Good morning and welcome to the Molina Healthcare Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Ryan Kubota, Assistant Vice President, Investor Relations.

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 second quarter ended June 30, 2018. The company issued its earnings release reporting second quarter 2018 results last night after the market close, and this release is now posted for viewing on our company website. On the call with me today are Joe Zubretsky, our President and Chief Executive Officer, and Tom Tran, our Chief Financial Officer. After the completion of our prepared remarks, we'll open the call to take your questions. If you have multiple questions, we ask that you get back into the queue so that others have the 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 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 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 August 1, 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. Last night, we've reported second quarter earnings of $3.02 per diluted share. This includes a $79 million positive impact or $0.92 per diluted share from settling the 2017 Marketplace risk adjustment payment. This also includes $0.09 per diluted share negative impact of net expenses primarily related to restructuring and debt extinguishment. Therefore, from a pure performance perspective, netting the $0.83 per share positive impact of these two items, we achieved second quarter fully diluted earnings per share of $2.19. These financial results are a strong indication that the early stages of our margin recovery and sustainability plan are working, as our focus on managed care fundamentals and a more rigorous performance management process is reflected in our improved earnings. Summarizing the key takeaways from the second quarter. Our Medicaid line of business performed slightly ahead of our expectations, and performance improved sequentially in the TANF line of business. The primary driver of improvement was contained to medical cost, particularly inpatient cost. Medicare continued to perform well in the second quarter as the medical care ratio remained flat at 85%, meeting our expectations for the first half of the year. Our SNP and MMP lines of business each contributed to this favorable result. Our Marketplace business has continued to outperform our forecast. It is becoming clear that the price increases we placed in the market along with improved retention of risk adjusted revenue are producing results that are projected to outperform our pre-tax target margin of 4.6%. From a local health plan perspective, our large, high-performing plans have generally continued to perform well. Many of our previously underperforming plans have improved considerably. Additionally, our health plans that are expected to experience major membership transition are also performing well. Our…

Thank you, Joe, and good morning. As described in our earnings release last night, we report earnings per diluted share of $3.02 and adjusted earnings per diluted share of $3.08, excluding the amortization of intangible assets. As Joe commented, these results were largely driven by our margin recovery initiatives and disciplined performance management. First, let me quickly highlight a few of the items that we call out in our earnings release. The incremental restructuring costs in the quarter are primarily related to the true-up of our initial lease abatement estimates, as we continue to rationalize our office space. We will likely continue to see additional lease restructuring costs over the next few quarters as we continue to rationalize our office space. As part of the 2020 convertible notes and embedded call option repurchase, we incur approximately $5 million of expenses. These costs primarily related to the acceleration of the remaining interest payments on those notes. I will now spend a few minutes discussing our reserve position. Our reserve approach remains consistent with prior quarters and our position continues to be strong. The favorable development we experienced in 2018 from 2017 has held steady at approximately $220 million, including the explicit margin that we hold. We experienced intra-year favorable development in the quarter, but we intended to and believe that we have re-established the same level of conservatism in the second quarter's days of service medical costs. Days in claims payable are down approximately four days sequentially. The decrease is partially attributable to a reduction in the outstanding balance of provider settlements. Reducing our overall provider settlement balance is a testament to our focus on improving our claims handling protocols. Also, contributing to the decrease were continued improvements in our claims handlings, abilities and improvements in speed of payment. In addition,…

We will now begin the question-and-answer session. The first question comes from Josh Raskin of Nephron Research. Please go ahead.

Hi. Thanks. Good morning.

Good morning.

I guess the big question – morning, Joe. The big question I guess for me is just the one quarter significant turn in the MLR and the operation improvements that you made and I guess I'm just curious more color on exactly what you're doing and if you could just give us some color on maybe denial rates or pre-authorizations or things like that? Just so we understand what exactly is changing here, especially on the inpatient side?

