Q2 2021 Maximus Inc Earnings Call
Greetings and welcome to the Maximus fiscal 2021 second quarter Conference call.
At this time all participants are in a listen only mode.
The question and answer session will follow the formal presentation.
Mm GAAP financial information management uses of this information in its internal analyses of results and believes this information may be informative to investors in gauging the quality of our financial performance identifying trends in our results and providing meaningful period of period comparisons for of reconciliation of the non-GAAP mess.
<unk> presented in this document police the the company's most recent quarterly earnings press release, and with that I'll hand, the call over to Rick.
Thank you James This morning Maximus reported a strong second quarter for fiscal 2021 with revenue increasing 17.3% the $959.3 million over the prior year period and diluted earnings coming in at one dollar and 29 cents per share. The companies operating income margin was 11 point.
8% for the quarter.
Our better than expected results were driven by the high level of COVID-19 response work revenue in the U S segments and employment services work in Australia.
Which experienced higher than expected volumes of activities since.
Since our February 4th call. We of continued to win a substantial amount of new work as Maximus plays an integral role helping government customers serve their citizens during the pandemic.
Ah revenue attributable to COVID-19 response activities, such as contact tracing unemployment insurance cares at communications and vaccine communications, where $242 million for the second quarter and $402 million year to date, We project COVID-19 response revenue will now range between 800.
An $850 million for the full fiscal year.
Or Australia employment services of business achieved a high level of performance in the quarter. His job seekers were able to find and sustained work as the Australian economy opened up the performance on this contract us improve faster than we projected resulting in higher second quarter revenue and profit for our outside the U S segment the org.
Ganic growth rate for the second quarter of fiscal 2021 was 12.8% or 29%, excluding the census contract revenue reduction.
Pain is estimated to contribute $120 million to $140 million of revenue for the seven months of the fiscal year. The pro forma trailing 12 months adjusted EBITDA for attain is approximately $32 million, which indicates attain is expected to be accretive in fiscal 2021, we.
Present, adjusted EBITDA in the management's discussion and analysis section of our form 10, Qs and 10 Ks.
For full year segment operating income margin expectations for the U S. Federal services segment has improved from 6% to 7% previously forecasted to approximately 8%. This is before including the acquisition of veterans evaluation services or the Es that we announced on April 21 with an expected.
Close date in our third fiscal quarter due to their fixed price nature. The ves contracts will naturally carry an operating income margin that is greater than our U S. Federal historical average over the past three years.
Adding in the Es, our full year fiscal 2021 guidance for the U S. Federal services segment improved to between nine and 10% for segment operating income margin turning to outside the U S segment revenue for the first quarter of fiscal 2021 was $189 million the.
This segment experienced the most pronounced negative impacts from the pandemic in last year's second quarter resulted in an operating loss of $26 $7 million.
This year the segment's second quarter operating income was $15 $1 million and the margin was eight 3% as I mentioned the better than expected results for the outside the U S segment were largely due to Australia, where market conditions continued to create and sustain job opportunities in conjunction with our team pushing performance.
And efficiency initiatives.
On our February 4th call. We noted that there was strong demand for employment services in the outside the U S segment, our employment services contracts typically experienced startup losses in the early phases of their operations and our prior guidance included our best estimate at that time. Since then we have one more new employment services.
Work than we projected on April 26th we announced a significant win in the U K on a program named the U K restart where we secured two of our preferred regions. In addition to this win the outside the U S segment has exciting new employment services programs in Saudi Arabia, Sweden, South Korea and Italy.
Ali.
Due to the startup nature of these contracts there will be startup losses incurred in the third and fourth quarters and the outside the U S segment as revenue ramps into the next fiscal year.
The U K restart is responsible for the largest share of the incremental start up loss.
These startup losses are more heavily weighted to the fourth quarter of fiscal 2021, the profitability of all of these outside the U S startup contracts is expected to exceed 10% over the life of the contracts given their performance based nature and the strong demand for employment services. These contracts range.
The length from one year to six years, we expect significant improvement to the financial contribution from these contracts in fiscal 'twenty 'twenty two.
