Juan Jose Orellana - Senior Vice President of Investor Relations & Marketing Joseph Mario Molina - Chairman, Chief Executive Officer and President John C. Molina - Chief Financial Officer, Executive Vice President of Financial Affairs, Treasurer, Director and Member of Compliance Committee Joseph W. White - Chief Accounting Officer Terry P. Bayer - Chief Operating Officer

Sarah James - Wedbush Securities Inc., Research Division Joshua R. Raskin - Barclays Capital, Research Division Michael A. Newshel - JP Morgan Chase & Co, Research Division Christian Rigg - Susquehanna Financial Group, LLLP, Research Division Andrew Schenker - Morgan Stanley, Research Division Ana Gupte - Leerink Swann LLC, Research Division Chris Carter Scott J. Fidel - Deutsche Bank AG, Research Division Stephen Baxter - BofA Merrill Lynch, Research Division Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division David H. Windley - Jefferies LLC, Research Division Thomas A. Carroll - Stifel, Nicolaus & Company, Incorporated, Research Division

Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded, Thursday, May 1, 2014. I would now like to turn the conference call over to Mr. Juan José Orellana, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, George. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the first quarter ended March 31, 2014. 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; and Joseph White, our Chief Accounting Officer. After the completion of our prepared remarks, we will call open the call to your questions. [Operator Instructions] Our comments today will contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. All of our forward-looking statements are based on current our expectations and assumptions, which are subject to numerous risk 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 Form 10-K annual report, our Form 10-Q quarterly reports and our Form 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 May 1, 2014, and we disclaim any obligation to update such statements except as required by securities laws. This call is being recorded, and a 30-day replay of the conference call will be available at our company's website, molinahealthcare.com. I would now like to turn the call over to Dr. Mario Molina.

Thank you, Juan José. Hello, everyone. And as always, thank you for your interest in Molina Healthcare. As you review our financial results for the quarter, you'll see that our performance reflects actions that we talked about at our Investor Day in February. We are experiencing considerable revenue and enrollment growth. We are transforming from an acute care company to a chronic care company. We are diversifying by winning new contracts and entering new states. We are aligning our resources and skills to gain greater administrative leverage, and we continue to build on our framework for dramatic expansion in 2014 and beyond. For the quarter, we delivered adjusted net income per diluted share from continuing operations of $0.64. Our operating results were strong, despite the headwinds we communicated at our Investor Day. Of considerable interest in the investors during the first quarter was the timing difference between expense and revenue recognition associated with the reimbursement of the health insurance fees. As expected, the company had not secured agreements with all of our states prior to the quarter end. And as a result, only recognized reimbursement and tax effect in Florida, Illinois, Ohio, Washington and Wisconsin. Nevertheless, we remain optimistic that agreements with our remaining states will be resolved prior to the close of 2014. While much has happened during the first quarter in both our industry and our business, not much has actually changed from what we reported at the Investor Day. So let me focus on some of the things that have changed. Earlier this month, CMS reported that between October and February, nearly 12 million people have been determined eligible for Medicaid and CHIP, but that only 3 million people have actually enrolled in these programs during the same period. The increase in Medicaid enrollment across the country…

Thank you, Mario, and hello, everyone. As Mario highlighted earlier, we reported adjusted earnings of $0.64 per diluted share; and on a GAAP basis, earnings per diluted share from continuing operations of $0.10. As a reminder, we introduced our methodology for the adjusted net income per diluted share calculation at our Investor Day last February. These adjustments add back non-cash items such as depreciation and amortization, stock-based compensation and noncash interest expense. We believe that these adjustments best reflect our financial performance. We're pleased with our first quarter results which have developed as much as we anticipated they would when we spoke to you last in New York in February. We have been speaking for some time about the dramatic changes that would come our way in 2014. These changes make meaningful comparisons difficult to our results of a year ago or even to the previous quarter. We outlined many of the items affecting year-over-year comparability in today's press release for your reference, so rather than revisiting the differences, let me highlight some of the accomplishments achieved this quarter. Premium revenue grew by 21%, almost $350 million from what we reported for the fourth quarter of 2013, only 12 weeks ago. At 88.7% of premium revenue, Medical care costs were flat compared to last quarter, generating over $37 million more in medical margin than we reported a year -- a quarter ago. General and administrative expense fell from 11% of revenue in the fourth quarter to only 9.1% of revenue 90 days later. So with that as background, let me dive into the details. First, let's take the revenue for this quarter. The major drivers of the $350 million increase over the fourth quarter of last year were: Medicaid Expansion in California, New Mexico and Washington, which added $200 million…