Sure, Josh. At Investor Day, we laid out a very clear path to our margin expansion and recoverable – expansion strategy and sustainability, and we identified a portfolio of nearly $500 million of profit improvements to be harvested over a two- to three-year period. Many of those are raw execution at the local level, tiering out high cost providers, re-contracting ancillary services locally, achieving better and more consistent execution of basic utilization controls. This company had inconsistent processes. It had, in some cases, poor execution in some of our local health plans and by a rigorous performance management process, leading indicators that identify the number of authorizations that are going in, so that we can head off high acuity inpatient trends that are emerging, all of these are contributing to the very favorable medical care ratios that we're experiencing in the first half. And I will tell you that the more complicated end of those profit improvement initiatives, outsourcing, co-sourcing some of our specialty utilization controls in other things like that, including PBM re-contracting or adjusting the planning stages and we can provide more margin upside in the future. So at the early stages, we're executing well locally and its managed care fundamentals.

Got you, that's helpful, and it kind of leads into what my follow-up question would be, which is talk – you guys are sort of at that 2.2% which is kind of you were just at the $6.30, implies sort of a 2.2% margin which is at the low end of that target range that you guys laid out for 2020 or 2021, so it sounds as though you guys are two, maybe even three years ahead of schedule, your comments there make it sound like there's actually more opportunity, so I guess, as we think towards 2019, are we already in a position to say that that 2.2% to 2.7% is too conservative? Is there more upside in the potential margin going forward?

At this early stage, Josh, we're willing to say and express a high degree of confidence in the margin ranges that we conveyed to you at Investor Day. I think as we get closer to developing our 2019 plan and look at where medical cost trends are landing, or looking at the strength of the rates that we're receiving from the states, we'll be in a better position to perhaps update those target margins, but at this point, at this early stage, we will convey to you that we are expressing a high degree of confidence in the margins that we projected.

And one last one, I apologize for asking third one, but the 2019, as you guys look at it today, assuming that maybe New Mexico doesn't go your way or what have you, do you know what is your run rate? What is your 2019 revenue run rate look like today excluding any other additional changes?

I think if you take a look at the Investor Day projection which included the complete loss of Florida Medicaid and the complete loss of New Mexico Medicaid and just pro forma back in $5 million to $550 million of recovery for Regions 8 and 11 in Florida, that's probably the one adjustment I would make to the revenue outlook we gave you at Investor Day. There's other puts and takes. Washington will probably have better membership next year due to our successful re-procurement. That might be aided by the behavioral benefit carve-in, but offset by the pharmacy carve-out. So there's all types of puts and takes, but I think the major item would be Regions 8 and 11, $5 million to $550 million of revenue in addition to the outlook we gave to you at Investor Day.

Okay. So Washington...

(32:02) offer one additional data point there is that we're obviously looking at the Marketplace and there are two markets that we have filed rates for which is Wisconsin and Utah that we may consider a re-entry. We will make that decision until a little bit later in the year, but that's also a potential upside in our premium income as well.

Okay. Thanks, guys.

The next question comes from Matt Borsch of BMO Capital Markets. Please go ahead.

Yes. Thank you. Maybe I just pick up on that last comment. What is it that you would be waiting to see regarding the decision to re-enter or not Wisconsin and Utah?

Our decision to file the rates and then just pause until open – you have until open enrollment to make that decision. And I just think it's prudent to see every bit of data off your 2018 performance. The issues we had in Utah and Wisconsin were mostly related to a network that was too wide and too highly priced. And the team is working at developing a network that will support the prices that we file. I would suffice it to say that I'm inclined to say that we would re-enter, but we don't have to make a decision until the end of the summer. We're going to watch every bit of data emerge on 2018 to make sure we have this right and then we'll make the call at that point.

That makes sense. And can you just talk to us about the – you mentioned probably not a huge thing, but the little bit of pressure in New Mexico from higher behavioral costs?

Yeah. New Mexico obviously is experiencing an epidemic of sorts of opioid substance abuse, opioid use disorder and the incidence rate is quite high. And it is putting pressure on the Medicaid line of business. We're on it. We're delivering the services we need to deliver. It's really not been reflected in the rates we got. So it's putting pressure on the MLR, but it's really that pure and simple that's what it is.

Does that relate at all to the IMD exclusion lifting in terms of what might be new?

No, I don't believe so. I think it literally is just a one component of medical cost trend that is racing ahead of our price to expectation.

All right. Thank you.

You're welcome.

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

Thanks. Good morning. Joe, you mentioned being well positioned to hit 2019 and 2020 margin targets. But obviously, your current 2018 guidance is already at the high end of the 2019 1.9% to 2.2% target.

