Maximus, Inc.

Greetings and welcome to the Maximus Fiscal 2024 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 Invest Relations and ESG 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, 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. Our second quarter results were exceptionally strong, driving the second consecutive raise to our fiscal 2024 guidance. Demand remains high across our programs, which elevated volumes this quarter, and perhaps more importantly, is indicative of stability returning following the disruptive years of the pandemic. We are also acutely focused on cost management, which had a positive impact to this quarter and has added potential to further improve our bottom line in future periods. Turning to results, Maximus reported revenue of $1.35 billion for the second quarter of fiscal year 2024, which represents 11.7% year-over-year growth, or 12.6% on an organic basis. Similar to last quarter, growth was driven by expanded programs in the U.S. federal services segment and a combination of resumed and expanded programs in the U.S. services segment. Adjusted operating income margin was 11.1%. and adjusted EPS was $1.57 for the quarter, which compares to 7.2% and 81 cents, respectively, for the prior year period. By our estimations, we set a high mark for earnings this quarter, with the strength coming from no single area, but rather across our portfolio of domestic work. A portion of the over-delivery in the quarter came from extra volumes in U.S. services tied to Medicaid redeterminations. Let's go to the segments. For the U.S. Federal Services segment, revenue increased 20.1% to $702 million, which was all organic and driven by volume growth on expanded programs, including the VA Medical Disability Examination, or MDE, contracts. The operating income margin for U.S. Federal Services in the second quarter was 11.9% as compared to 8.2% in the prior year period. The segment margin this quarter was slightly better than expected, thanks to our MDE contracts exceeding their production goals and continuing to execute well in an environment with high demand for assessment. For the U.S. services segment, revenue increased 8.1% to $486 million, also all organic. A portion of the growth stemmed from resumed Medicaid redetermination activities, which weren't present last year. The segment also has a large state-based assessment program, which has ramped in previous periods and contributed to growth on a comparative basis. The U.S. services operating income margin was 14.0% in the second quarter of this year. The prior year period's margin of 9.5% was before redetermination activities resumed. It's worth noting that this quarter's margin of 14.0% is likely the high watermark for the segment, at least in the near term, bearing in mind our longer-term target margin for this segment is 11 to 14%. As I mentioned earlier, a portion of this segment's overperformance came from extra volumes tied to the restart of Medicaid redeterminations, which is a process that has been playing out over the last several quarters. We continue to forecast slight segment margin normalization after this second quarter as the relatively limited amount of extra volumes conclude, meaning landing closer to the middle of that 11 to 14% margin range for the back half of the year. That said, the outlook is slightly improved for the back half as well and driven by improvement to other core areas of the business. Compared to this time last year, we are quite pleased that the segment is reflecting stabilized operations after being heavily disrupted during the pandemic. And in the case of Medicaid redetermination, which has occupied the spotlight recently, they should go back to quietly running in the background. Turning to the outside the U.S. segment, revenue decreased 7.2% year over year to $161 million for the quarter. Most of the decline was attributable to less revenue following completed divestitures to date, while the rest of the segment was flat on an organic basis. The segment made a small profit of $0.7 million as compared to an operating loss of $3.7 million in the prior year period. Our commitment to reshape the segment is in progress, and we remain on target this fiscal year. In the meantime, recent results demonstrate reduced volatility to the employment services portion of the segment now that the pandemic is behind us, and we expect this trend to continue. Let's now turn to cash flow and balance sheet items. Cash provided by operating activities for the second quarter of this year was $130 million, and free cash flow was $105 million. DSOs finished the quarter at 62 days. Our free cash flow guidance for the rest of the year has increased due to the improved earnings forecast. We ended the second quarter with total debt of $1.22 billion, and our net debt to EBITDA ratio improved from 2.1 times to 1.7 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. Our long-term target debt ratio remains two to three times. However, in the current interest rate environment, our bias is toward the lower end of that range. We are now below that range and are comfortable in the near term continuing to pay down to build capacity for future M&A while also maintaining an opportunistic share repurchase program. On that front, post-quarter end in the month of April, we repurchased nearly $20 million worth of shares. Turning to fiscal year 2024, we are pleased to be raising guidance for the second time with increases to both the top and bottom line guides. Revenue is now expected to be between $5.15 billion and $5.25 billion. which is up $75 million at the midpoint compared to the previous guide. Adjusted operating income is estimated to be between $540 million and $560 million, which is an increase of more than $34 million from prior guidance using the midpoints. Adjusted EPS, excluding intangible standardization and divestiture related charges, is now projected to be between $5.65 and $5.85 per share. Using the midpoints, this reflects a 40-cent raise from prior guidance and up 55 cents from our initial guidance in November. As a result of the improved earnings forecast, we are raising free cash flow guidance to between $330 and $370 million for fiscal 2024. The improved outlook reflects higher expectations for both organic revenue growth and margins. At the guidance midpoints, organic growth is projected to be nearly 7%, up from 5% in prior guidance, and adjusted OI margin is 10.6%, up from 10.0% in prior guidance. Let me add some color on earnings in the back half of the year. We expect higher earnings in our fiscal third quarter compared to the fourth quarter due to a combination of factors in our U.S. federal and U.S. services segments. We are planning on some investment costs in the U.S. federal segment in the fourth quarter, which will begin driving further operational efficiency in fiscal year 2025. On a full year basis, the federal segment margin should be approximately 12 percent. Second, for the U.S. services segment, as mentioned earlier, we expect this segment's margin to be more in the middle of the 11 to 14 percent target range for the back half of the year. as volumes related to Medicaid redeterminations continue to moderate. And given the strong first half, the segment margin should be approximately 13 percent on a full year basis. The outside the U.S. segment remains on track to be slightly above break-even for the full year, assuming status quo for the current footprint. We do expect further shaping of the segment to occur this fiscal year in an effort to deliver consistent profitability. A few other assumptions for fiscal 2024 include interest expense of approximately $77 million and intangibles amortization expense of approximately $89 million. To conclude, I would like to congratulate the entire Maximus team on executing another terrific quarter and reaffirming my comments on prior calls that the business is healthy with the ability to build momentum from previous quarters. The domestic segments both hit the upper ends of their long-term margin targets this quarter, demonstrating the business has the earnings power that we have long signaled. Work remains on the outside the U.S. segment, and we have been clear that action in the remaining half of the year is a management priority. While we have been quite successful in navigating a period of higher rebid activity, there are two contracts that have some unique circumstances that Bruce will discuss further. and do not change our positive view of the business, nor disrupt the momentum we have built. Finally, our balance sheet is very strong, as our debt ratio now sits below our long-term target range. This provides us flexibility and capacity to execute on our capital allocation priorities. With that, I'll hand the call over to Bruce.