[Operator Instructions] Our first question comes from Sarah James from Wedbush.

As some of your dual contracts have started to come online, has there been any updates or developments, any understanding of opt-out likelihood? Your assumptions seem to be a little bit more conservative than some of your peers?

This is Mario. We think it's a little too early to start commenting on the opt-out rates. Remember, that these patients have the ability to opt out any time throughout the course of the program. And for our guidance, we assumed a 50% opt-out rate.

Okay. You mentioned benefiting some -- Sovaldi not being on the preferred drug list in some markets in first quarter, which is similar to comments that your peers have made, but some states have moved it onto the PDL for April while others, like Texas, may not do so until the third quarter. So I was wondering if you could help us understand how much of your book was exposed to that drug cost in the first quarter versus how you think about it being exposed in the second quarter, given the recent PDL update?

Well, this is Mario again. I think that we will see more exposure going forward. I think Gilead reported that only 7% of the sales in the first quarter were from Medicaid, although they didn't break out how much of the sales on the HMO side were to Medicaid patients covered by health plans. But I do think we will see this grow as the year unfolds. At the same token, when we first started talking about this at the beginning of the year, most states didn't recognize the problem. I think now it's widely recognized by state Medicaid directors that this is an issue, and I think there's growing acknowledgment by state Medicaid programs that the rates that we initially received did not include the cost of this new drug. So the story is evolving, and I think that perhaps next quarter, we'll be able to tell you a little bit more about utilization, but also a little bit more about what the state Medicaid programs are doing to appropriately reimburse us for costs.

Our next question comes from Joshua Raskin with Barclays.

My question is on the Medicaid expansion population. I know it's early in terms of trends, and it sounds like you guys were accruing, I guess, you said at 88% MLRs. When do you think you'll have a better handle as to what the claims looks like? I'm assuming you've got some of the January claims processed and maybe a lot of the pharmacy claims, et cetera? And then the second part to the question is where are these members getting enrolled? Are the states aware of who these individuals are and they're auto assigning them? Or a lot of these people are getting signed up through utilization of the health care system i.e. hospital providers signing them up when they have some sort of acute episodes.

Josh, this is John. With respect to your -- the first part of your question. I think we'll have a much better handle by the end of the second quarter in terms of what the true utilization patterns are going to be. And as far as how folks are singing up, we don't have a lot of visibility into that. If they do identify a provider and they communicate that to the state and we get that information, then we can match them up. But I don't know at this point how many do and how many of them are just being auto assigned.

I guess, if you look at your January enrollment, for example, in some of the states where you've seen some robust growth there, are you able to see some sort of episode or some sort of cost usage early in their assignment of health plans? Or was there a January 1 sort of bucket that came through, so it looks like these are more evenly distributed across the population?

We didn't notice any particular pattern of how people were enrolled, Josh, sorry.

Okay. All right, no problem. Just one second question, just on the exchange, I know it's only 8,000 lives for you. Is that majority in California? And then, any thoughts on where those individuals are coming on versus where you guys priced for them?

Well, the state that has the largest enrollment right now is California, so it is the -- where the majority of -- probably, half the 2/3 are coming out of California. What was the second part of your question, Josh?

In terms of cost trends or any early signs of the age or demographics, how they're lining up relative to what your expectations were?

