in Indiana in 2005. Clearly a real plus for us. In Ohio we have entered into precontracting process with the Ohio Department of Job & Family Services. Our ability to serve patients there is still subject to securing a Medicaid contract and obtaining a license to operate as an HMO. We anticipate a contract and license to be issued in the third quarter of 2005.

Ohio is a state that meets our strategic and financial criteria for a new market and we are enthusiastic about bringing our services to Medicaid beneficiaries in that state. Much like Indiana, Ohio is a state with good growth potential. Recently the Ohio commission to reform Medicaid submitted a proposal to implement mandatory managed care enrollment across all counties. In Texas we have applied for an HMO license and we are seeking Medicaid contracts in certain regions of that state.

As I said before, Molina has initiated efforts to serve in the dual eligible population. The Company has submitted applications to operate the special-needs plans for this population in California, Michigan, Utah and Washington. In addition, the Company's Utah HMO has submitted an application to serve Medicare long-term care beneficiaries as part of the Utah special-needs plan. We believe serving more elderly and disabled members is a natural extension of our commitment to provide access to quality care to underserved populations through government programs.

Our growth initiatives and acquisitions in 2005 demonstrated our ability to identify investment opportunities and to deploy our capital in order to generate a healthy return on our investment. The results of these acquisitions are bearing fruit today. Our strategy has not changed and the number of opportunities has grown. Our core business remains strong and we remain committed to our successful business strategy as well as the fundamentals that drive financial strength. Now let's hear from John.

Good afternoon, everyone. As Mario said, we've had a very successful quarter. Net income for the quarter ended March 31, 2005 grew 33% to $15 million compared to net income of $11 million for the quarter ended March 31, 2004. On a fully diluted share basis net income in the first quarter grew approximately 23% to $0.53 per diluted share versus net income of $0.43 per diluted share for the quarter ended March 31, 2004. Growth in EPS trails our growth in net income as a result of having more shares outstanding this quarter than the year ago.

Premium revenues for the first quarter ended March 31, 2005 were $391 million, up 79% from $218 million in the same quarter a year ago. Revenue growth was fueled by enrollment growth and, to a lesser extent, by rate increases. As Mario mentioned, our enrollment as of March 31, 2005 stood at 803,000 members, up 37% from 588,000 members a year ago. Our increased enrollment includes the membership gains that resulted from the acquisitions in Washington, New Mexico and Michigan which closed at different intervals after the first quarter last year.

On a sequential quarterly basis enrollment grew by approximately 15,000 members or 2% fueled by significant enrollment gains in Washington and Utah. This was all organic growth as we had no acquisitions closed during the quarter. Medical care costs were higher in the first quarter consistent with the observed seasonality in our historical cost trends. Our medical care ratio for the first quarter of 2005 increased to 84.9% of revenue as compared our medical care ratio for the first quarter of 2004 of 84.1%.

The primary source of this year-over-year increase was our acquisition of the New Mexico health plan in July of 2004. As expected New Mexico runs a higher medical care ratio than our other health plans. Excluding New Mexico our medical care ratio for the end of the first quarter 2005 would have remained essentially flat at 84.2%. Including premium taxes our general and administrative expenses increased to 8.5% of revenue in the first quarter of 2005 compared to 7.9% in the first quarter of 2004. However, general and administrative expenses excluding premium taxes decreased to 5.9% in the first quarter of 2005 as compared to 6.6% in the first quarter of 2004.

The increase in our overall G&A ratio is therefore mainly driven by our growth in states that apply premium taxes. As a reminder -- Washington, Michigan and New Mexico tax Medicaid managed care plans on their premiums.

I would like to point out that we expect a rate increase in California later this year as the result of a premium tax. Specifically in the first quarter of 2005 the centers for Medicare and Medicaid services authorized the state of California to impose a 6% quality improvement fee on the premiums received by managed care plans operating in California's Medicaid program. Offsetting this fee Medicaid managed care programs would also receive a 9% rate increase resulting in a net rate increase of 3%. This quality improvement fee and the proposed rate increase are anticipated to occur in the third quarter of 2005.

