Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare Second Quarter 2015 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we’ll conduct a question-and-answer session [Operator Instructions]. As a reminder, this conference is being recorded Thursday, July 30, 2015. I would now like to turn the conference over to Juan José Orellana, SVP of Investor Relations. Please go ahead sir. Juan José Orellana: Thank you, Thaddeus. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare’s financial results for the second quarter ended June 30, 2015. The company’s earnings release reporting its results was issued today after the market close, 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 open the call to take your questions. If you have multiple questions, we ask that you get back in the queue so that others can have an opportunity to ask their questions. 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 our current 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 July 30, 2015, 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. Good afternoon everyone and thanks for joining us today as we report our second quarter results for 2015. I am pleased to report that during the second quarter, we maintained momentum in our business and continue to deliver great financial results. We are growing, we are diversifying and we are driving strong operating results. Striking a balance between growth and profitability is an imperative for us. As a result, we were very pleased to deliver both revenue and enrollment growth that was nearly 50% greater than what we reported during the second quarter of 2015. After the first two quarters of the year, our net profit margin now stands at 1% and we saw a net profit expansion of 80 basis points sequentially. My father used to say shoemaker mind I last, and we have done so. While speculation and mega deals among the commercial players have been grabbing all the headlines, we have remained focused on growing our core business and we have been involved in several key acquisitions of our own. The transactions that we have announced demonstrate our continued focus on government programs and our ability to use our expertise in providing access to healthcare to those who needed most and who are least able to afford it. We remain focused on our mission to serve low income individuals that require government assistance. Let me provide you with some greater details on each of these transactions. Our transaction with Preferred Medical Plan in Florida will add about 25,000 Medicaid members to our Florida health plan, doubling our Medicaid enrollment in the Miami-Dade market. Many of our existing providers are also contracted this preferred medical plan. Therefore this acquisition will deepen our relationships with providers. We anticipate this transaction will add about $80 million…

Thank you, Mario. Good afternoon, everyone. Today we reported net income of $0.72 per diluted share and adjusted net income per diluted share of $0.86. We are particularly pleased that we achieved these results by growing, both our top-line and our profit margins. As Mario briefly touched upon, premium revenue grew in excess of 50% compared with the second quarter of 2014 and our medical care ratio dropped by 60 basis points. This improved medical margin performance coupled with greater administrative cost efficiency and more complete reimbursement of the Affordable Care Act’s Health Insurer Fee or HIF. Our second quarter after tax margin grew to 1.1%. This is the first time in our company’s 35-year history that we have reported pretax income of $100 million for a quarter. Our second quarter results demonstrate the diversification of our business even as we remain focused on Medicaid related markets. Medical care ratios at nine of our health plans were lower this quarter than in the second quarter of 2014. Based on our results during the last two quarters, we expect that six of our health plans will each have revenues in excess of $2 billion by the end of the year. Pardon me, will have in excess of $1 billion by the end of the year. We also continued to make progress in securing reimbursement from the HIF. During the second quarter, we received a commitment to reimburse the fee from California, leaving only Michigan and Utah among our state plan partners that have not formally committed to reimbursement of the fee. During the second quarter, we recognized all of the 2014 HIF reimbursement due from California and half of the amount due for 2015. This amounted to $29 million, but because we are still not recognizing HIF reimbursement from Michigan and…

[Operator Instructions] The first question is from the line of A.J. Rice with UBS. Please go ahead.

Thanks. Hello everybody. On the MLR for the first half, so you are at 88.7 and I think your full guidance is still 89.5, can you give us some of the factors that -- a sense on seasonality in the back half of the year, any other factors, does that MLR number now look increasingly conservative; any color?

A.J., this is John. What I would say is we do have some seasonality Q4, but really the medical costs are coming in line a little bit faster than we expected but I wouldn’t draw any conclusions on what that first half of the year as to the second half of the year, because as we’ve talked about in the past, we’re not going to update guidance unless something material changes.

Right. And then similarly, this is my follow-up on the SG&A line, if I look at that, you’re 8.1 in the first half, your outlook for the year is 7.6, so in that one you need the back half to be quite bit strong or is that mainly just leverage or is there something else that would happen that would help you on that?

It’d be continued leverage but I think the thing we have to look at with respect the admin ratio is, as we’ve discussed before, we have profit the caps, medical cost floors and those are achieved largely by reductions in revenue, but in the case of a marketplace for example while we may reduce the revenue for things like risk adjustments, the marketing costs, the broker commissions et cetera are flat. So as a percentage of the revenue, we get from marketplace, it’s higher. But I’d say all in all, both admin and medical claims are -- medical costs are coming in, in a way as Mario said that makes us very pleased.

