Good morning Ladies and gentlemen, and welcome to the Molina Healthcare Fourth Quarter and Year-End 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ryan Kubota, Director of Investors Relations. Please go ahead, sir.

Thank you, operator. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the fourth quarter and year-ended December 31, 2017, and preliminary guidance for the full year 2018. The company issued its earnings release reporting 2017 results and full year preliminary guidance yesterday after the market closed, and this release is now posted for viewing on our company website. On the call with me today are, Joseph Zubretsky, our President and Chief Executive Officer and Joe White, our Chief Financial 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 into 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 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 our 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 13, 2018, 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 at our company's website, molinahealthcare.com. I would now like to turn the call over to our Chief Executive Officer, Joe Zubretsky.

Thank you, Ryan, and thank you all for joining us this morning. This quarter's results reflect a significant transition we are undertaking here at Molina. The disappointing contract losses in New Mexico and Florida, and the related goodwill impairment charges, the continued expenses for restructuring and the cash up adjustments related to the poor performing marketplace business are all legacy issues that we believe are now behind us. The performance of the core business however, which we define as a Medicaid and Medicare was respectable and when viewed on a run rate and full year basis provide a solid baseline from which to achieve our margin recovery and sustainability plan. We are squarely focused on improving our operating margins and creating an earnings profile that is less volatile and more sustainable. Only when we have accomplished this, we'll be able to reap the full benefits of this franchise, with its strong revenue base, across well diversified geographies and product lines. This morning, I will be discussing the sustainability of our revenue base, the key operating and financial results from the fourth quarter and the full-year and connecting them to our 2018 preliminary guidance, and to the vision that I provided at a presentation to investors last month. First, with respect to the disappointing news related to the re-procurement of our Florida Medicaid contract, we are taking urgent and focused actions to secure this revenue base. Today, we operate in 8 of 11 regions throughout Florida, serving approximately 350,000 Medicaid members, with $1.5 billion of annualized revenue. The entire state is currently up for re-procurement, effective January 1, 2019. As we announced last week, we have been selected to negotiate to the award of a managed care contract in only one region of the state, that region, Region 11 comprises Miami-Dade…

Thank you, Joe and hello everyone. Yesterday we reported a net loss for the quarter of $4.59 per diluted share, and a net loss of $4.52 per diluted share on an adjusted basis. As Joe mentioned, embedded in these results are several significant items outside of our normal operations that were in further discussions. First we took a $73 million charge as a result of the federal government's decision to stop paying cost sharing reduction rebates or CSRs to health plans beginning in the fourth quarter of 2017. To be clear, we believe we are legally entitled to those payments and will pursue all available means to collect them. We recorded a further charge of $50 million to increase liabilities for marketplace risk adjustment in CSR that related to the first nine months of 2017. Our marketplace premium deficiency reserve was reduced to zero as of December 31, 2017. This was a $70 million benefit in the quarter. We recognized approximately $20 million in incremental flu costs in the quarter. We recognized $269 million of non-cash impairment losses at our Florida, New Mexico and Illinois health plans. The impairments at Florida and New Mexico was a result of our recent contract losses. The Illinois impairment is purely an issue of historical costs. While we are confident that we can improve profitability in Illinois so that it is a meaningful contributor to our company that current profit profile of the health plan does not support the purchase prices paid for certain membership years ago. We recognized approximately $73 million of restructuring costs in the fourth quarter of 2017. In the fourth quarter we also incurred approximately $14 million in expense related to the exchange of equity for $141 million of face value of our 2044 convertible notes. Finally, we recognized approximately…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Sarah James of Piper Jaffray. Please go ahead.

Thank you. And I appreciate all of the detail about 2018 guidance. But there is a couple of pieces that I was hoping to get more clarity on tax reform benefit how much is the net on that? How much turnaround savings is assumed if we assumed flat, is there is still a drag from Pathways and then on tax, you previously talked about it and [indiscernible] similar admin cost but now it sounds like it may be offset by comp changes. So how should we think about the health contribution changing? Thank you.

Hi, Sarah, its Joe White, we struggled to hear you, could you ask those questions one at a time please? Thank you. Good morning by the way.

