Maximus, Inc.

Greetings and welcome to the Maximus Fiscal Year 2023 Third Quarter's 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, Jessica Batt, Vice President of Investor Relations for Maximus. Please go ahead, Ms. 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 10-Q and 10-K. 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. Our third quarter results reflect strong organic revenue growth and progress on our commitment to margin improvement, particularly in the U.S. federal and U.S. services segments. Our federal team is successfully ramping up to meet the unprecedented demand for clinical assessments for veterans. Our team supporting state customers have begun assisting beneficiaries in navigating the unwinding effort as redeterminations resume. Third quarter results include an expense of approximately $22 million for the cybersecurity incident that we disclosed last week. This charge represents our updated best estimate of costs to be incurred related to the incident for the total investigation, which is expected to be concluded this month, and remediation activities. The outside the U.S. segment realized a much greater than anticipated operating loss driven in large part by macroeconomic factors that have caused our expectations to decline on our employment services contracts. Looking ahead, we feel confident in ongoing successful delivery to enable a step-up in earnings in the fourth quarter, with our expectations for the quarter largely intact from last quarter. Turning back to third quarter results, Maximus reported revenue of $1.19 billion, which represents 5.6% year-over-year growth, or 6.7% on an organic basis. This growth was driven by both the U.S. federal and U.S. services segments, which I'll cover shortly. Adjusted operating income margin, which excludes only intangibles amortization, was 6.9%, and adjusted EPS was 78 cents. This compares to 6.9% and 78 cents respectively for the prior year period. To be clear, the approximately $22 million expense related to the cybersecurity incident I mentioned earlier is included in this quarter's results, reducing our adjusted margin by approximately 180 basis points and our adjusted EPS by 26 cents. It is accounted for in other SG&A and not allocated to the segments. Absent these incident costs, adjusted operating income margin would have been 8.7%, and adjusted EPS $1.04. I'll also point out that last year's period had less interest expense due to lower interest rates, while in this quarter, our tax rate had favorability from a number of discrete items, which benefited EPS by approximately 6 cents. Let's go into detail around the segment. For the U.S. Federal Services segment, revenue increased 11.1% to $584 million, which was all organic. The key drivers were volume growth on both the Veterans Affairs Medical Disability Exams contracts, which comprised the Veterans Evaluation Services, or VES, business, and on our student loan servicing work. The operating income margin for U.S. Federal Services in the third quarter was 12.7%, as compared to 10.4% in the prior year period and slightly better than we anticipated. Strong delivery by VES driven by ramping PACT Act related volumes drove the improved margin. For the U.S. services segment, revenue increased 12.5% to $449 million, also all organic. Contributions from new work wins last year are still driving strong growth numbers in the segment. Plus, we have an uptick to revenue from beginning to process redetermination volume. The US services operating income margin was 10.5% in the third quarter. This compares to 8.0% in the prior year period when redeterminations remained paused and the meaningful short-term COVID response work had largely concluded. The margin reported this quarter is consistent with our expectations for an improving trend in this segment across the remainder of fiscal year 2023 as redetermination activities ramp. As a reminder, over the last three years, many programs in this segment have been operating with depressed margins resulting from the pause in Medicaid redeterminations. With their resumption, we expect a full period of conducting redeterminations in the fourth quarter. Turning to the outside the U.S. segment, revenue decreased 22.5% year over year to $156 million for the quarter. Organic revenue contracted 16.6%, driven primarily by a lower run rate in Australia following last year's rebid outcome and a $14.4 million reduction due to lower estimates for future period outcomes-based payments on employment services programs, predominantly in the United Kingdom. Last quarter's two divestitures and currency impact reduced revenue by 4.5% and 1.8%, respectively, as compared to the prior year period. The segment had an operating loss in the third quarter of $15.2 million as compared to an operating loss of $11.2 million in the prior year period. The much greater than anticipated loss this quarter is attributable to the aforementioned $14.4 million reduction due to lower estimates, which falls to the bottom line. The revenue recognition for many of our employment services contracts requires us to reflect in our current period our best estimate of future employment outcomes. Since last quarter, both our view and our customers' view of macroeconomic conditions have moderated. We are not satisfied with the financial performance of this business, and with the disappointing third quarter results, we reiterate our commitment to shaping this segment bearing in mind practical constraints to represent a portfolio that is strategically aligned and drives consistent profitability. To that end, we divested two businesses in the March quarter, and we continued to execute on multiple cost-saving initiatives in the segment. Let's now turn to