Q2 2023 Maximus Inc. Earnings Call

May 4, 2023

Peter assistance during the conference. Please press Star Zero on your telephone keypad as a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Jessica bat, Vice President of Investor Relations and ESG. Thank you. Please go ahead.

Good morning, and thanks for joining US with me today is Bruce Caswell, President and CEO , David Matron, CFO and James Francis Vice President of Investor Relations I'd.

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 a 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 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 and good morning, we made significant progress in the second quarter executing on our financial and strategic priorities, while generating strong cash flows and delevering our balance sheet by half a turn sequentially. We also have strong line of sight on the drivers that will support margin improvement.

In the second half of the year and as a result are reaffirming our fiscal year 2023 financial guidance.

Finally, we divested two small businesses and the outside the U S segment.

I'll now discuss our results in greater detail.

Maximus reported revenue of one point to $1 billion for the second quarter of fiscal year, 2023, which represents two 5% year over year growth or 4% on an organic basis.

Our organic growth more than overcame the completion of short term Covid work, there was about $100 million in the year ago quarter.

Adjusted operating income margin was seven 1% and adjusted EPS was <unk> 80 for the quarter.

This compares to eight 3% and $1 seven respectively for the prior year period, which still included profitable short term Covid response work and the domestic segments and lower interest expense due to the interest rate environment a year ago.

Last year's second quarter was effectively the last period with meaningful short term work in the business.

Outside the U S segment realized a loss in margins in the quarter were slightly below our expectations, primarily driven by the U S. Federal segment, let's turn there.

For the U S. Federal services segment revenue increased one 9% to $584 million.

Which was all organic and driven primarily by volume growth and the VA medical disability exam, or MDU contracts, which comprise our veterans evaluation services or <unk> business.

The operating income margin for U S. Federal services in the second quarter was eight 2% as compared to eight 1% in the prior year period and slightly lower than we anticipated.

The main driver behind the lower profitability relates to timing and the <unk> business as we have scaled up to handle greater volumes stemming from the Pact Act while volumes increased throughout the quarter. They were slightly lower than we had forecast at the same time, we incurred higher costs associated with training and ramping up staff default.

<unk>. The good news is that the volumes continue to increase and we have a strong line of sight over the remainder of our fiscal year with high confidence that we have the capacity to meet the demand.

For the U S services segment revenue increased 13.0% to $450 million.

As I have noted in recent quarters contributions from new work wins across the portfolio and core business areas, such as eligibility support and clinical services are driving growth in this segment.

The U S services operating income margin was nine 5% in the second quarter of fiscal 2023.

This reflects the expected headwind of paused Medicaid redetermination activities as.

As we covered on the last call, we anticipate redetermination activities to commence in the third quarter.

Turning to outside the U S segment revenue decreased 16% year over year to $173 million for the quarter organic revenue contracted 8.0% and driven primarily by lower revenue in Australia. Following last year's rebid outcome currency impacts reduced revenue.

By approximately 7% from the prior year period.

The segment had an operating loss in the second quarter of $3 7 million.

As compared to an operating profit of $4 3 million in the prior year period, we remain unsatisfied with the performance and margins of the outside the U S segment and are systematically focused on portions of the segment that are underperforming as such we divested two small businesses in this segment with.

Bind operating losses of $1 $5 million in the quarter.

Bruce will cover a few added details on the divested businesses.

As a result of the transactions there was a loss on sale of approximately $900000. So the impact to diluted EPS in the quarter was about a one penny reduction the loss on sale is included in the SG&A line on our income statement and is not included in the outside the U S segment Oi.

Going forward, we expect the impact of the divestitures to be slightly accretive to the segment's margin and to the company's earnings.

Let's now turn to cash flow and balance sheet items as.

As we expected cash flows this quarter were robust and made up for the temporarily low cash flow in the prior quarter.

Cash from operating activities for the quarter ended March 31, 2023 was $310 million and free cash flow was $292 million collections.

Collections in the second quarter were very strong with DSO, it's finishing at 56 days our normal target range is 60 to 70 days.

Our cash flow performance enabled us to repay $275 million of debt and we ended the second quarter with total debt of 1.30 billion.

Our net debt to EBITDA ratio was two five times at the end of the quarter, which is a reduction of half a turn from 3.0 times at December 31st.

As a reminder, this ratio as our debt net of allowed cash to adjusted EBITDA for the last 12 months as calculated in accordance with our credit agreement.

