Maximus, Inc.

Greetings. Welcome to Maximus Fiscal Year 2023 Fourth Quarter and Year-End 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 Bass. Vice President of Investor Relations for Maximus. Thank you, 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 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 a solid finish to fiscal year 2023 with 7.4% organic revenue growth and a 10% adjusted operating margin in the fourth quarter, reflecting healthy earnings tailwinds that we expect to carry on through fiscal year 2024. Last week, we announced that we divested several international employment services businesses in our ongoing effort to strategically shape the Outside the U.S. segment and improve profitability and stability. We had robust signed contract awards in the fiscal year of $6.1 billion, which includes successfully defending key recompete. Our contract backlog that we report annually stepped up again from last year to $20.7 billion, over four times our trailing revenue. We are executing on our stated capital allocation priorities with debt paydown yielding 2.2 times net debt to EBITDA at September 30th, while also increasing our quarterly cash dividend to 30 cents, in line with our commitment to grow the dividend with earnings over time. Our fiscal 2024 revenue guidance reflects mid-single-digit organic growth, and our earnings guidance implies at or above 30% bottom-line growth over fiscal 2023. Finally, the essential nature of our work means that we have excellent insulating properties during periods of uncertainty around government budgets. Let me orient you to our revised definition of adjusted EPS. In addition to adding back intangibles amortization expense, now and going forward, we are adjusting for gains, losses, or other charges relating to divestitures. While these types of costs have not been large in fiscal year 2023, we are underway with reshaping the outside the US segment and it's a process that could last for several more quarters. We have not added the costs related to the cybersecurity incident disclosed last quarter to our list of adjustments, but have provided a pro forma view excluding these costs for improved visibility. There is a slide in the presentation for today's call which demonstrates the methodology change and identifies the cybersecurity incident costs in fiscal year 2023. For the full fiscal year, total company revenue increased 5.9% to $4.90 billion. On an organic basis, revenue growth was 7.1% over the prior year and consistent with the mid-single-digit rate that we expect for the business. The growth drivers were a combination of new work as well as growth on existing programs in the U.S. segment, which I'll add more color on in the segment discussion. On the bottom line, the full fiscal year 2023 adjusted operating income margin was 8.0%, and adjusted EPS was 383. Three things to note on our full year earnings, which are highlighted on a standalone slide in the presentation today. Number one, the total impact of the cybersecurity incident in fiscal 2023 was $29.3 million, or 35 cents. We believe our analysis of affected individuals is complete. and the largest component of costs we've incurred has been related to the required notifications. This means adjusted EPS for the full year excluding the incident was 418, and at the high end of our guidance range of 4 to 420, excluding the incident costs. Number two, the second half of the year looked quite different from the first half, as there were several sizable step-ups in earnings power of the core business, as Medicaid redeterminations commenced in the third quarter in U.S. services and volumes ramped on both the Veterans Affairs medical disability exam contracts, which comprise the VES business, and the student loan servicing contract in U.S. federal services. Number three, on a related note, it's worth highlighting the fourth quarter of this year in which we delivered strong sequential earnings growth as we had expected. U.S. Federal Services benefited from ongoing higher program volumes that I just highlighted and U.S. Services had a full period of Medicaid redetermination. Adjusted EPS for the fourth quarter was 129 and adjusted operating income margin was 10.0%. Five cents were adjusted under our expanded definition and relate to a $2.9 million non-tax deductible asset impairment charge incurred in preparing the recently divested properties for sale. This charge was not contemplated in our fiscal 2023 guidance. Fourth quarter earnings also include a $0.09 detriment from incremental costs incurred related to the Q3 cybersecurity incident, meaning, excluding the incident, adjusted EPS would be $138 in the quarter. Let's go to the segment results, starting with U.S. Federal Services. For the U.S. Federal Services segment, revenue increased 6.4% to $2.40 billion. All growth was organic and driven predominantly by continued ramp of volumes on the VA medical disability exam contracts as the overall program grows to meet client expectations. The operating income margin for U.S. Federal Services was 10.4% in fiscal 2023 as compared to 10.4% in the prior year. It's worth noting the segment continued its solid execution by delivering a 12.4% margin in the fourth quarter, which remains slightly above our expected margin range for this segment. For the U.S. services segment, revenue increased 12.7% to $1.81 billion. All growth was organic and driven by new work wins and our successful conversion of some short-term work into longer-term contracts. Examples include eligibility support contracts in Indiana and Arkansas, long-term care assessment work across the country, and a multi-year unemployment insurance contract with California. The U.S. services operating income margin was 10.1% as compared to 11.3% in the prior year. Let me recap the margin trend of this segment. Last year, in fiscal 2022, the first half of the year was overweight from the last of the profitable short-term COVID response work, while the second half of the year was underweight. This year, the first half remained underweight until the paused Medicaid redeterminations commenced in the third quarter, yielding margin improvement in the back half of the year as we expected. With a full period contribution of redeterminations, U.S. services realized an 11.6% margin in the fourth quarter. For the outside the U.S. segment, revenue decreased 9.8% to $689 million. This is net of currency impacts, which reduced revenue by 4.6%. The other two declines were roughly equal parts organic contraction from lower volumes on employment services programs across multiple geographies, and divested businesses that we announced in the second quarter of fiscal 