Yeah.

Obviously a high class problem to have, but I was hoping you can give us some color on where you think 2018 results may not be sustainable, like what portions of this 2018 upside might not be sustainable into 2019. Particularly, can you tell us where exchange margins sit for 2018 versus that 4.6% target?

Sure. With respect to the Marketplace business, the rates that we filed are no longer what I'll call corrective. The last two rate filings were clearly corrective rate filings to get our prices where they needed to be in order to have a margin that is in excess of our cost of capital. The prices we put into the market this year that we filed are more reflective of the acuity of the members we think we'll attract, any benefit changes, although that's pretty limited in this product line, and medical cost trend. The strategy for 2019 in the Marketplace was to optimize our contribution margin, not to grow membership considerably, but not to allow it to attrit considerably due to competitive pressures. So, our outlook for 2019 Marketplace should be maximize margin, hold onto membership and let's see what happens, so that we can perhaps grow this business more aggressively in 2020. With respect to the core business, look, we're operating pretty well. Our Medicaid line of business at 90% for the first half. TANF at 90%, we think can still be a little bit better. ABD at 93%, we think there's more opportunity there. Expansion at 87% is probably where it needs to be. And our Medicare line of business at 85% is doing well from a medical margin point of view. The SG&A ratio is still a bit high. So there is more opportunity here. It's all about the rates and the strength of the rates you get. And as we also said at Investor Day, we always put in a hedge for medical cost trend inflections that you don't anticipate or a bad rate here and there. So, we remain guarded and cautious, but obviously, we're off to a good start and we still think there's plenty of opportunity for improvement.

Got it. So, if I could just follow up here. One, I'd asked about where your exchange margins are for 2018 versus that 4.6% target. Can you give us an idea? I mean, are they closer to 10% than 5%?

In this first half...

(37:19) but I'm just trying to figure out magnitude.

Sure. On an adjusted basis, I mean, you really have to scrape out the CSR subsidy and the noise. If you scrape out the noise, we did just under 10% for the first half and I'll remind you that has the seasonality effect of the business. In the back half, we're projecting to be slightly over breakeven. And on the same basis of the target pricing margin of 4.6%, the guidance margin for Marketplace is just under 5.5%. So, we're beating the – our guidance calls for a beat to our 4.6% target pricing margin.

Got it. So then, I guess, so if margins and exchanges aren't going to be that big a headwind considering they are only slightly above your target and you're pricing to your target next year, what is the big headwind to next year? I think a lot of people when they look at these margins that you reported this year, that you updated guidance for, would look and say geez, it looks like it gives you the opportunity to kind of get to the 2020 margin in 2019. What's going to – in your mind, what are the key factors that kind of keep you from doing that? Are you going to guide to that 1.9% to 2.2%, meaning earnings is actually down next year versus this year, because that's what it sounds like you're saying.

Sure. Obviously, we're not going to be giving 2019 guidance at this early stage, but...

Sure.

...in tracking the moving pieces, the major profit improvement initiatives that are what I call enterprise-wide, re-contracting our PBM, perhaps re-contracting some of our specialty UM, perhaps outsourcing or co-sourcing some of our IT and transaction services operations that would provide significant benefits along the lines that we conveyed to you at Investor Day, those are still in the planning stages and will provide benefit in 2019 and 2020. I always remain cautious about the rates we're going to get. Right now, the rate environment is what I consider stable. It's mostly meeting the actuarially soundness standard. It generally reflects the trends we are experiencing, but I always just remain guarded on the strength of the rates we're going to get. So if rate environment remains stable and strong and our profit improvements take hold as we think they will, perhaps there is upside, but again, it is too early in our turnaround plan to begin conveying expanded margins to what we conveyed to you at Investor Day. Let's wait till the end of the year, see how 2018 plays out, and when we give you 2019 guidance, hopefully there could be positive news there.

Thanks for all the color.

You're welcome.

The next question comes from Ana Gupte of Leerink Partners. Please go ahead.

Hey, thanks. Good morning. So the first question was about the SG&A guidance which you reiterated rather than I thought might be that there may be some improvements for 2018 and can you give us any sense of the outlook into 2019, given you've been taking down a lot of your corporate overhead and the like?