Income taxes were recognized in the first quarter of 2005 based upon an effective tax rate of 38.0%. The effective tax rate has increased in 2005 as a result of the declining significance of certain economic development credits that the Company continues to take. Cash flow from operating activities provided approximately $2.4 million for the quarter ending March 31, 2005.

Two items had a significant impact on cash flow. Accounts Receivable at the Company's Utah HMO grew by approximately 7.6 million. All monies related to this receivable were subsequently received in the first three weeks of April. In addition, our Michigan subsidiary made a premium tax payment of approximately $5 million on March 31st as it was due April 1. Days in claims payable decreased to 48 days at the end of the first quarter 2005 down from 54 days at the end of the fourth quarter. The decrease in days in claims payable is primarily the result of decreases in claims inventory.

At our Michigan HMO we reduced claims backlog that had accumulated late last year due to the wellness acquisition which nearly doubled our enrollment in that state. In our New Mexico HMO the transition to our corporate claims platform resulted in substantially faster processing of claims. As a reminder, over time we expect cash flow from operations to be approximately net income plus depreciation and amortization.

We ended the first quarter of 2005 with cash and investments at the parent company of approximately $52 million. Our subsidiaries had a combined $86 million in statutory equity in excess of regulatory capital. In addition, in the first quarter the Company gained expanded financial flexibility by increasing its credit facility from $75 million to $180 million.

As you may be aware, the Company has filed a registration statement with the Securities and Exchange Commission relating to a proposed follow-on offering of 3 million shares of common stock. Of the 3 million shares 1 million are being offered by the Company and 2 million are being offered by family trusts of which I am a trustee. This is consistent with our communication to investors of our plan to decrease family ownership through an organized approach over time. The net proceeds from the offering of shares by the Company will be used for working capital and other general corporate purposes which may include acquisitions (indiscernible) amounts outstanding under the Company's credit facility. As of March 31, 2005, $3.1 million had been drawn on our credit facility.

Finally, we are affirming our previously issued EPS guidance. We anticipate that earnings per diluted share in 2005 will be in the range of $2.40 to $2.45. Despite factors such as the dilution from the Company's anticipated stock offering, higher costs associated with our credit facility, and an increase in the effective tax rate to 38%, we believe that new developments, such as the launch of our Indiana subsidiary and higher investment income will approve the Company's 2005 performance.

We will update guidance in greater detail after the second quarter. This concludes our prepared remarks. Operator, please open call to questions.

(OPERATOR INSTRUCTIONS). Greg Nersessian, Lehman Brothers.

My first question is just quickly on the guidance. I guess the 240 to 245, that includes any anticipated dilution from the secondary as well as -- offset by Indiana and higher investment income. My first question -- does that also include any impact from California or will there be a separate announcement when that deal closes that will provide us with the impact of that transaction on the second half of the year -- or both of those transactions, I guess?

The $2.40 to $2.45 guidance that we reaffirm today, Greg, does not include impacts from the two California transactions, nor does it include the impact of the quality improvement fee that we discussed.

Okay. So presumably when that deal closes you will provide what the impact -- or when those deals close you'll provide the impact on '05 EPS if there is one and beyond?

That's been our practice to talk about impact to EPS once the deal has been closed.

Okay. You mentioned June -- should we expect that end of June so that we would factor that into our third-quarter and fourth-quarter results or potentially in the beginning of June?

NO, typically the way these things work in California is the membership transfers at the first of the month, so June 1st.

Great, thank you, that's very helpful. My second question was you mentioned Texas which I haven't heard you mention in the past. Could you describe the extent to which you're looking to participate in that state? Would it be with the traditional TANF population? Are you interested in participating in the Star Plus program? And would that be as an independent or would you look to combine with another company in serving that market?

Right now we do have applications in for all three contracts.

As an independent?

Correct.

Okay. Great, thank you very much.

(OPERATOR INSTRUCTIONS). Ed Kroll, SG Cowen.

That rate news in California sounds promising. I'm just wondering what other hurdles might there be or what other sign offs, let's say, are there until you have final assurance that that rate goes into place Q3? Or has that already happened?

