Q3 2022 Maximus Inc Earnings Call
Greetings and welcome to the Maximus fiscal 2022 third 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. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
Phone keypad as a reminder, this conference is being recorded please note that the slides on today's webcast. Our user driven it is now my pleasure to introduce your host Ms. Jessica bat, Vice President of Investor Relations and ESG for Maximus. Thank you Ms. Beth you. Please go ahead.
Good morning, and thanks for joining US with me today is Bruce Caswell, President and CEO , David in your trend 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 one of our most recent Form 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.
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.
Todays presentation also contains non-GAAP financial information management uses this information internally to analyze results and believes it may be informative to investors engaging the quality of our financial performance identifying trends and providing meaningful period to period comparisons.
For a reconciliation of the non-GAAP measures presented please see the company's most recent forms 10-Q, and 10-K and with that I'll hand, the call over to David.
Thanks, Jessica This morning Maximus reported revenue for the third quarter of fiscal year, 2022, which decreased approximately $118 million to 1.13 billion as compared to the prior year period.
This is net of a $413 million decline of short term Covid response work, which is largely concluded as expected.
The decrease was offset by a combination of organic growth and acquired growth from acquisitions in the U S. Federal services segment opt.
Operating income margin for the quarter was four 8% or six 9% excluding the expense for intangibles amortization diluted earnings per share were <unk> 51.
Or <unk> 78.
Excluding the amortization expense.
Third quarter results were negatively impacted by a contract in the outside the U S segment, which required a write down of $11 7 million or.
Or <unk> 14 of diluted earnings per share.
I will provide further detail in the segments discussion.
Absent the write down this quarter reflected our expectation for lower earnings caused by declines in profitable short term Covid response work, while also facing lower volumes in our core programs as Medicaid Redetermination remained paused.
This quarter, while organic revenue declined if you adjust for the Covid response work normalized organic growth would be approximately 21% as compared to the prior year period.
As usual we have included a table in the appendix of today's presentation, showing a reconciliation of normalized figures let.
Let me take you through the segments.
The U S services segment delivered revenue of $399 million for the quarter, which is a decline from the prior year period, driven by expected reductions to short term Covid response work normalizing for this revenue growth for the segment was nearly 40% due to a combination of ramping of new core work.
As well as Covid response work that evolved into longer term work with new customers gained during the pandemic. The new core work includes the previously delayed clinical assessments work that went live in the third quarter.
The segment operating income margin was 8.0% as compared to 14, 3% in the prior year period.
On the last call I noted our margin step down in this segment, which these results reflect profitable short term Covid response work has declined while Medicaid redetermination remain paused, which reduces volumes on core programs in the prior year period strong Covid response work helped to offset those negative impacts.
<unk> to our core program.
For the U S. Federal services segment third quarter fiscal year, 2022 revenue decreased to $526 million due to expected reduction to short term Covid response work, partially offset by contributions from the <unk> and <unk> advantage acquisition, while revenue decreased on an organic basis Nora.
<unk> for the Covid response work revenue for this segment grew approximately 6% the operating income margin for U S. Federal services was 10, 4% in the third quarter as compared to 13, 9% in the prior year period.
It's worth noting that in the prior year period. This segment benefited from particularly high volumes of Covid response work.
Turning to the outside the U S segment third quarter revenue increased 6.0% to $201 million as compared to the prior year period. This is net of currency impacts, which reduced revenue approximately 9% organic growth was about 11% and normalizing for Covid response work organic.
Growth was about 21% and driven primarily by continued ramping of the UK restart program the.
The segment recorded an operating loss of $11 2 million as compared to an operating profit of $8 3 million in the prior year period.
As I mentioned earlier this quarter's loss was driven by a write down on a project in the implementation phase, where we recognize revenue on a percentage of completion basis, making this a somewhat unique contract.
Due to higher forecasted cost we had to book a forward loss provision this quarter.
The mechanics of the forward loss provision that we took the loss in the third quarter and if the forecast holds we would breakeven over the contracts remaining life.
<unk> four outside the U S. This quarter also included severance tied to the job active contract in Australia. Following the rebid, where we realized a higher than expected market share reduction on the successor contract.