With the startup losses, the fiscal 2021 full year margin for outside the U S is expected to be in the low single digits with the fourth quarter swinging to a loss as activity picks up on the U K restart program.
Let me turn to cash flow items and the balance sheet at March 31, 2021, we had $240 million of borrowings on our $400 million corporate credit facility, we had cash and cash equivalents of $101 7 million.
DSO was 70 days at March 31, 2021, including attain on a pro forma basis. This compares to 75 days at December 31, 2020, and 72 at March 31 2020.
Cash flows were strong in the quarter with cash from operations of $181 $6 million and free cash flow of $167 1 million for the three months ended March 31 2021 given.
Given the two significant acquisitions, we recently announced I will expand on my usual capital allocation remarks, the financing required for the V. S transaction will result in initial leverage estimated to be approximately two seven times debt over pro forma adjusted EBITDA for.
Pro forma adjusted EBITDA is calculated by using the last 12 months of EBITDA for Maximus in accordance with our existing credit facility plus estimated EBITDA for attain and for V. S. Assuming the acquisitions were included in our operating results for the entire trailing 12 month period.
Traditionally Maximus has maintained low leverage we strive to be good stewards of shareholder capital and believe that we are appropriately selective in the acquisitions, we pursue focusing on those that we believe are both consistent with our strategy and will enable us to drive future organic growth.
Three the impact of the significant startup contracts outside the U S and for the negative impact of the COVID-19 pandemic on some of our core programs.
Let me address these factors in that order first the COVID-19 response work, we have earned to date and project. The earn in fiscal year 2021 is much greater than anticipated when we communicated our first quarter results on February 4th.
As I mentioned, we are now forecasting 800 million to $850 million of COVID-19 response work and the full fiscal year 'twenty 'twenty. One we expect this work to diminish over time and Accordingly project a drop in the fourth quarter as compared to the third quarter.
Second we have included the acquisition of the E S and our guidance assuming the transaction closes in the beginning of June.
When we announced the deal on April 21, we disclosed the estimated revenue from June through September to be $160 million to $175 million.
There are one time expenses of approximately $13 million for the the Es transaction.
There is interest expense tied to the term loan borrowings that we will use to finance. The acquisition. We are still finalizing the intangibles valuation, but based on what we're seeing today. The V. S acquisition will be slightly dilutive to earnings per share for the remainder of fiscal 2021.
Third we have startup losses planned outside the us with a more meaningful effect felt in the fourth quarter.
Fourth we are assuming the negative impacts related to the public health emergency persist through the remainder of the fiscal year 2021 as signaled by the January 22nd letter from the then secretary of the Department of Health and human services to the U S governors.
We are assuming the public health emergency will continue past, our fiscal 2021 year and all of that together. We now expect total company revenue to be in the range of four to $4 $2 billion for fiscal 'twenty one.
And our estimated diluted earnings per share to be in the range of $4 20, the $4.
And 40 cents per share.
Cash from operations is expected to be between 400 and $450 million and free cash flow is expected to be between 360 and $410 million.
The guidance range is wider than typical in mid year, but it's necessary to account for the volatility and the COVID-19 response work the midpoint of our guidance range for revenue indicates an expected organic growth rate of nine 9% for fiscal 'twenty, one as compared to fiscal 'twenty we.
We also considered the impact of the COVID-19 response work and the census contract and calculated in expected adjusted organic growth rate of approximately 6% for fiscal 'twenty one.
Our effective income tax rate should be in the range of 26% to 27% for the full fiscal year 2021, and weighted average shares outstanding in the range of $62 2 million and $62 3 million shares.
Our effective income tax rate is being impacted by the high level of income in Australia, and the reduced income in the U K caused by the startup contracts.
The $4.30 midpoint of updated guidance implies reduced earnings in the second half of fiscal 2021 as compared to the first half we anticipate a step down of third quarter earnings compared to second quarter results, which is primarily driven by some one time costs for the <unk> transaction, we anticipate.
An additional step down of fourth quarter earnings compared to the third quarter created by the increased impact of the start up contracts in the outside the U S segment and the reduced forecasted levels of COVID-19 response work.
