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Maximus, Inc. (NYSE:MMS) Q1 2024 Earnings Call Transcript

Maximus, Inc. (NYSE:MMS) Q1 2024 Earnings Call Transcript February 8, 2024

Maximus, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to Maximus' Fiscal 2024 First Quarter 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 station. [Operator Instructions] 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 for Maximus. Thank you. Mrs. Batt, you may begin.

Jessica Batt: Good morning, and thanks for joining us. With me today is Bruce Caswell, President and CEO; David Mutryn, 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.

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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.

David Mutryn: Thanks, Jessica, and good morning. We are pleased to report a strong first quarter as well as an improved outlook for margins, earnings and free cash flow for the full year. Our operational performance has been excellent, and our dedicated teams are meeting our customers’ increasing demand in complex areas including Medicaid redeterminations and veteran exams. The business is on solid footing with the ability to be resilient in an environment with budget uncertainty and capable of further margin expansion on top of demonstrated progress so far. Moving to results. Maximus reported revenue of $1.33 billion for the first quarter of fiscal year 2024, which represents 6.2% year-over-year growth. Organic growth was 6.9% driven by expanded programs in the US Federal Services segment and a combination of resumed and expanded programs in the US Services segment.

Adjusted operating income margin was 9.9% and adjusted EPS was $1.34 for the quarter, which compares to 7.9% and $0.94, respectively, for the prior year period. Earnings exceeded our forecast for the quarter, driven by performance across the segments. I'll turn now to commentary on each. For the US Federal Services segment, revenue increased 9.5% to $677 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 the segment was 10.2%. The prior year's first quarter's margin of 8.3% largely reflected hiring in advance of the VA volumes that are now flowing through our operations. Segment income results for the first quarter of this year aligned to our previously communicated expectation for an improving margin across the full year.

For the US Services segment, revenue increased 11.5% to $490 million and was also all organic. The drivers were the resumption of Medicaid redetermination activities as well as expanded programs in eligibility support and clinical services. As a reminder, the redetermination activities are helping the top-line but have a disproportional impact to the bottom-line due to improved operating leverage. The US Services operating income margin was 13.5% in the first quarter of this year. The margin of 8.6% in the first quarter of last year reflected paused redetermination activities. We view the 13.5% margin this quarter as a high watermark for the segment for the near-term and expect modest margin normalization in the remainder of the fiscal year.

Turning to Outside the US segment. Revenue decreased 16% year-over-year to $160 million for the first quarter of this year. Of that, approximately 7% was attributable to divested businesses no longer in the portfolio. The other 9% was a combination of slightly lower volumes on employment services contracts and currency impacts. The segment broke even in the first quarter of this year as compared to an operating margin of 5.3% in the first quarter of last year, which reflected healthier employment services volumes. We remain focused on expedited efforts to reduce volatility and yield a desired portfolio capable of delivering consistent profitability. This process remains a priority for us this fiscal year. Turning to cash flow items. Cash provided by operating activities was $22 million, and free cash flow was an outflow of nearly $1 million for the quarter ended December 31, 2023.

First quarter cash flows reflected expected seasonality around timing of payments that we tend to have in this quarter. Our collections remained on target and our days sales outstanding were a healthy 59 days. We are increasing our free cash flow expectations for the remaining quarters, which I'll speak to during updated guidance. From a balance sheet perspective, we finished the December quarter with total debt of $1.32 billion. Our net debt to EBITDA ratio improved from 2.2 times last quarter to 2.1 times as we continue to move towards the lower end of our target range of 2 times to 3 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.

As I articulated on the last call, beyond organic investments, our priorities for capital deployment are maintaining a dividend that grows with earnings and strategic acquisitions intended to accelerate organic growth. I should note that M&A opportunity evaluation remains an important part of our normal activities, and we remain opportunistic on deals that come to market in the future. In the meantime, we plan to continue to delever and build capacity. I'll finish with 2024 updated guidance, where we are raising earnings and free cash flow projections and reaffirming revenue guidance of $5.05 billion to $5.2 billion. Adjusted EPS, excluding intangibles amortization and divestiture related charges, is now projected to be between $5.20 and $5.50 per share.