The next question is from the line of Sarah James with Wedbush Securities. Please go ahead.

I was wondering if you could walk us through some of the moving pieces in the quarter. So, as I think about MLR, were there any rate updates that came through and improved things sequentially; was there any benefit from a three-R true up? And then on that SG&A side, was there any impact all from either the financing transactions or due-diligence for M&A that impacted the quarter that wouldn’t be an ongoing cost?

Okay. Sarah, this is John. Let me see if I can take those three questions now in order. On the MLR side, there were no rate increases. I think that the MLR is where it is because we’re doing good medical management. On the three Rs, there was no true up. And in terms of the SG&A, there was no significant increase either from the offering or from M&A.

Got it. And I guess just a follow-up excluding out the one-time items. On Texas, I think you guys had talked about in the past the state providing data finally last quarter to the plans and then there was a review or appeal process. So, where does that stand now as far as closing out…

It’s like the John show; I’m getting all the questions. We actually hedged; there are two systems state provides to us to use and unfortunately the last time order from the state the two systems were in bit of a conflict. So, we have no further information other than state is rerunning the data and will get back to us as soon as they have good confirmation.

The next question comes from the line of Tom Carroll with Stifel. Please go ahead.

Hi guys. Good afternoon. Another follow-up on Texas while I’m thinking about it. The 32 million that you highlight, remind us again are you cash flowed that money or is that just money you are owed at some point in time. And secondly, in terms of the process, I guess you have some peers in the state that have recognized the fair amount of their share. So, should we take that as being -- maybe the probability is a bit higher that you will eventually recognize those dollars in the near future?

To your first question, that’s not a cash flow issue for us. The state, if they were to take money back would have to take money back from us if we miss the measure. So, it’s not a cash flow issue. To the second point, obviously we don’t know what are peers are doing in the state but from our perspective, the quality measures break into two broad categories, about half of them we have which are HEDIS based measures, we have good insight to and we’ve been recognizing revenue associated with those measures. It’s just these other measures that we don’t have insight to that we’re not recognizing revenue. So for us, it splits out about 50-50 of the potential. I don’t know what our peers are doing obviously.

So on the 32 million, half of that you’ve recognized or half you could, you have better visibility on?

That 32 million is what is unrecognized. So, if you take the potential, it would have been around 64 million. We’ve recognized 32 and there is another 32 out there.

And then just for clarification, the health insurer fee items, those are all contemplated as part of your outlook this year. Correct?

That’s correct.

The next question comes from the line of Andy Schenker with Morgan Stanley. Please go ahead.

This is Cornelia in for Andy. I guess just focusing on Florida for a second, the MLR fell more than 600 basis points quarter-to-quarter. Was that all driven by your marketplace numbers, or did you see any improvement in MMA as well?

No, it’s marketplace. This is John.

And then can you just remind us what you’ve included in guidance for a rate increase in Florida?

In January we’re expecting 3%.

Okay. And then just following up on the marketplace MLR, obviously down significantly to 55.4%. It sounds like that’s not related to any three R true-ups; is there anything else going on in the quarter that we should be thinking about? I mean all these Florida members are super profitable, or…

In general, we’ve been seeing very good experience on the marketplace. As far as three R true-ups we’re helped in a few of our states because of credibility of factors where we’re not having to accrue MLR get backs. But we’ve actually got a nice table on the three Rs at the very end of our 10Q where you can see how we’re positioned for 2015. I think in general though it’s fair to say that pretty much across the board, the marketplaces have come in very well for us this year.

The next question is from the line of Josh Raskin with Barclays. Please go ahead.

This is Mary Shang in for Josh this afternoon. So, you clearly saw some significant initial enrollment in Puerto Rico. Was this enrollment that you saw in line with your expectations and could you may be provide some more color on the cost trends of these members so far?

The enrollment is right where we expected to be. Remember in Puerto Rico we are serving two regions and we are the only health plan in those two regions. So, if you are on Medicaid in either of those regions, you are a member of Molina. In terms of cost trends, just a little early to say anything; we’ve got three months worth of experience. So, when we have more to report at the end of the third quarter and certainly going into the fourth quarter.

You’ve been active with your recent acquisitions in Florida, Illinois, Michigan. Could you just provide some more color around what the future pipeline looks for you? I know you mentioned Florida health plans in your prepared remarks.