Yes. Actually, the demographics are very similar to what we expected when we made our projections, so we're pleased about that. A little over half of them are coming on in the Silver plan. 91% of them are receiving some sort of government subsidy, so it's all very consistent with what we expected. In terms of the medical costs, I think it's probably still too early to say, but the pharmacy costs seem to be tracking within expectations.

Our next question comes from Justin Lake with JPMorgan. Michael A. Newshel - JP Morgan Chase & Co, Research Division: It's actually Mike Newshel in for Justin. So I kind of like to go back to Hep C cost. If you can, is it possible to -- can you give us a number of patients or the dollar spending for the quarter? And sort of embedded within -- embedded in guidance, do you have -- there's something embedded in there for the full year? Or you're just assuming that if it does accelerate that the states are going to come back and cover for you?

Well, we're not going to break out the number of prescriptions or utilizing patients. We typically don't get into that kind of granular detail on our medical costs, so we're not going to do it here either. I don't believe that it was built into our guidance, because, we, frankly, did not anticipate this based on the rates that we were given from the state. So we see this as something outside of guidance. We are negotiating probably, right now, with about half the states over adjustments to payments whether it be through carve outs or a pass through or some of the mechanism or revisiting this in the rates. Michael A. Newshel - JP Morgan Chase & Co, Research Division: Okay. One more question on the ramp up of -- or, actually, the ramp down of the administrative expense ratio over the course of the year. You updated the fourth quarter. Any update you can give for the second and third quarter in terms of the ramp down given the delays in duals launches?

Sure. This is John. If you go back to our Investor Day slide presentation, there was a slide that had quarterly estimate for what we thought the MN expense ratio would be. I don't, off the top of my head, know what it is for Q2 and Q3. But if you want to go back to the slide, you should be able to find it. Michael A. Newshel - JP Morgan Chase & Co, Research Division: I know, and it's still valid?

Yes, that's correct. It's Joe speaking. We don't think the sliding of those duals program is going to affect guidance one way or the other.

Our next question comes from Chris Rigg with the Susquehanna International Group.

Just to come back to the exchange population again. I know you get paid slightly different rates, because there's, obviously, some acuity differences, but more generally, and we've heard some of the hospital guys talk about substantial declines in their uninsured visits, primarily, in the expansion states. And, I guess, can you give us a sense for whether you've seen a materially higher level of inpatient or hospital outpatient utilization among the newly enrolled by the expansion versus traditional populations?

Well, we -- are you talking about the expansion population or the exchange population? Because it sounds like you're mixing the 2.

Yes, I meant to say the Medicaid expansion population, so the 133,000 that you guys highlighted.

Yes. It's Joe's speaking. Frankly, those claims have been slow to come in. And we really don't -- we just don't have a read on their -- the medical claims development there, how it breaks down between inpatient and outpatient. Again, we're confident it's in that high 80s MCR, but we just haven't had a huge amount of claims development.

Okay. And then, just on the build and the claims inventory in the balance sheet. Is that just due to your expected ramp in growth? Or is there something else going on there?

It's Joe speaking again, that's tied to our growth, nothing unusual in claims process or anything.

Our next question comes from Andy Schenker with Morgan Stanley.

Just going back to the exchange this year, obviously, about 8,000 lives in the first quarter. May I ask what are you guys expecting now for the year? Is it still around the 15,000 point, or after April, this is going to vary a little bit from that?

This is John. We did see a pick up in enrollment towards the end of March, early April, so that's going to grow. I don't know, it's going to get much beyond the 15,000 that we're talking about.

So switching, specifically to Washington there, I saw a little bit of an increase in the MCR, obviously, an expansion state there, was that part of the driver of the increase? Or share anything else was highlighting in Washington, specifically?

It's Joe speaking yes, it's expansion, which is running [indiscernible] again of what we expect is running a little bit about what we traditionally run for the other populations in Washington. And I think we talked to the end of last year about a little bit of rate pressure in Washington, which is carried over into this year.

Our next question comes from Ana Gupte with Leerink.