Sure. We remain committed to the operating leverage, that is we're holding our operators accountable to actually holding fixed costs fixed and only adding a variable cost when volume is involved. Second, we continue to chip away. No major announcements, but every day, every month we find new opportunities. In the quarter, our administrative costs were sort of flat quarter-over-quarter. So the reduction in the G&A ratio was actually a function of the revenue line, rather than the cost line, and we do have a backend loaded SG&A forecast. The SG&A forecast is $50 million higher in the back half of the year than the front half as we deferred some improvement projects. We have the New Mexico and Florida transition cost to incur, and Medicare marketing season opens as you know in October, November. So there's potential upside there, but right now we're comfortable at our original guidance of 7.4%, and any reduction in that clearly is coming from the revenue line and not the cost line at this early stage.

That's helpful. Thanks. So moving to revenue, can you give us an update on the Texas RFP and the resubmission by the 22nd, what is the timing on that and what kind of converse are you having?

The resubmission was actually almost a nonevent. The RFP came out on July 23rd I believe, we have 30 days, so it's late August when it's due. There was only one noticeable change. So there was no change to the very technical requirements. They only gave you 30 days to respond, so they couldn't change much technically, what they did include was a more subjective element to the evaluation process to where the raters and the evaluators can inject more subjectivity and judgment into the raw scoring. Rates were still not part of the bid. We were comfortable and confident in our original submission. We remain comfortable and confident with our resubmission, and we're still hopeful that our six regions in Texas can expand to something north of 6% and south of 13% and we can expand our ABD revenue in Texas as a result of this. So we still remain very bullish and optimistic on the prospects there.

I would add one more data point to that, to what Joe said is that the go live day has been pushed back...

Sure.

...by approximately five months, so it is now June 1, 2020.

And the awards will still be in October to choose, I couldn't find that on the website?

They have not given a date. They have not updated the date that they indicated they would announce the award. So we don't actually know.

Got it. One last one then, just you're getting to a point where just within a pretty short period of time you have shown remarkable turnaround, but there still seems a lot of runway for MLR improvements and broader margin expansion, would you consider maybe as new RFPs like North Carolina in particular, which is coming any day, bidding for that at this point or might you just stick with the, let's get through our margin turnaround and be cautious and that does put a dent a little on the potential growth for 2020?

Ana, it's the latter. We have to stay focused and committed to our margin recovery. And the keyword here is sustainability. That's the key question for us, that's the key question for you. And we actually think we are at the early stages of improving our core processes, the infrastructure to support the complexity of the revenue we take on in order to sustain these margins. And as I mentioned before, if we continue to be in a stable and actuarially sound rate environment and those profit improvement initiatives we conveyed to you at Investor Day, there could be margin upside here, but we remain committed and focused to the sustainability and margin expansion. And we have enough revenue right now to consider this a very solid franchise. We have a Mississippi implementation going in. We have an Idaho expansion. There's a potential LTSS opportunity in Ohio a year, year-and-a-half out. So there's plenty of growth opportunity in our existing footprint that we can focus on as we expand our margins and not get distracted with greenfield opportunities.

Super helpful. Thanks so much.

You're welcome.

The next question comes from Steve Tanal of Goldman Sachs. Please go ahead. Stephen Tanal - Goldman Sachs & Co. LLC: Good morning, guys. Thanks for the question. I guess, just on the risk adjustment side, while certainly, I guess, not run ratable at this level, it does seem like you'd be setting up for another risk adjustment gain next year related to this plan of yours, so how do you suggest we sort of think about that year-to-year step down given the smaller overall footprint? And is that something you'd include in guidance as you approach next year?

Well, I think, Steve, I would make two comments. One, getting better at accounting for it is only half the battle, we actually have to get better at doing it and getting risk scores that are commensurate with the acuity of our population. We clearly got better at accounting for it, but we are actually getting better at actually doing it, and having a profit improvement emerge out of the improved risk scores that we're harvesting. I would tell you that the first half of 2018, our revenue profile on the revenue that we booked for the first half is reflective of the experience that emerged off of 2017, whether there's upside to that or not we'd have to wait and see. But the 2018 revenue is being recorded on the same basis of the experience that emerged out of 2017. Stephen Tanal - Goldman Sachs & Co. LLC: Got it. And then, so would 2019 guidance include some expectation of how that will run rate next year or would you exclude that from guidance kind of going forward?