Sure, good morning. So, just trying to look through a few of the moving pieces on guidance that weren't spiked out, the one being tax reform, how much benefit how much benefit realized on tax reform?

Sure, hi Sarah, its, Joe Zubretsky. On tax reform, if you just look at the 35% statutory rate versus the 21%, it created a $59 million benefit to our 2018 guidance, which is about $0.87 of earnings per share. I will remind everyone that as we either exceed our plan or missed it for every dollar of earnings above or below our marginal tax rate is 21%. And the reason our guidance is at about 42% is the result of a non-deductibility of the HIF. Another question we are often asked is did we change our spending outlook for 2018 because our rates were set, when tax rates were 35% versus 21%. And I would say, no, we had a plan in place of our margin recovery and sustainability plan, it does require investments to be made. Those investments were fully baked in our SG&A roles for 2018 and we did not change the course of that spending as a result of the new tax rates.

Thank you. And the other moving piece I was hoping you could spike out flu if there is any change from 2017 to 2018 on your assumptions there. The Pathways which has been a drag in the past if it assume to continue and then exchanges in the past you have talked about there being a tailwind from a lower admin load. I'm not sure if that still assumed going forward.

With respect to flu as we said we recorded our $20 million top up to our fourth quarter. As we observed pharmacy and physician cost higher than normal particularly in the CTC Hotspots. I would tell you that that trend continued into January, pharmacy and physician costs were higher than normal due to the flu season that we are experiencing and others are as well. With respect to Pathways and our other sort of non-core subsidiaries, I mean say the earnings picture is just not material. It's stable, they're performing well, and it's just not a material part of the story.

Got it. And one more clarification if I could and then I'll hop off, you talked about unwinding Florida if the appeals are not successful. How long should you think about that taking. So how much time to get the SG&A overhang if no matching revenue if the appeal in Florida is unsuccessful?

Sure, if we are unsuccessful in Florida and or New Mexico then we have a plan in place where we will try to transition our service profile in those states and in orderly fashion. Whether we transition it to another incumbent or new player or whether we just educate ourselves entirely. Obviously, when the revenue stops on January 1st, you still have a claims tail to service, you still have member calls that need to service. And so we'll have to hold on to part of the operating platform for the tail period. But we're not going to let the administrative costs and bringing those plans and runoff be a drag on our earnings. We'll have to educate ourselves quickly, but there would be a slight drag on 2019 as we work the claims tail off.

Thank you.

The next question will be from Justin Lake of Wolfe Research. Please go ahead.

Thanks, good morning. Few questions here, just wanted to start off on the marketplace. You talked about the membership numbers and the pricing. So the math should be pretty straightforward there, but I want to make sure I got it right. I think your revenue was about $3 billion in premium in 2017. Can you give us the number there for 2018? Is it around $2 billion? And then it sounds like that you said there was no improvement assumed in terms of the economics on the margin. And I think you lost about $100 million plus for 2017, is that the right ballpark for 2018?

Yes, Justin the revenue number for 2018 contemplated in our guidance is about $1.5 billion. And you have the pricing right. I mean obviously at 102.1% for the quarter 88% for the year against a target of 78%. We lost money in the marketplace this year. The way I would characterize our guidance is we cleared the clutter around 2017. Obviously getting the one timers behind us getting a cleanse claims view of the 2017 run rate projected forward our pricing at the 4.6% target margin. But until we see the effects of our profit improvement initiatives and that pricing take hold in the market, we did not include a lot of that turnaround benefit in our guidance. We need to see it emerge in the first quarter before we firm up our guidance for improved market place performance.

Okay. So the $1.5 billion of premium just sound a little bit low relative to the declining membership and then adding in a 50% price increase, am I missing something there or is it geographically bias to some of the lower premium states?

Justin, its Joe White speaking, there are a few issues that play there, one would be the shift downward to bronze relative to sliver, the other would be geographic matter as we continue to see rather proportion stronger enrollment in Texas.

Also bearing in mind that…

Okay.

We always project a 2% monthly decline in membership, so while we are starting the year at 450,000 it's going to end the year at about 300,000 at least in our project.