So just following up on the Medicaid Expansion and the claims experience that you saw this quarter. You talked about the 1Q being -- coming in favorable relative to expectations. How much of that is due to any kind of weather and/or the flu impact? And on the Medicaid Expansion, you said you haven't seen a lot of claims, but are you trying to steer the patients more to your point about being a chronic care company to the primary care physician when they come on board? Or will they just stand up in the ER? And how long does the claim cycle take for you to start seeing something? Might we see something that may have already happened in 1Q?

There's a bunch of questions in there. Let me see if I can hit them all. In terms of our expectations in whether a favorable pickup in Q1 because of -- I think what we said was we're coming at our expectation, which was the high 80s, like 88%. So I'm not sure if there was any favorability there. In terms of where are we expecting them to get care, all of the patients that we get, we do try to steer towards the primary care doctor as opposed to the ER. These folks may traditionally have used the ER as their primary care site, but that's really not much different than any time we switch from a fee-for-service in the managed-care environment. So we do try to connect them with their PCP. We do welcome calls, make sure they know who their primary care doctor is and encourage them to go in for that visit. And last, again, it's just really too early to tell, since we don't have a lot of claims experience yet to know what the utilization pattern is, but I don't think we're seeing anything unusual.

Okay, yes, got it. It's very early in the day. And I just wanted to follow-up, understanding, again, it's very early on the duals side. You've enrolled some members, and you're doing the health risk assessments, I'm just trying to triangulate to your point around, we should be looking at adjusted income. And as you're seeing some of its early experiences and risk profiles with duals and Medicaid expansion and after you get your revenue, that you're expecting on board, what might we see as normalized MLRs and your administrative cost ratio and margin? What would be your best guess going forward compared to where you are today?

Sure, I think that for the year, we're estimating medical care ratio of somewhere between 88% and 90% off the top of my head. I'm going back to guidance. And the admin cost, we're expecting will continue to decline throughout the year. We should have, as we said, fourth quarter about 7.5%. And I think on average, about 8% for the year. 89%...

I was thinking more about your $12.5 billion kind of long-term targets, and so it shouldn't go beyond your one-time story in '14. We all understand it's a transition here?

True. And what we've said consistently is we should exit 2015. We're on a $12.5 billion run rate, and our net income goal is 2%, and that's on a GAAP basis, so we'll be revisiting that in the next Investor Day to translate that into an adjusted earnings margin. But our story is fairly consistent in terms of what we expect, in terms of the margin and the revenue goals.

So still 2%, okay.

Our next question comes from Chris Carter with Crédit Suisse.

I guess, just first question. Can you just talk about if you experienced any benefit in the quarter from weather or more benign flu season?

This is John. I think the flu season was about the same as it was last year. So I don't know -- certainly better than when we had H1N1 in 2009, but I don't know if I would say it's a benefit.

In terms of the weather, this is Mario, a lot of that weather affected more the eastern part of the country. If you look, a large part of our membership is in places like California and Washington. I don't think the weather had any impact on us.

Okay. And then just curious, I know that the California MLR looked pretty good. I'm curious how that compared to the 3.25% target margin in the settlement agreement? And maybe if you had a swing positive or negative into that settlement account?

This is John. I think if you look in our Q, which is also filed today, we realized about a $5 million pickup from the settlement agreement.

[Operator Instructions] Our next question comes from Scott Fidel with Deutsche Bank.

First question, just looks like the cost of services ratio improved by around 250 bps sequentially. were there any factors that drove the improvement in particular? And is this a good run rate for the rest of the year? That would seem to be trending a bit better than I was expecting there.

This is Joe speaking. We've seen a pretty good quarter with MMS in first quarter of this year. It's a couple of things. There has been some lift, which we expect to continue from more claimed volume tied to Medicaid expansion. There were also some revenue recognition related to projects being completed and onetime payments from the state. I say if you can look at that, the improvement is 50-50 split between those two. So some of that improvement will carry forward.

Okay. Then just on the Texas MLR, was up around 300 bps sequentially. Was that all just not being able to recognize the quality revenues yet? Or were there any other factors that drove the MLR up a bit sequentially?