Let me make a few comments as we consider fiscal 2022.
The amount of revenue we expect from the two acquisitions is estimated to be between 700 and $750 million. While we do expect some of the COVID-19 response work to continue into fiscal year 2022, it is extremely difficult to predict.
Equally hard to predict is the timing and impact of the public health emergency on Medicaid Redetermination and the resulting increase to Maximus revenue our forecasting precision remains limited due to ongoing volatility created by the pandemic.
As you see with the results announced today as compared to our estimates three months ago.
Bruce and I are grateful to our busy and hard working teams around the world. We are responding quickly to customers needing help with vaccine administration working hard on large scale existing and new employment services programs and beginning to integrate two important acquisitions with valued team members and with that I will.
Turn the call over to Bruce.
Thank you Rick and good morning, everyone.
Since I transitioned into the CEO role in 2018, I've spoken about our three pronged strategy to accelerate our progress and drive the next phase of our growth through first digital transformation within the government services market, enabling new solution offerings to address the mission requirements of our customers and improve overall service delivery across.
Our operations. This began with improved tools for citizen engagement and process automation and is evolving to include new capabilities in artificial intelligence and machine learning natural language processing and advanced analytics to enhance our competitive position second clinical evolution to address long term macro trend.
<unk> driving demand for independent and conflict free business process management or BPM services with the more clinical dimension, while maintaining the foundational elements of our business operating customer engagement centers, and providing case management services and third market expansion as we evaluate adjacent and emerging.
The markets organically grow the portfolio and acquire capabilities and contracts to establish a foothold in these markets. We also consider our customers longer term visions for reengineering social program delivery models and of course macro trends. We aimed for expansion that is a natural complement to our core services globally.
Today I will focus on how recent efforts are aligning with these three strategic priorities, including the two acquisitions recent wins and COVID-19 implications.
As you know in March we announced the acquisition of the federal business of attain furthering two of our primary strategic pillars by first accelerating our digital transformation by strengthening our technology capabilities and application development and modernization enterprise business solutions cyber security and the data Sciences.
Including advanced analytics and machine learning these capabilities address federal it spending imperatives and priorities, while also being applicable to our BPM solutions and secondly, expanding further in the U S federal market into new departments and agencies, such as the Securities and Exchange Commission and department of Homeland.
<unk> as well as within our common clients such as the department of health and human services.
While our integration is still in its early days already I'm pleased to see how our teams are working together to address pipeline opportunities with our strongest capabilities and to share experience and skills to improve the solutions, we're delivering to our federal customers.
As I spoke of briefly when we first announced the transaction attain brings innovation and experience in many competencies that are in greatest demand in federal while Maximus brought scale and highly desirable contract vehicles like Alliant. Two together, we can now address opportunities where neither company would have previously been competitive.
Further executing on our strategy, we most recently announced an agreement to acquire privately held veterans evaluation services or V. S. A premier provider of medical disability examinations or empty ease to the U S Department of Veterans Affairs the V. A.
This significantly advances our strategic aim of clinical evolution, while meaningfully expanding our presence in the VA as Rick stated, we expect to close this transaction in the third quarter.
While our independent clinical assessments business has been growing at the U S state level through our 2016 acquisition of ascend and subsequent organic growth primarily in Medicaid related long term care of assessments. The yeses expertise will create an opportunity for such growth at the federal level.
As a result, the independent health and disability assessments and appeals portion of our business will comprise a larger share of our overall portfolio and pipeline lending further credibility to our organic growth efforts with other federal departments and in non federal markets.
The acquisition comes at an important time for the VA as the veterans benefits administration or VBA has been focused on reducing the inventory of exams that naturally has grown during the pandemic, while preparing for the future needs of veterans with qualifying conditions.
To that end and as they have done periodically in the past the VBA recently launched of market assessment to better understand industry capacity and capabilities.
Through our combination we believe Maximus N V S, bringing the credibility and quality of an established partner and ability to rapidly add clinical capacity and invest in technology innovation that will benefit veterans and the VBA.
