Ladies and gentleman, thank you for standing-by. Welcome to the Molina Healthcare Fourth Quarter and Year End 2015 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, Monday, February 8, 2016. I’d now like to turn the conference over to Juan José Orellana, Senior Vice-President of Investor Relations. Please go ahead, sir. Juan José Orellana: Thank you, Nikki. Hello, everyone and thank you for joining us. We apologize for the late start but apparently there is a problem with the telephone numbers, so hopefully everybody will have joined by now. The purpose of this call is to discuss Molina Healthcare's financial results for the fourth quarter and fiscal year ended December 31, 2015. The company issued its earnings release reporting these results today after the market closed and this release is now posted for viewing on our company website. On the call with me today are Dr. Mario Molina, our Chief Executive Officer; 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. As a reminder, on Thursday at our investor day presentation, we will discuss the company’s outlook for 2016. Today, we will only be taking questions related to our earnings release. Additionally, 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 February 8, 2016, and we disclaim any obligation to update such statements except as required by the securities laws. This call is being recorded and a 30-day replay of the conference call will be available on our company's website, molinahealthcare.com. I would now like to turn the call over to Dr. Mario Molina.

Thank you, Juan José and thank you for that nice introduction. Hello everyone and thank you for joining our call this afternoon. The fourth quarter of 2015 capped off a very strong year for Molina Healthcare. Net income more than doubled when compared to 2014, and we are making progress towards our goal of a 1.5% to 2% net income margin by the end of 2017. However, today I want to talk about our results within the framework of our mission and strategy. Our mission is to provide quality healthcare to people receiving government assistance. One of our first objectives of our strategy over the past 35 years has been to grow and diversify our revenue. We have done just that in 2015. Revenue grew by 46% from $9.7 billion in 2014 to just over $14 billion in 2015. Revenue growth was driven by an increase in membership of about 35% from 2.6 million members in 2014 to slightly more than 3.5 million members by the end of 2015. Our growth strategy can be divided into four components: growth and retention in our existing markets, expansion into new geographies, transitioning members and benefits from fee for service to managed care, and finally, developing and acquiring new products and capabilities. During 2015 we successfully executed on all four of these components through our growth strategy. We retained and grew exisitng business with our re-procurement wins in Michigan and Washington. Our new contract in Michigan expanded our service area across all of the lower peninsula spanning an additional 18 counties. The Washington win along with our acquisition of Columbia United Providers strengthens our presence in the Southwest region. It also serves as a solid foundation to build on the state as the state continues to consolidate medical and behavioral health benefits under…

Thank you, Mario and hello everyone. As Mario said, the fourth quarter was a strong close to a strong year. Our financial performance in 2015 exceeded our expectations and bodes well for the future. In addition to our top line revenue and membership growth, we took substantial strides towards our margin targets for the end of 2017. We will be providing additional insight into what 2016 holds later this week during our investor day. But for now I want to focus on our performance throughout 2015. Today we report full year earnings of $2.57, almost doubling the $1.29 we reported last year. Fourth quarter EPS of $0.51 and our full year earnings would have been $0.26 and $0.27 higher respectively but for the following items. First, we recorded a $15 million charge resulting from the early termination of a hospital management agreement. Let me be clear this expense has been included in our 2015 results and will not be a drag on earnings in 2016 [ph]. We [ph] incurred G&A expense relating to transaction costs during the quarter associated with our acquisitions. Finally, we also recognized $6 million in interest expense related to our recent senior note offerings that we issued in November, an expense that we will continue to recognize going forward. Premium revenue was up almost 50% from 2014 and has more than doubled since 2013. That growth in itself is impressive but we should not forget the many paths we have traveled to get here. In two years we have established a start-up health plan in Puerto Rico, opened six Medicare Medicaid health plans, established a strong physician in the ACA marketplaces, won four key re-procurements, among our health plan and MMS states, closed on 10 acquisitions through January 2016, and provided over 0.5 million Medicaid expansion…

[Operator Instructions] Our first question comes from the line of Josh Raskin with Barclays.

So first question, just on the hospital contract termination, I just wanted to better understand what exactly happened there. Was that some sort of contract dispute around rates, et cetera? And then were you in some sort of position where you owed the facility some sort of settlements, or how did that cost you guys money?

Josh, this is John. A little bit different kind of contract than we are used to. A couple of years ago, we actually went into a management of the acute care services of a hospital that we did not own but that a behavioral health company owned. Given their priorities and our priorities did not converge as we expected. We felt the best thing for us to do was to get out of that contract. In order to get out of that contract, we took a charge of $15 million.