A quick update on the U K restart program. It continues to perform slightly above expectations with volumes ahead of the latest customer forecast.
Let me turn to balance sheet and cash flow items as of June 32022, we had debt of $1 $49 billion, and we had unrestricted cash and cash equivalents of $94 million.
The ratio of debt net of allowed cash to pro forma EBITDA as calculated in accordance with our credit agreement is two nine times, which puts us towards the upper end of our target range of two to three time.
The increase to the ratio was driven by a combination of a modest increase to our borrowings and a lower trailing 12 months of EBITDA due in part to lower results for this quarter.
Flow from operations totaled $58 million and free cash flow was $45 million for the three months ended June 30th cash.
Cash flows were lighter than expected due to timing of certain large collection with $80 million coming in on the first two business days of July .
As a result, our DSO increased to 70 days at June 30th but are still within our target range of 65 to 80 days.
We purchased approximately 706000 shares totaling $48 million in the third quarter and since quarter end, we have purchased 354000 shares totaling $22 million.
As for the remainder of fiscal year 2022, our expectation for the full year is for revenue to range between $4 55, and $4 65 billion.
And for diluted earnings per share to range between $2 85.
And $3 five.
Or $3 95 to $4 15 on an adjusted basis, which excludes intangibles amortization expense.
We are narrowing the revenue guidance around the $4 6 billion midpoint, which is unchanged from prior guidance on the bottom line. Our prior guidance could not accommodate third quarter results and in particular, the write down which was the primary reason for the takedown.
As a reminder, the low end of prior guidance already assumed the phe would not expire prior to the end of fiscal year 2022.
That aspect of the forecast does not further impact this year.
Another factor expected to put pressure on earnings for the final quarter of this year as anticipated expanded volumes in the <unk> business and U S. Federal services related to the Pact Act.
While we expect the potential volume increase to benefit fiscal year 2023, the cost necessary to increase staffing levels would be incurred this year, including investments in existing staff to promote retention in the second half of fiscal year 2022 includes between eight and $10 million of additional cost.
That we have included in our revised guidance.
The revised guidance implies a step up in earnings from third quarter results and yields of fourth quarter forecast that is largely unchanged from prior expectations and I should note. It includes absorbing the incremental staffing costs I just mentioned.
From a segment margin standpoint, the forecast for U S services. These modest improvement in the fourth quarter as compared to the third quarter, meaning the segment is expected to deliver in the 10% to 11% range for the full year.
As a reminder, there are no redetermination activities assumed in fiscal year 2022.
For the U S. Federal services segment as a result of the Ves anticipated staffing costs. The margin is expected to be at the low end of our expected range of 10% to 11%.
Finally, the outside the U S segment will be in a loss position for the full year with the fourth quarter margin expected to be just above breakeven.
Our cash flow guidance is narrowed following the change to earnings with cash flows from operations is expected to range between $220 million and $260 million and free cash flow between $170 million and $210 million.
We expect interest expense to be about $42 million in fiscal year 2022.
The effective income tax rate should be between 25.0, and 25, 5% and weighted average shares should be between 61, eight and 62.0 million absent further share purchases.
Let me conclude by sharing some early thoughts around fiscal year 2023.
From a revenue standpoint, our current line of sight suggest we could more than overcome the nearly $300 million year over year reduction in short term Covid response work that would mean a positive organic growth projection from an earnings standpoint, we expect a lift in profitability from fiscal year 2022.
Of course these initial views of fiscal year 2023 assume some key factors, including the financial profile tied to resuming redetermination following a phe exploration and volumes materializing to our expectations in the Es business.
These factors should help to offset the decline in meaningful bottom line contribution from Covid response work, which as we operated those short term programs longer delivered margins above the rest of the business.
For the Phe. We currently believe it is unlikely that it will expire in mid October while exact timing of the phe expiring remains unknown. We do know that this event and resulting resumption of Redetermination will increased volumes in our core Medicaid program.
We also know that states will have 14 months to complete their redetermination.
The challenge is modeling how exactly that will affect our earnings through that period.