We fully paid down our revolving line of credit at March 31.

Giving us access to the full line of $600 million.

During the second quarter of fiscal 2023, we also fixed an additional $150 million of debt through September 30th 2024.

This means our mix of debt is now about 50% fixed and 50% floating.

Overall, we are pleased with the progress we are making on our near term capital allocation priority of debt reduction we are on track to finish the fiscal year below two five times as we guided last quarter, our longer term capital allocation priority remains strategic acquisition to accelerate organic growth.

Let's go to fiscal 2023 guidance, which remains unchanged from the prior quarter adjusted.

Adjusted EPS, excluding intangibles amortization is projected to be between $4 and $4 30 per share.

Adjusted operating income is estimated to be between 415 and $440 million, which is before the estimated $94 million of intangibles amortization expense.

Revenue is projected to be between $4 85 billion and $5 billion.

This represents year over year growth of 5% to 8% substantially all organic and overcomes the $300 million reduction in short term Covid response work.

Free cash flow is estimated to be between $225 million to $275 million for fiscal 2023.

We expect our earnings profile for the third and fourth quarters to both strengthen sequentially, particularly in the fourth quarter driven by re determinations in the U S services segment and packed act volumes in the federal segment.

We expect a step up in the third quarter as compared to the second quarter results as the volumes grow on.

On the prior call. We noted how the third quarter should be viewed as the transition quarter for U S services with volumes phasing in which still remains the case.

Then in the fourth quarter, a much greater step up as expected from the third quarter as there should be a full period of redetermination activities in U S services and further volume growth in the <unk> business, which as I've noted we believe there is good line of sight too.

As we have stated previously there remains some uncertainty about how exactly the redetermination volumes will flow through our programs in particular since it relies in part on how beneficiaries interact with the process that said, we are confident that our guidance range accommodates the likely financial impact which is.

<unk> and our fourth quarter.

Moving to segment margins for the full year, we still expect U S. Federal services in the 10% to 11% range, although most likely towards the lower end of the range due to this most recent quarter's performance.

U S services is expected to finish strong in the fourth quarter due to the Redetermination and the full year blended expectation is still 9% to 11% for.

Outside the U S. We now expect operating income margins in the 1% to 3% range last quarter, we guided to the low end of the 3% to 7% range. The reduction to the forecast is attributable to the emerging markets portion of this segment, resulting from a combination of a delay to starting a major new program, which we expect to be <unk>.

Prairie as well as continued difficulty by smaller employment programs and achieving critical mass amidst the current economic conditions.

Then in the fourth quarter, a much greater step up as expected from the third quarter as there should be a full period of redetermination activities in U S services and further volume growth in the V S business, which as I've noted we believe there is good line of sight too.

Our interest expense projection is trending favorably in light of recent debt reduction in the interest rate environment, We now expect between $82 million and $85 million of interest expense for fiscal 2023.

We expect our full year effective income tax rate between $24, five and 25, 5% and weighted average shares outstanding between 61 to $61 3 million with that I will turn the call over to Bruce.

Thank you David and good morning, everyone.

Our second quarter results exhibited meaningful progress on our goal for solid execution and continued momentum building across fiscal 2023.

We demonstrated healthy rationalization of our debt and related interest expense, we have taken action in areas of the portfolio that were not driving long term shareholder value and are committed to further evaluation and.

Another quarter complete means better visibility to our reaffirmed guidance let.

Let me share a look behind the scenes as we enter a busy second half of the fiscal year.

Top of mind for us is visibility and execution in two key areas first in our U S services segment supporting our state customers with their Medicaid Redetermination as part of the unwinding of the continuous coverage provision and second in our federal services segment processing high volumes and our veterans evaluation services.

Or <unk> business, which include claims related to the Pacte Act.

On the Redetermination front, the key assumptions that we discussed last quarter remained well intact that is we anticipate some states with larger populations, which include our current customers spreading the work out over the allowable period, meaning there is more than a year in which maximus will be supporting our state customers and working through this.

Renewal workload as a result, we anticipate an increase in volumes in our third quarter, meaning we should have full period contribution and be at run rate in our fourth quarter.

I am pleased that we've recently added several modestly sized programs to support either existing customers with new eligibility work under which redetermination, Paul or new customers, who are seeking assistance during the unwind phase.