Sure. We are seeing smaller health plans just like the three that we talked about today, provider sponsored plans that realize they want to focus on being providers for us and not being in health plan business. And as we’ve discussed in the past we’re also looking at companies that can help broaden our service capabilities.

The next question is from the line of Peter Costa with Wells Fargo. Please go ahead.

The marketplace MLR is so low, 70% or so for the first six months. Do you think that that is something that’s going to trigger the medical loss ratio minimums in that category or is that being accounted for correctly already?

Peter, in some states it will, as Joe mentioned in some states there is credibility factors which have a different effect. But we’re confident that we are accruing everything correctly for the marketplace.

So we shouldn’t expect that to go higher going forward as you see the performance continue be good if you will.

I think as we leave the protection, if you will, the credibility factors as the plans get bigger, we could obviously see higher MCRs.

And then sort of on the same MLR line but different business, the California MLR continues trend a little bit worse. I know you have a lot of improvement in almost every other state but just focusing on California where it did deteriorate again, do you expect that to continue to deteriorate or do you think that can start to improve from here?

This is John. I think it will start to improve.

And do you want to give any color on why?

I was waiting for you to ask me that question. We are seeing more of our members go into our own delivery system. We’ve seen -- that has at least two effects. We do know that in our own clinics we tend to get patients with more chronic illnesses, so until we get the risk scores and everything turned around there, I think that we’ll see a little bit higher MCR, we also have some hospital contracts that we’re in the process of renegotiating which are a bit higher than we like them to be.

So, can you give us a timeframe on when some of that stuff will start to hit?

Probably early next year.

The next question is from the line of Dave Windley with Jefferies. Please proceed.

If I take your year-to-date performance and then tack on the, say the net benefit from the HIF that you haven’t collected in the first six months and from everything you’ve said so far, it doesn’t sound like there is significant negative seasonality in the back half. So, if I kind of annualize your number, you are running pretty significantly above your 235 guidance. I know to A.J.’s question you kind of mentioned materiality. Is it still not material enough to make a change on guidance?

This is Mario. We said at the beginning of the year that we were going to provide annual guidance unless there was a material change. Earlier this year when we did the stock offering, we did update the guidance because of the change in the share count. But at this point we are going to stick by our policy of providing annual guidance. The number is what it is. The performance is running better than what we had forecast.

Alright, so moving on then, a couple of maybe organic opportunities in Iowa where I think you are bidding and then Michigan where you’re going to close an acquisition and there is opportunity there or re-procurement there. I’m wondering what your views are on opportunity to win and/or defend position as the case maybe?

This is Mario. We obviously feel pretty good about Michigan. As far as Iowa goes, I wouldn’t care to speculate at this point. We submitted what we think was a good response and we will just have to see how the scoring and the awards come out.

The next question is from the line of Kevin Fischbeck with Bank of America. Please go ahead.

Hi. This is actually Steve Baxter on for Kevin. I just want to clarify the HIF commentary just to put a fine point on it. The $0.14 when you flagged that in the press release, that’s the amount of revenue you recognized not related to the second quarter of 2015. So if we were trying to think of a run rate, $0.14 is the right number to adjust?

That’s correct.

And I guess I’d love to get a little bit of an update on the duals population. I know you caution against too much quarter-to-quarter MLR comparisons but it looks like the MLR jumped up a little bit there. I guess any color on that would be great. And I guess just ongoing dialogue with the states to kind of improve the sustainability of that program would be of interest as well.

With regard to the MMP contracts, I think the results right now are lumpy and that’s for a couple of reasons. First of all, we’re getting a lot of new enrollment and the numbers are still small. So until things stabilize, I think you will see fluctuations. The other thing is that depending on the state, in some cases, our medical costs are higher than anticipated on the Medicare side whereas in other states the costs have come in a little higher than anticipated on the Medicaid or the LTSS services. And some of that is a function of our experience with those services. But I think that as John pointed out, I wouldn’t read too much into it at this point. The numbers are small, things are still in flux. And it’s going to be a while before everything I think settles out. Generally speaking, it takes nine months to a year for things to kind of stabilize. So don’t read too much into the quarter-to-quarter numbers.

I guess just one question on the exchanges. It seems like you have a significant amount of room to re-price that business to kind of get to a margin that might be a little more sustainable and won’t really put you up against all the three R corridors. Can you talk about what your expectations are for growth around that program over the next couple of years and how that might impact your government comp tax susceptibility?

We don’t anticipate being able to adopt the executive comp starting next year because the marketplace has been successful for us. We like the product and are going to continue to try and grow it the way we did in 2015.