It's Joe speaking again. The big issue there in terms of that, sequentially, from fourth quarter is the at-risk quality revenue not recognized.

Okay. Then just last question, I guess, just swinging back to Sovaldi here. Interested just how much does the determinations differ in the States, where the drug is on the PDL as compared to those that aren't. It was just interesting looking at the Florida Medicaid drug utilization report for the first quarter. It showed that Sovaldi for Florida Medicaid was the most costly drug in the program, even though they didn't even put it to the PDL till the end of the quarter. So just thought it was interesting that we're already seeing that type of spend, even in a state where it wasn't in the PDL. So just interested in how -- the variability that occurs between states with it on the PDL as compared to those that are not.

Well, we know that the state of Florida that they expect that -- Sovaldi to double their cost this year for the treatment of Hepatitis C, so I think, at least, in that status, it's going to be significant. I can't give you data on a state-by-state basis. And, of course, we only have limited exposure, because we're only looking at what our patients are experiencing, not what the entire state is doing.

Mario, just on Florida, is there any update you know of as to where the discussion stand? Because I think the budget was basically getting wrapped up, right? So just wondering whether -- how the discussion on getting a rate adjustment filtered into that sort of last-minute discussions going on?

I think there's a lot of activity even yesterday and today on that. And I would say that it's a positive sign that the states are recognizing that this is an incremental cost. And I think most states are now recognizing that it was not built into the rates.

So you feel positive they're going to make an adjustment then, for the rates there?

I think we're going to see some adjustments. Like everything else though, is it appropriate, is it enough? Those are the kinds of things we always discuss with the states when they makes changes in the rates?

Our next question comes from Kevin Fischbeck with Bank of America.

This is Steve Baxter on for Kevin. I wanted to come back to the balance sheet. It looks like the claims in the inventory and the claims in inventory per member roughly doubled year-over-year. I was wondering if you could provide some color on what's driving the increase? And whether you expect that to clear out, or whether that might be a more stable kind of inventory level to think about going forward?

It's Joe speaking. The increase in inventory, I think, a better metric to look at would be to compare it to fourth quarter of last year, but it's certainly and predominantly enrollment-driven.

Okay, well, I see that the claims per member were about 0.08 last year in the fourth quarter and now it looks like they're 0.013 -- or 0.13, so it seems like a pretty dramatic increase.

Well, you're always going to have with -- as good a job, frankly, as we think we do in terms of claims payment, when new populations come on, you always tend to have a buildup, with peak, third, fourth month, fifth month of enrollment. And it just speaks to the time it takes for that. There's claims that show up in inventory and then to work through the backlog. It takes a while maneuvering people on for doctors to get the claims and -- based on where the member belongs.

And this also underscores why the days in claims payable was up.

Okay. No, that makes sense. I appreciate the color. And then just one follow up on the $5 million you recognized from the risk share restaurant agreement. Was that on the duals site of enrollment or in the Medicaid side?

It was on the Medicaid side.

No duals at first quarter in California.

Okay then. So you're not really booking the duals at very high MLR then? Somewhere in the low 90s, like you had kind of given a guidance?

We haven't got any duals in the revenue side for the first quarter, so we will book those, as they start to come in Q2.

Our next question comes from Peter Costa with Wells Fargo.

Can you tell us a little bit more about the woodwork effect? I know you haven't seen much of it yet, but you talked about potentially seeing it going forward? Do you think that it's just held up sort of in process as we're moving through some of these people who've been identified as perhaps eligible for Medicaid that just haven't signed up yet? Is it a matter of going out and targeting these people from you guys? Or exactly, what do you think is going on there? And when do you think that will start to show up in your numbers?

This is Terry. It varies by state, but you've seen in the press that the high number of folks who've been found eligible but still had not really made it into the roles. Remember, there's a process, by which people get on Medicaid, and it can take months. It varies sometimes [indiscernible] at the county level. There have been issues with some of the state processing systems. So in most cases, we had seen delays in that. And we expect it to be coming in, as people work their way through that process.

