Maximus, Inc.

Greetings and welcome to the Maximus Fiscal Year 2023 Second Quarter Earnings Conference Call. At this time, all participants are on 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, Jessica Batt, Vice President of Investor Relations and ESG. Thank you. Please go ahead.

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, engaging 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 made significant progress in the second quarter, executing on our financial and strategic priorities while generating strong cash flows and de-levering our balance sheet by half a turn sequentially. We also have strong line of sight on the drivers that will support margin improvement in the second half of the year, and as a result, are reaffirming our fiscal year 2023 financial guidance. Finally, we divested two small businesses in the outside the U.S. segment. I will now discuss our results in greater detail. Maximus reported revenue of $1.21 billion for the second quarter of fiscal year 2023. which represents 2.5% year-over-year growth, or 4% on an organic basis. Our organic growth more than overcame the completion of short-term COVID work that was about $100 million in the year-ago quarter. Adjusted operating income margin was 7.1%, and adjusted EPS was 80 cents for the quarter. This compares to 8.3% and $1.07, respectively, for the prior year period, which still included profitable short-term COVID response work in the domestic segments and lower interest expense due to the interest rate environment a year ago. Last year's second quarter was effectively the last period with meaningful short-term work in the business. The outside the U.S. segment realized a loss, and margins in the quarter were slightly below our expectations, primarily driven by the U.S. federal segment. Let's turn there. For the U.S. Federal Services segment, revenue increased 1.9% to $584 million, which was all organic and driven primarily by volume growth in the VA Medical Disability Exam, or MDE, contracts, which comprise our Veterans Evaluation Services, or VES, business. The operating income margin for U.S. Federal Services in the second quarter was 8.2% as compared to 8.1% in the prior year period, and slightly lower than we anticipated. The main driver behind the lower profitability relates to timing in the VES business, as we have scaled up to handle greater volumes stemming from the PACT Act. While volumes increased throughout the quarter, they were slightly lower than we had forecast. At the same time, we incurred higher costs associated with training and ramping up staff to full productivity. The good news is that the volumes continue to increase, and we have a strong line of sight over the remainder of our fiscal year with high confidence that we have the capacity to meet the demand. For the U.S. services segment, revenue increased 13.0 percent to $450 million. As I've noted in recent quarters, contributions from new work wins across the portfolio in core business areas such as eligibility support and clinical services are driving growth in the segment. the U.S. services operating income margin was 9.5% in the second quarter of fiscal 2023. This reflects the expected headwind of paused Medicaid redetermination activities. As we covered on the last call, we anticipate redetermination activities to commence in the third quarter. Turning to outside the U.S. segment, revenue decreased 16% year over year to $173 million for the quarter. Organic revenue contracted 8.0% and driven primarily by lower revenue in Australia following last year's rebid outcome. Currency impacts reduced revenue by approximately 7% from the prior year period. The segment had an operating loss in the second quarter of $3.7 million as compared to an operating profit of $4.3 million in the prior year period. we remain unsatisfied with the performance and margins of the outside the U.S. segment and are systematically focused on portions of the segment that are underperforming. As such, we divested two small businesses in the segment with combined operating losses of $1.5 million in the quarter. Bruce will cover a few added details on the divested businesses. As a result of the transactions, there was a loss on sale of approximately $900,000 so the impact to diluted EPS in the quarter was about a one penny reduction. The loss on sale is included in the SG&A line on our income statement and is not included in the outside the U.S. segment OI. Going forward, we expect the impact of the divestitures to be slightly accretive to the segment's margin and the company's earnings. Let's now turn to cash flow and balance sheet items. As we expected, cash flows this quarter were robust and made up for the temporarily low cash flow in the prior quarter. Cash from operating activities for the quarter ended March 31, 2023, was $310 million, and free cash flow was $292 million. Collections in the second quarter were very strong, with DSOs finishing at 56 days. Our normal target range is 60 to 70 days. Our cash flow performance enabled us to repay $275 million of debt, and we ended the second quarter with total debt of $1.30 billion. Our net debt to EBITDA ratio was 2.5 times at the end of the quarter, which is a reduction of half a turn from 3.0 times at December 31st. 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. We fully paid down our revolving line of credit at March 31st, giving us access to the full line of $600 million. During the second quarter of fiscal 2023, we also fixed an additional $150 million of debt through September 30, 2024. This means our mix of debt is now about 50% fixed and 50% floating. Overall, we are pleased with the progress we are making on our near-term capital allocation priority of debt reduction. We are on track to finish the fiscal year below 2.5 times as we guided last quarter. Our longer-term capital allocation priority remains strategic acquisitions to accelerate organic growth. Let's go to fiscal 2023 guidance, which remains unchanged from the prior quarter. Adjusted EPS excluding intangibles amortization is projected to be between $4 and $4.30 per share. Adjusted operating income is estimated to be between $415 and $440 million, which is before the estimated $94 million of intangibles amortization expense. Revenue is 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. Free cash flow is estimated to be between $225 to $275 million for fiscal 2023. We expect our earnings profile for the third and fourth quarters to both strengthen sequentially, particularly in the fourth quarter, driven by redeterminations in the U.S. services segment and PACT Act volumes in the federal segment. We expect a step up in the third quarter as compared to the second quarter results as the volumes grow. On the prior call, we noted how the third quarter should be viewed as a transition quarter for U.S. services, with volumes phasing in, which still remains the case. Then, in the fourth quarter, a much greater step-up is expected from the third quarter, as there should be a full period of redetermination activities in U.S. services and further volume growth in the VES business, which, as I've noted, we believe there is good line of sight to. As we have stated previously, there remains some uncertainty about how exactly the redetermination volumes will flow through our programs, in particular since it relies in part on how beneficiaries interact with the process. That said, we are confident that our guidance range accommodates the likely financial impact, which is concentrated in our fourth quarter. Moving to segment margins for the full year, we still expect U.S. federal services in the 10 to 11 percent range although most likely towards the lower end of the range due to this most recent quarter's performance. U.S. Services is expected to finish strong in the fourth quarter due to the redeterminations, and the full-year blended expectation is still 9 to 11 percent. For outside the U.S., we now expect operating income margins in the 1 to 3 percent range. Last quarter, we guided to the low end of the 3 to 7 percent range. The reduction to the forecast is attributable to the emerging markets portion of the segment, resulting from a combination of a delay to starting a major new program, which we expect to be temporary, as well as continued difficulty by smaller employment programs in achieving critical mass amidst current economic conditions. Our interest expense projection is trending favorably in light of recent debt reduction and the interest rate environment. We now expect between $82 million and $85 million of interest expense for fiscal 2023. 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.