2023. The segment realized an operating loss of $9 million for fiscal 2023 compared to an operating loss of $15 million in the prior year. This year's loss was attributable to the $14.4 million revenue reduction in the third quarter of this year tied to lower estimates for future outcomes-based payments. Meanwhile, the segment broke even from a profit standpoint in the fourth quarter. a slightly better result than previously expected. We have acknowledged that this segment is not meeting our financial expectations and are executing focused efforts to reduce volatility. As announced last week and completed in the first quarter of fiscal 2024, we divested three more businesses, specifically the Employment Services Division in Canada, along with Singapore and Italy, which were exclusively employment services. Let's turn to the balance sheet and cash flow items. As of September 30th, 2023, we had gross debt of $1.26 billion and we had unrestricted cash and cash equivalents of $65 million. We paid down approximately $60 million of debt in the fourth quarter, which brought our debt ratio to 2.2 times at September 30th and near the low end of our stated target range of two to three times. This is down from 2.5 times one quarter ago at June 30th. As a reminder, this ratio is our debt net of allowed cash to pro forma EBITDA for the last 12 months as calculated in accordance with our credit agreement. We had strong cash flows in the fourth quarter to finish the year. Cash flows from operating activities totaled $314 million and free cash flow was $224 million. near the high end of our previous guidance of $190 to $230 million. Days Sales Outstanding, or DSO, were 60 days at September 30, 2023, compared to 62 days for the same day last year. Looking forward, our capital allocation priorities are unchanged. First, we fund organic investments, which are typically a combination of capital expenditures and expenses. Second, we maintain a dividend that we intend to grow over time with earnings and is evidenced by the recent quarterly dividend increase announcement to 30 cents per quarter. And third, strategic acquisitions intended to accelerate organic growth. We will continue to evaluate acquisition opportunities with discipline and our strong and improving balance sheet provides capacity should good opportunities arise in fiscal year 24 and beyond. In the near term, we will continue to feather in debt pay down as part of capital deployment. While we still believe two to three times is an appropriate target leverage range, supported by our long-term contracts and high cash conversion, in the current interest rate environment, we have a bias toward the low end of two times. Looking forward, our guidance for a step up in earnings and free cash flow, absent M&A, would enable a debt ratio of 1.5 times by the end of fiscal year 2024. About 50% of our debt is fixed through interest rate swaps, so further delevering efforts will reduce the higher-priced floating rate component. Let's go to fiscal year 2024 guidance. Revenue is projected to be between $5.05 and $5.2 billion. Adjusted operating income is estimated to be between $488 and $513 million. The midpoints of those ranges imply an adjusted OI margin of 9.8% and within our target range of 9 to 12%. Adjusted EPS is projected to be between 505 and 535 per share. Based on the revenue guide, the $5.125 billion midpoint represents about 5% organic growth over fiscal 2023. The major drivers are, first, in U.S. federal, higher volumes in the VA medical disability exam contracts and, to a lesser extent, new work across multiple categories. Second, in U.S. services, there is a full period of redeterminations which, as we've reminded before, have a disproportionate benefit to the bottom line. There are also expanded clinical assessment programs contributing to organic growth in the segment. The adjusted EPS guidance includes approximately $70 million of interest expense, which equates to about $14 million less than in fiscal year 2023. I'll briefly share our forecast on segment margins. We expect the U.S. Federal Services margin to be in the 11 to 12 percent range, which represents moving up a notch from last year in the pre-existing target range of 10 to 12 percent for this segment. We expect our U.S. services segment margin to be about 11%. Finally, we expect outside the U.S. to be slightly above break-even for the year. We expect a more straightforward quarterly profile in fiscal 2024, reflecting the improved stability of the business compared to prior years. Our current view is that operating margins should improve across the year and therefore be modestly higher in the second half than in the first half. While redeterminations in U.S. services are helping more in the first half, we expect margin growth across the rest of the portfolio to contribute to the profile of more steady growth over the year. Lastly, we expect a small loss on sale in the first quarter tied to the completed divestitures, which will be excluded from adjusted EPS. From a cash flow standpoint, we expect free cash flow between $290 and $340 million for fiscal 2024. We currently expect a slightly negative free cash flow in Q1 as a result of seasonality and timing of certain payments, as has been the pattern in recent years. Some other assumptions around fiscal year 2024 include an estimated $88 million of intangibles amortization expense. The full year effective income tax rate should be between 24.5% and 25.5% and weighted average shares should be between 62.2 and 62.3 million. Before handing off to Bruce, I want to highlight our resiliency during periods of budget uncertainty with our government customers, particularly those comprising the U.S. federal government. Anytime there is a focus on a potential shutdown, it can be a difficult environment to navigate from an outside perspective. For Maximus, our primary focus is assessing any impact that might be expected in our U.S. federal segment. which is about half the business. Having recently coordinated with our federal customers, we anticipate a significant majority of our contracts would be deemed essential. In fact, our current estimate is that less than 5% of our U.S. federal segment revenue could be disrupted during a shutdown, representing less than 3% of total company revenue. Therefore, we believe our guidance range can accommodate a temporary shutdown which remains a possible scenario in fiscal year 2024. And though we are cautious about potential collection delays during such an event, we have significant liquidity, including our $600 million line of credit, which was undrawn at the end of fiscal year 2023. With that, I will turn the call over to Bruce.