So it was some sort of performance fee that you guys would have to -- it was just to break the contract, it sounds like. So it wasn't a medical expense or anything like that?

Correct. Josh, we did book it medical expense because it was part of our direct delivery network but not as an ongoing provider contract like we would have with an unaffiliated hospital.

And so now you'll just replace it with some sort of fee-for-service payment to other providers in the market, whatever market that is?

That’s correct.

And then just second, on the Texas performance fees, it looks like you didn't book -- I don't want to say you didn't book anything, but it didn't look like you booked the full amount for sure in the fourth quarter. Did you book anything? And then if not, are we now less confident or is this just again a timing issue, where you can't prove it, so you're not booking it?

I think it’s the latter, Josh. We didn’t book anything in the fourth quarter. It’s not that we are less confident, it’s just that we have really no additional news that would give us any more confidence at this point to book anything. It’s a very challenging environment to try in and keep the accounting in parallel with items that we can’t assess.

And then as I remember, John, you had given guidance early in the year, when you guys were providing initial guidance, that had included that, right? So I just want to make sure that's right. That's typically the practice, but if you anticipate getting some sort of performance fees, that will be included; and then we should think about your earnings coming in a little bit better relative -- despite the fact you didn't get any of the Texas performance fees. Is that fair?

That’s fair.

And I assume you would just continue that practice. You'll assume you're going to be able to book performance fees as you've always been able to in your contracts?

We do assume that we will book a portion of it and on Thursday we can provide some additional insight into that.

Our next question comes from the line of Sarah James with Wedbush.

Thank you. You guys have had a number of contracts that renewed their rates. Since we last spoke there's, I think, Texas in September, and Michigan in October, and then a number in January. So if can you kind of walk us through what you're seeing so far with the rate update?

Sarah, this is John. I don’t have that numbers specifically for Texas and suffice it to say we are we’re going to be detailing that out on Thursday but it still remains very low single digits if anything at all. And I think a couple of states actually had some drop in the rates effective Jan 1. So the rate environment is not where we would like it to be and our improvement is not going to be driven primarily by increased rates.

And was there anything out-of-period in the quarter in relation to the New Mexico true-up? I think in the past you guys had talked about the liability being in excess of third-quarter accruals there. So was there anything out-of-period recognized in New Mexico?

Sarah, it’s Joe speaking. No, there wasn’t. If I can just tag on to what John said about rates, we’re not seeing anything different as he emphasized, now than we've been talking about for the last couple of years. Low single digits, at best. So I just wanted to make sure that that was familiar. But nothing picked up in New Mexico.

And just to clarify, Joe, are liabilities still in excess of current accruals for New Mexico or are you guys kind of on par now?

Going back to the third quarter disclosure, I wouldn’t say liabilities are in excess of accruals because the two equal each other. If you took the department’s most extreme position, I guess, that exceeds our liability but we do not believe that it’s going to play out the department’s most extreme position. So we think we are adequately reserved at December 31.

And our next question comes from the line of Kevin Fischbeck with Bank of America.

This is actually Steve Baxter on for Kevin. I wanted to come back to your comments on the exchange business. I guess can you quantify the impact, the dollar impact of the risk adjustment true-up in the quarter -- and I guess, what the entire net change to the Three Rs was? Just trying to get a sense for the run rate of the business headed into 2016.

It’s Joe. I will take that question. Outside of risk adjustment the impact of the 3Rs is very minimal. Obviously the corridors I think everybody is familiar with. There's not a lot of protection from those. Reinsurance is pretty much easily measured. So then we are left with the risk adjustment and I think it’s fair to say that if you look at the year in total which we disclosed for marketplace [technical difficulty] the number for the full year. So I think broadly you can take the difference in MCR between the fourth quarter and the year to date and that would basically reflect the impact of risk adjustment for the quarter.

And I guess nothing so significant that it kind of impacts how you feel like you are positioned for 2016?

Well, that’s a 2016 question. But I think John, he made it clear that we still feel reasonably confident about marketplace from our perspective.

And then I guess on the recent acquisitions you guys have done, can you give us an update on the performance of Providence or I guess now, Pathways's performance, since you closed the deal, and performance of the tuck-in deals? I think you guys have said that those typically come on a little bit above total company margins. Is that kind of playing out with your expectations?