This reflects a $0.15 raise from prior guidance. Adjusted operating income is estimated to be between $503 million and $528 million, which is an increase of $15 million from prior guidance. As a result of the improved earnings forecast, we are raising free cash flow guidance by $10 million to between $300 million and $350 million for fiscal 2024. The improved earnings outlook is driven by higher margin expectation. At the guidance midpoint, adjusted OI margin is 10.0%, up from 9.8% in prior guidance. Across the rest of the year, we expect a positive trend driving consolidated margins above 10% in Q3 and Q4, reflecting a combination of strong volumes on our portfolio of performance-based contracts as well as disciplined cost management. For the US Services segment, we now expect the margin to run between 11% and 12% for the remaining quarters, which is notable because any temporary redetermination surge benefit will be finished as we enter the back half of the year.

And given the strong Q1, the segment should land near the high-end of that range on a full-year basis. For the US Federal segment, consistent with prior guidance, we still expect OI margins between 11% and 12% on a full-year basis, meaning growth across the remaining quarters from this quarter's 10.2%. We still expect Outside the US to be slightly above breakeven for the full year amidst our ongoing commitments to shape the segment to deliver consistent profitability. A few other assumptions for fiscal 2024 include interest expense of approximately $73 million, approximately $88 million for intangibles amortization, a full year effective income tax rate of between 24.5% and 25.5% and weighted average shares outstanding between 62.0 million and 62.2 million.

Before handing the call over to Bruce, I'd like to emphasize that we are quite pleased with the current state and health of the business. We have multiple core programs that have scaled up significantly compared to this time last year. Each are demonstrating operational excellence, which are reflected in the segment margins for the domestic segment. Under the Maximus Forward initiative, we are making investments in systems and technology to ensure the work we do for our customers years from now is either higher value or more efficient, or a combination of both. Our business model is resilient in the face of potential negative outcomes resulting from current budget talks within the US Federal Government. More specifically, less than 3% of total company revenue may be impacted by a temporary shutdown.

More broadly, from a budget standpoint, we are confident in the strategy of the company being squarely focused on the areas of priority for government spending. I'll let Bruce expand on those thoughts. So Bruce, over to you.

Bruce Caswell: Thanks David, and good morning. As David presented, we are pleased with fiscal year 2024 results thus far. And our increased earning guidance affirms our continued optimism about the business. In my closing remarks of our FY '23 Q4 call, I addressed the ongoing global conditions that were creating an unprecedented environment, highlighting volatility, uncertainty, complexity and ambiguity as common descriptors of the business and economic climate. These conditions continue to exist and are in some ways amplified as we enter an election period. I'd like to highlight how Maximus remains well-positioned to mitigate many of these risks through our business model and the underlying nature of the programs we are entrusted to deliver for our government customers.

Our view remains that these strengths will enable continued delivery of our mid-single digit organic growth and margin expansion targets, both near and longer term. For the next few minutes, I'd like to further explain our view. First, I'll start with Maximus' significant foundational base of business, which emerges well protected from a period higher rebid activity. Many established entitlement programs make up this base, and history has shown they stand the test of various presidential administrations. This history combined with our track record of strong operations, gives us confidence in the stability and future of these programs regardless of present budget and election dynamics. A great example is our CMS related work where we help consumers gain access to critical healthcare.

A customer service representative standing by a computer screen in the contact center.
A customer service representative standing by a computer screen in the contact center.

Ensuring equitable access for those entitled to benefits has been a fundamental program function for Medicaid and Medicare since their enactment under Title XIX of the Social Security Act of 1965. More recently, we've witnessed the resilience of the Affordable Care Act, more than a decade from its enactment, with enrollment reaching a record 21 million for the 2024 plan year. While national enrollment levels are correlated to our business performance over the longer term, they are not the primary determinant. Rather, we operate a portfolio of contracts where our scope of services, payment models and activity specific volumes collectively drive business outcomes. Over time, we have differentiated our services to provide greater value to our customers in line with longer term program trends.