Well, I'd answer the question maybe slightly differently than you even asked it, it's a question of how did we price? And again, when you're filing rates three, four months into a year that has experiences yet to emerge, you're forced to be cautious and conservative. So the 2019 rates that we filed actually included a risk adjustment outlook that was pretty consistent with the 2017 experience that emerged into 2018 and the 2018 experience that we have currently. If we get better at actually harvesting the risk adjustment scores that would be upside to our 2019 performance. Stephen Tanal - Goldman Sachs & Co. LLC: Understood. That's helpful. Okay. And then just excluding the risk adjustment, it would still look like there was a big drop in marketplace PMPMs especially sequentially I guess is the way we'd look at that. And I'm kind of curious to understand what drove that and I guess in doing that math, are we correct to adjust the CSR out of expenses as opposed to premiums?

That's correct, Steve. CSR is really a adjustment to the medical costs and if you look at the Q2 premium for marketplace, it is benefited from the risk adjustment from 2017. So that's why you had a little bit of a artificial lift, if you will. If you adjust it out, then Q1, Q2, they're fairly stable, Q1 stepping up to Q2 slightly roughly about $15 million, $16 million. So that's really the picture. Stephen Tanal - Goldman Sachs & Co. LLC: Okay. So follow-up, it looks like a bigger step-up, but okay, and just lastly for me. In Washington, can you give us a flavor for the PMPM value of the RX carve-out versus the behavioral carve-in, are those pretty similar? And then may be just a little color on sort of the net impact of both of those as well as the membership gains as you enter 2019. It sounds like you're saying are net positive overall. And that's all I had. Thanks.

Let me comment on the pharmacy carve-out, which was effective July 1 of this year. So, as Joe commented before, it's approximately $100 million of back half premium reduction. So behavioral health, on the other side, does not kick in until the first part of 2019. So there is a timing issue there, but what Joe commented before is that we feel optimistic that we will expand membership in 2019. So on top of picking up the behavioral health premium, then it possibly may more than balance out the loss of the pharmacy revenue.

The behavioral carve-in was worth about 10 percentage points in the rate, if you can use that in your model that might help you. Stephen Tanal - Goldman Sachs & Co. LLC: That's perfect. Thank you very much.

The next question comes from Sarah James with Piper Jaffray. Please go ahead. Sarah E. James - Piper Jaffray & Co.: Thank you. And I appreciate the detail on the clean EPS, it's very helpful. But I was hoping you could also put the progress in terms of the $400 million to $600 million savings target laid out at Investor Day? And then which buckets would you say you're close to hitting the goal on? So, for example, it sounded like network and payment integrity were maybe the furthest along, this were laid out as being maybe up to $85 million, so if you could give us some perspective on those buckets and where you are in achieving them? Thank you.

Sure. I will say in the early stages here, the profit improvement is emerging out of better execution of utilization management on the front lines in the local health plans, one. Second, re-contracting, tiering out high cost facilities, re-contracting with re-contracted behavioral services in various geographies with outsourced vendors. So re-contracting utilization control and we've gotten a lot better at claims handling. When we say there's less going into the provider settlement pot, I mean that gets expensive. And so we're just getting better at straight through processing, auto adjudication, our rework rates are down, our provider settlements are down, more to go there, but it's all contributing to the early success we're experiencing here. I'd say those were the three major categories and better risk adjusted revenue retention. Those are the four categories that we're probably hitting hard right now. The enterprise-wide initiatives, all the re-contracting, potential outsourcing in the works, plans in place, execution for 2019 and 2020. Sarah E. James - Piper Jaffray & Co.: Can you comment to where you are towards hitting the $400 million to $600 million target?