I guess that just begs the question then on do you have a sense of what the adjustment would look like to your tax rate?

I think it was around 40 bps but obviously our tax rate has been in such flux lately that I’m not sure you can really adjust that very easily. But I believe it was around 40 bps when we talked about it last year.

The next question is from the line of Ana Gupte with Leerink. Please go ahead.

Just following up again on the marketplace, why is it that you are doing so well? I’m just curious why is it that your margins are so good? And it seems like for Medicaid players in general as compared to players like Humana which generally in the same states as well, not just in California, seem to be in trouble. Is it because you are contracting on Medicaid networks whereas they are not or I’m just curious what’s going on?

It’s difficult question for us to answer. What I can say is that our strategy was to offer products that would be attractive to people who are at the lower end of the FPL, so maybe upto about 250% of poverty and that we wanted to build this as an extension of Medicaid. So that people who were coming off of Medicaid, the so called churn would be able to stay with their health plans, stay with their doctor. That’s how we’ve designed the products. I can’t tell you why there is a difference between us and some of the other health plans. But we had a strategy. I also think that we were conservative going in and that’s allowed us to lower our rats a little bit in the second year. So far our strategy is holding. We’ll see what it does in the third year.

So it’s partly maybe not just the networks but you’re targeting a certain segment of that subsidized population, it sounds like. And just following up on that, when I look at the 2016 proposed rates and I expect you all are still in the negotiating phase of the HIF marketplaces. You are filing for something on average that looks like a rate reduction probably and I may not have all the states and all but somewhere in the 8ish percent range. And is that to kind of get to the more normalized sustainable state or am I missing some data somewhere?

The ability to have affordable products for the population that Mario talked about is very important and core to the mission of the company. So, our ability to lower the price going into next year was very important and with the balance being able to lower our costs for our members and making sure that we have the right margin on the business. I don’t know if it was 8% across the board or what but it was our goal to balance those two items.

The next question is from the line of Brian Wright with Sterne, Agee CRT. Please go ahead.

Two real quick ones. On the California PMPM, I just would have thought that with the health insurance fee accrual this quarter, it would’ve been a bit higher, because I mean even with that it’s down year-over-year, so is there anything one-timeish in the revenue that’s driving that?

Brian, I don’t know if it’s one-timeish but remember last year there was the PCP parity and then also we had some retroactive adjustments to our MMP rates in California sort of normal course reconciliation that hit this quarter.

Brian, also if you’re looking at the revenue in the detail, we exclude the HIF from that.

And then lastly, it looks like CMS is allowing the states to have the option to extend the duals pilots another two years. I was just curious if you had spoken to California and kind of gotten their lenience on that option.

We haven’t started to engage with the state obviously. We put a lot of effort into the MMP programs across all the states and so we like to see the programs continue. But we’re not going to speak for the state Medicaid agencies.

And let me just add, this is Mario. I think that it’s really appropriate to extend these pilots because the truth of the matter is some of them got started late and three years is a very short time to really analyze the effectiveness. By the time you get all the data and then try to analyze it, you’re talking about probably two to three years anyway. So, I think the three year timeframe was pretty short to do a really good analysis of the value of these new MMP programs. It makes sense to extend them.

[Operator Instructions] The next question comes from the line of Matthew Borsch with Goldman Sachs. Your line is now open.

Congrats on another great quarter. This is Christopher Benassi on for Matthew Borsch. With all the industry consolidation that has been occurring, could you touch on where Molina sits within the managed care ecosystem and how you are strategically positioned? And just following that up, do think the push for scale has been overemphasized?

This is Mario. Let me take a minute on that. I think that the way things are settling out, Molina is turning out to be the purest of the pure plays that we are really focused on our mission which is to serve low income patients who receive some form of government assistance with their healthcare premiums. As you can see from the acquisitions that we have done, we continue to grow; we’re going to add 900,000 members this year. We have a lot of opportunity in front of us in Medicaid and especially when it comes to programs like the duals and the long-term care services. So there is plenty of room for us to grow, lots of accretive opportunities in front us and that’s I think where we sit in the sort of managed care ecosystem.

And just to dovetail off that, would you maybe be willing to touch on any areas you’d be interested in expanding into geographically and how do you think you’ll be positioned for any divestitures in the upcoming consolidation -- in the upcoming wave of consolidation?

Clearly we’re interested in Georgia and Iowa. We remain interested in states that have significant managed care opportunities in Medicaid. We are looking at companies for acquisitions that might give us capabilities that we don’t currently have. And as far as divestures go, the fact that we have the equity offering behind us now and the line of credit, we’re well poised to take advantage and move quickly in opportunities that they may arise.