On our last call, we talked about a 30 per quarter rough order of magnitude impact due to redetermination, which reflected the reduction of our earnings forecast as the Phe's subsequent extension.
We are often asked if this means we expect an immediate increase of 30 for each of the first four quarters after re determinations resume and.
In short it is unlikely to be that simple so I'd like to spend a few minutes here, taking you through our current thinking on how the earnings profile may unfold.
Consider that this work will not have been completed for nearly three years and we as well as our customers have never been faced with a pause and restart of Redetermination.
I'll highlight several factors as to why the potential earnings impact is complex, meaning there can be a wide degree of variability.
First redetermination don't typically have specific paypoint. Instead, we are often paid for units such as number of minutes on the phone or number of documents processed <unk>.
Blair to how it took us time to isolate the redetermination effect when they paused, it's difficult to predict with certainty how total program volume will be tied to redetermination when they resume.
Second some contracts have a tiered pricing structure, meaning various ranges of volume of work output can have different unit rates within a given range profitability can vary.
And finally, the volume impacts depend in part on decisions that some state customers have not yet made due to ongoing uncertainty as to the phe end date, and how they will elect to conduct the unwinding.
We are discussing opportunities with current and potential customers for this reason our earnings expectation may continue to change between now and the eventual resumption the shape of the curve is not yet known.
So what does this all mean.
On what we know today, we still expect this volume to be highly accretive, but potentially at slightly lower margins than in previous forecast.
We now believe 30 per quarter rough order of magnitude is possible, but I want to caution that we now see that as the upper end of our range. We continue to refine our expectation and stress test the impact of different scenarios.
Another factor for fiscal year 2023 earnings as our interest expense, which we expect to increase year over year as a result of higher rates as.
As we detail in our SEC filings $300 million of our debt is fixed rate through an interest rate derivative and the remainder is floating rate base.
Based on today's forecast of rates, we could see the expense be in the range of $70 million to $80 million for next year.
Consistent with our past practice, we will provide guidance for fiscal year 2023 in November .
And with that I'll turn the call over to Bruce.
Thank you David and good morning, everyone.
I'd first like to thank those who attended our Investor day on May 24th where we unveiled our refreshed three to five year strategic plan and our segment leaders share details on how we will continue to drive our business forward.
I shared the three strategic pillars that will define areas of focus and priority for Maximus, which are first the future of health that grows our clinical capabilities to meet rising demand for independent and conflict free health services by governments.
<unk> on our success first in the U K and more recently in the U S, including last year's acquisition of EES, we see significant market opportunity to continue expanding our clinical assessment business.
Second is technology services, where we apply advanced technologies for it modernization and will expand our ability to transform complex, but aging government systems in support of our customers' missions and third customer services digitally enabled think of this as the extension and expansion of our already six.
Asphalt digital transformation strategy, making greater use of the data, we collect through our operations and leveraging intelligent automation and cognitive computing such as natural language processing. We will also bring to scale areas of proficiency such as robotic process automation or RPE.
Collectively we improve the consumer experience, while driving greater cost efficiencies in our operations.
Taken together these pillars significantly expand our addressable market, which I noted now stands at an estimated $150 billion in annual value growing in the mid single digits technology.
<unk> services, and clinical and health services represent significant portions of that figure.
From a segment standpoint, there is greater emphasis on the U S federal market, but all three segments have strong opportunities finally, I shared our underlying goals behind this next phase of the company, which are to support reliable mid single digit organic growth, while enabling margin expansion to 10% to 14 <unk>.
<unk>, excluding intangibles amortization.
Bearing in mind, the barriers to entry in certain core markets. Our goal is to continue to leverage the conflict free status of Maximus on which many of our customers rely.
As we embark on this next phase of our evolution I look forward to providing updates on our progress along with key success measures.
These include winning more work in our technology solutions business tied to modernizing legacy systems with clients, who know our brand achieving key wins with new clients and finally continued investment in technology strategic relationships and most importantly, our people that will help us grow the business.
In fact, we're already seeing positive proof points that provide early momentum to the strategic refresh let me mention a few.
As an example of our work in the technology services pillar. We recently won additional work valued at $60 million total contract value or <unk> on the army unified ERP contract and our partner on this program directly supporting customer requirements.