Okay. And then just it staying on premium guidance for a second, premium guidance going to be - it looks like it's down about $1.5 billion when you adjust for the reclassification of some of the HIF collection or I should say the HIF collection. So that makes sense to your point the marketplace is a big part of that, but beyond that it doesn't seem like there is any organic or same store growth assumed in there and I would have thought there would be 2% to 3% which should add up $500 million to growth there. Am I - is there any offsets or any other bad guys when you think about besides marketplace? Or we just assuming kind of not much in the way of organic kind of same contract growth in 2018?

So, Justin, we have slight Medicaid membership decline particularly in Michigan with an after profit are taking share. In Ohio where we run into some redetermination issues, slight not a lot but enough to matter in the bridge year-over-year. Our Medicare is up slightly we are holding on to our membership and getting good rates. And we do have two new markets, we have [indiscernible] and Idaho and the inception of our Mississippi TANF contract, which will begin in October of this year, and that's of $200 million all in. So Medicaid membership, a little bit of a slip two new market entries and Medicare is growing nicely to the rates.

Okay. If I could just ask one more numbers question, I think Sarah asked around flu, is there a dollar number you can give us Joe in terms of what you think we could be looking at here relative to last year in terms of flu cost in the first quarter? Thanks.

Honestly not yet. We just closed the books, just literally within the past few hours and we've intentionally looked at the underline trends in pharmacy and physician, which is where we need to look and while we know we're experiencing a higher than normal flu season continued in 2018, I really can't peg a number for you right now Justin.

Thanks.

The next question will be from Matt Borsch of BMO Capital Market. Please go ahead.

Hi, thank you. If I could ask about, Joe, your view on margin levels and I know you have your preliminary guidance out for 2018 and we appreciate getting that, I'm not looking for guidance for another year. But when you think about the net margin that we see it say peers companies it's a little above 2%. Is that structurally a place that you think Molina can get to overtime because prior to this year the trailing or trailing five year average is something like 0.5%? It just seem that there is us then a structural barrier to getting to the margins that are comparable to peer companies?

Well Matt, I appreciate the question, but no I really don't think there are any structural impediments in our portfolio. As I said to investors last month, this is clearly a question of performance and not a question of portfolio. We have many high performing plans, we need to fix the hotspot. As I said in my prepared remarks all of our products are just running slightly north of where they need to be to hit their target margins. And you can book inside the numbers and you can go around sort of the wheel of performance in terms of what you need to do with your network, what you need to do with utilization controls. What care management protocols for high acuity populations, holding on to more of our revenue at risk. As I said to investors last month, we are holding on to fewer dollars of revenue at risk than we think our competitors are, we need to get better on risk scoring and quality scores to hold onto the quality withholds that the states hold out to. So I clearly believe it's a question of performance and if we look at the fundamentals of managed care, on a mix adjusted basis, I still feel confident in saying we can get to the competitors range of 1.5% to 2% after tax.

That's great, thank you. And also just one more if I could. I don't - I may have missed it, did you touch on your diagnosis of the reasons for the downsizing of the Florida arrangement?

The reasons that we lost?

Yes, yes, sorry. Yes, I know you touched on New Mexico, I didn't hear Florida?

Well, we touched on New Mexico, we actually have the scoring and we're able to conclude pretty much that it was rates and not service and technical capabilities. In Florida, we have not seen the scoring yet. As part of the process, we will get the scoring, we'll analyze it and then structure our appeal or protest around the scoring parameters.

Thank you.

The next question will be from Chris Rigg of Deutsche Bank. Please go ahead.

Good morning. Just wanted to get some clarification on the cost savings from the restructuring plan that are in 2018. It sounds like the run rate savings achieved by the end of 2017 were 235, I mean, you are expecting $160 million to be realize this year with the delta being realized last year. Is that correct and do you still think you're going to get the $300 million to $400 million target by the end of the year - run rate target?