It's really hard to say. Many of the let's say locally deployed initiatives are hitting, the bigger ticket ones or not, but clearly when we developed our 2018 plan and looked at the strength of our rates, we know we needed more locally deployed profit improvement initiatives. In fact, when Hampstead Mac joined us we added over 100 basis points of revenue to everybody's profit improvement plan. So it's hard to say how much of the $500 million was actually harvested to date, but most of this is raw execution on the front lines on the three or four core processes that I mentioned. When develop our 2019 plan or perhaps at our next Investor Day, we'll do our re-accounting for the $500 million of opportunity, so you know how much is left, but I would tell you that a significant portion of that, the enterprise-wide initiatives has yet to have been harvested. Sarah E. James - Piper Jaffray & Co.: That's helpful. And then on California, it looked like there was a good improvement on MLR there. I wanted to understand, was that just tax related or was there a meaningful improvement on the Medicaid side or anything out of period impacting California? Thank you.

These are basics fundamental of execution on our plan and that's why you see California has some improvement. There's also some – if you look at California first half – first quarter, second quarter, I mean loss ratio improved quite a bit. And that's pretty much across a lot of lines of business as well. Sarah E. James - Piper Jaffray & Co.: Thank you.

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

Hi. Thanks for taking my question. So, Joe, in your prepared remarks, you talked about the better performance on risk adjustment, and you expected that to flow through and that that was specifically now incorporated into your guidance. And so, I guess I'm wanting to perhaps parse apart the benefit that I believe you're calling out for 2Q from 2017 risk adjustment and perhaps the benefit that maybe you're including as run ratable in 2018 that would have come from what I believe you're saying is a lower risk adjustment payable accrual for 2018. Am I understanding that correctly?

Yeah. I think it's fair to say that our first half results, there's always puts and takes for the quarter as you adjust your outlook. But the first half results are a fair reflection of the strength of our risk adjustment position for 2018. So I would ask that – as we talked about a $3.70 pure performance first half that is reflective of our 2018 risk adjusted revenue outlook for the marketplace.

Got it. And similarly all incorporated into the 5.5% that you answered to Justin?

That is correct.

Right. Okay. And looking at some of your variance around your rates in the exchange business, you have a couple states where it looks like you're looking for double-digits in a couple of states, where you're bigger, you're looking Texas and Washington for example in the low double digits and New Mexico, Michigan may be closer to flat. Can we think about kind of specifically in exchange, are those being reflective of particularly the lower ones, where maybe you're kind of over earning and believing that you're hitting caps and essentially bidding back to a normal margin?

Fair point. The only plan where we're bumping up against the minimum MLR is New Mexico.

Okay.

Because it's a three-year rolling average, we still have enough of the old experience in the calculation where we're generally avoiding that for this year and probably for next. It's a very fair characterization that our rates are no longer corrective. They are now reflective of the acuity of the membership we believe we will track, of the trends we are experiencing and always with an outlook of where the competitors are. So this is a blind bidding process as you know, so you could talk to yourself and convince yourself that your rates are okay and you'll track membership, but you always have to have an outlook of where is your product price juxtaposed against the competitors, where do you think they'll land so you have an outlook of what type of membership. So we do a very detailed elasticity of demand study on where our pricing is. And that's how we prepare our rates, whether they're mid single-digits or low double-digits, it's always reflecting trend and then juxtaposed against where we think our competitive pricing is, and where the competitors will land, so we can attract the membership we plan to attract.

Appreciate that. And then last one real quickly, as you've now made substantial progress in cleaning up the balance sheet and you're obviously focused on profit improvement and organic operations here, but as you start to generate some cash flow and don't have balance sheet applications for that in the immediate, how do you think about capital allocation, say, beyond the very near-term?

Well, right now, we're still focused on our recovering sustainability plan. We are not really looking for inorganic opportunities. I will tell you that in the near-term opportunities that we've identified in some of our existing footprint, if we can harvest that revenue over the next year or two, it will require risk-based capital to be deployed in our local health plans. So as we outlined to you at Investor Day, there is $1.5 billion to $3 billion of opportunity, we only squeeze $600 million out per year for each of the following two years. If we went more aggressively at that, figure around 10% to 15% of that revenue being tucked away as statutory capital, which by the way is the highest and best use of excess cash flow, as it produces north of 30% levered returns. So we're very focused on driving the value of our business through our existing footprint first. We will look to then greenfield opportunities later and if our currency trades well and we can get back in the M&A game at some future date, then we would do that. But right now focusing on organic growth opportunities that will require our free and excess cash flows to be deployed locally as statutory capital.

Appreciate the answers. Thank you.

