Maximus, Inc.

Greetings and welcome to the Maximus Fiscal 2025 First Quarter 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 Back, Vice President of Investing Relations and ESG for Maximus. Thank you, Mrs. Back. 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 identifying trends gauging the quality of our financial performance, 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 Bruce.

Thanks, Jessica, and good morning. We have strong first quarter results to share with you today, and I'll offer my perspective on Maximus' favorable position in government services as we navigate the first weeks of the new administration. But first, I'd like to recap the highly positive developments for the business that have occurred since our November 21st year-end call. I'll start with the two large re-competes that we faced. In what I believe was the best outcome, the government withdrew the attempted early re-compete of our CMS Contact Center Operations, or CCO contract, also known as the 1-800-Medicare and Federal Marketplace contract. We objected to the basis for the re-compete and took our case first to the Government Accountability Office and subsequently to the Court of Federal Claims. Following the election in late November, the government canceled the procurement, thereby clearing the way for our current contract to continue operating, which we expect it to, through 2031, using the available option periods. Then, as announced last month, we were successfully re-awarded the successor contracts for our VA medical disability examination, or MDE work, These two-year contracts began on January 1st and enabled our support of the VBA and the veteran community to continue uninterrupted. Next, we completed the divestiture of our employment services businesses in Australia and South Korea that resided in the outside the US segment. We had previously committed to reshaping this area of the business and are pleased to have worked again with a recognized provider who has proven to be an excellent home for our employees. This recent divestiture achieves an important goal of reducing volatility and is expected to improve profitability in the segment through fiscal year 2025 and beyond. Finally, as announced in mid-December, the Board of Directors authorized an increase of $200 million to our share repurchase program. When we go to David for financial results, he will share the latest activity on that front. I'd like to turn now to how Maximus is uniquely positioned to continue being a proven value-added partner to government. This speaks to both our current book of business as well as new opportunities that may lie ahead. During the transition period, we've witnessed the durability of our core business as well as early insights as to the priorities of the new administration to which we believe we are well equipped to respond. While we predominantly serve the federal civilian side of government and its related state administered benefit programs, our durable portfolio is tied to well-established entitlement programs and others requiring mandatory spending that have broad bipartisan support. Medicare and veterans disability benefits are prime examples, and we've witnessed recent events that demonstrate their criticality to government. One was the recent hiring freeze on federal civilian employees, which exempted positions related to the distribution of benefits under Medicare, veterans benefits, and Social Security. Separately, the Office of Management and Budget instituted a temporary pause of agency grant, loan, and other financial assistance programs. While the funding freeze was ultimately rescinded, OMB had already clarified that programs providing direct benefits to Americans, including mandatory programs like Medicaid and Medicare, were explicitly excluded. In a fast-moving policy environment that can introduce uncertainty and ambiguity for some companies, we believe our track record has demonstrated that our core business across major federal and state programs has desirable characteristics that contribute to its resilience. Looking beyond the core benefit program areas I've mentioned, our earned reputation as an efficient and accountable service provider, in our view, positions us well to respond to the evolving needs of our customers and priorities of the new administration. One area receiving ongoing attention, of course, is the Department of Government Efficiency, or DOGE. As you know, the DOGE now resides in the renamed United States DOGE Service, or USDS, previously known as the United States Digital Service. The legacy USDS was established in the Executive Office of the President in 2014 to bring top-tier technical talent to partner with federal agencies to, among other objectives, improve critical government services. The executive order establishing and implementing the DOGE updates this objective in its stated purpose to include, quote, modernizing federal technology and software to maximize governmental efficiency and productivity, end quote. In our view, recognizing that we are still in the early innings, the importance of technology modernization to the administration and capabilities needed to achieve the USDS software modernization initiative goals are well aligned with the demonstrated experience of Maximus in the areas of software development network infrastructure, and IT systems. Finally, turning to the state level and our U.S. services business, much has been written about potential changes to reduce the level of federal Medicaid spending through levers ranging from FMAP reductions to per person spending caps or block grants. Many states in turn are developing contingency plans that for some include accessing reserves and for others may include examining eligibility requirements. While it's too early to know which, if any, proposed policy changes will proceed, I'll offer two observations on the dynamics that characterize our Medicaid business. First, changes requiring consumer engagement, such as steps to verify eligibility, generally increase our volumes. Most of our state contracts are based on the volume of activity we perform, rather than a flat rate per member per month. And, second, in many of our largest states, we also administer state-based exchanges. in which consumers may become enrolled when no longer eligible for Medicaid, meaning our engagement with those consumers is sustained. We anticipate states will take varying approaches in addressing potential Medicaid policy changes and see opportunity to work collaboratively with them to apply our deep experience to tailor solutions to their different needs and desired outcomes. Let's turn to awards, and I'll share two recent wins that provide further evidence