Earnings call transcript: Molina Healthcare Q4 2024 misses EPS, stock drops 10%

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Overview

The earnings call highlights strong financial performance with significant growth initiatives, positive EPS and revenue guidance, and effective cost management. The Q&A section reveals management's confidence in handling MLR trends and financial forecasts, though some responses lacked clarity. Despite minor uncertainties, the overall sentiment remains optimistic, supported by solid financial metrics and strategic growth plans. The absence of negative catalysts and the potential for improved operating cash flow in 2025 further bolster a positive outlook for the stock price.

Key Financial Performance

Adjusted Earnings Per Share (EPS) $5.05 for Q4 2024, down from expectations due to higher medical costs.

Full Year Adjusted EPS $22.65, representing 8.5% year-over-year growth.

Premium Revenue (Q4 2024) $10,000,000,000, reflecting a decrease in expectations due to medical cost pressures.

Full Year Premium Revenue $38,600,000,000, representing 19% year-over-year growth.

Consolidated Medical Care Ratio (MCR) (Q4 2024) 90.2%, higher than expected due to medical cost pressure.

Full Year MCR (2024) 89.1%, reflecting higher than expected medical costs in the second half of the year.

Medicaid MCR (Full Year) 90.3%, adjusted to 89.8% when accounting for prior year items.

Medicare MCR (Full Year) 89.1%, above long-term range due to higher medical costs.

Marketplace MCR (Full Year) 75.4%, significantly outperforming long-term target range.

General and Administrative (G&A) Ratio (Full Year) 6.7%, reflecting effective cost management.

Operating Cash Flow (Full Year 2024) $644,000,000, lower than 2023 due to risk corridor payments.

Debt to EBITDA Ratio 1.7x, indicating strong capital foundation.

Cash Balance (End of Q4 2024) $445,000,000, used partially for the ConnectiCare acquisition.

Total Revenue (Q4 2024) Approximately $10,500,000,000, reflecting overall performance.

Pre-tax Margin (Full Year) 4.3%, well within long-term target range.

Projected Premium Revenue (2025) Approximately $42,000,000,000, representing approximately 9% growth from 2024.

Projected Adjusted EPS (2025) At least $24.5, reflecting a solid foundation for growth.

Projected Consolidated MCR (2025) 88.7%, indicating a slight improvement.

Projected Medicaid MCR (2025) 89.9%, nearly 100 basis points off long-term target.

Projected Medicare MCR (2025) 89%, reflecting conservative approach to bids.

Projected Marketplace MCR (2025) 79%, within long-term target range.

Investment Income Expectation (2025) Approximately $400,000,000.

Operating Cash Flow Expectation (2025) Expected to improve compared to 2024.

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Operating Highlights

Acquisition of ConnectiCare: Closed acquisition of ConnectiCare from EmblemHealth on February 1, expected to generate $1,200,000,000 in revenue, primarily in the marketplace.

New Medicaid Contract in Georgia: Awarded a Medicaid managed care services contract in Georgia, estimated to generate $2,000,000,000 in annual premium revenue.

Dual Eligible Contracts: Secured dual contracts expanding footprint in Ohio, Michigan, Massachusetts, and Idaho, with incremental revenue over $3,000,000,000.

Marketplace Growth: Marketplace MCR was 75.4% for the full year, allowing reinvestment of excess margin into 2025 pricing to drive higher growth.

G&A Ratio: Achieved an adjusted G&A ratio of 6.7% for the full year, demonstrating effective cost management and productivity.

Premium Revenue Growth: Reported full year premium revenue of $38,600,000,000, representing 19% year-over-year growth.

2025 Guidance: Projected 2025 premium revenue of approximately $42,000,000,000 and adjusted earnings per share of at least $24.5, reflecting an 8% year-over-year growth.

Long-term Growth Targets: On track to meet targets of $46,000,000,000 in premium revenue by 2026 and at least $52,000,000,000 by 2027.

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Risk or Challenges

Medical Cost Pressure: Higher than expected medical costs in both Medicaid and Medicare segments, with a consolidated MCR of 90.2% in Q4 2024, indicating increased utilization and costs.

Regulatory Risks: Potential cuts to Medicaid funding as part of legislative packages in 2025, which could impact enrollment and benefits.

Competitive Pressures: Increased competition in the marketplace, particularly with the need to maintain competitive pricing while managing margins.

Supply Chain Challenges: Challenges in managing medical costs and utilization trends, particularly in long-term services and supports (LTSS) and pharmacy.

Economic Factors: Economic pressures leading to higher medical costs and potential impacts on premium revenue growth.

Contract Implementation Costs: $1 per share in contract implementation costs related to new significant revenue growth cycles, which could affect EPS guidance.

Membership Growth Risks: Projected membership growth may be impacted by potential changes in APTC subsidies and overall market conditions.

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Guidance & Outlook

Acquisition of ConnectiCare: Closed acquisition of ConnectiCare from EmblemHealth, expected to generate $1.2 billion in revenue primarily from the marketplace.

New Medicaid Contract in Georgia: Awarded a Medicaid managed care services contract in Georgia, estimated to generate $2 billion in annual premium revenue.