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

Great. Thanks. Just wanted to kind of follow up on one of some of the earlier lines of questioning just because the order of magnitude of performance and improvement this year is pretty surprising. So I just wanted to understand if there is anything else kind of this year that looks maybe one-time in nature. I guess you mentioned $26 million of Florida retroactive payments. But is there anything like that that says that this base might not be quite the starting point when thinking about 2019?

No, I think we tried to give you all a very clear picture over how the business was performing and we actually think that first half sort of pure performance picture of $400 million pre-tax, 240-plus million after tax and $3.70 is a very clean and accurate view of how the business is performing. There's puts and takes all over, but for the most part with respect to our product lines, our local health plans all aggregating to the consolidated view we, think that's a pretty good picture.

I would also add to what Joe said here. I'm sorry. But we have a very high visibility to our premium rates already for the year. So that's pretty good locked in pretty close to 100% that we know about. So the balance is really managing our medical cost structure. So we have good sense on that side, so that give us comfort level to look at second half of the year.

Okay. And then, with the Medicaid Solutions sales, it looks like they didn't generate much gross profit at all. Does that mean that it was losing money on a net income basis, so divesting that business is going to be accretive even before you take into account what you do with that cash?

No, it's pretty much a push on the EPS line. If you assume you're going to repay debt with the proceeds, it's a push on the EPS line. It generated about $30 million of EBITDA and $7 million of EBIT on an annualized basis. So the multiple we got for it was actually quite attractive. But it's a push on the EPS line if you assume we'll repay debt.

All right. Great. Thanks.

The next question comes from Steven Valiquette of Barclays. Please go ahead.

Thanks. Good morning, everybody. You touched on this a little bit but for the Marketplace business, just to kind of clarify a little bit further. Separate from your decision whether or not to re-enter Utah and Wisconsin, just based on your pricing strategy, are you budgeting right now for membership growth in the Marketplace in 2019 in the existing states or do you anticipate just based on your pricing strategy it's more likely it could be down or is it still really just too early to tell?

It is too early to tell. But I can only tell you what we strove to achieve in our pricing strategy, which was to – except for Utah and Wisconsin which are separate, to maintain the membership profile that we have and maximize the contribution margin dollars. And so put a price in the market that remained competitive juxtaposed against the competitors that would show well on the exchange, maintain the membership profile, don't try to grow it, but make sure it doesn't attrit, and maximize the contribution margin dollars. That was the strategy. And then of course, if we're successful in launching Utah and Wisconsin, that would be added membership. But the strategy wasn't to grow it or let it attrit. It was to maintain it and maximize profit.

Okay. That's helpful. Then just a real quick housekeeping question, for the $79 million risk adjustment payment, thinking about how that may have been allocated by state, is it safe to assume that some of the states where you have the lowest Marketplace MLRs like in California and Florida probably had the heaviest weighting of the risk adjustment payment in 2Q 2018?

Yeah.

I mean, you obviously had a 28% Marketplace MLR in Cali, 39% in Florida. But then Texas is your biggest state but that actually had one of the highest state MLRs in the Marketplace at 73%. So I was just kind of curious just to kind of confirm what's probably obvious around the allocation there.

Sure. Sure. Very fair question. And the bulk of this risk adjustment item from 2017 pertain to the largest states such as Texas, and the rest I won't go into the detail of that, but certainly if you look at from an allocation perspective, the typical market share that you see from our Marketplace state-by-state, that will be a way to look at it. But Texas is certainly the lion's share of that adjustment.

No, it is. Okay. Okay. All right, great. Thanks.

Sure.

The next question comes from Gary Taylor of JPMorgan. Please go ahead.

Hi. Good morning. A lot of my questions have been answered. Just one quick one on the Florida out-of-period benefit which looks like it would've been $0.31. I mean, the reason you don't I guess sort of back that out of kind of the clean earnings number or the go-forward number is just that there's probably other smaller positive, negative adjustments throughout the quarter or various quarters. Is that why that wasn't explicitly sort of backed out like say $0.96 plus?

Gary, I'm not sure when you say the Florida adjustment, I'm not sure, what you...

Yeah, maybe we didn't understand. This was a earlier comment, but I thought you said the quarter included $26 million pre-tax of out-of-period payments in Florida related to I think the higher outpatient fee schedule which...