of our execution on our three- to five-year strategy. First, we are pleased to have been selected by the Federal Reserve System to provide technology-enabled contact center services through our recently announced Total Experience Management, or TXM, solution. The Federal Reserve Board of Governors were in need of modernized contact center operations, including self-service capabilities, all to be delivered meeting strict data privacy requirements and in a SOC-compliant and Fed-ramped environment. Total contract value of the award is $76 million over nine years with options and is reported in our unsigned award balance at December 31st, 2024. Our TXM solution leverages data insights and cost effectively enables federal agencies to reach citizens through a multi-channel secure cloud-based platform. Through potential shared services agreements, it is anticipated that other agencies including the Federal Deposit Insurance Corporation, and the National Credit Union Administration could benefit from TXM in the future. I'm also excited to announce a recent win at the National Energy Technology Laboratory, or NETL, part of the Federal Department of Energy. Valued at $123 million total contract value with a five-year performance period, Maximus will provide expanded professional IT services to meet the business and research needs of the NETL in areas including high-performance computing, AIML development, and ongoing operations and maintenance. Delivered by our technology consulting services or TCS team, our services reflect strong core capabilities in enterprise IT infrastructure, cyber, data management, and AIML. I'm proud of our TCS team who's exceptionally qualified to support the modernization, operation, and maintenance of NETL's complex portfolio of enterprise, cyber, and research infrastructure. Let's go to awards reporting and the pipeline. In the first quarter of fiscal year 2025, signed awards totaled $2.1 billion of total contract value. Further, at December 31st, there were $410 million worth of contracts that had been awarded but not yet signed. These awards translate into a book to bill of approximately 0.7 times using our standard reporting for the trailing 12-month period, or about 1.5 times when measured in the quarter. This represents a healthy step up from our book to bill at September 30th and tracks to our expectations for an improved metric in this fiscal year. A key driver this quarter was the successful re-compete for the MDE contracts demonstrating rebid award activity picking up again after lower rebid volumes in preceding periods. As we approach the midway point of the second quarter, I'm pleased that we're continuing to see awards flow and thus far, solicitations tracking to expected schedules. We maintain our slightly cautious approach to forecasting this year while also being optimistic about our deal flow. Our total pipeline of sales opportunities at December 31st was $41.4 billion compared to $54.3 billion reported at September 30th. The prior period pipeline figure had included the early rebid of the CCO and recompete for the MDE contracts, so the reduction is largely driven by the successes discussed at the start of my remarks. The current pipeline is comprised of approximately $2.5 billion in proposals pending, $1.5 billion in proposals in preparation, and $37.5 billion in opportunities tracking. Of our current pipeline, approximately 57% represents new work. 63% of the $41.4 billion total pipeline is attributable to our U.S. federal services segment. We are continuing to focus on the U.S. federal sector where we believe technology modernization and cost-effective program administration using private sector partners will remain a priority while maintaining a balanced mix of federal and state opportunities. This approach aims to ensure a responsibly diversified portfolio and well-managed exposure across the segments. Over the past few years, we've communicated ways in which our company culture has evolved, leading to greater organizational agility and a heightened ability to innovate. As an example, the Maximus Forward Initiative has been a positive forum to challenge established structures and processes, promote more efficient operations, and provide for reinvestment in the business to address priorities from talent acquisition and development to technology and innovation, Reflecting the goals of Maximus Forward, our Chief Digital and Information Officer, Derek Pledger, established an AI and Data Accelerator Group to advance our AI capabilities, providing the necessary resources, frameworks, and infrastructure to harness the full potential of AI across our operations. The AI and Data Accelerator is designed to speed up the development and deployment of AI-driven solutions, from pilots to scale, while ensuring they adhere to our governance principles. Central to our strategy is our commitment to responsible AI development and use, while taking steps to help ensure that our AI solutions are implemented ethically, transparently, and with accountability to government guidelines and regulations. In this spirit, I'm excited to announce our inaugural investment via Maximus Ventures, our corporate venture capital function. We will be partnering with a company that is developing human in the loop AI capabilities specific to clinical assessment services. Our objective is to support our clinicians in a manner that allows for fully auditable, timely, effective, and quality health assessments and evaluations. We've structured an investment that is designed to drive increased financial performance on our existing clinical programs while bringing differentiating technology to our government clients. We believe our unique positioning with federal and state governments makes us an attractive partner for innovative health technology companies and startups wishing to access these large markets where contract vehicles, relationships, and the complex nature of government contracting are challenging for outsiders. In addition to driving efficiency in our service delivery, Maximus is also focused on helping government gain access to proven, safe, and ethical new technologies through its venture investments. Before I turn the call over to David, I'd like to congratulate our teams on an excellent start to the fiscal year. With our CCO and VAMDE contracts now secure and fueled by a strong start to new contract wins, our teams are focused on consistent operational execution while supporting our clients as policy priorities continue to evolve. While we, like many of our peers, continue to face unknowns and the risks they represent, overall, we believe the balance tilts toward opportunity. And with that, I'll turn the call over to David.

