Maximus, Inc.

Greetings and welcome to the Maximus Fiscal 2022 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Madison West, Vice President of Investor Relations and ESG for Maximus. Thank you, Ms. West. You may begin.

Good morning, and thank you for joining us. With me today is Bruce Caswell, President and CEO, David Mutrin, CFO, and James Francis, Vice President of Investor Relations. I'd like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions. Actual events and results may differ materially, including those discussed in Item 1A of our most recent forms, 10Q and 10K. We encourage you to review the information contained in our most recent filings with the SEC and our earnings press release. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances, except as required by law. Today's presentation also contains non-GAAP financial information. Management uses this information internally to analyze results and believes it may be informative to investors in gauging the quality of our financial performance, identifying trends, and providing meaningful period-to-period comparisons. For a reconciliation of the non-GAAP measures presented, please see the company's most recent forms 10Q and 10K. And with that, I'll hand the call over to David.

Thanks, Madison. This morning, Maximus reported revenue for the second quarter of fiscal year 2022, which increased 22.7% year-over-year from to $1.18 billion. Growth on the top line was driven primarily by the acquisitions in the U.S. Federal Services segment and the U.K. Restart Program in the Outside the U.S. segment. Operating income margin for the quarter was 6.4%, or 8.3%, excluding the expense for intangibles amortization. Diluted earnings per share were $0.80, or $1.07, excluding the amortization expense. Second quarter earnings reflected our expectation for lower earnings caused primarily by delays in our core programs returning to pre-pandemic levels as the COVID response work continues its predicted decline. We also experienced some variability between segments with U.S. federal below expectations while outside the U.S. exceeded our expectations for the quarter. Organic revenue growth was relatively flat in the quarter but adjusting for the COVID response work, normalized organic growth would be approximately 20% year-over-year. Let's turn to results for the segments. The U.S. services segment delivered revenue of $398.1 million for the quarter, which represents a decline over the prior year period driven by expected reductions to short-term COVID response work. Normalizing for the COVID response work, revenue for the segment grew approximately 25%, This was all organic and driven by ramping of new work, some of which represents COVID response work that has evolved into longer-term work with new customers gained during the pandemic. The segment operating income margin was 11.7% as compared to 18.5% in the prior year period. As expected, profitable short-term COVID response work has declined, while Medicaid redeterminations remain paused. keeping our core work operating at depressed levels. In the prior year period, strong COVID response work helped offset those negative impacts to our core programs. A quick update on Medicaid redeterminations. The most recent Public Health Emergency, or PHE, extension occurred in mid-April and remains in effect for 90 days. This represents a one-quarter delay from our previous projection. I'll speak more about this in the context of fiscal year 2022 guidance. For the U.S. federal services segment, second quarter fiscal 2022 revenue increased to $573.3 million, driven primarily by contributions from the attained federal, VES, and Advantage acquisitions. On an organic basis, revenue increased about 9% in the quarter. And if you adjust for the COVID response work, normalized organic growth in the segment would be about 13% over the prior year period. The operating income margin for U.S. federal services was 8.1% in the second quarter as compared to 7.0% in the prior year period. While the attained federal and VES acquisitions are helping to blend up the segment's margin as expected, results for this quarter fell below our expectations due to impacts from our Advantage business. First, we recognized higher costs this quarter related to the transition of the contract from the prior provider, some of which we had forecast in future periods. Second, the continued delay in the return to repayment, which was extended again to August 31st, resulted in reduced revenue and lower profitability in the quarter. Turning to the outside the U.S. segment, second quarter revenue increased 13.8% to $206 million, Ramping of the UK restart program was the primary contributor to growth in the segment. The segment delivered a profit of $4.3 million or 2.1% margin for the second quarter. This compares to $15.1 million or 8.3% in the prior year period that was bolstered by above average performance on job placement activities in Australia. Results for this quarter exceeded our expectations due to strong performance on the UK restart program, which delivered a positive profit one quarter ahead of schedule. This is tempered by lowered expectations for our largest employment services contract in Australia, called Job Active, which is concluding its final two-year option period, ending of June of this year. The government recently announced awards for the rebid, and we have been awarded less market share than we anticipated on the successor contract. We had expected reduced volumes as the Australian government continues to push digitization for easier-to-serve job seekers, meaning those individuals are serviced completely online by government, as well as their stated desire to bring in additional new providers in this reduced market, potentially making it more fragmented. However, the decline in our share of volumes exceeded our expectations. Nevertheless, as we regularly note in our risk factors, changes in government policy whether legislated