Those numbers are correct, $15 million in the third, $60 million in the fourth for a total of $75 million and incremental of $160 million for 2018. And bear in mind, when Joe and his team put out that longer-term target, that was not merely SG&A savings, but were cost structure savings across all the dimensions of managed care including network and care management. And yes, if the 1.5% to 2% after tax margin and EBITDA margins north of 5% are in our future, which we predict they will be. Then yes we have to achieve those types of cost savings over the next two years. And as I mentioned previously, we have not included many of those cost structure improvements and performance improvement initiatives in our 2018 guidance, we'll wait to see them emerge, before we adjust our guidance accordingly.

Great. And then along the same lines, in your prepared remarks you have noted that you guys are in the process of retaining several subject matter experts to help you with upcoming re-procurement and maybe to even do a look back analysis on the state's rate and win. Are those people that should be employed full time by Molina, are these people probably like industry standards that normally are consultants? And then are the costs associated with these experts in the guidance or are these can be treated as one-time items? Thanks.

The - all the costs are in the guidance. And yes, because these proposals are in flight, we decided to add to the complement of resources, we have internally with outside resources. But ultimately if we are going to turn-on the new business and the re-procurement machine permanently, begin growing again after we return to our target margin profile then yes, we will build internal teams that are capable of routinely winning re-procurements and new bids. So because that were in flight we went outside, but ultimately they need to be built inside.

Great, thanks a lot.

The next question will be from Peter Costa of Wells Fargo Securities. Please go ahead.

Good morning. And hi Joe welcome back to the earning conference calls. I wanted to ask you couple of questions. So first one is just, you have done a lot of talk about the MLRs for the marketplace business, but if we exclude the marketplace business and look at all the rest of the businesses is your expectation to get to the 89% loss ratio that the MLR will improve or decrease for that business or will it get worse?

Well if you look at and again, 2017, very noisy year, and so you have to sort of clear the clutter on 2017 where the reported MCR consolidated was 90.6%, 130 basis points of which was prior period development. When you started looking in at the detailed product lines, TANF reported at 92%, ABD 94.7%, Expansion 84.9%, and so on and so forth. You can pro-forma and project network contracting, retaining more revenue, better utilization controls in care management to get to our 89% and beyond. So we were very cautious on 2018 guidance not to include the results of those performance improvement initiatives, but they are in flight and we expect them to work. But because of this company's past history of execution we were hesitant to put them in our guidance are very comparable with the approximately 89% for 2018. And when we see our performance initiatives manifest themselves in earnings, we would just accordingly.

So beyond the prior period development going away, you're not expecting necessarily for that other rest of the business to improve, is that correct?

Yes, that's a good assumption. Our guidance for 2018 is just slightly better than the pure period for 2017.

Okay. And then moving on Joe, you've come from a background with having seen far more advanced systems. How difficult will it be to get Molina's systems to the point where you need them to be, so that you can avoid fighting hotspots and instead be proactive and be sure of the performance you have going forward.

Very logistic question and you're right. In this business, this is an information business primarily, and the veracity and velocity of medical cost trend information is critical to the life blood of a well-managed, managed care company. The systems here okay, we have many sources of data warehouses that create good medical insights. We have an actuarial community that I believe is very, very good. We can get better, and the investments needed to create higher velocity and more veracity of information are baked into our plans. And I think as part of our margin recovery plan we contemplate getting better information on a real time basis and reacting to the trends that are emerging in the marketplace more quickly than this company has reacted in the past. I'm running this organization a lot flatter. And I'm closer to 13 health plans than the predecessor management and with Joe and his team, Pam Sedmak on board, we're going to make sure that we serve the emerging trends more quickly and react to them on a more real time basis.

Thank you.

The next question will be from Dave Windley of Jefferies. Please go ahead.

Hi there, it's Dave Saddle [ph] on for Windley. Thanks for the questions and welcome over Joe again. Want to just to come back to comments that you made at a prior conference kind of laying out the 1.5% to 2% in our debt margins. I'm just curious do you have an updated view of that considering the negative fixed cost leverage that comes from the unexpected New Mexico and Florida RFP headwinds. Does that changed or picking about getting to those margins or perhaps the timing of being able to do that in the one to three year target that you previously talked about?

