Maximus, Inc.

Greetings and welcome to the Maximus Fiscal 2023 First Quarter Earnings Conference Call. At this time, all participants are in 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, Jessica Batt, Vice President of Investor Relations and ESG for Maximus. Thank you, Mr. Batt. You may begin.

Good morning, and thanks for joining us. With me today is Bruce Caswell, President and CEO, David Mutren, 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 as a result of risks we face, including those discussed in Item 1A of our most recent Forms 10Q and 10K. We encourage you to review the information contained in our 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 10-Q and 10-K. And with that, I'll hand the call over to David.

Thanks, Jessica, and good morning. We are pleased to report solid first quarter results as well as increase our revenue and earnings guidance for fiscal 2023. We have some important updates to share regarding Medicaid redeterminations that are now scheduled to commence later this fiscal year. First, I will discuss results for the quarter. Maximus reported revenue of $1.25 billion for the first quarter of fiscal year 2023, which represents 8.5% year-over-year growth. Organic growth was 10.3%, driven by new or expanded programs in all three segments, as we continue to see strong demand for our services across our markets. adjusted operating income margin was 7.9% and adjusted EPS was 94 cents for the quarter. This compares to 9.0% and $1.12 respectively for the prior year period, which included profitable short-term COVID response work in the domestic segments and less interest expense due to lower interest rates. Let's go to segment results. For the U.S. Federal Services segment, revenue increased 6.2% to $618 million, driven primarily by volume growth tied to strong demand in the segment's clinical services business and anticipated higher revenue on a large cost plus contract. The operating income margin for U.S. federal services in the first quarter was 8.3% as compared to 10.6% in the prior year period. Segment income results were in line with our expectation for a lighter quarter, and our expectations for the full year are unchanged. For the U.S. services segment, revenue increased 13.7% to $439 million. This was driven by contributions from new work wins across the portfolio in core business areas such as eligibility support and clinical services that we have discussed on recent quarterly calls. The U.S. services operating income margin was 8.6% in the first quarter of fiscal 2023, reflecting the ongoing headwind to the segment's profitability caused by paused Medicaid redetermination activities. Now that we have clarity on restarting redeterminations, which is factored into our updated guidance, we expect improvement to operating margin for this segment. Turning to outside the U.S. segment, revenue increased 5% year over year to $192 million for the quarter. This is net of currency impacts which have been meaningful in the past year and reduced revenue by approximately 12% from the prior year period. Organic growth, which excludes the currency impact, was 16.0% and driven primarily by volume increases on the UK restart program that has now reached its full run rate. Operating income margin for outside the U.S. in the first quarter was 5.3%. The segment had an operating loss in the prior year period due to contracts with planned startup losses, such as the UK Restart Program. Today, that contract is performing to expectations, meaning it is more than overcoming the planned startup loss and helping to drive overall profitability in the segment. Let's turn to the balance sheet and cash flow items. Starting with cash flows, for the quarter ended December 31, 2022, cash used in operating activities totaled $135 million, and free cash flow was an outflow of $150 million. We had anticipated lower cash flows for this quarter due to the timing of certain payments, like the final payment of payroll taxes that were deferred from 2020, and seasonality around collections given the holidays. Collections in December were lighter than expected, which brought DSOs at the end of the quarter to 74 days, above the range we typically expect of 60 to 70 days. We expect the increase to be temporary, with DSOs quickly falling back into our targeted range. In the December quarter, we borrowed on our revolver to support the higher working capital. Already in the month of January, we've used improved cash collections to pay it back down by $75 million. As a result of the lower collections, we finished the December quarter with total debt of $1.57 billion and our net debt to EBITDA ratio at approximately three times, putting it at the upper end of our target range of two to three times. As a reminder, this ratio is our debt, net of allowed cash, to adjusted EBITDA for the last 12 months as calculated in accordance with our credit agreement. Looking forward, we expect our debt ratio to improve over the remainder of fiscal year 2023. I view December as a high watermark given the temporarily higher DSO. Over the next three quarters, our cash flows consistent with our guidance range should enable us to finish the fiscal year below 2.5 times. Our capital allocation strategy remains unchanged from last quarter. In the near term, we plan to prioritize debt reduction using our free cash flow. Longer term, our core focus remains strategic acquisitions intended to accelerate organic growth. Turning to fiscal year 2023 guidance, the Consolidated Appropriations Act 2023, also known as the Omnibus Spending Bill, was passed in late December and included direction to states on resuming Medicaid redeterminations and the associated funding. Bruce will provide further remarks on the specifics of the policy and related schedule that states are targeting, but we now have a high degree of certainty that the redetermination work will commence during our third fiscal quarter. As a result, we are increasing our outlook for fiscal 2023 to reflect redetermination volumes which were not previously assumed in guidance. Working up from the bottom, our fiscal 2023 guidance is increased as follows. Adjusted EPS, excluding intangibles amortization, is now projected to be between $4 and $4.30 per share. This reflects a $0.30 raise from prior guidance. Adjusted operating income is estimated to be between $415 million and $440 million, which is before the estimated $94 million of intangibles amortization expense. Revenue is now projected to be between $4.85 billion and $5 billion. This represents year-over-year growth of 5% to 8%, substantially all organic, and overcomes the $300 million reduction in short-term COVID response work. This reflects an increase of $100 million from our prior guidance. We are maintaining free cash flow guidance of $225 to $275 million for fiscal 2023. While our profit forecast is up, we are factoring in some working capital increase in the fourth quarter as a result of higher revenue. You may note that the redetermination benefit we have assumed in the second half of the year suggests the lower end of our previously communicated range of 15 to 30 cents per quarter. There are a few things at play. First, as we've indicated previously, states are in varying degrees of readiness. Even those who have been deliberate in their planning for the unwinding, we see taking extra time to coordinate all aspects of their operations and systems. In short, we currently expect the redetermination volumes for us phasing in during our third quarter, and we forecast more of a full quarter contribution in the fourth quarter. Second, it still remains to be seen exactly how the volumes tied to redetermination activities will flow through our programs. which can have an impact on profitability and was one of a few reasons why we previously provided a wide range on the per quarter benefit. As a reminder, the impact to us is a function of each contract's specific pay points as well as how beneficiaries ultimately interact with the process. And third, there are states with whom we are in active dialogue to potentially help them approach the unwinding task now that there's clarity around the timeline. Our fiscal 2023 guidance assumes volumes for which we have a strong line of sight on our core programs. Additional scope or volume with new or existing customers could represent further upside. As a final thought, I'd like to remind investors that redeterminations are a normal, annually recurring component of Medicaid programs, which we support with many state customers. While the resumption of redeterminations after a pause of three years will likely create a surge of activity, we would expect the volume impact to our core programs to continue on as it did before COVID. Turning to segment margins, we still expect U.S. federal services in the 10 to 11% range. U.S. services should finish stronger in the back half of the year due to the redeterminations and the full year blended expectation is now 9 to 11 percent, an increase from our previous range of 8 to 10 percent. We still expect outside the U.S. operating income margins near the low end of the 3 to 7 percent target range. We are refining our interest expense projection and reducing the top end of the range by $5 million. We now expect between $85 million and $90 million of interest expense. We expect a full-year effective income tax rate between 24.5 and 25.5% and weighted average shares outstanding between 61.2 and 61.3 million. With that, I will turn the call over to Bruce.