Yeah, yeah. That's correct. Yes, the industry in Florida was handed $185 million update to the EAPG Fee Schedule, $26 million of it related to us, we recorded it in the quarter. Yeah, there were other, I mean, there's so many other puts and takes in the quarter, we thought we'd call it out, because it was sort of an industry phenomenon and it was sort of known out there and clearly something that masked the true performance, the core performance of Florida was actually pretty good this year and it sort of masked that. So we thought we'd call it out. But that's what that's related to.

Okay. And then my other question is as we think about, Joe you had mentioned this, limiting, minimizing the impact of stranded costs as you exit New Mexico and Florida Medicaid revenues. And you said you're committed to that, I guess the question is how should we think about that in terms of a 2019 headwind. When you say limit the impact, is it plausible to get that to something that's fairly de minimis in terms of EPS impact or it's going to be a measurable impact regardless but you're going to get it as low as possible?

Well, if you recall in our margin projection, we included $50 million pre-taxed of a headwind in 2019 due to stranded fixed costs for the combination of New Mexico and Florida. The fact that we've actually now retained over $500 million of our Florida revenue, that $50 million is more like $40 million. So it's already included in our margin forecast for 2019, but I'm not satisfied until we actually try to solve for it. We just thought it was prudent and cautious to say it could get stranded, but we have teams of people who are working on extracting the variable costs, the step variable costs and the next step would be get at the fixed cost that could get stranded if we don't get at it quickly. So we are committed to trying to outperform that assumption, but it was already included in our 2019 margin projection.

That's a good reminder. I appreciate it. And last follow on to that would be New Mexico, I think, has been unprofitable from Medicaid perspective, you talked about behavioral being an issue, so I'm presuming kind of all-in that's still unprofitable, so is there a measurable EPS tailwind as you exit the New Mexico Medicaid or that's sort of encapsulated in some of the stranded cost estimate also on a net basis?

No, when we projected 2019 margins, we extracted the contribution margin from the Medicaid business. As I said, included the stranded fixed cost, that's already been embedded in there.

Okay. Got it.

Yes. It's already been embedded in our forecast.

Okay. Thank you.

You're welcome.

The next question comes from Zack Sopcak of Morgan Stanley. Please go ahead. Zachary Sopcak - Morgan Stanley & Co. LLC: Hey, thanks for the question. Can I just ask quickly on cash flows in the quarter, operating cash flows turned negative after a strong first quarter, anything in there surprising or was that in line with how you're thinking about how they would sequence through the year?

Mostly timing of – I'll kick it to Tom, but mostly just the timing of cash flows related to some of the receivables we carry. Tom, you want to elaborate?

Sure. Sure. I mean, you look at the operating cash flow, it was down definitely and primarily related to the receivable and the timing of receipt of premium in certain states, some of the larger states California, Florida, Ohio, Washington, they're more or less temporary in nature. And also we have HIF, health insurance fees receivable that we don't get settled with say until later part of the year. And one other data point is that with the reduction in our Marketplace membership, went down by more than half, you would see that medical claims payable related to that also came down. Therefore it'll affect cash flow as well. Zachary Sopcak - Morgan Stanley & Co. LLC: Okay. That makes a lot of sense. That helps, thanks. And quickly just one of the first questions I asked about 2019 revenue discussion you had at Investor Day, and you talked about potentially a tailwind from Florida and you talked about puts and takes on Washington, does Puerto Rico expansion at all factor into that or is it too early to have an idea of what impact that could have for next year?

Puerto Rico could provide some upside, but we did not include any upside. At the time, we prepared our forecast... Zachary Sopcak - Morgan Stanley & Co. LLC: Yeah.

...it was unclear whether we'd even be successful in Puerto Rico. Now that we have been, we're actually pretty confident that we'll do very well in the auto assignment process for the Commonwealth, and we could see some membership growth from our 320,000 members, but that was not included in our forecast at the time, nor was any loss of membership. We pretty much forecasted status quo. Zachary Sopcak - Morgan Stanley & Co. LLC: Okay, great, thank you. And congrats on the quarter.

Thanks.

This concludes today's question-and-answer session and today's conference call. Thank you for attending today's presentation. You may now disconnect.