Molina Healthcare Inc (MOH) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare fourth-quarter earnings 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, February 11, 2010.

I would now like to turn the conference over to Juan Jose Orellana, Vice President of Investor Relations. Please go ahead sir.

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 and year ended December 31, 2009. The company's earnings release reporting its results was issued today after the market closed and is now posted for viewing on our company website.

On the call with me today are Dr. Mario Molina, our CEO; John Molina, our CFO; Terry Bayer, our COO; Dr. Jim Howatt, our CMO; and Joseph White, our Chief Accounting Officer. After the completion of our prepared remarks, we will open the call to take your questions.

Our comments today contain numerous forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act, including statements regarding our earnings, guidance, and operations for 2010, and the pending acquisition of the HIM business from Unisys. All of our forward-looking statements are based on current expectations and assumptions, which are subject to numerous risks, uncertainties, and other 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, including our previously filed 10-K annual report for 2008 and our 10-K annual report for 2009, to be filed early next month, our 10-Q quarterly reports and our 8-K current reports. 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 11, 2010, and we disclaim any obligation to update such statements.

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 MolinaHealthcare.com.

I would now like to turn the call over to Dr. Mario Molina.

Good afternoon everyone. Our remarks today will be brief since we provided preliminary estimated results about a month ago. And we also had an opportunity to provide additional information about our company and our results during our investor day on January 27.

In the fourth quarter of 2009 we incurred a net loss of $4.5 million, or $0.18 per share.

For the full year of 2009, we earned net income of approximately $31 million, or $1.19 per share.

Both our quarterly and year-end results are consistent with the estimates we had provided during our primary earnings announcement on January 11, 2010.

The four main factors which drove our poor fourth-quarter financial results, which I will discuss in detail, were margin compression related to pressures on state budgets, higher medical costs due to the widespread flu impact, higher costs associated with substantial enrollment growth, and higher emergency room costs.

First, state tax revenues plunged nearly 21%, the sharpest decline in the last 46 years. With tax revenues down so much, states were left scrambling to somehow fill budget gaps in order to achieve a balanced budget. Some of the states in which we operate responded to this crisis by cutting Medicaid premium rates or by changing the covered benefits under managed care. For example, our health plans in Michigan, Missouri, Washington and New Mexico all experienced premium rate reductions during 2009.

Some of these premium cuts were partially offset by reductions in payments to providers, however the overall impact was a $14 million reduction in medical margin in 2009.

The second factor affecting our fourth-quarter and full-year results was the H1N1 flu epidemic. The states of California, Michigan, Ohio and Washington account for a little over 75% of our membership. The incidence of flu in each of these four states exceeded the national average.

Unlike the seasonal flu, which has historically represented a bigger health risk for the elderly, the H1N1 flu appears to have posed a greater health risk for younger people.

As a reminder, approximately 87% of all of our members are part of the TANF eligibility group, which is comprised primarily of young mothers and their children. States like Washington and California have a higher percentage of these patients because nearly all of our membership in these states is from the TANF group. We believe that our geographic footprint and our patient mix may help explain why our health plans were severely affected by the flu in 2009.

Third, we believe that rising unemployment in 2009 drove higher enrollment at our health plans. In 2009 our enrollment increased by nearly 16%, compared to a 9% increase in 2008. Our studies show that new members drive higher medical costs during the first nine months of their enrollment.

Finally, higher emergency room costs affected our results. The results were driven by higher unit costs and increases in utilization. Higher unit costs were the result of provider adoption of billing methodologies that included the use of codes representing higher levels of service. We discussed these factors in greater detail at our investor day approximately two weeks ago.

Also at our investor day our guest speaker, Tony Rodgers, a former director of the Arizona Medicaid program, provided a high-level overview of the MMIS business in anticipation of our acquisition of the HIM business of Unisys. Joseph White, our Chief Accounting Officer, reviewed some of the important accounting differences between the MMIS business and our managed care business.

I highly encourage investors that have not heard our investor day presentations to listen to these replays on our website at www.MolinaHealthcare.com, as these presentations capture the challenges as well as the opportunities that we currently face in our business.

I would now like to turn the call over to John.

Premium revenue for the quarter was $962 million, up $153 million or approximately 19% from the fourth quarter of 2008.

For all of 2009, premier revenues increased by $569 million, or 18%, to $3.7 billion, compared to premiums in 2008 of $3 billion.