Thanks, Bruce, and good morning. We're pleased to start fiscal 2025 with strong first quarter results and an improvement to our full year earnings guidance. We're delivering them from a strengthened position after successfully securing favorable outcomes on the two key rebids. We also completed the divestiture of our employment services businesses in Australia and South Korea, thus reducing volatility in the outside the US segment and providing a lift to the segment's profitability. In addition, we significantly increased our pace of share repurchases in the quarter. From our fiscal year start on October 1st through last week, we have deployed approximately $290 million through share repurchases, enabled by our strong balance sheet and consistent with our capital deployment strategy. Let's turn to quarterly results, where Maximus reported revenue of $1.40 billion for the first quarter of fiscal year 2025 which represents 5.7% year-over-year growth, or 6.3% on an organic basis. The U.S. Federal Services segment was the primary driver of growth in the quarter, with the Outside the U.S. segment also posting strong double-digit organic growth. Adjusted EBITDA margin was 11.2%, and adjusted EPS was $1.61 for the quarter, which compares to 10.6% and $1.34 respectively for the prior year period. The outside the U.S. divestiture was completed in the first quarter, and as a result of the transaction, we incurred divestiture charges of about $38 million. The majority of this, about $21 million, results from foreign exchange losses that had accumulated over decades related to Australia. These had been recorded in other comprehensive income but the transaction event requires them to move to the income statement. There is no cash impact related to this shift. These divestiture charges also caused a higher effective tax rate to be recognized in the quarter. The divestiture charges and the related tax rate impact, which together make up 64 cents per share, are excluded from our adjusted EPS and adjusted EBITDA metrics, consistent with our methodology. I'll now move to results for each of our segments. For the U.S. Federal Services segment, revenue increased 15.3% to $781 million, which was all organic. Revenue growth stemmed from multiple areas throughout the segment, including clinical assessments, some outsized volumes on other clinical programs, as well as customer service type programs. The operating income margin for the segment in the first quarter of fiscal 2025 was 12.7%. as compared to 10.2% in the prior year period. The outsized volumes in certain smaller clinical programs helped bolster this quarter's margin and are not expected to carry through the remainder of the year at these levels. For the U.S. services segment, revenue decreased 7.7% to $452 million. The prior year period, which had outsized growth at the time, benefited from strong performance across the Medicaid-related portfolio, most of which were excess volumes from the now-completed unwinding exercise. The segment's operating income margin this quarter was 9.0% and compares to 13.5% for the prior year period. A portion of the margin gap stems from the prior year period's enhanced profitability from the excess volumes. The other portion is some seasonality that was contemplated in our full year outlook for the segment, which is unchanged in our updated guidance. Turning to the outside the U.S. segment, revenue increased 6.0% year over year to $170 million for the quarter. Organic growth was 10.7% and driven by strength in flagship contracts in the U.K., such as the new functional assessment services contract. the segment generated $8.1 million of profit, which is a 4.8% margin compared to an operating loss of $0.1 million in the prior year period. Following the divestitures of predominantly employment services contracts that we have completed in the last two years, we are now seeing a notable reduction of volatility in the segment. We will continue to evaluate this segment's performance though we believe that the shaping actions requiring prioritization have now been completed. Turning to cash flow items, cash used in operating activities was $80 million and free cash flow was an outflow of $103 million for the quarter ended December 31st, 2024. First quarter negative cash flows reflected expected seasonality around timing of payments that we tend to have in this quarter. which I noted on our November call. Our day sales outstanding were 62 days. During the quarter, we significantly increased the pace of share repurchases, buying back approximately 3.1 million shares for $237 million. This increase is consistent with our stated capital allocation approach, which features opportunistic share repurchases enabled by our strong balance sheet. Since quarter end through January 31st, We repurchased an additional 686,000 shares for $53 million, leaving approximately $85 million remaining under the current $200 million Board of Directors authorization. We ended the first quarter with total debt of $1.40 billion, and our net debt to EBITDA ratio increased from 1.4 last quarter to 1.8 times this quarter, primarily as a result of the share repurchase activity. 