Through this effort Maximus serves as the lead integrator of the Army logistics modernization program, the Army's core logistics information technology initiatives.
This program is one of the world's largest fully integrated supply chain maintenance repair and overhaul planning execution and financial management systems specifically.
Specifically, we are aligned to the type of work, we want to do for digital modernization solutions, such as application development and operations and cyber security.
During his remarks, David mentioned that we plan to ramp up staffing in anticipation of higher volumes in the Es business driven by the Pacte Act.
The pack that expands certain conditions under which veterans would presumptive qualify for benefits and would result in increases in medical disability exam volumes.
By ramping up our hiring now and making certain investments to retain our current employee base, we are demonstrating our ability to perform urgently and ensuring that veterans will be seen as soon as possible. Once their claims are filed.
We look forward to working with our partners at the VA and the various veteran services organizations to support the estimated more than $3 5 million veterans that may be eligible for expanded presumptive benefits.
Also during the third quarter, we successfully hired more than 600 nurses nurse practitioners and physician assistance necessary to commence assessment work in mid May for a key state client.
This is new work for us with the potential for expansion to other state Medicaid programs and is yet. Another example of our ability to deliver complex programs with a clinical dimension at scale.
Both the potential volumes related to the path Act and new assessment work are examples that validate our commitment to the future of health as a strategic pillar and continued to demonstrate our ability to act with urgency and respond to the dynamic needs of our customers.
Historically, our clinical capabilities in the U S were more limited covering Medicare Appeals workers' compensation and limited areas of Medicaid as part of our market strategies, we have expanded our capabilities to larger markets in Medicaid and veterans evaluations by doing so we are in a better position to pivot into further.
Jason assessments markets.
We are advantaged not only by our independence and ability to recruit train and manage clinical skills at scale, but also by future opportunities for realizing greater efficiencies through technology and shared services.
Our continued investment in recruitment and retention evidenced as the new normal to which no business is immune demanding more flexibility and in many cases greater remote working opportunities.
Touching on the challenges of the current labor market I'd like to add some commentary to the O U S write down to which David spoke earlier.
Over the past year, I've mentioned that there are certain skills that have become more difficult to attract and retain particularly in today's environment. Most notable and specific to our business, our clinical and technology experts.
While I am pleased with our success in hiring the clinicians I previously mentioned and a tough market.
A contributing factor to the write down we faced this quarter was higher than historical attrition among the technology team on the project like many businesses. We are rapidly adjusting to the scarcity of certain technical skills and the optionality that remote work offers for many.
Let me share some news, which we're proud of that recognizes our efforts spent investing in the federal business, where we have sought to build scale develop deep relationships and deliver complex programs of national priority.
In Washington Technologies Top 100 U S federal contractors annual ranking by Prime contract obligations, we broke into the top 20 and took number 19 for 2022 up six positions from last year.
As we focus on our refreshed strategic plan and make continued investments in the federal space, both organically and through acquisition, we seek to build on our efforts acknowledged by this award.
In regards to the Phe earlier, David noted that another extension has occurred and the exact timing of the phe unwinding remains unclear and of course out of our control.
Last quarter, I mentioned, Cms's comprehensive guidance and resources available to states, meaning it remains only a question of win by our estimations.
In the meantime, we're actively working with current and prospective clients to ensure we are well positioned to restart operations once the phe ends.
I will now turn to award metrics and pipeline as of June 30.
Signed awards in the quarter include a one year extension of our CTO contract with CMS.
The extension, which began on June <unk> provides continued funding for the program.
The CTO rebid remains under procurement with a final announcement still expected in late summer.
As a reminder, from our second quarter discussion included in this quarter's awards is our new contract to administer central and regional change center eligibility operations for the Indiana family and social services administration or FSA.
The contract has a four year base period worth $425 million with the option for two one year renewals.
As the cycle times that it takes to find and train the resources that you need as well as to replace underperforming resources have been elongated during this period.
Not pleased obviously with the recent challenges that we're faced but I can assure you that we're applying experienced FERC management, including tenured technical leaders that understand the product.