Investment income for 2009 was down nearly $12 million when compared to 2008. This decline was primarily due to lower interest rates throughout 2009.

As Mario pointed out, net losses for the quarter ended December 31, 2009 were $4.5 million, or $0.18 per share, compared with earnings of $15 million or $0.55 per diluted share for the same period last year.

Net income for the full year was $31 million or $1.19 per share, compared with net income of $60 million or $2.15 per share for 2008.

Medical costs remained elevated. Our medical care ratio increased to 87.5% in the fourth quarter 2009, compared to 84.7% in the fourth quarter of 2008. Sequentially our medical care ratio increased by 80 basis points over the previous quarter.

During the fourth quarter, hospitals continued to code emergency room visits at higher levels than they did in the fourth quarter of 2008, which resulted in higher costs per visit. For all of 2009 the cost per visit was up 9% for emergency services when compared to 2008, and utilization was also up by 8% year-over-year.

The impact of the flu decreased earnings per share by $0.47 in the fourth quarter of 2009 compared to the fourth quarter of 2008 and decreased our earnings per share for all of 2009 by $0.83 per share.

Excluding costs associated with the flu, the impact of higher emergency room costs decreased our earnings by $0.15 in the fourth quarter of 2009, compared to the fourth quarter of 2008, and decreased our earnings for all of 2009 by $0.77 compared to last year.

Our membership at year-end stood at 1.45 million members, up 16% from a year ago. Membership growth contributed to the increase in our premium revenues, but it also contributed to the increase in our medical costs.

Our studies show that on average medical costs associated with new membership are highest during the first nine months of enrollment. However, enrollment grew steadily throughout 2009 with a continuous monthly influx of new patients diluting the cost decline anticipated from patients who had been enrolled with us for 10 months or more.

We expect to see slower enrollment growth in 2010, which we expect will help bring down our medical costs.

General and administrative expenses, including premium taxes, were $116 million for the fourth quarter 2009, representing 12% of total revenue, as compared with $92 million or 11.3% of total revenue for the fourth quarter of 2008.

Premium taxes were the largest contributor to our higher G&A expenses, increasing sequentially by nearly $10 million. Our premium tax increased to $39 million or 4% of revenue in the fourth quarter of 2009, up from 3.2% of revenue for the third quarter. This was due to an increase in the Ohio premium tax from 5.5% to 7.7%, or about $5 million, and a California premium tax retroactive from January 1 to September 30 of about $5 million. And Washington had a retroactive business tax of about $2 million.

Core G&A, or G&A less premium taxes, decreased to 8% in the fourth quarter 2009, as compared with 8.1% in the fourth quarter of 2008. However, on a sequential basis, core G&A increased by approximately 50 basis points.

The upward creep of our core G&A ratio was due to front loading Medicare marketing expenditures, which occur in the fourth quarter as part of the program's open enrollment period, network development costs associated with our new CHIP contract in Texas, which is scheduled to be implemented in September of 2010, and the move of our data center from California to New Mexico.

Days in claims payable for the fourth quarter were 37 days, which was flat on a sequential basis compared to third quarter.

The company remains consistent in its reserving methodology.

I would also like to point out, as we mentioned at our investor day, that we received approximately 2 million more claims in 2009 than we did in 2008. And yet we still ended the year with claims inventory levels similar to the end of 2008.

Positive cash flow for the fourth quarter was $25 million, while cash flow from operating activities for all of 2009 was $155 million compared with $40 million in 2008, an increase of $115 million. Contributors to this increase included a $114 million increase in deferred revenue, primarily in Ohio, and a $43 million increase in medical claims and benefits payable associated with enrollment growth across the company's health plans.

Excluding restricted investments, the company had cash and investments of approximately $704 million.

The parent company had free cash and investments of approximately $46 million, including auction rate securities with a fair value of $17 million.

Now let me spend a moment reviewing our 2010 guidance. We are reaffirming our guidance discussed at our investor day on January 27, 2010. Please bear in mind that all of these figures are approximations.

Premium revenues, $3.9 billion.

Investment income, $9 million.

Medical care ratio, 86%.

G&A ratio, 11%.

Core G&A ratio, or G&A ratio excluding premium tax, 7.6%.

Depreciation and amortization, $42.6 million.