At the state level, this has included Medicaid expansion, tailored state plan options, and the continued movement to manage long-term care, which often includes a requirement for independent and conflict free assessments. I'm proud of our operational teams for stepping up to the unprecedented restart of redeterminations and note that David and his team have done an excellent job in quantifying the impact. Our results are showing the analysis continues to be right on the mark. Our performance reflects our market leading position in the administration of complex benefit programs and as a trusted partner as these programs continue to evolve. Another great example of the durability of our business is the work we perform for the VA where we help veterans and transitioning service members receive the benefits they've earned.

These benefits are a core non-discretionary spending obligation that receive broad bipartisan support. As evidenced by the passing of the PACT act in 2022 and the subsequent surge in applications that have driven inventory levels to new heights, we are focused on supporting the VA in their mission to provide every veteran the support to which they are entitled. Last week, the Veterans Benefits Administration reaffirmed their increased hiring across 2024 of staff whose jobs include supporting the compensation and pension benefit decision process for years to come. Moving beyond entitlement programs, technology modernization is a prioritized area of the Maximus business enabled by our qualifications that have been significantly bolstered over recent years, and in a market, that's well supported by durable Federal spending drivers.

As one of our three strategic pillars, IT modernization represents a $40 billion addressable market for Maximus at the Federal level, growing in the high single digits annually. The modernization trend will continue as government systems age and the complexity of challenges facing government increases, and in our view, will transcend administrations. Our work at the IRS is a good example and underscores our position as a Top 20 Federal IT contractor. We feel well-positioned to respond as the need to modernize and secure government systems continues to be quoted by government officials as a top priority. Organic growth in our business is always driven by a combination of new work and volume growth on current programs. We have a solid track record of working closely with government clients to take on more volumes or responsibilities within current programs.

This fiscal year is no different where organic growth is forecasted to meet our mid-single digit target. Further, we've demonstrated time and again our ability to improve margins as we scale. The health of our core business underpinned by a successful year of rebids and several programs scaling up adds to stability and certainty for the fiscal year. In fiscal year 2023, we were successful in securing more than $5 billion of total contract value in rebids. As a reminder, our September 30th backlog of $20.7 billion was over four times our trailing revenue at that time. This fiscal year, we have very few scheduled rebids, providing strong line of sight to future revenues. While on the topic of rebids, I'd like to touch on the recent announcement by CMS that it will recompete the Contact Center Operations contract at some future point with the expressed purpose of including a Labor Harmony Agreement requirement.

Maximus is currently in the second of nine available option periods on this contract that we have operated since 2018. Since being awarded the current contract in 2022, we have outperformed customer service metrics and achieved record customer satisfaction levels, while respecting occasional labor organizing activities which have not interrupted operations. In the company's view, the introduction of such a requirement is unprecedented in a services contract of this nature, particularly in light of its highly successful performance and demonstrated continuity of operations. We look forward to providing continued best-in-class customer service to our CMS customer and the American people, including tens of millions of seniors. We are proud of our employees across seven states who have worked in partnership with CMS to provide exemplary service each day and whose job satisfaction has been evidenced through our annual independently conducted employee engagement surveys.

No timeline or further details have been disclosed by the government, which in due course will inform our further actions, as is the case with all procurements. Until a recompete process is complete, which typically takes a year or more for a contract of this size and complexity, we expect to continue to work uninterrupted, supporting our customer and nearly 75 million Americans. We continue to stay committed in our efforts to optimize our organization for the future and think critically about our delivery model. Through our Maximus Forward initiative, which we introduced last year, we continue to see success in identifying opportunities to innovate and are rethinking end-to-end delivery, including our supply chain to drive efficiencies and gain greater access to global talent.