Our goal is to both contribute to the timely reduction of pandemic related inventory and be the partner of choice as the M. D. E program continues to develop.
Our acquisitions of attain and ves as well as essential in 2015 and citizen engagement Center operations from G. D. I T. In 2018 help us play a more meaningful role in the U S. Federal market as we build scale expand and diversify our customer base and improve our competitive advantage.
Concurrent with these acquisition efforts, we continued to win COVID-19 related work at the state and federal level as Rick discussed in his remarks.
This includes the recently posted CDC vaccination Hotline award illustrating the trust the government places and Maximus based on our historical performance.
While COVID-19 work is generally planned to be shorter term in nature, we remain well positioned to adjust as the pandemic related needs of our customers continue to evolve.
These efforts also allow us to meet new customers expand into new areas of service with existing customers and increase our impact on their behalf.
Through this work, we build longer term references and past performance credentials that are advantageous in future bidding.
For instance in areas like unemployment insurance the demonstrated value of our model is creating opportunity for longer term relationships with state department of labor as they see the benefits of the flexibility and accountability, we can provide in delivering outcomes that matter in more routine program areas.
Further our ability to stand up solutions quickly during challenging times using effectively our modular capabilities makes event driven work of beneficial element of our business model in response to less predictable, but regularly recurring government needs.
Our investment in the digital transformation of citizen services, coupled with our decades long experience had been recognized by our government customers. During this pandemic as we responded to real time requests to quickly deliver support and services.
Our outside the U S teams are securing some exciting new wins as well as Rick mentioned in the United Kingdom. We were recently awarded two prime contracts in our preferred regions to deliver the restart program, which provides 12 months of tailored and community based support for people that have been unemployed longterm and directly impacted by the pandemic.
This contract was procured through the cares framework, which I mentioned in my remarks in the fourth quarter of the last fiscal year and is used for contracting national employment support programs.
Adding emphasis to Rick's earlier point startup costs are typical with significant new contracts like this one therefore, we anticipate Q3, and then Q4 earnings will step down sequentially. As a result, followed by a subsequent rebound driving earnings estimates upward in fiscal year 2022 the.
These programs create long term shareholder value and we'll operate within our expected corporate range of profitability. This is not the first time, we've accepted startup losses for a longer term and more significant future benefit.
In total the two contracts the maximum that could be won by a single provider are valued at more than $960 million 690 million British pound sterling over the base and option periods totaling six years Maximus UK will be recruiting more than 500 people to deliver the program.
We have a long history of supporting work for services in the U K, establishing our foothold in the U K employment and training marketplace in 2008 during the economic recession.
This solid platform history of excellent performance and strong client relationships have provided the necessary credentials to expand employment focused programs as illustrated by this award.
While this new work has provided some positive offset our core operations in the U K continued to face disruption as a result of the pandemic. This negative impact continues to be driven by temporary volume and revenue declines as well as a pause on face to face of assessments.
Although we continue to face decreased volume across some of our geographies in Australia. We are seeing strong volumes as the economy reopens demand is holding more than we anticipated during the holiday season and serves as an example of anticipated volume return as certain countries slowly begin to emerge from the pandemic.
All in all we will remain dedicated to addressing COVID-19 implications with our customers, while driving organic growth opportunities across the business.
In that spirit I will now turn to New awards and pipeline as of March 31.
As of the second quarter of fiscal 2021 signed awards were $1.11 billion of total contract value at March 31st further at March 31, there were another one point to $8 billion worth of contracts that have been awarded but not yet signed I should note that the CDC vaccination hotline and you.
K restart contract awards were subsequent to our March 31st cutoff.
Let's turn our attention to our pipeline of addressable sales opportunities.
Our total contract value pipeline at March 31 was $35.6 billion compared to $31.6 billion reported in the first quarter of fiscal 2021 of our total pipeline of sales opportunities, 67.4% represents new work.
On the final note I am excited to welcome our newest team members from attain and I'm looking forward to doing the same for our perspective colleagues from V. S. When the transaction closes the hardest thing to get right in any integration is culture and we've been very focused as an integrated leadership team on getting that right for all employees.