Providence is a little bit of a different animal than our normal managed-care tuck-ins. We see some of those come in with margins that start out a little bit lower and then they go higher. They start out a little bit lower because you’ve got some pent-up demand that occurs like usually in the first quarter after the acquisition, than of having higher margins overall because you don’t have to add as much in terms of an admin expense. Incremental admin for a tuck-in is less than the average. On Providence, that’s largely a fee for service business currently which Mario will discuss on Thursday how we want to use that in the future but we’ve only had it now for November and December. So it is moving along as we expected for the first two months.

Our next question comes from the line of Ana Gupte with Leerink Partners.

So I wanted to just follow up on the 1.5% to 2% you've expressed confidence in the net income margin. How are the marketplaces performing? It looks like you went from about 55% to 70% in the third quarter, and now it's 73% or 74% on the MLR. As you are seeing the open enrollment membership coming in, ex-the Three Rs, and you've seen quite a bit of attrition, it looks like, how is this going to bode for next year? And do you expect margins to remain constant or expand?

So Ana, you said the magic words, the next year. We’ll talk about that on Thursday.

But I guess from the experience in the fourth quarter, say, for going from the third quarter to the fourth quarter, you saw a little bit of deterioration. Are you seeing any issues with special enrollments? And when you look at the risk adjusters, are you thinking about a pooled risk adjuster across companies that are serving more than just the churn from the Medicaid population? And how have you booked it?

It’s Joe. I am not sure I understood the last question. But speaking in general, we feel that that for 2015 the full year financial performance we disclosed is indicative of where the margins ended up for this year. We don’t think fourth quarter reflects anything unique or any kind of inflection point. And as John and Mario said, we will talk about the rest on Thursday.

And just following up on your tax rate, how should I think about this, when I'm modeling it? It surprised me a little bit because it was positive.

The tax rate for the full year came in at – came in pretty close to what we thought it would come in when we guided back – revised guidance back in September. The rate came in around 56 – I want to say 56.2% -- which is 55.5% -- I think back in June, we guided to 56%. So it’s come in about what we expected it would come in at. Obviously it’s high for all the reasons we’ve talked about in the past, the non-deductibility of the health insurance provider fee in particular.

But the fourth quarter came in lower than that, correct? Or am I reading that wrong?

That’s correct. In the fourth quarter added very typical, we took in some discrete items that were favorable, various credits and stuff that are available, swapping [ph] credits, R&D credits, normal course type of stuff. The ETR has also helped out a little bit by the fact that our pre-tax income came in higher than we were anticipating back in June when we revised guidance. So that gives you a – that improvement in the pretax number gives you – also gives you some lift in lowering your effective tax rate.

Our next question comes from the line of Chris Rigg with Susquehanna.

Just one quick follow-up on the tax rate. If I normalize it for the health insurer fee, it looks like it came in in the upper-20% range in the quarter. Is that the right way to think about it?

I think at a very technical level, that might be the right way to think about it, Chris but again if you think about what happened in the fourth quarter, we had the benefit of the three items which are obviously not repeated in the other quarters. So that’s going to push down the rate. And again the fact that pretax income came in higher than we anticipated is also going to push down the ETR for the year and it’s all going to be magnified in the quarter. So like much of this year’s financial performance, I think the way to look at is to look at where we ended the full year on. And if you care to extrapolate, extrapolate from that, or wait until we talk about it on Thursday.

And then on the $15 million charge in the quarter, I know you guys don't update guidance very frequently, but was that $15 million assumed in the guidance that you had left out there?

No, it isn’t.

And then the last question, which just may fall into the conversation later in the week, but you raised about $700 million a couple months ago. And it looks like a lot of that is still residual on the balance sheet. How should we think about the deployment of that money?

There really hasn’t been change in the strategy of how we want to deploy the money in terms of statutory capital as we enter new markets and acquisitions both of health plans and new capabilities.

But is the money earmarked specifically for something at this point, or right now just in the kitty for future uses? –

Yes.

Our next question comes from A.J. Rice from UBS.

Just a couple of quick things. On the duals, give us just your latest thoughts as you ended the year on that program. And I noticed specifically California, I guess, has announced they're going to delay their decision on whether to continue. Are you in discussions with them? What's happening just generally in the dual program, and particularly California?

This is Mario. Yes, the duals continue to march forward. We are happy with the contracts. The issue in California is around the managed care tax. I do think that’s going to get resolved. So we are not anticipating any changes in those programs right now. If there was one thing we would like to see the government do, it would be to allow us to market and enroll directly as we do for other Medicare beneficiaries.

And I might just ask you quickly, for my follow-up, on the Puerto Rico. It looks like you had a very good medical care ratio in the quarter. Just wondering, it seems like that must be going well. Is there any update on Puerto Rico and how that's working?