One corporate-wide objective of Maximus Forward is increasing employee retention, which enhances quality on programs, reduces costly turnover and creates greater career opportunities for our staff. Our teams have developed several initiatives to improve retention over the next 18 to 24 months and ensure we have the right talent to support our growth. I am particularly proud of one initiative that has already proven to reduce the costs associated with turnover. Last quarter, within a matter of weeks, our teams successfully redeployed hundreds of employees coming off of handful of projects onto new programs. These transition periods are never perfectly timed to end one day and begin the next. With better processes and data, we can bridge our valued employees to their next opportunity while enabling training and upskilling in the interim.

Courses available to employees range from soft skills such as leadership development to technical programs including project management and agile certifications. It's exciting to see this employee led initiative come alive. The strength of our balance sheet is the final point I'll make about the stability and certainty of our business. Our debt ratio is now 2.1 times, giving us capacity to make strategic investments to accelerate growth as we identify them. Ahead of uncertain economic conditions, having robust cash flows, which we increased the guidance for this year, healthy assets and an appropriate amount of debt are further evidence of the strength of our balance sheet. Looking forward, we recently announced the hiring of our new Chief Digital and Information Officer.

This position marks our evolution from a more traditional CIO role and demonstrates our ongoing commitment to technology modernization. Derrick Pledger, who stepped into the role on January 29th, will serve as a catalyst for leveraging digital tools and data to drive business growth while maintaining a resilient and dependable IT foundation. Under his leadership, our IT and operations teams will deepen collaboration with our government clients to harness data in a manner that optimizes processes and improves the citizen experience, a priority for all government agencies. On the topic of evolving our approach to technology, let me share some advancements on our journey with artificial intelligence. Following our early establishment of solid governance processes, we're starting to make progress on specific use cases designed to support our employees.

At one of our larger state customer contact centers, we're piloting two AI capabilities to enable our customer service representatives to train new hires faster and help them work smarter. Using AI, the program is developing training simulations that will allow employees to learn in a safe space using real life examples. Simulations are a proven tool to improve retention and create a positive environment that encourages learning. We anticipate that as we build the simulations for various aspects of the program time to train new employees will shrink by several days. Agent Assist is a second example of our team's work to leverage AI in an employee centric manner. Agent Assist listens to calls in real-time and offers agents solutions to questions as they are raised by the consumer, reducing and possibly eliminating the need to search for information while carrying out the call.

Agent Assist will reduce wait times, improve first call resolution by ensuring the correct information is provided in real-time and enhance the citizen engagement experience with our team members. Agent Training and Agent Assist are two capabilities meant to improve quality at our contact centers and enhance the work performed by our team members. Citizen Experience is the first priority for our programs, and we view AI as a helpful tool to exceed expectations and further empower our team members in delivering exceptional service. Now I'll turn to pipeline and awards. For the first quarter of fiscal 2024, signed awards totaled $422 million of total contract value. Further, at December 31, there were $802 million worth of contracts that have been awarded but not yet signed.

These awards translate into a book to bill of approximately 1.2 times for the trailing 12-month period. Our pipeline at December 31, was $37.7 billion compared to $37.1 billion reported in the fourth quarter of fiscal 2023. The December 31 pipeline is comprised of approximately $933 million in proposals pending, $1.01 billion in proposals in preparation and $35.7 billion in opportunities tracking. Of our total pipeline of sales opportunities, approximately 77% represents new work. Additionally, 57% of the $37.7 billion total pipeline is attributable to our US Federal Services segment. In closing, we are pleased with the performance of the business during this past quarter and grateful for the tens of thousands of Maximus employees who have made this possible.

By the metrics, we are progressing toward our established targets of 10% to 14% total company adjusted operating income margin and mid-single digit organic growth. At the segment level, our FY '24 forecasts for the US Services and Federal Services segments place us comfortably within the 11% to 14% and 10% to 12% adjusted operating income targets we established. With strong tailwinds, a well-performing core business, a healthy balance sheet, and long-term programs with proven resilience, we are well-positioned for continued execution on our three to five year strategy. With our Maximus Forward initiatives well underway, transformational leadership driving greater technology innovation, and employee-driven to grow and retain talent, we are carrying strong momentum into future periods.

And with that, we'll open the line for Q&A. Operator?

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