Sure, Dave. Whatever we thought we were going to achieve. And I still believe 1.5% to 2% is achievable. Obviously if there is some stranded fixed cost as a result of withdrawal from a market or two that would create a headwind. But as we've analyzed this, I don't consider any cost to be fixed. Obviously the variable costs of the plans operating the plans are easy to identify and educate. Variable's very easy to identify and we're going to right size the enterprise to the new revenue base. And so the headwind in my opinion is not in the percentage of target margin, but in the actual dollars of underwriting margin and operating profit will produce, which to some extent has been compromised if we lose these two contracts. So no, I'm not backing off the long-term margin percentages. Although, if there are fixed costs that need to come out and it becomes stranded, then we just need to work hard to get them out.

Okay. And just to be clear, is that target range excluding upside from tax reform or not?

Yes, we haven't updated our long-term view, because as I've said publicly it's not clear to me and while there is no specific past line item in the rate development in state contracts whether states at least contemplate or consider the new tax regime as they structure rates on the various rating factors it's not clear to be that - it's not going - rates are not going to settle back to the after tax margins that we are seeing today. And until we see that prove out, I am not going to increase the target, but certainly there would be upside if the rating environment does not consider the new tax regime?

Right. Got it, okay. And then apple to apples on the non-exchange MLR improvement of 210 basis points sequentially, I think my understanding is that 4Q have less unfavorable development than 3Q, so maybe that explains some of the improvement. But I am curios what some of the other factors could have been in there I guess flu you spiked out and that was something that you had to overcome, but is there some - some approach that you could provide to 3Q to 4Q MLR.

So I am going to turn it to Joe since he was obviously heavily involved in those quarters.

Sure, I think as you take a look at quarter-to-quarter fluctuations you obviously have to be careful in this business about what you read into them. But I think it is a pure statement to say that excluding marketplace where we made some out of period adjustments in Q4, I think your statement Dave, that there was less unfavorable development in Q4 than Q3 is correct and just reflects the general trend we have been making to improving the quality and the sustainability of our reserves. I think there is also there were some pleasant surprises in patient utilization in a couple of parts of the business and particularly on the Medicare side. I also think in some cases in some of our plans that hadn't performed as well overtime or recently as we would have liked we are seeing the benefit of new management teams settling in. New Mexico showed some improvement in the second half for the year. Puerto Rico while it had - continues to have some one-off issues related to provider sharing accruals and things like that they continue I think the positive trend. So I think overall it just reflect a general stabilization of the business, the benefits of certain cost take outs we took last year, and the - just essentially getting a lot of the heavy lifting around the increasing of reserves behind this.

Thanks.

The next question will be from Josh Raskin of Nephron Research. Please go ahead.

Hi, thanks. Good morning, guys. Wanted to touch basically sort of on a longer term revenue perspective and not much organic change expected in the current year and we think about in Mexico I think you sized that $1.5 billion and in term could be your 2018 expectation I don't think I heard a Florida expectation maybe we just assume the 2017 numbers pretty similar. But I want to understand you talk a little about these changes there are a few process bringing in new hires, congrats to both of them as well. And hiring external but I am just curios what you think about revenue run rate once you kind of rebase the business take out let's call $2.5 billion for the lost contracts in 2019 add back them the HIF. So really just what do you think this business grows at when do you think you will sort of be back in the RFP wining game. And then I guess on the side question the marketplace is that a business you are still in, in 2019 and beyond?

Sure, Josh, this is Joe. The revenue trajectory hasn't changed in my view and all I said was we are pushing the pause button on new business growth, while we repair and restore the margins to target. I am very hopeful that that's a 2018 exercise. Meanwhile during 2018, Pam, myself, and others will be rebuilding the new business procurement machine so that we can began to participate in 2019 pipeline. So, this is not a story without growth, we are just pushing the pause button on North Carolina and Kentucky and a few other opportunities until we can actually see the margin restored and start moving to target levels. So, I would - for the long-term I do not view the story as anything different from the growth story that any other Medicare and Medicaid company is portraying. With respect to marketplace, well early on there were all the strategic views of you needed to be in the marketplace if you were in Medicaid and vice-versa. And I think the market has learned that while there are similarities in network configuration and costs that these two businesses are quite independent on each other. And that you can't really warm transfer a member between the two markets, they go into the exchange, they go into exchange. So in my view the business has to produce a target margin and cash flows that fit with the portfolio stands on its own. Our marketplace business in Texas is incredible profitable. It was Florida that was the problem and in the five other markets it's not at its target, but it is still profitable. And so, we're going to final rates in April. We are going to see how our profitability emerges this year, make that final call in August and September when you need to, but we're pretty confident that with 59% rate increases, 4.6% pre-tax target margin that this could be and is a sustainable business for the enterprise.