There is not a lot to say about Puerto Rico at this point. We’ve had that contract for less than a year. I would say that it’s operating pretty much the way we anticipated. We had some initial startup problems that are typical for any kind of a new health plan but those have largely been ironed out and it seems to be doing well.

Our next question comes from the line of Scott Fidel with Credit Suisse.

Thanks. Just had a question on Florida, it looked like the MLR was up quite a bit sequentially. Was that where you guys were booking the hospital management charge, or was there something else going on there?

Hi, it’s Joe speaking. The main issue that you see pushing through the Florida MLR is just the adjustments that we talked about, the exchanges. Remember most of our exchange enrollment last year was in Florida.

So that was mostly just the change in the risk adjuster accruals playing out in Florida?

Exactly, exactly. So think of that as being spread over the entire year.

And our next question comes from the line of Tom Carroll with Stifel.

Just one quick one on service revenue. It doubled sequentially; is that related to the Providence acquisition?

Tom, it’s Joe. That’s correct. We are recording a revenue associated with Pathways as service revenue and related expense as service expense, just to separate it from our health plan.

And then just a quick follow-up on the tax issues. The favorable items that were recorded in the fourth quarter -- were you mostly expecting those? Because we had modeled a much higher tax rate.

I don’t want to say our tax leadership may have forecasted it. I know that we typically do receive these kind of benefits, these kind of discrete benefits we generally record, that was in the fourth quarter. I don’t think there’s surprising in their size, I think what you might not have modeled, I don’t know what Tom, what you modeled for pretax income number. But again if you modeled a pretax income number much as we expected in our guidance, when that number turned out higher, it’s going to push down the effective tax rate. So that might be your issue there.

So maybe these things just come in when they come in, and for the full year you were pretty much right on where you expected, that's probably how I should think about it?

Again with the exception that pre-tax income came in higher than we expected, so that was a little bit of a – depressing all the tax rate.

Our next question comes from the line of Gary Taylor with JPMorgan.

I was just slightly tuned out two questions ago. So I hope I'm not asking the same question, but if I am, just tell me to move on. But, Joe, you've done a good job all year describing to us that some of these very low MLRs in the marketplace business aren't completely obviously accruing to earnings because the minimum medical loss ratios. Given that you've got these additional risk adjustment accruals in the fourth quarter, were you able to reverse any of the rebate accruals for the year to date?

Yes, they are small right now. The rebate accruals are within – well under $10 million. I don’t have that handy but they’ve pretty much dropped to nothing.

And also I just wanted [technical difficulty] the loss ratio includes that $15 million. So really that's, maybe, recurring numbers, about 40 basis points lower -- $88.7 million maybe? Is that right?

I haven’t done the math on that but you are correct. It is in medical costs, so to get an MLR you’d have to back that out.

And then last question, I guess I have lost track of MyCare Chicago? Did that transaction close yet? We were looking for maybe $60,000 in Illinois enrollment, which obviously wasn't in the year-end number sequentially.

This is John. We are still waiting on one of the Chicago acquisitions to close in March, the rest closed in January.

It’s Joe again. So when they’re closed in January obviously you don’t see them on these numbers.

Our next question comes from the line of Michael Baker with Raymond James.

Just a follow-up on the earlier question in terms of Pathways, Providence. Sounds like that's running through service revenue. When you have a situation in which a state includes behavioral going forward, at some point are we going to see some of that revenue get allocated to that state as you do services internally or how should we think about that?

Mike, it’s Joe speaking. I think what you will see going forward is that the health plan will pick up a portion of that service expense – the bottom line impact should be improved, slightly improved margins.

Our final question comes from the line of Dave Windley with Jefferies.

Part of my Florida question was asked a couple of minutes ago, but I did want to clarify, we were also expecting a rate update to impact your revenue and MLR in the fourth quarter, and I think recognizing maybe five or even six months' worth of rate updates in the fourth quarter. Did that happen and what impact on the MLR did that have, if you can tell me?

Dave, are you talking specifically about Florida?

Yes.

The Florida rate increase was –

I think the Florida rate increase, we start about 5%, we started picking that up September –

So we talked about in the last call.

So that’s been there from September [ph].

So you did accrue that in the last quarter pro rata? It wasn't a cash back in the fourth quarter?

Correct, for two months. End of Q&A

And we have no further questions at this time. I will turn the call back to you.

Well, thanks for joining us everyone. We look forward to seeing you on Thursday in New York for investor day.