In addition, we are well positioned to provide assistance to other states later this summer and fall who may find themselves in need of our expertise and ability to scale staff and processing quickly once they get into their redetermination work.

Turning to the <unk> business, we are seeing an increase in volumes both related to current inventory and New Pact Act cases, as the VA and affiliated organizations continue to publicize these expanded benefits and process initial claims as.

As David noted the actual volumes, we saw were slightly below our forecast for the second quarter as awareness builds in the VA and its partners like Maximus become more familiar with these claims.

Nevertheless, we've invested in ramping up new staff to full productivity. As this is the first quarter in which <unk> volumes have begun to flow and is not indicative of expectations for the rest of the year.

In fact, our analysis of building claim inventories coupled with our planned capacity provides us with a high degree of confidence in our outlook for the second half of FY2023.

As we've stated on prior calls the increased volumes from the pack that are anticipated to ramp over the remainder of FY 'twenty, three and be sustained well into FY 'twenty four as we work through initial claims.

It's worth noting for exams in general whether they are <unk> or non packed act. There is a recurring element driven by veterans medical conditions evolving over time.

The benefits for which veterans qualify are tied to severity of their condition and corresponding disability rating, meaning a change in one's condition can result in either the VA or the veteran requesting a reexamination.

As David mentioned during the quarter, we divested two small businesses in the outside the U S segment, as we continued to optimize our portfolio where possible the <unk>.

First was a commercial division within the United Kingdom. The second was our employment services business in Sweden for.

For both we determined that they were non core to our strategy and not meeting our financial objectives, we routinely evaluate our portfolio of businesses in this way and we'll continue to do so, particularly in light of the segment's performance this second quarter.

Together the annual revenue run rate is about $40 million going forward, we expect the transactions to be slightly accretive to our earnings.

The financial impact, especially given the partial year is not large enough to affect our guidance.

I will now provide an update to the IRS enterprise development operations services, or <unk> procurement, which had been under protest and is now resolved.

We have secured our place on the multiple award blanket purchase agreement worth up to $2 $6 billion over seven years for the resulting task orders, which are expected to contribute in our fiscal year 2024 and beyond.

The resolution removes uncertainty around the timing of future task orders.

This is a core win and our strategic focus area of technology modernization and builds on our relationship with the IRS as a trusted partner.

We are proud to be supporting the long term modernization and transformation of the Irs's technology infrastructure.

Remaining in federal we also recently received good news for our advantage business, which is aligned with our strategic focus of customer services digitally enabled.

We were just awarded a position on the successor contract vehicle known as unified servicing and data solution or USPS, which supports our work serving student loan borrowers over the next decade and is expected to commence when the current contract concludes on December 31 2023.

The new idea IQ under the federal student aid office or FSA within the department of education spans a 10 year period, including options and Hasnt awarded potential value of $16 billion.

We estimate more than a $2 billion realizable value for Maximus based on advantages projected run rate going into the new contract.

The FSA has made it clear their goal is to continue to enhance the borrower experience through improved performance transparency and accountability.

As a conflict free experienced and trusted operator Maximus offers the FSA a borrower first mentality and the added agility of our technology capabilities to improve the borrower experience.

We've been successfully operating underperformance related service level agreement metrics, which had been added to the current contracts and we look forward to bringing innovation and borrower focus to FSA for the decade to come.

To that point, we have also been entrusted with more borrower accounts, which now total over 9 million borrowers or about a quarter of the approximately $39 million Department of education borrower accounts, which is up from $5 8 million borrowers at the time of contract Novation in October of 2021.

A quick reminder, that returned to repayment is scheduled to begin the earlier of 60 days. After the debt relief litigation is resolved and the Supreme Court or 60 days after June 32023.

Debt relief would decrease our revenue while returned to repayment increases our revenue on our existing contract as we've said before these potential outcomes are accommodated in our FY2023 guidance.

I will now turn to award metrics and pipeline as of March 31.

For the second quarter of fiscal 2023 signed awards totaled one 2 billion.

Of total contract value further at March 31, there were one point to $7 billion worth of contracts that had been awarded but not yet signed these.

These awards translate into a book to Bill of approximately two one times for the trailing 12 months period, which as a reminder includes our large CTO award in Q4 of the last fiscal year.

I'll offer a few comments on our awards that came in during the second quarter.

Which contributed to our one point to $2 billion year to date booked awards.