And is that factored into your guidance as you sort of -- that enrollment process, and you see them for those people coming in? Do you have sort of factored in, in the last couple of quarters here showing up?

Yes, we do. I think we went over that -- quantified that at the Investor Day.

Okay. And then just on the Texas incentive fee is that in guidance at this point, the $0.06?

It's Joe speaking, yes. We expect to realize most of that. I mean, recognize most of that by the end of the year.

Our next question comes from David Windley from Jefferies.

Quick question on your MLR accrual on expansion lives. I want to make sure I understand. So I've heard you say 88% to 90%, or that range a couple of times. I've also heard you say that you haven't seen a lot of claims for them. So can you help me again to understand your comfort level with that high 80s level, if I have that right? And what allowances you're making for the low visibility relative to claims volume?

This is Joe speaking. Obviously, when we have situations with light claims receipts, we tend to err a little bit to the side of being cautious. What we do, clearly, have though with expansion lives at this stage is we have very good pharmacy data, of course. And that is suggesting that we're tracking to where the lives are priced at by the state, or perhaps a little better than that. So I think it's fair to say we feel pretty good about that number. Pharmacy date is a pretty good indication of where it's going to come in, in time.

And taking that down to operating and pretax. What are your -- what are the company's expectations for contribution margin on these lives? What's in guidance, I guess, what I mean by that?

This is John. In guidance, we've got -- it varies a little bit by state, but 88% is about the average. If you go back to our Investor Day slide, we sort of broke it down, what we thought Medicaid Expansion will be on a state-by-state basis. I don't know that the admin costs vary much, so I'd use an average admin cost. And that's how you can get to a margin.

And if you look towards the MD&A discussion in our 10-Q, you see where we talked a little bit about the blended premium rates for the different population routes. So you can build it from that, I think.

Our last question comes from Tom Carroll with Stifel. Thomas A. Carroll - Stifel, Nicolaus & Company, Incorporated, Research Division: Question for you on kind of the variation in the headwinds that you told us about -- at your Investor Day a couple of months ago versus the actual results. And if I'm adding it up correctly, it looks like you highlighted kind of $0.92 a share in headwinds, and it looks like those are only turning out to be about $0.40 a share. So big favorable swing. Any 1 or 2 items you could highlight for us that would reconcile that sizable difference from 2 months ago?

Sure, it's Joe speaking. When we called those out in New York, the intent was to present in each of those areas, the most extreme negative circumstances that could arise from those areas. So, obviously, had all of those played out, I think Slide 57 on our investor deck, had all those played out as negative, we would have had a disastrous quarter. So I think the way to look at it is those were each worse case and what could develop. That's not -- we don't set guidance, so assuming every worse case is going to develop. So that's the best I could express that. Thomas A. Carroll - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay, okay, very good. It sounds like a lot of conservatism built into those numbers, which were worst-case scenarios.

And if you had anybody worked those into their numbers, they would've had a much lower number than how consensus work out for this quarter. Thomas A. Carroll - Stifel, Nicolaus & Company, Incorporated, Research Division: And then I missed it. Did you mention the Sovaldi spend in first quarter? I'd love to know that number if you could provide it to us.

No, Tom. We didn't, and we're not disclosing it. We typically don't break out medical cost to that granular degree, so we're not going to do that now. Thomas A. Carroll - Stifel, Nicolaus & Company, Incorporated, Research Division: It's just kind of an unusual characteristic this quarter, so just sticking to your guns on that?

That's right. Thomas A. Carroll - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. And then one last question. I'm pretty sure you guys bid down in Puerto Rico. I wondered if you could give us an update on kind of where that stands? It seems like sources and information's kind of gone radio silent. Is there an update you can give us?

No, this is John, no. Until something definitive happens, we're not going to comment.

All right, well, thank you, everyone. We appreciate you listening in on this quarter's call, and we'll be back with you in a few months to go over the second quarter.

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