The company for some time and we're focused on meeting our contractual obligations.
Great. That's helpful anything further on that but yes, we would like to move to another questioner has any further questions.
That's good and very helpful. Thank you if you could talk a little bit more about the.
Potential exploration down the road of the PHA, David you kind of frame.
The high end of the range.
<unk> for the quarter being at higher ends.
Can you help me frame, what the range might look like.
Fiscal 'twenty three.
More specifically.
The lower end of that range, but what that might look like.
Sure, Yes of course, so rough order of magnitude I'd say for the low end would be in the 15% range as I believe we have a good line of sight to at least that level.
It's worth pointing out I think as we model different scenarios.
Precise earnings impact actually depends on which month or which quarter the PHA.
Since the Redetermination volume must be considered in conjunction with what other volume is already in the system and the corresponding staffing level for.
For example at times, we may be able to carry existing staff to perform that work as it comes in whereas at other times in the year. It may require a greater re staffing effort.
As I mentioned, we still expect this volume to be highly accretive, but with all the moving parts on the scope. There's a higher degree of variability that we do see potential for the margin to be slightly lower than the previous forecast of a straight 30.
I thought it might be also helpful to put this range into the context of the margin ranges that I provided last quarter and at the Investor day. So for U S services Youll recall I said, we expect a range after the phe end of 11% to 14%.
I still feel that this range is in the ballpark.
Margins could fluctuate quarter to quarter for the reasons I have explained.
And as a comparison the U S services margin in the third quarter was 8%.
So if you model a pickup of the equivalent of 15 per quarter at the low end that would bring margins maybe slightly under that 11%, whereas 30 would bring the margin comfortably into that 11% to 14% range in fact, even closer to the high end.
That helps.
Yes, very much. Thank you very much on that and then Bruce maybe just shifting to kind of bigger picture with the pag.
Certainly doesn't seem pretty much coming out of Washington in regards to letting the PHA expire.
Any thoughts there and with the mid terms coming up.
It seems like another essentially seems likely here, but.
No.
<unk>.
Those are down the road.
It's a good question Charlie.
We hesitate to engage in political prognosticating, but I think youre reading the tea leaves is likely accurate gen.
General.
Consensus is that with up to 14 or 15 million Americans potentially facing this enrollment through the redetermination process the timing of that.
With regard to the midterm elections becomes a critical consideration.
While we do know is that CMS has committed as you may recall to giving governors 60 days notice.
The exploration of the PHA and so thats a signal that everyone is watching for since the current extension as you noted is.
Set to expire in mid October we therefore look forward that signal sometime in mid August so within really.
Almost 10 or 11 days from now.
Also I just wanted to maybe add a little color to why it's more challenging to forecast the impact of the unwinding than just kind of a binary event that leads to maybe a step function change in volumes kind of across the portfolio.
So forgive me.
Background in policy tends to make me want to explain these things a little bit more in a detailed fashion. So there's a difference between initiating a case action and completing that case actions. So think of initiating a case action as reaching out for new information like an update on income or household composition or what have you completing the case action.
Is either the continued enrollment of that individual or family or additional rollout.
Rates have the flexibility to initiate case actions as early as two months before the end of the pag, hence the importance of the signal that I mentioned or they can have the flexibility to complete case actions, which is the enrollment of that additional element of as much as 14 months. After the end of the phe, So theres a broad time period.
Pointed that each state's going to do what they think is really best for their circumstances.
So one thing that we can conclude is that when we see the signal or hear the signal. This work is going to spread out easily over the course of a year depending on the priorities at this stage.
That helps.
Very much so thank you.
Staying on the topic, a little bit there are pieces of that.
The phe that get funding like telehealth et cetera.
Essentially it could be.
We moved out of the.
Okay.
Cancellation, if you will.
Yes.
Stand alone <unk>.
Items.
The stimulus package.
I certainly hope that's the case.
Again, not in a position to comment on the politics of it but I will say we have to.
Great fortunate being able to host Senator Mark Warner and our offices recently and that is specifically a topic that he spoke to.
What we've really learned during the pandemic of the importance of telehealth and.
And really its viability as a sustained kind of engagement and patient engagement and treatment modality in a way that.