Okay. And then just on New Mexico Joe, you made the comment that you know the loss was on the cost proposal portion, certainly looking at that, I think the average you guys were 150 points off the average, I think 275 points of the winners. And so I conquer with that, but there were some areas in technical that were noticeably below average around care coordination and in post-systems and some of those. It didn't look to me, I think you guys would have been fifth-place just looking at the technical scores didn't look to me like Molina was really that well positioned as an existing plan, even if you through the whole cost proposal out. So you know I assume as part of this RFP revamping and revitalization plan, I assume there's more going into that, I was just curious if you could provide some color on how do you kind of fix that sort of stuff, is it capabilities or is it just the proposal responses weren't really perfectly written and I'm just curious what your thoughts are there?

First Josh, as we gone back and reverse engineer the scoring, we have us actually closer to being a third than fifth or sixth as you suggested when you remove pricing, but we going to pay that back and forth all day along. The real issues the one you suggested, I don't think our proposals as we go back and look at Florida and New Mexico reflected the capabilities that we have. We have been in New Mexico a long time, we enjoyed a good relationship with the state. Our service to members and to providers has been very good and I don't think we reflected our capabilities in the proposal well enough. And then clearly, when you're participating in a rate auction and purposely did at the 75th or 80th percentile on the range just pure auction theory is you are not going to win. And during that period of time, there was a very unclear view of how New Mexico was performing, it was all types of backlog claims and prior period development and it wasn't performing well. And so the management team at the time bid higher in the range, hindsight maybe we would have or wouldn't, but clearly due to rates in that performance in our opinion. But we are revamping the entire proposal writing machine to better reflect the capabilities that we do have in these markets.

Okay, that's perfect. Thanks, Joe.

The next question will be from Steve Tanner [ph] of Goldman Sachs. Please go ahead.

Thanks a lot, guys. Good morning. Just wanted to clarify some comments around target margin rates, the timeline and also tax reform as it relates to those items. So it sounds like Joe you don't expect to keep the tax benefits, but in 2018 they do represent you guys said $0.87 in the outlook. So for kind of pulling that out, it seems like the net margin goal for this year is closer to sort of 80 or 90 basis points and assuming that math is right, where should we think about the next sort of 70 to 110 bps of margin improvement coming from in 2019 and beyond and is the timeline for 1.5% to 2%, still kind of two to three years?

Yes, and that's exactly the math and you've capture it appropriately, in terms of the tax impact on our guidance for 2018. In the first year of the turnaround, where we are trying to get to 1.5% to 2% after tax. All in having and after-tax margin of 1.2%, we should suggest it slightly below 1% when adjusted for sort of the tax benefit of the tax law change is a good starting point. As we said, as we look at the back half of the year, most of our businesses, at least are operating in a stable way, we have identified the underperformers. And the next margin enhancement benefit is again I hate to coming back to managed care 101, but our utilization controls are not consistent across the country in our health plans, our care management for high acuity members, our integration of behavioral and medical is very good in some places and lagging in others. Our networks contracts are - in certain places are price too high the networks are too wide. Some of our insulated contracts have unit costs that are far too high for the volumes for giving our venders. Our retained revenue, our risk adjustment scores are not keeping pace with the acuity of the population. We're getting too much back on the revenue withhold. So I keep coming back to all of the performance measures that one looks at throughout the managed care program and we can see outlook for meaningful improvement across all those measures. And that's where the arrival at a target margin will come from.