Our goal for our colleagues from both attain an V. S is that you will have more opportunities to take on new challenges to advance their careers and to be rewarded for quality work.
I wanted to congratulate and thank the Maximus team around the globe for their ongoing efforts during the pandemic to keep our employees safe, providing high quality and innovative solutions to our customers and best in class service to the individuals and families. We serve.
We've been fortunate to have been well positioned to respond to the needs of government at a very challenging time. This has been possible only through the efforts of more than 35000 colleagues worldwide and tens of thousands of delivery partner staff on behalf of the entire Maximus leadership team. We thank you.
And with that we'll open the line for Q&A operator.
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One moment, please while we poll for question.
Thank you. Our first question comes from the line of Charlie Strausser of CJS Securities. Please proceed with your question.
Good morning. This is Brendan pops in on for for Charlie.
Fantastic quarter, obviously of and I wanted to dig into the the outside the U S performance and you guys you guys of the.
Alluded to this talking about Australia, but the high single digit margin.
As I expected and.
I know you talked about the the employment services.
Being strong and high higher attainment retain the going on and with the employees.
I wanted to ask just like how sustainable that that margin is and if you gave us dig more into the the puts and takes there and what we could see down the road.
Hey, Brandon Good morning, it's Bruce Thanks, so much for the question I'm going to turn it over to Rick to address and I'll add a little color commentary, perhaps at the end.
Thanks, so much.
Yes. Thank you.
With respect US Australia first you know the first quarter. We told you that they were coming out of the lockdown and they had strong demand during that Christmas period.
Due to the fact that there was a lot of pent up.
The man from the employers who needed the quickly fill some of those retail and travel related jobs loans or industries debt.
Hum.
We typically place a lot of people Inc.
In Q2 of our fiscal year Q2. They also achieved good financial performance on the bear case load metrics and Sustainment for what we also of coal Retentions is really means that more people.
For people the replacement of work, we're able to sustain their jobs or retain them.
And that shows the Australia has really come out of the pandemic.
Of the countries around the world of <unk>.
Growth trend should really be in our favor down there.
Is difficult for you, though predicting what happens quarter to quarter.
For the pandemic, but while Australia looks very good and is doing really well.
Think embedded in your in your question is really also about the owed us startups the outside the U S startups.
Those are in multiple geographies for.
Some of which are countries, we've operated in for several years and others.
Our newer for us.
Those are outcomes based contract with typically take time to build up the volumes. It gives you of economies of scale over time. However in the early phases of a contract.
Our cost ramp up quicker rate.
And that will create initial losses, so the revenue will come slower than the costs of that ramp up.
So we anticipate several quarters of losses on these contracts before they turn profitable.
It will be a bit of a drag to the U S segment results in FY 'twenty, one and as I noted I think the.
Startup contracts will drive an operating loss in the fourth quarter of our fiscal 2021.
Bruce mentioned, we do believe that these.
Contracts are of good investment for us they made the sense due to the overall favorable economics over the lives of these contracts. We do expect these contracts to deliver 10% of operating income margins over their life that answer your question Bruce.
Yes, that's great.
But I also want to ask about the the pipeline Bruce was talking about with yeah of the increase obviously of from V. S N of Tan.
And what's assumed in the pipeline from that and then more than that I guess, you know what what's the potential pipeline expansion from from the acquisitions.
Sure Brandon.
Take that to begin with and ask corrected.
I'm in as well.
Importantly, I want to note that there's no ves in the pipeline because of the transaction has not closed right also yes.
Historically I can just to give you a little more color historically the V. S really hasnt had kind of the business development function. They have been completely focus on serving their VA customers well you could imagine and so.
If there is the deals that will be added at the additive to the pipeline once the transaction closes it'll likely be synergy opportunities that we've identified as part of the process of getting to know the yet to understand their capabilities and taking a longer term view of where their capabilities could be applied to other kind of areas of white space in the federal government I want.