cash flow and balance sheet items. Cash used in operating activities for the third quarter was $5 million, and free cash flow was an outflow of $30 million. DSOs were 61 days near the low end of our expected range of 60 to 70, but an increase from 56 days in the prior quarter, and thus increased our working capital. There was also a timing impact from an additional payroll cycle for cash flow as of June 30. We expect an improvement to fourth quarter cash flows. I would like to note that our CapEx has begun to increase. and we expect it to run at these higher levels through fiscal year 2024. The main driver is investment in capitalized software on a number of systems that we anticipate providing enhanced efficiency, especially in highly scaled areas of the business. We ended the third quarter with total debt of $1.32 billion, and our net debt to EBITDA ratio remained unchanged at 2.5 times from last quarter. 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. Our priority in the remaining quarter of fiscal year 2023 is further debt reduction, which our projected cash flows should afford. We remain on track to finish the fiscal year below 2.5 times. This will offer us flexibility to execute on our longer-term capital allocation priority, which is strategic acquisitions to accelerate organic growth. Let me update you on fiscal year 2023 guidance, which has been impacted on the bottom line by third quarter results. Revenue is holding, and we are tightening the range, now expecting to be between $4.875 billion and $4.975 billion. The midpoint of this range is unchanged from last quarter at $4.925 billion, representing year-over-year growth of approximately 6.5%, which is substantially all organic and overcomes the $300 million reduction in short-term COVID response work. Adjusted operating income following our pattern to exclude only intangibles amortization is now estimated to be between $387 and $401 million. This includes the approximately $22 million from the cybersecurity incident, whereas excluding this expense, our range is $409 to $423 million. This is down modestly from last quarter's $415 to $440 million driven by the third quarter loss in the outside the U.S. segment. Adjusted EPS is now projected to be between $3.74 and $3.94 per share. Again, this includes the 26 cents from the cybersecurity incident, whereas excluding these costs, our adjusted EPS guide would have been intact from last quarter and tightened to between $4 and $4.20. Our EPS guide has better holding power due to an improvement to the full year tax rate. Finally, free cash flow is now estimated to be between $190 and $230 million for fiscal 2023. As with adjusted OI, our free cash flow would have seen less of an impact with guiding to between $212 million and $252 million, excluding the cybersecurity incident costs. I should also note that our full year CapEx projection is now approximately $85 million. Our third quarter results offer us yet further visibility to our projections for the last quarter of this year. U.S. Federal is demonstrating solid momentum that should continue to build into the fourth quarter and, if anything, has improved from our prior thinking. The second driver to fourth quarter improvement is a full period of Medicaid redeterminations, which should continue ramping as compared to third quarter, albeit not with a sharp step up and that ramp should continue into fiscal year 2024. With just one quarter remaining, the adjusted EPS guidance implies $1.22 to $1.42 in Q4. Thus, our expectations for strong sequential earnings growth are largely unchanged from last quarter. Let me briefly touch on segment margins for the full fiscal 2023 year. No change to U.S. federal services expectations and we should finish towards the lower end of the 10 to 11% range as noted last quarter. Also, no change to U.S. services with an expectation of 9 to 11% for the year. The outside the U.S. is now expected to finish in a lost position with the fourth quarter expected to be slightly below break even. Our interest expense projection is still between $82 million and $85 million for fiscal year 2023, albeit we expect to come in toward the lower end of the range. Our full year effective income tax rate projection is now between 23.0% and 23.5% and weighted average shares outstanding between 61.4 and 61.5 million. Our guidance ranges do not include any additional costs related to the cybersecurity incident other than the approximately $22 million recorded in Q3, which reflects our best estimate based on the currently available information. Let me now share some early thinking on fiscal year 2024 ahead of our November call when we typically issue guidance. From a revenue standpoint, Our current line of sight suggests a positive organic growth projection aligned with our mid-single digit growth target. From an earnings standpoint, we expect a meaningful lift in fiscal year 2024 as compared to this year. Our current thinking is the fourth quarter of this year is a good proxy for the earnings power of the business going into next year. One thing to be aware of is the redetermination dynamics. I mentioned earlier that we expect volumes to continue ramping into fiscal year 2024, driven by anticipated higher volumes or more numerous consumer interactions tied to elevated Medicaid roles, which have grown substantially over the course of the pandemic. So we would expect the contribution from these volumes in U.S. services to grow from the fourth quarter into the first half of fiscal year 2024 and then settle back to a steady state level in the back half of the fiscal year. Consistent with our past practice, we will provide guidance for fiscal year 2024 in November. With that, I will turn the call over to Bruce.