Let me put it this way, Ed. The most important approval is the approval of CMS and that's been obtained. The state is telling us that they anticipate that this will go into effect in the third quarter. So really it's now a matter of the California state bureaucracy and if they can get this done in that time frame. But it's our understanding the state intends for this to happen in the third quarter and I don't believe there are any other approvals that are necessary.

Great. And on the days -- should the mid to high 40s; is that our new normal level? Is that a permanent decrease in the claims inventory? Or are we at a new normal level of claims inventory? Just wondering what kind of days trend we should expect for the rest of this year.

I think between 45 and 50, Ed, absent any acquisitions or rapid enrollment growth.

Thanks for that. And then finally, was there anything regarding that temporary AR build in Utah? Was that systems related? Just curious -- you got the money, obviously, in April but just wondering what the cause of that was.

As I understand it, there was a new format for us to submit claims to the state and it took a little while for the bug to be worked out of that, but now we're back on track.

Great, thanks very much.

Patrick Hojlo, Credit Suisse First Boston.

This is (indiscernible) in for Patrick. Just a couple questions on membership, one regarding the New Mexico plan. I know you said they shifted the certification process I think twice a year from month, which sounds a little bit like what has been causing some problems for your competitors down in Florida. I'm just wondering if that -- I know you said that a lot of times (indiscernible) is more costly in the long run than shifted back. But in the event that New Mexico doesn't shift that back any time soon what you think membership would look like there for the rest of the year, if you're going to see more losses there or if there are some other growth opportunities?

First of all the redetermination has gone from annually to every six months and typically when these things do occur there is some change in membership, but we've been able to hold our relative market share.

It looks like it's stabilizing at about 61,000 to 62,000.

So going forward you wouldn't expect it to have that big impact then?

Correct.

And then I guess kind of a similar question in Utah where the change has actually helped you guys and you've had some big growth there. Is that open enrollment for the SCHIP program, is that a onetime thing that happened in January or would you expect that to help you throughout the rest of the year?

No, I don't think so. The state had open enrollment once or twice a year for the SCHIP program and they're moving to open enrollment every month. So -- starting in July. So we think that will help a little bit.

Great. And then my last question was I just missed what you said the Company has in unregulated cash.

52 million at the parent company and then 86 at the subs, that's in excess of statutory requirements.

Great, thank you.

Greg Nersessian, Lehman Brothers.

I just had a couple of quick follow ups. The first was on Indiana. I guess you had much better growth than I expected already in April in that state. Are you entering that state statewide or are you looking at only certain market? How are you looking at the competitive environment in that state as you go in de novo?

Greg, we're looking at all opportunities in the state. We think that by the end of the year we can be in as many as 40 to 50 counties.

Wow. The only challenge in that would the do get the provider contracting in place or is it just a matter of waiting until the state opens up those counties to mandatory status?

The state has a rollout program for different parts of the counties, so there's going to be -- or different parts of the state. There's going to be a wave in July, another one in September and then the last one maybe in December. So we are approaching those counties as they come up for enrollment.

Okay. What would you view as the organic opportunity in Indiana through the course of the year? I guess, how should we look at modeling that for the remainder of the year in terms of membership?

As you know, Indiana has got heightened competition with the entry of another new health plan and the three that are existing there. I think you're right, I think we did very well in getting the 5,000 members -- higher even than I think we anticipated. So we're looking, again as we said last quarter, for slow growth over time.

I think you should be conservative there because while we do think it's a great opportunity, there's been some discussion about the way that the patients enroll. It's really driven by the primary care provider and we're going to be conservative in our contracting. While it's nice to have market share we also feel it's important to be profitable.

Good, so do we. And then my last question, the one state I did not hear you mention other competitors have is Georgia. Should we interpret that as an opportunity which you are not pursuing at the time or you're simply not commenting on?

I'll comment on Georgia. We actually did incorporate in Georgia and we looked at that state as a potential state for a de novo startup. We have some concerns about the program itself and part of the RFP requires a bid on the rates and we're a little bit concerned about the data used to develop the rates. Given the many opportunities that we have, Georgia has now fallen to a much lower position in our overall rankings. So we don't anticipate responding to the RFP at this time.

Okay. Great, thank you very much.

There are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

We have nothing else to add. Thank you all very much for joining us and we look forward to our next conference call.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.