It also however, say that likely those pipeline opportunities would be more like two to four years out and not immediate because we are absolutely 100% focused as we come together would be yes, and working with the DVA on the inventory as I mentioned in my prepared remarks, that's built up during the COVID-19 pandemic period and also to ensure that day.
We're very well positioned to address the needs of veterans for whom.
The it's a dynamic program and periodically Congress will authorize new benefit categories net creates demand that needs to be addressed so that is absolutely our focus which is bringing capacity and scalability and further capabilities to serve the VA and then we would hope that over time.
New course, and at an appropriate time, there would be additional pipeline opportunities for us to pursue so that's the the ESP the.
Rick mentioned debt, we did see a meaningful uptick of small uptick in our pipeline as we came together with attain you can imagine the process is that the companies went through and scrubbed the pipeline to make sure that if there are any deal that overlap that we're both pursuing and looking at we eliminated the overlaps.
And then we looked at the pipeline that debt attained brought over and then we also looked at are there deals now that we will be able to as I mentioned in my remarks pursue because of the combined capabilities of Maximus and attain I would say that the pipeline reflects.
A minimal number of those presently because we're still only getting started with the pain and really understand kind of what the combined capabilities. Now mean in terms of larger deals that we can bid in and editors that we can go against so the additive component of the pipeline would be really just what came over at that with entertains pipeline at the time of the.
Transaction.
Which was not insubstantial and I'm very pleased with and I think the team has done a great job of positioning for those deals.
Just to give you a little more sense of behind the scenes.
We make sure that if teams have been both looking at opportunities. We're looking at which team is best positioned in terms of customer relationships and you know.
Teaming agreements that may have been developed and so forth to capture the deal and there's been just a great level of collaboration between.
For the legacy attain and Maximus teams in that regard.
If that answers your question Brendan is there anything further.
Yeah definitely.
I'll hop back in the queue.
Okay, great. Thanks.
Thanks, Brendan operator next question please.
Our next question comes from the line of Donald Hooker with Keybanc capital markets. Please proceed with your question.
Great Good morning.
A lot of moving parts here.
<unk>.
I guess, maybe I'll ask a question about the.
The state Medicaid Redetermination, the sort of the pause there.
Can you help us think through kind of I am sort of imagining that there will be a release of work for you kind of sort of bolus release of work for you at some point maybe in fiscal maybe next year I don't know, but.
But can you help us think through kind of what that could look like I mean, how do you. How do you see these medicaid programs getting back to sort of normal.
Operations with these redetermination.
Sure.
It's Bruce why don't I go ahead, and begin and then ask rich.
To add to this.
I think of as John at the January 20th second there was a letter that was sent by the then acting secretary of HHS to all of the Governor's, indicating the intend to the bite administration to extend the public health emergency through the end of calendar year 2021, we're taking our guidance guide off of that if you will.
Which would therefore everything that we've spoken to in terms of our view of when Redetermination would resume and the impact on the fiscal years that this public health emergency will extend through the end of the calendar year at the.
At the very.
Earliest given whats been said publicly you could imagine that there will be then a period of a couple of months probably after the end of the calendar year as things ramp up and get going again.
Our view would be that that certainly there is a backlog that has been building up because common practices to re determine.
Eligibility for certain tranches of the existing population on a periodic basis under the debt not having been done it needs to be caught up.
And so we would expect there to be some backlog related to that that will need to be worked through as we turn the corner into the next calendar year.
Of that work historically has benefited from the scale of economies of our operations in other words once you've already stood up an operational center of that as you know.
Our back office processing capability of mailroom.
A document the documents sorting and and.
<unk> function eligibility staff that review applications, but can also do redetermination you can imagine that incremental volume related to redetermination can be handled with a lot of existing infrastructure. So we expect that work to be more accretive in nature of when it comes back on then the standard kind of base Ella.
The ability of work that we do but Rick would you add anything for US just just quick three quick really quick ones. The first off we are assuming we're not assuming the pandemic related headwinds abate during the remainder of this fiscal year. So we're assuming that.
It does not help this fiscal year logic does tell us that there should be backlog.
When this becomes work for us is really tough to determine what Bruce is right when that does occur that should be profitable work whenever that catch up happens.