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 remain below our stated target net leverage range of two to three times adjusted EBITDA. Our capital deployment priorities have not changed, and we continue to seek acquisitions that can accelerate future organic growth. Meanwhile, we continue to pay a dividend that increases with earnings over time and maintain an opportunistic share repurchase program, which has been consuming a larger portion of our capital deployed over the last few months. I'll finish with 2025 updated guidance where our implied organic growth rate is increasing and we are raising both earnings and free cash flow projections. On the revenue side, our updated guidance is $5.2 to $5.35 billion. Crosswalking from formal guidance in November, $100 million was removed for the completed outside the U.S. divestiture, which means other areas of the business, including Q1 results, have increased guidance by $25 million. This translates to a 50 basis point bump to the implied full year organic growth rate versus last fiscal year. On the earnings side, for fiscal year 2025, our full year adjusted EBITDA margin guide improves by 20 basis points to 11.2%. and our adjusted EPS guide increases by 20 cents to range between $5.90 and $6.20 per share. Free cash flow guidance increases by $10 million to $355 to $385 million. There are several drivers to the increased guidance. Number one, our Q1 results were strong and ahead of internal expectations. This was evident in the U.S. federal margin of 12.7% in the quarter. Number two, the divestiture in outside the U.S. At the time of announcement in December, we noted the transaction was estimated to be slightly accretive, which is now baked into the full year forecast. And number three, the higher levels of share repurchase activity, especially in the first quarter of this year, is providing a benefit to our full year adjusted EPS. It's worth noting that our forecast for the remaining three quarters of fiscal 2025 remains largely intact and reflects a continuation of a more cautious approach, which was our objective when we laid out initial guidance for the year. I'll touch on segment margin assumptions. We expect the U.S. federal segment to deliver a full year margin of around 11.5% for fiscal 2025, reflecting more typical performance after a strong first quarter. The U.S. services segment remains on track to deliver a full year margin of around 11%, reflecting improvement for the remaining quarters after the lower first quarter margin, which, as I mentioned, was largely expected. For the outside the U.S. segment, we expect 3 to 5 percent for the full year, as we noted on our divestiture announcement. This is a 200 basis point increase from initial guidance, and while the actions we've taken are still fresh, I'm pleased to see us tracking to our committed 3 to 7 percent margin range for this segment. Other updated assumptions for fiscal 2025 would be an updated interest expense of approximately $75 million resulting from greater borrowings tied to higher repurchase activities. Our full year tax rate is now expected to range between 28% and 29%. As a reminder, the higher first quarter rate was tied to the divestiture related charges and not an indicator of the three remaining quarters, which are expected to be in the 25.5 to 26% range. Finally, on a full year basis, the weighted average shares are expected to be about 58 million shares. We continue to track favorably to our 10 to 13% adjusted EBITDA near-term margin expectations that I shared on the November call. Today's guidance for fiscal 2025 is approximately 11.2%, and our goal beyond 2025 is ongoing incremental improvement to move into the upper half of that range. We believe there is cause for optimism with the business firmly rooted in essential bipartisan programs, a healthy pipeline of opportunities, and a reputation for solving challenges for government customers through the efficient delivery of quality programs often at scale. And with that, we will open the line for Q&A. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question comes from the line of Charlie Strawser with TJS Security. Please proceed with your question.