Interest expense, $13.8 million.

Net income, $39 million.

Diluted EPS, $1.50.

Diluted shares outstanding, 26 million.

Not included in our 2010 guidance are the following items.

The anticipated dilution from the HIM acquisition.

Any savings from our medical cost initiatives.

Any rate increases or rate decreases other than those that we know about in California, Ohio, Utah, and Washington.

An important factor to keep in mind while building your models is our earnings seasonality. We expect to see 30% at our annual earnings in the first half of 2010 and 70% of our earnings in the second half.

Also, as it relates to seasonality, please take into consideration that our medical care ratio has historically been the highest in the first quarter.

This concludes our prepared remarks. Operator, we are now ready to take questions.

Josh Raskin, Barclays Capital.

Just first question, what is the normal total dollars or total cost of a flu season for you? Maybe -- I don't know how you guys think about it, as a fourth quarter or first quarter -- I'm just trying to find out what is a normal -- say, an '08 number? And then the -- versus the incremental in 2009?

Well, the first thing is, we don't know what a -- quote, unquote -- normal flu season is. Each year it comes out a little bit differently. What we do -- what we have been able to determine is the impact of the flu on this year over 2008. The total dollar -- the total per-share amount was $0.83, so I guess if you give me a minute I can back that into a dollar figure.

The other thing to remember is that typically in the past the flu season for us has occurred in December, January and February. And we saw three flu seasons in 2009, the winter flu season, the H1N1 flu season around April, and then another flu season in the fourth quarter. So it was a big impact.

What I was looking for is, the $0.83, it's incremental, so does that mean that the total costs were $1.00 per share and it was $0.17 in '08 or (multiple speakers) I'm just trying to figure out.

Oh. I guess we'd have to go back and figure out what the flu impact was for 2008. (multiple speakers)

That's fine. The second question is on some of the states the membership numbers moved around a little bit I guess. California was down a little bit. I was a little surprised by that. And then conversely I guess Michigan and Texas were a little bit higher than we were looking for. Was there sort of any change, program changes or anything we should know about there?

Well, actually in California, if you go back to our third quarter call, one of the things that we talked about was getting out of areas or cutting out providers that were not profitable for us, and so the strategy in California is taking hold now.

In Michigan I think the -- two things happened. One, there was a rebid of the RFP, we got a few new counties, but also we moved up the scale in terms of the algorithm. The algorithm in Michigan is based on a number of quality factors, and we were able to move up higher in the tiers and so we got more membership.

And in Texas, it was -- we did a small acquisition in Laredo of some CHIP members, which really helped set the stage for the -- for our expansion that's going to come later this year.

Okay. That's preparation for September. Okay, thanks.

(Operator Instructions). Tom Carroll, Stifel Nicolaus.

I guess a couple of things. The medical loss ratio in Florida, 97%, I guess just struck me as being a bit high, especially after having kind of a critical mass in members, what, 50,000 you ended the year at, and I think you've been operating there since, what, December of '08. So I guess what do you think that will improve to in 2010?

And then secondly in Florida, do you believe the state is serious this time around in migrating PCCM beneficiaries over to managed care companies? I feel like that's something we've heard about in Florida for -- going on seven or eight years now.

Let's take the second question first. We don't know. As you said, the State of Florida continues to look at moving the PCCM members into managed care, and it always comes down to a political battle. So we don't have a particular view on that.

The reason that the Florida medical costs were high, we did get it looks like about a 15% increase in membership in Florida during the fourth quarter. One of the things that we know -- we may have discussed this before -- is that we've got to honor the pharmacy regimen that the patients are getting when they come on the plan, for at least 90 days. So when the patients come on they have very high pharmacy costs until we are able to get them under our formulary and bring them down.

We don't really disclose MCR targets by state. But I would be safe to say that we think we can get the costs down in Florida to 97%

And then as a second question, you made a lot of comments in your press release about flat inpatient costs despite higher utilization. What helped to support that? Was it your re-contracting efforts in the last couple of years?

Yes. The unit costs have come down as a result of our contracting efforts.

So that's the -- it's just new contracts is the primary reason, okay. Thank you.

There are no further questions at this time. I will now turn the conference back to you.

Well, thank you everyone. We will see you at our next quarterly earnings release.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask you to please disconnect your lines. Have a great rest of the day everyone.