Okay.
And then in terms of you guys.
<unk> some employment services work in the outside of the U S segment. I think you mentioned some countries that I'm not familiar with Maximus being involved in the catch me from Ronny I think Sweden, South Korea, Italy, I think of some work in Saudi Arabia.
But are these new.
New geographies for you does this open up potentially new doors for Maximus over the next few years in these countries.
Yeah, let me catch up a little bit on that and then ask Rick again to comment on.
So to begin the the.
The.
The significant opportunity that we're seeing obviously, we spoke to the UK restart and opportunity.
But we do we had completed previously and it gets maybe lost in the.
Like you say a lot of moving parts here, a small tuck in acquisition in South Korea.
And that small tuck in acquisition was.
In response to a market trend that we identified where the government was going to be requiring companies of much larger sizes than had been required historically to us.
The provided employment service providers.
The place displaced workers back into employment. So we always look at kind of going back to the conversations we have with rich montney not just the propensity to outsource of change and the propensity to outsource and that policy signaled the shift the reason we approached it with the tuck in acquisition at that time was of the assets because of that policy was being implemented quickly and we didn't have the opportunity to.
The enter organically.
By contrast, we did recently organically began operations in Sweden and that was.
In direct response to the major policy plank of the coalition the the primary.
Primary of majority of party of the coalition government that had really run on premise of our principle of reforming the public employment system, which they felt was not successful for Sweden.
So there are there is an existing program, but also a new program.
That is being administered where it places of being transferred to the new one of the programs being expanded and we felt as we looked at that situation, we had the ability to to to create the business and build the business organically and that's exactly what we've done.
As it relates to Saudi Arabia, we have the had a strong business in Saudi Arabia historically.
That has the primarily focused on employment services, we've seen an opportunity there recently to grow that business as the government is both focused on driving employment reemployment of Saudis and of post pandemic.
Era, but also continuing to advance the the validation of policy and initiative, which is to provide primarily primary employment opportunities for Saudi citizens.
In lieu of historical policy that also.
The significant portion of foreign workers in the workforce in response to those trends and also the government's desire to continue to think about training and upskilling their citizens to take on kind of jobs of the future. We've seen opportunities develop in Saudi Arabia as well I think the last one that we haven't talked about us Italy.
Italy, we similarly, we're following.
Really a shift in policy that signal of an opportunity to do some work there in that related back to the historic use of European Social fund money or ESF funds to fund employment services without dragging either of the weeds of the policy change we saw an opportunity to enter the market. We began again organically with a small.
Business in familiar Romana, and we've been able to expand into the Lombardi us well actually it reversed the two of began in Lombardi and then went to familiar of on it.
We're pleased we're pleased with the operation of that program presently given the overlay of the pandemic that it certainly Italy was as you all know extremely hard hit by the pandemic and it's taken some time to recover but that method of private the provided employment services still remains a great priority of the government.
I lay all of that out to say, we are very very deliberate always extremely deliberate about decisions to begin businesses in new countries and it is not our policy of our plan around here at the plant flags, but rather to look at the market very carefully evaluated across a broad number of risk factors and only move.
Into a new market area. When we believe it has the potential to deliver long term growth for our shareholders and to support multiple business lines for Maximus. So not just in the employment services space, but also in the health related areas over time, so sorry for the long answer, but that's kind of the strategy as we're executing it and catch up on.
And those Rick is there anything further you don't add that as a very complete answer.
Alright, yeah that's.
Super helpful.
Thank you so much.
Don will keep your line open do you have any other questions for us.
Sure and then maybe for the have you have you all quantified sort of us when you think about.
Fiscal 'twenty two.
Some of the UK deals.
The Tuesday, the restart program.
Kind of when that sort of ramps. The it's a big Big program for you guys when that would sort of hit full run rate is that a year or two years three years at the multiyear program for one would that hit.
Full run rate and margin.
Yes, that's obviously hard to gauge where generally thinking of it takes us a while to get that going but I would think the second half of fiscal year 'twenty two would.
It would be when you would see there was a revenue catch up so what you really have happening we've done is that the costs ramp up and you're serving the.