Hi, good morning. Good morning, Charlie. Bruce, if you could, you know, maybe talk about the strength in Q1, you know, very, very strong quarter, you know, well ahead of our expectations. You know, was there any, you know, if you'll pull forward from, you know, in that outperformance, I should say.

Yeah, it's a good question, and David will give you some more details on that.

Yeah, thanks, Charlie. Just to put it in the context of the annual guidance as well, maybe it would be helpful to kind of roughly quantify some of the changes in the full year guidance. So, you know, I said the forecast for Q2 to Q4 is largely intact. The share repurchases, if you look at the change in share count, the higher interest, and combine that with a slightly higher tax rate, that gives you about $0.10 improvement to the full year earnings, so kind of below the line. And then the other two drivers I mentioned, which were the Q1 overperformance as well as some accretion from the divestiture, actually drive a little bit more than $0.10. So altogether, that would be a little bit over $0.20. Given we're only one quarter in and still maintaining a disciplined approach, we decided to keep the earnings guidance rates at the $0.20 level. And as we said on the last call, we have intentionally kind of de-risked the forecast for any potential impact of procurement timing. So now less than 2% of our revenue midpoint is coming from new work. So Q1, it was less of a pull into Q1, but just wanted to put the Q1 overperformance into the context as it relates to the full-year guidance. Is that helpful?

Yeah, definitely. And, you know, maybe talk a little bit, too, about, you know, your confidence performance in the guidance, you know, kind of making some of that into your thought process?

Yeah. I think confidence remains high. When we give guidance, we're careful to not lean forward too much, and I think you're used to us having that thinking around it. I think the new business assumption I mentioned is probably the clearest and most precise kind of evidence I can show that we're being careful about the environment and making sure we've got good visibility.

Great, thanks. And Bruce, given the headlines from the new administration, obviously you probably have some smaller pockets of your portfolio that are not tied to durable programs where you might have opportunities or risk. Can you maybe talk about that and give us a little more color on that front?