I think coming out of the pandemic, we ought to be adjusting our policy to and reimbursement policies to support that will help going forward. So I know that thats something thats absolutely being.
<unk> talked about.
And clearly there is another dynamic at play here, which my understanding is is incorporated in the legislation that's been.
Developed between Senator Schumer, I mention and that is.
How the subsidies that have supported individuals in the exchanges the enhanced subsidies. If you will during the pandemic can be sustained going forward to avoid significant likely increases in premiums that individuals could face in many instances as high as 50%. So there's a lot happening from.
Policy perspective that as those pieces fall into place.
We will create the environment that states will then have to navigate in terms of how they move individuals that may not be.
Eligible any longer for Medicaid into some form of continuing coverage in fact, some states have contemplated the idea of effectively temporarily a presumptive Lee moving individuals that are no longer qualifying for Medicaid into.
If the state has a basic health plan for example, which is usually an income threshold above Medicaid, but below the exchange put them there or maybe even into the exchange and then go through the process.
Further determining based on their eligibility of their kind of long term.
Plan for coverage. So there is an awful lot on the table here and interrelated points.
I guess I'd say, one final thing and that is there have been individuals certainly in the Congress that I've talked about decoupling.
The Medicaid continued enrollment provision from the phe as well.
And.
For reasons that we've discussed previously, but fundamentally because states want to ensure in many instances that people are getting the appropriate coverage that they qualify for further income another other factors.
While we haven't seen that.
Incorporated in any potential legislation since the original build back better Act.
We are familiar that thats, something thats still being discussed in some circles. So I guess the final point would be stay tuned right Charlie.
It sounds that way.
Shifting back to the New awards and pipeline.
A fair amount of.
Signed contracts that $4 billion in the quarter.
Is it safe to say that the CTO extension is the largest in that bucket or is there other contracts in there.
I'll talk more about.
So Charlie Yes, I think it's safe to say that one year extension that provides continued funding.
It was likely the largest component, but I will say a close second was the.
Indiana project that we mentioned that moved from.
The awarded unsigned to the awarded signed category in the quarter.
And I will anticipate maybe a follow up question and just as I indicated in my prepared remarks note that the schedule for the award of the CTO Rebid contract remains late summer as we understand likely late August notification.
So that's where that stands.
Great and then just touching on.
And the fact that.
Any more context, you can provide in terms of the.
Yes.
In the U S segment again as I as I mentioned previously we experienced higher than normal attrition on a complex technology projects that was a contributing factor to the write down this quarter.
Continuing to offer people more flexibility helps puts us in a better position to attract the right kind of talent for our business certainly but at the same time, we're realizing as we go forward as I think many businesses are that some work has just done with teams working physically together and.
And I'll note that this is a discussion I've had with peers in the industry and they are finding the same thing as we get further into this.
Quasi post pandemic period, we're learning as others do and I expect that the current allure of offering 100% work from home.
At very high salaries and unlimited vacation, so forth for technology workers will inevitably adjust over time so.
So on the positive side.
And likely while we've made very good progress with the clinical skills that I mentioned during the call.
We have a very strong brand and if anything it was strengthened during the pandemic, we work hard everyday to provide competitive compensation and benefits for our people and then once they're here, we focus on additional training and skill development to give them what they need to continue their career here at Max Smith.
And I would probably conclude by noting that over time.
Wage rates affect all market participants and they become reflected in the Rebids and new work that everyone is bidding on.
And Meanwhile for current contracts that are fixed unit rate or performance based in our portfolio. We worked very hard to offset labor cost pressures through greater use of technology that said I want to be clear that we also don't shy away from seeking equitable adjustments from our clients in cases, where the market difference from the bid model.
To where we find ourselves today is particularly profound so with that I know I've covered a lot of ground David I don't know if you have any.
Further you'd like that nothing else to add thanks, alright, excellent well that concludes the question and answer session today, operator back to you.
Ladies and gentlemen, thank you for your participation and interest in Maximus you may disconnect. Your lines of log off the webcast at this time and enjoy the rest of your day.
Okay.
Okay.
Yes.
Yes.
Yeah.