Dual Eligible Contracts: Secured dual contracts expanding footprint in Ohio, Michigan, Massachusetts, and Idaho, with incremental revenue exceeding $3 billion.

Retention of Medicaid Contracts: Successfully retained traditional Medicaid contracts in Michigan, Florida, and Wisconsin, representing over $2 billion in renewed premium revenue.

Growth Targets: On track to meet targets of $46 billion in premium revenue by 2026 and at least $52 billion by 2027.

Embedded Earnings: Increased embedded earnings to $7.75 for 2026 and beyond, supporting future EPS growth.

2025 Premium Revenue Guidance: Projected premium revenue of approximately $42 billion for 2025, representing about 9% growth from 2024.

2025 EPS Guidance: Adjusted earnings per share guidance of at least $24.5, reflecting approximately 8% year-over-year growth.

2025 MCR Guidance: Consolidated MCR expected to be 88.7%, with Medicaid MCR at 89.9%.

2025 Pre-tax Margin Guidance: Expected pre-tax margin of 4.1%, within long-term target range.

Membership Growth: Expecting to add over 100,000 new Medicaid members, with year-end membership projected at approximately 5 million.

Investment Income: Implied investment income expected to be about $400 million for 2025.

Operating Cash Flow: Expecting a rebound in operating cash flow in 2025 after a decline in 2024 due to corridor payments.

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Shareholder Return Plan

Dividends Paid: In the quarter, we harvested approximately $327,000,000 of subsidiary dividends.

Share Repurchase: During the quarter, we repurchased 1,700,000 shares at a total cost of $500,000,000.

2025 Adjusted EPS Guidance: Our adjusted EPS guidance for 2025 is at least $24.5 per share, which includes $1 of contract implementation costs.

Embedded Earnings: Our 2025 guidance includes the realization of $1.5 to yield embedded earnings of approximately $7.75 going into 2026.

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Key Q&A

Q:Can you give us a little bit more color on the components within that between rates, trend and corridors that came in better or worse than expectations resulting in Medicaid MLR 90 basis points above that?

A:The MLR guide for 2025 in Medicaid is basically flat with 2024. We have good visibility into rates. We're projecting a 4.5% rate increase and a 4.5% trend of the 2024 baseline. That rate increase, 75% of it is known at 5%, twenty five % of it is estimated at 2.5% blending to 4.5%. On the trend number, we fully considered the second half pressure as we trended into 2025.

Q:Can you help us understand cited about 100 basis points remaining at the third quarter call?

A:It's a matter of geography. The benefit of the corridor is not evenly distributed across 21 states. If you have underperformance, it depends where that underperformance happens, whether you get the benefit of the corridor. In the fourth quarter, we had forecasted 50 basis points of trend pressure absorbed by the corridors, but it didn't pan out that way.

Q:I was hoping you could give us also the fourth quarter breakdown, if there's any lingering impact from new store, any impact from retros either positive or negative?

A:On the Medicaid MCR in the fourth quarter, it was merely a case of fourth quarter dates of service trending at 1.2% versus a forecast of 50 basis points. There were no one-time items. The trend outpaced our estimate, quarters protection provided no benefit.

Q:Would you be able to share the IBNR balance at the end of the year just to help us evaluate the reserve picture?

A:On medical claims payable, we were at $4,600,000,000. The DCP was $48,000,000,000. This is well within our normal range.

Q:What gives you comfort there regarding Medicare MLR?

A:We reported an 89.1 for twenty twenty four. While the revenue impact was not meaningful, the MLR impact was. So take 40 bps off the 89.1% and normalize the jumping off point to 88.7%. We believe our benefit design anticipated a lot of this.

Q:What was 4Q cost trend and what's driving your assumptions of cost trend lowering in 2025?

A:In 2024 in Medicaid, our cost trend was 6.5%. Comparing that to the 4.5% trend in 2025, the acuity shift doesn't recur. We considered every nuance of utilization trend in the third and fourth quarters to inform that trend.

Q:Can you give us some more color on that?

A:We consciously when you're producing 10% to 11% pretax margins two years in a row, you got to remain competitive and if you keep it there, you're going to run into the three year minimum MLR.

Q:What are your assumptions on marketplace membership attrition should APTC subsidies not be extended?

A:We took all the factors into consideration in our marketplace membership projection and we're modeling about 4% attrition a month.

Q:How much did the risk adjustment screw up actually impact your MLR?

A:The first is recall we exited MAPD, traditional Medicare Advantage prescription drug in 13 states for 2025. While the revenue impact was not meaningful, the MLR impact was.

Q:What are your expectations for investment income and operating cash flow for '25?

A:Call it about $400,000,000 would be my implied investment income number within guidance. Operating cash flow should always be higher than net income.

Q:Review of Unclear Management Responses

A:Management appeared to avoid giving a direct answer regarding the specifics of the risk corridors and their impact on the financials, as well as the exact details on the assumptions for marketplace membership attrition and the impact of APTC subsidies.

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Earnings Word Cloud

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Earnings call transcript: Molina Healthcare Q4 2024 misses EPS, stock drops 10%

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