Charlie, it's a good question. Thank you. And I think you've hit an important point that these would be small pockets. We've really, as you can imagine, looked very closely at the portfolio kind of across all of our federal customer areas on a contract-by-contract basis. And as we have done that, we've, you know, the process we've looked at is to say, look, what's the core function that's being performed here? And if if, for example, there were to be a structural change at a department level, where would that core function have to go to continue? Because in our view, the programs themselves are not going to go away, and the basic functions of providing service and managing portfolios, for example, on behalf of the government have to continue to be performed. And so we've looked at, you know, where that might go in the future if necessary and would be ready to adjust if we needed to. But fundamentally, We really haven't seen many pockets that would be, if in fact any pockets, that would be directly impacted by any of the executive orders. It's worth also saying that we've been pleased to see continued deal flow in the pipeline. I'd be happy to go into more detail on that, but compared to other presidential transitions or the last presidential transition, it's really normal course presently from a deal flow standpoint.

Yeah, I was going to ask you, too, about last time when Trump was first put into office. It took him quite a while to find the right appointees, et cetera. It seems like he kind of hit the ground running here. Has that helped you with your pipeline in terms of going after RFPs and RFPs being let out? slow down in that sales cycle, if you will.

Yeah, let me give you a little more context on that. So we're not seeing any real direct impacts presently on deals that we're watching in the pipeline, particularly in the health and the defense and the homeland security areas. Some individual agencies within that group, as you might expect, are temporarily pausing new acquisitions to ensure that they're aligned with administration priorities, and that's a very common thing for them to do during a period of transition, kind of as expected, and we bake that into our expectations in terms of new work for the year and so forth. On the civilian side of the business, it's a slightly different dynamic. We're seeing some customers turn to extensions and bridges on existing contracts to get work through and get it programmed and accommodate delays in other procurement vehicles. So that, of course, is a great position to be in when you're an incumbent because you're picking up work with really very low or no cost of sales on existing vehicles. It's less of a great position to be in when you're waiting for procurements to come out. And I'm pleased that from a civilian perspective, I feel like we've been more on the beneficial side of that. Another point I would make is that many of the GupCon companies, as you well know, are dependent on government-wide acquisition vehicles or GWACs, government-wide acquisition contracts. And we really haven't seen any material delay in the acquisition schedules for those. So that gives you a sense of the lay of the land. I want to note, however, that there are some other variables that everybody's watching. One is the FY25 appropriations process that could impact the timing of new contracts community if they represent actually new spendings and would obviously go above the funding that would be available through a continuing resolution. So already we've seen talk about what will happen on March 14th when the current CR expires. Will we see another CR? Will that carry us through the remainder of the fiscal year? In some instances, if we're maintaining current funding levels, that could keep new contracts from being funded with new money. We're also cautiously watching the OPM deferred resignation and voluntary early retirement authority or VERA process for the potential impacts on government procurement staff. You know, we've talked about this before, Charlie, but government procurement teams and contract shops have been stretched for a number of years in some agencies, and we want to obviously consider and as an industry consider how resignations and retirements could exacerbate that issue. That's why I think David put it well when he said, you know, we're maintaining a disciplined view of the remainder of FY25 and that we've got less than 2% of our FY25 revenue coming from anticipated pipeline conversions. Hope that helps.

Yeah, definitely. Thank you very much, Bruce. And David, if you maybe if we could talk a little bit more about segment margins. What are the assumptions you're baking into your stated goals there, and are there any key drivers or impediments to achieving those goals?

Sure. I'll start with U.S. services. The U.S. services margin in Q1 was a bit lower than what we expect for the year. As a backdrop, as you recall, last year in 24 U.S. services had higher than normal margins as a result of the extra volumes from the Medicaid unwind. So we have tough year-over-year comps for the first three quarters there. And then recall in Q4 of last year, U.S. services delivered a more typical margin of 11 percent, which again is what we're guiding to for this full year, despite the first quarter being at 9 percent. The dip in Q1 was largely anticipated. A component of that was really the impact to open enrollment on that segment, especially this year. We were prudent in how we staffed our contracts there that are typically paid on either a volume-based or more of a fixed-price basis, especially given there's been a lot of change in that population. So we largely anticipated that when we gave the guidance back in November. And we still expect that segment to come in around 11% for the full year. For U.S. federal, margin was a little bit higher in Q1 than our guidance of 11.5%. And again, as I said, there were some smaller clinical programs that really over-delivered in the quarter, just given higher volume coming through that we are not currently anticipating that level of volume continuing at such a high level. So that explains what we see there. Then outside the U.S., pleased that it's at 3% to 5% and should be more stable as a result of the shaping we've done.