or, as in this case, to reflect the priorities of the party in office, can result in our not being awarded contracts at the same level as in the past through the competitive bidding process. I will quantify the Australia effects in the fiscal 2022 guidance discussion, and Bruce will provide additional perspective in his remarks. Let me touch on the balance sheet and cash flow items. As of March 31st, 2022, we had gross debt of $1.46 billion, and we had unrestricted cash and cash equivalents of $93 million. The ratio of debt net of allowed cash to pro forma EBITDA as calculated in accordance with our credit agreement is 2.4 times. Cash flow from operations were strong as expected, totaling $115 million, and free cash flow was $98 million for the three months ended March 31st. We repurchased approximately 330,000 shares, totaling $24 million in the second quarter. We had good cash collections, and our DSO at March 31st was 68 days, putting us at the lower end of our target range of 65 to 80 days. Now I will turn to our revised fiscal 2022 guidance. We are maintaining our revenue guidance of $4.5 to $4.7 billion for the full fiscal year. We now expect diluted EPS of $3 to $3.50, or $4.07 to $4.57 on an adjusted basis, which excludes intangibles amortization expense. We are deliberately providing a wider range than we normally would at this point in the year. The revised earnings guidance equates to a $1 reduction on the low end and an $0.80 reduction on the high end. The reductions are driven by three components. Number one is the PHE. I mentioned on the February earnings call that another delay to the PHE would likely risk us not making the guidance range we gave at that time. At that point, the PHE extension lasted through mid-April. Since then, another delay has occurred, meaning as of today, the PHE now lasts through mid-July. A rough order of magnitude for this one-quarter shift is a 30-cent reduction from guidance provided in February. However, given the politicized nature of the PHE and midterm election considerations, we felt it prudent to accommodate in our guidance the potential for an additional extension or extensions beyond mid-July, meaning redeterminations would remain paused through our fiscal 2022. the estimated effect of the PHE extending beyond September 30 would be a roughly 60-cent reduction from our prior guidance. Given that, if you only assess the variability tied to the PHE, no additional extensions would put us in the upper half of the new guidance range, while an additional extension would put us in the lower half. While the pause in redeterminations as a result of the PHE reduces our annual forecast and more extensions push that work to the right, Every indication is that the volumes will return as states work through the backlog of nearly 87 million Medicaid and CHIP enrollees as of January 2022. Number two is delays on ramping of new work in the U.S. services and outside the U.S. segments, which equates to about 20 cents of the guidance reduction. The U.S. services new work is driven by fiscal year 2021 awards that were scheduled to start earlier in fiscal year 2022 but have been delayed by the customer and should begin in this third quarter. The delays in outside the U.S. are mainly in employment services contracts in other geographies besides the U.K. and Australia, where volumes have been slower to increase, in part due to COVID disruptions. For both segments, we believe these delays are temporary. And number three is Australia. As I mentioned, we were disappointed with the reduction to work share on the rebid. This has an outsized impact to fiscal year 2022 compared to subsequent periods. The new contract begins on July 1st, so our fourth quarter will reflect the lower run rate. However, the accounting standards require us to recognize revenue based on anticipated future outcomes, so the lower volume means a reduction to Q3 revenue and profit as well. We also expect to incur severance charges of between $4 and $5 million in the third quarter. In total, these changes in Australia drove a reduction of about 15 cents to our guidance for fiscal year 2022. As with most of our contracts, we have a highly variable cost structure. That means on a go-forward basis, we expect to reduce costs, operate the new contract profitably, and ultimately have a few cents less of diluted EPS on an annual basis. Stepping back, while these three factors represent headwinds to fiscal 2022, they should not weigh down the potential of the business once the PHE lifts and the delays abate. Of course, as we look ahead, there remains uncertainty on the specific timing of these items outside of our control. Our cash flow guidance is updated following the change to earnings, with cash flows from operations expected to range between $225 million and $300 million and free cash flow between $175 million and $250 million. We expect interest expense to run between $40 and $42 million, the effective income tax rate between 24.5 and 25.5 percent, and weighted average shares absent additional share purchases to be between $62 and $62.2 million. Let me cover segment margin expectations. We anticipate U.S. services to now be in the 9 to 11% range for the full year and notably expect a margin step down in the third quarter as short-term COVID response work further reduces to close to zero, but before the redetermination activities resume. The U.S. federal services margin expectation remains unchanged at 10 to 11% for fiscal year 2022. For the outside the U.S. segment, We now expect a full fiscal 2022 to be slightly below break-even, given the changes in the Australia business. In closing, despite the short-term earnings headwinds, we expect a strong return in profitability once the delays abate. I am also pleased with the strong underlying organic revenue growth, as well as the backlog we have built through a number of recent new work awards that Bruce will share. And with that, I'll turn the call over to him.