Understand. And just one follow-up for me, just on Illinois trying to think about that rate increase as well as the statewide expansion, I guess just most helpful maybe is just to understand what MCR is assumed in guidance and maybe would also be helpful to understand where the plan would have ended the year not for sort of the unusual items that that occurred over the course of last year? Thank you.

Sure, with the rate increase we're giving and with the major corrective actions that we had to put emplace in Illinois, Illinois is in our guidance at just about breakeven for 2018.

Okay.

And for 2017, it was - it lost money, was unprofitable for 2017.

Got it, okay. Thank you.

The next question will be from Kevin Fischbeck of Bank of America Merrill Lynch. Please go ahead.

Great, thanks. I just wanted to ask about the top-line, you mentioned that losing New Mexico and Florida would be bad from an earnings power perspective, I guess, if we assume that those contracts were lost and then you kind of annualized the contract 51 at the end of this year and I guess maybe your view about exchanges. And what is the right kind of normalized run rate as we enter 2019 from a revenue perspective? I do you expect revenue to be down year-over-year if you loss those two states.

Yes, I mean, if we lost the Medicaid business in New Mexico and let's say if we lost the - we kept Miami Dade in Florida of lost the other regions then yes, revenue would certainly be down in 2019. There is no way that the new launches that we've had were small, I mean, Mississippi is going to be 100,000 to 120,000 TANF members to start, there is probably an ABD contract on the backend of that. But yes, I don't think there is any question that if we are unsuccessful retaining the majority of those two contracts revenue would be down in 2019.

Okay. And then you talked about DCP in the quarter, I guess, DCP is being up four days and two of those it sounds like just timing, but due to reserve strengthening, is that - is the reserve strengthening in your view because it's really just the under reserving heading into the period previously or is there in your view kind of extra cushion now because of all the moving pieces that have been going on, but you kind of view this as I don't want to say over reserve, but conservatively reserved?

Yes, we are appropriately and conservatively reserved. Joe?

I think that's fair statement, given everything we've developed in 2017 from the 2016 reserve we thought it was appropriate to not only replenish reserves to previous levels, but to allow additional cushion for everything we've seen happen this year and the variability in our reserve development.

Okay. And then last question, how do you think about leverage because, I guess, when you just look at it on a gross basis you are like 60% debt to cap obviously you have some cash on the balance sheet, how do you think about where you debt to cap is now when you kind of look at all the pieces there? And then what's the target and what's the reasonable timeframe to get that target?

Bear in mind I'll kick it to Joe in a minute but bear in mind that we were after our note exchange we have moved down from about 57% I believe on measured on the GAAP basis. And the reason we popped over 60% isn't because of leverage, it's actually because of the reduction to equity due to the charges we took. So Joe do you want to expand on that.

Yes, I think the best way to express it is that we are viewing leverage really in the same line we are as our expectation for 2018. We'll be able to make better informed decision once we see the profit improvements driven by everything we've talked about today manifest themselves in our earnings. So, basically what we're going to do now is we're going to manage cash and leverage as appropriately as we can we going to bring much discipline to it and we're being more focused on the management. But as far as any major decisions going forward, we're going to foresee how much we can grow our way into a lower debt to cap ratio through retained earnings.

But right now it looks like you guys think that if you hit your plan and execute you'll be able to grow into the balance sheet you want overtime there is no need to do anything if you're hitting your targets?

Yes, it's all about earnings and the sustainability and the lack of volatility in earnings. Sustained earnings is actually as much the problem with our capital base as the capital is itself.

Okay, great. Thank you.

The next question will be from Ana Gupte of Leerink. Please go ahead.

Yes, thanks. Good morning. On the Texas and the Washington contracts, can you give us a sense of what the states you're thinking about on these two in terms of seen a supplier consolidation. Is it a price bid or something else around member, provider and networks or quality? And how do you feel about the positioning of Molina? And what is also the timing of the submission and the awards?