Great. And one housekeeping question for you, David. Tax rate was a little higher in the quarter and your implied tax rate and guidance is a little bit higher as well. What's driving that?

Yeah, so the first thing is the impact of those divestiture-related charges. So those are non-tax deductible. Therefore, the Q1 rate is very high, which we've adjusted out of our adjusted ETF numbers. Even apart from the divestiture-related impact, I said in my commentary the tax rate in Q3 and Q4 should be in the 25.5% to 26% range, which is just a tad higher than the 25% range we said last quarter. upward impact there with no single driver once you normalize for the divestiture impact.

Great. Thank you very much for taking my questions. Thank you, Ben. Thanks, Charlie.

Thank you. Our next question comes from the line of Brian Gisold with Raymond James.

Please proceed with your question. Hey, good morning. Really nice job on the quarter and the execution. I wanted to, Bruce, kind of peel into some of the commentary you had around Medicaid. I appreciated that color. I think it's pretty intuitive that you get incremental volume for more consumer engagement or changes in the program, but I thought it was really interesting, your discussion around running the state-based exchanges as well and picking up incremental volume as perhaps populations decline in Medicaid. We've had the Medicaid CHIP population peak at about 94 million. We're now under 80. Can you maybe talk about that relationship and what you've seen over the last 12 months?

Sure, Brian, and good morning, and thanks for the question. So to give it some context, at the national level, we just ended the 2024 open enrollment period. Total health plan selections made during open enrollment were 21.4 million. And that's at the federal marketplace and also includes the state-based exchanges. So the 21.4 million is a 5.1 million increase over 2023 or 31% increase across the entire system. Interestingly, there was a 41% increase in new consumers signing up for plans. So the dynamic that you're referencing is borne out in the data as people are transitioning from after all the recertification process and redetermination process in Medicaid it's clear that individuals are traversing over to the exchange business. And as I said, we are fortunate that in many instances we're operating state-based exchanges or really a single entity that could include the Medicaid work as well as a basic health plan as well as an exchange alternative for consumers. And also, of course, through the work that we do on the 1-800-Medicare or federal marketplace contract, we're picking up enrollment activity related to federal marketplace states. So as reported by CMS, just to drill into some of the numbers, New York, who is a big customer of ours, saw open enrollment plan selections during this period increase 35% from 2023 to 2024. So individuals clearly moving from one coverage area to another. All of that, it's important to note in the context, however, that it's a very fluid policy environment. So as you're, I'm sure, very well aware, there was a final rule on streamlining that was issued by CMS that affects Medicaid, CHIP, and basic health plans, and that came out in March of 2024. There are a number of states that are challenging requirements of that rule, and with things like, for example, continuous eligibility requirements and so forth, and that could overall further affect enrollments going forward in CHIP programs. and in some instances maybe cause more individuals to need to make a plan selection in a product other than Medicaid or CHIP. The last thing I'd say is that still hanging out there, of course, are the subsidies that were provided through the American Rescue Plan and the Inflation Reduction Act. Those subsidies have enabled consumers with higher income levels to get coverage, including about a million and a half consumers that reported income over 400% of the federal poverty level this last open enrollment period. So, again, sustaining those subsidies would be critical to keeping those enrollment levels where we're seeing them.