And I guess one more quick follow-up as well. Where would you feel comfortable with your debt to cap? You screen towards the bottom end of our coverage and you have a great balance sheet, so just kind of curious around that.

I think that after the equity offering, we’re pretty happy with where we are right now.

The next question is from the line of Gary Taylor with JP Morgan. Please go ahead.

Most of my questions have been answered. I actually just have one small clarification from a question earlier. Did I hear correctly that you said the sequential year-over-year improvement in the Florida medical loss ratio was mostly due to the performance of marketplace plans, is that correct?

That’s correct Gary.

The next question is from the line of Chris Rigg with Susquehanna Financial Group. Please go ahead.

Mario, just a follow-up on what you said a few minutes ago about potentially buying capabilities that you don’t have. Does that theoretically mean if some Medicare Advantage assets came up for sale, you guys would take a look?

I think that we would be willing to take a look at Medicare Advantage assets, sure. We’d be looking at Medicare, Medicaid other companies that could fill in parts of our business portfolio in the area of long-term care services; there is a variety of things. We wouldn’t necessarily shy away from Medicare Advantage.

This is really just a follow-up on at least two questions that have been asked with regard to guidance. I guess when I look at the year-to-date MCR and the year-to-date G&A, then look back where you’re at guidance wise, is it just conservatism in the outlook or are you actually indeed looking for a big step down on an absolute basis of G&A and the MCR to bump in a very meaningful way in the last half of the year?

I would say that we tend to be conservative, if you look at the way we’ve handle things like the Texas pay for performance revenue and some of these other things, we tend to be on the conservative side and we would rather be that way; same thing with the health insurance fees. We think that health insurance tax will ultimately all be paid and we’ve assumed that in our guidance but we haven’t recognized all of it yet. So, we tend to be conservative.

Got it. And I appreciate that but on the MCR in particular, is there anything that we should know about that actually is going to drive that meaningfully higher in the back half of the year or we should just take the conservative commentary on its face?

There are no events that we’re aware of right now that I think will drive the MCR higher. John did mention there is some seasonality. We typically see higher medical costs in the fourth and first quarters of the year. But aside from that, no. We continue to work on the MMP and the Medicare costs but nothing out of the ordinary.

The next question is follow up from the line of Tom Carroll with Stifel. Please go ahead.

Just a few others here just to think about. So, on Texas, the $32 million, how do you expect that to hit the bottom-line, should it come into play? Is this just a tax adjustment and the rest of it falls right to the bottom line and is it around $0.30 a share? Is that what you think about?

Whatever comes in would be a direct increase to pretax income. So, there is no offset in terms of expenses or anything.

And then secondly, somewhat conceptual; in Utah and Michigan, the Affordable Care Act rolled out 18 months ago, we’ve had visibility on this thing now for what five years. I can’t believe it’s been that long. What do you think the holdup is in these two markets; are these guys just stringing you along for another few months and then eventually it’s going to hit or maybe give us some sense of what you think these markets are -- what are they thinking?

I don’t think that either state is intentionally staying there so long. In both Michigan and Utah, the dollars have been passed through the budget by the legislatures. But in fairness, there is a lot of stuff going on in both of those states. Michigan is putting out a new RFP; Utah is taking about expansion of Medicaid. And what we’re waiting for is the contractual language, the contracts amendment to solidify that. So, we are very comfortable that the both states intend to pay us in the future and we’re being patient. And that’s why again it’s becoming a smaller and smaller issue. So we’re happy not to talk about it anymore.

Tom, is the question about the health insurance fee or Medicaid expansion?

The health insurance fee, the fee side of things.

Okay. I misunderstood. Thanks.

John I won’t ask you about it anymore. And then lastly on your acquisitions, I think you said they were going to be accretive but where do you expect these to operate in 2016? Are these operating in line with your broader organization in terms operating margin or is there going to be some further ramp in year one where you’ve got to get in there with the Molina secret sauce and get it going?

Since these are in-market or “bolt-on acquisitions”, they tend to perform slightly better than company average but we’ll get into the accretion numbers etcetera in 2016 at our normal Investor Day A.

Great. Thank you very much. That’s what I was looking for.

Okay. Gentlemen, there are no other questions left in the queue. I’ll turn it back to you. Please continue with your presentation or closing remarks.

Great. Thank you. Well everyone, we hope that you will have a good summer what’s left of it and look forward to seeing you again at the Investor Day in New York in September.