The citizenry, but the the volumes take a while to catch up with debt.
And so as I said I think it's about four quarters, the second half of fiscal year 'twenty two.
Okay, great. Thank you.
Thank you.
Non.
Operator back to you.
As a reminder, if you would like to ask the question Press Star one on your telephone keypad.
Our next question is a follow up from Brendan Pops and with CJS Securities. Please proceed with your question.
Thank you.
I just wanted to ask real quick on on the Redetermination.
Are there obviously, there's some there's different.
The different policies the different states are following and in some states are doing.
Have more restrictions in the other states is there a difference in summary of our some of your states coming going to come back sooner than others or is it kind of is there some kind of a central.
Authority that debt that means that not much of it will come back until after the.
Public health emergency us.
Yeah, yeah over.
Yes from the ladder Brendan the.
The way it works. It works is that in order for states to continue to receive enhanced federal matching funds during the pandemic. They have to agree to what historically have been referred to as kind of MLR or maintenance of effort on the on the program that they can't do.
They can't.
The erode any types of <unk>.
Any types of services that they're providing or are diminished any services. They are providing and that means they need to do everything they can to keep existing Medicaid beneficiaries on the rolls.
There are some cash.
Panic that we can share with you maybe offline it would be best in terms of once the public health emergency has been declared to be over there is that period than when they can resume these activities as I mentioned previously it's not absolutely immediate and I think it's actually tied to when they last received funding related to the program but.
We'll clarify that for you the.
Point of being though that all states have the follow that same set of rules that have been laid out by CMS.
And you're right while there are differences in the way of states administered they're programmed in this specific instance, as it relates to this population they can't.
Theoretically the jumped the gun and begin the process sooner, but they would lose out on the enhanced federal money and nobody really wants to do that.
Okay, Yeah that makes sense.
And I just want to ask about a capital allocation question you guys have talked about your you know your pro.
Pro forma.
The leverage.
What's your view on on deleveraging as this is the going to be in our main priority are you comfortable.
The EBITDA grow into it or what's your what's your priority of there.
Yeah.
Oh I'm sorry, Brandon this is Rick.
Yeah. These are too.
With respect to companies that we want to do a very good job on with integration. This integration is going to take us of while I think let's say at least two quarters to really get it to really get it done.
We have good free cash flow each quarter.
And I would say that we will pause significant M&A get the integrated get the integration done right and and have our debt pay down.
Low of 2.5 ex that is really our aim is to keep our leverage.
Below $2 five ex I mean.
We're starting off out of an area of $2 seven ex debt that we're comfortable with but but I think overall over the long term staying below two five ex would be our aim.
Great. Okay. Thanks Brendan.
Yep.
Operator back to you next question please.
Our next question is a follow up from Donald Hooker with Keybanc capital markets. Please proceed with your question.
Yes. The one question I meant to ask and I appreciate your time here in.
And the Federal services segment, you mentioned won't be the addition of EES would sort of create at the close to the 10% margin I guess for the full year if you.
Include debt.
That looks like and if youre signaling a fairly large step up in operating margin I guess in the.
The fiscal in the September quarter, So I guess as we go into next year can.
Can we think about like what can you help us think about what a what a normalized.
Pro forma operating margin would be for the federal services with the higher margin the Es business.
Thinking that's a pretty material change for next year.
Yes.
Yes, I do think that as we look forward.
That should be able to give us a 10% or better operating income margin.
I would say that you have to always recall that we have a large cost reimbursement style contract and the one 800 Medicare contract that carries the lower margin, but yes, we should have higher margins from both the team and the Es and some of our legacy.
Work has also been somewhat tamped down by the pandemic and that should come back. So we should have 10% plus operating income margins in U S. Federal in fiscal year 'twenty two.
Okay. Thank you.
Thanks, Don any more questions.
If not we'll go back to the operator.
Thank you ladies and gentlemen, we have reached the end of the question and answer session and are out of time for today's call.
Maximus. Thanks, you for your time and participation today you may disconnect your lines at this time.
Yeah.
Yeah.