I hope that helps. That's a great answer. I appreciate all the data that was embedded in that. Thank you. In order to talk about the veteran assessment business, it looks like inventories are drawing down slower. In other words, there's a lot more kind of ongoing activity on this. Can you maybe just talk about your outlook for that in terms of growth as we think about it embedded in your guidance, and maybe this really nice new contract renewal that you had, how we think about the particulars of how that might impact the business as well?

Yeah, I'll start, and then I'll hand it off to David for some more color. You're right. The claims inventory that the VBA reports came down from a peak of what appears to be about $1.1 million down to about $953,000 and is kind of stabilized at that level. So there continues to be an awful lot of work to be done, and we continue to have our fair share of that work, and we're very pleased with the performance of the team and the volumes that they're handling in what is a complicated program and complex choreography, if you will, between the work we do with the veterans and the clinicians and so forth and the VA. So David can comment on kind of our volume expectations that are embedded in our guidance for the full year, but I'll just say As we've said on prior calls, we're very focused on continuing to improve the veteran experience and ensure that we can increase our ability to handle these volumes and what might be further volumes in the future, but more importantly, to ensure that we're maintaining quality and that we're meeting the handle time requirements within the contract. So we are making a significant investment in technology to support that program that we expect to be coming online more fully I'd say toward the end of this fiscal year. So with that said, I'll hand it off to David to talk a little bit about what's embedded in our guidance.

Yeah. I think, in short, our view and expectation for volume hasn't changed much over the last couple of quarters. Obviously, we had a big step up in volume, as did the other vendors over the past two years. And from here, what we see is more stability. Certainly, we see the volume sustaining at the current level. more at a steady to modest growth level rather than another step up.

Great. Thanks. Maybe just a couple other real quick ones. Housekeeping. Can you maybe comment on the loan servicing you have with Department of Education and student loans and maybe just talk about all the noise around the headlines that are seemingly coming out on a daily basis?

Yeah, I appreciate the question. And I would just say, you know, in our view, that's a perfect example of what I spoke to a little bit earlier, which is that, you know, the core function, which is managing a portfolio of federally direct-lent student loans that are, you know, we've now been through return to repayment and we're in, you know, kind of full operational mode. That's going to need to continue one way or another. I would have to say that, you know, obviously all the borrowers out there are going to need continuity of service regardless of ultimately where that function lands in government. And there has been some speculation as to other agencies that have similar financial management functions as part of their remit where a portfolio like that could go and continue to be serviced. But we don't feel that that would in any way change the contracting model that government's using to service those loans. So we'll just continue to support our customer, and we're pleased to, you know, continue to handle the portfolio that I will say has grown over time as a reflection of our high customer satisfaction scores and the confidence that the customers expressed in the work that we're doing. And we'll let the other decisions related to department structures and so forth be handled, you know, at the political level.

I appreciate that. And then just final one, David, probably for you. Help us a little bit on the rhythm of the free cash flow. You've got a lot of free cash to generate over the next three quarters. Is it a linear progression? Are there any kind of considerations to take on a quarter-by-quarter basis? And maybe really just a little bit of help on how we shape that.

Yeah, I mean, Q1, I guess, as I highlighted, timing of certain payments that we expected. If you look at our cash flow statement for Q1, you can see a cash outflow related to accrued comp and benefits, so that has to do with our annual incentive payments as well as just the timing of payroll, which we anticipated. And then even though our DSOs were only up one day, you can still see a use of cash on accounts receivable. That's really just revenue being quite high in December, especially during open enrollment. So that tied up a little more in AR. So we do expect both of those to be Q1 specific. For the rest of the year, nothing really to highlight. I think we'll continue to see strong cash flows come in over the next three quarters. It's sometimes even difficult with collections coming in right at the end of a month to pick which quarter among the three. So there's nothing else unusual, I'd call it.

Understood. Thanks so much, guys.

Thank you.

Thank you. And this concludes today's teleconference. You may disconnect your line at this time. Thank you for your participation.