Let's take them - hi, Ana, it's Jose. Let's take them one at a time. Texas the response to the Texas ABD proposal is in flight and is due to be submitted in early March. And we are told that awards will be announced as late as October of 2018. We're in 6 of 13 regions in Texas right now. And it's a statewide proposal. So obviously our first focus is to retain what we have. But there is actually room to grow, and with our service profile deep provider relationships, skilled nursing facility networks and a really good service platform, it's possible that we can actually grow in this RFP. I will remind you that rates are not part of either one of these proposals. It's all capability and service profile rates to be negotiated later. So that that phenomenon where a new player can come in and try to sort of invest in the state that doesn't exists in either one of these. In Washington with 55% market share, a great platform of integrating behavioral and medical, a track record of having won two of the nine regions already, two of the nine regions in Washington actually went into procurement in the past two years and we won them. And we actually grew our membership after we re-procured. We have 50% of our cost base in Washington running to value based contracts, which we believe is best in market. So we're feeling pretty good about both of these both from a market share perspective, the ability to grow and our service profile and track record in either state. The Washington RFP hasn't arrived yet; it's supposed to arrive in the next couple of weeks. And I'm struggling to remember the actual submission date, but we can get to back you on that.

Thanks, Joe. Just one follow-up more broadly on the states and the discussions you're having around rates and what you might expect this fall. Is the environment likely to be supported despite tax reform and might this become a tailwind to your margin expansion goals for 2019 or are you hearing anything around claw backs and does that differ by red or blue states or specific states.

No, we haven't heard - first of all on 2018, we haven't - there is no discussion about claw backs. The rates on 80% of our revenue are locked in. And due to various renewal dates throughout the year 20% or not. But 80% - rates on 80% of our revenue are locked in. So 2018 we think is the avoid of any renegotiation. And look, all the rating factors with the states argue about various medical cost trends sort of back to our rate increases by including benefits and service profile, these are all types of way to structurally negotiating rates. And I'm just guarded that I'm not yet ready to declare of that the after tax margins in the Medicaid business are now going to be higher than everybody projected because of the new tax regime. But there has been no discussion specifically about taxes vis-à-vis the rates that we're negotiating, which I think is a good sign.

Got it. Thanks, Joe. Helpful, color.

The next question will be from Lee Pressman of Morgan Stanley. Please go ahead.

Hey, sorry, this is Zack Sopcak from Morgan Stanley. Quick question Joe, as you think about the overall Medicaid opportunity now versus back when you were doing a due diligence stepping into the November, is there anything from a regulatory standpoint that's surprising you, work requirements, states that may or may not be expanding or anything else?

No, not really. When you are in this business you have to make sure you can tolerate through the necessitude of legislative and regulatory affairs and keeping track of all that is quite challenging as you know. But no, as we look at the regulatory environment, as we look at very legislative proposals, Medicaid is here to stay there is contemplation of perhaps certain states sort of merging the expansion market with the marketplace market, that's possible. There still a round flow of support for having the higher acuity populations ABD and long-term services and support in a managed environment. And I think the industry has done a great job demonstrating that these managed care savings by having those high acuity populations in managed care versus fee for services. So no, I don't think there is anything legislatively or regulatory that causes me to think differently above the attractive growth aspects of this business.

All right, thanks for the questions.

And the final question this morning will be from Gary Taylor of JPMorgan. Please go ahead.

Hi, good morning. Just a couple of questions, one for 2018 marketplace of that $1.5 billion of premium you're talking about, how much of that would in Florida, ballpark?

Of the 450,000 members, I believe Florida is projected to have around 50,000, down from over 200,000 in 2017. So I would tell you that it's probably between $300 million and $350 million.

Okay. And then my other question is, I guess, I'm in the camp of one of those having little trouble on the share account I think I understand the convert dilution pretty well, but maybe I'm just missing, where you ended the quarter. So 57.1 million average diluted shares for the quarter, could you give us end of quarter basic and diluted kind of as the jumping off point?

I'll take it to, Joe.

Sure, it's right around - end of quarter it's right around 60 million.

Okay.

I think what you are missing there is the impact of the exchange of equity we did for our some of our convertible notes and in middle of December, which involve issuing about 2.6 million shares.

Okay, thank you.

And ladies and gentlemen this will conclude our question-and-answer session. And it will also conclude our conference call for today. We thank you for attending today's presentation. At this you may disconnect your lines.