We have not included any value for the new IRS <unk> BPA. The subsequent task orders carry the value potential of $2 6 billion across the awardees, meaning contributions to our signed awards would occur as task orders are executed.

Also the new idea IQ for USD was awarded subsequent to quarter close.

Finally, I'd like to highlight two contracts worth nearly a half of $1 billion that contributed to our solid bookings this second quarter and illustrate the strength of our customer relationships.

First is our recompete win on our Florida healthy kids contract worth $332 million over 12 years, including option periods. This contract provides a variety of services, including eligibility and enrollment for the states Chip program known as healthy Kids last year, we announced an extension on this program through <unk>.

<unk> of 2025.

So the period of performance for this win begins in April of 2025 and carries us through the year 2037 with options.

This is a prime example of how we can secure long term contracts that offer excellent revenue and margin visibility.

The second award is a two year extension on our Michigan enrollment broker services contract worth $124 million our relationship with this customer the Michigan Department of Health and Human services goes back to 1997, which underpins the long term value proposition of the services we provide.

Let's turn our attention to our pipeline of opportunities.

Our pipeline at March 31 was $31 9 billion compared to 35 billion.

Reported in the first quarter of fiscal 2023.

March 31 pipeline is comprised of approximately $5 6 billion in proposals pending $900 million in proposals and preparation and $25 3 billion and opportunities tracking.

Of our total pipeline of sales opportunities, 78% represents new work. Additionally, 62% of the $31 9 billion total pipeline is attributable to our U S. Federal services segment.

With the meaningful progress achieved in the second quarter behind us our priorities for the remainder of fiscal 2023 are clear specifically execution on ramping volumes in our core Medicaid eligibility and veterans assessments markets continued focus on underperforming businesses and.

And disciplined capital allocation.

Over the broader horizon I am very pleased with the combination of Recompete Awards, and New work awards that bolster our future and enable us to deliver reliable mid single digit organic growth.

Multiple multibillion dollar awards in the federal segment solidify our reputation as a proven large scale partner to the federal government and delivering mission critical citizen services.

Finally.

In addition to our near term focus on execution. The management team is optimizing our organizational model and processes to support our three to five year strategy and for that matter. The company longer term our activities will bring greater use of technology and innovation in our operations create greater value for our customers and underpin our operator.

Reported in the first quarter of fiscal 2023.

The March 31 pipeline is comprised of approximately $5 6 billion in proposals pending $900 million in proposals and preparation and $25 3 billion and opportunities tracking.

Income margin commitments, we made last may on Investor day.

And with that we'll open the line for Q&A operator.

Thank you we will now be conducting a question and answer session and I will turn the call over to Mr. Francis.

Of our total pipeline of sales opportunities, 78% represents new work. Additionally, 62% of the $31 9 billion total pipeline is attributable to our U S. Federal services segment.

Good morning, and thanks for joining models, let's first go through the line of Charlie Strausser of CJS Securities. Please good morning.

Good morning, Thanks for taking my questions.

Talk about if we could just starting off with the REIT.

Redetermination restart.

Read somewhere that.

Five states that have already kind of startup adjacent work, there and whether the queens.

Clean from that so far.

And disciplined capital allocation.

<unk>.

Other states on the runway that you have.

Over the broader horizon I am very pleased with the combination of Recompete Awards, and New work awards that bolster our future and enable us to deliver reliable mid single digit organic growth multi.

You've heard as well.

Sure Charlie Good morning, its Bruce I hope Youre doing well.

Start and then ask David too as we often do to add some further color commentary so to give you a sense of kind of where the various states are in the unwinding process Youre absolutely correct.

Multiple multibillion dollar awards in the federal segment solidify our reputation as a proven large scale partner to the federal government and delivering mission critical citizen services.

Five states completed their first cohort of activity in April 14 States will then complete their first cohort or batch of renewal processing in May and then we really get what we would have referred to historically as a bolus of states 20 States in June followed by 12 more states in July .

Finally in.

Those 12 states in July it's important are the larger states like California, and New York and Texas. So it's that dynamic that has fed into.

Income margin commitments, we made last may on Investor day.

While we're now characterizing fiscal Q3 is a transition quarter for us for the Redetermination activity.

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

Operator.

Thank you we will now be conducting a question and answer session and I will turn the call over to Mr. Francis.

It's important also to note that we have more visibility now than we did last quarter and more refined profile as we transition into Q3 and execute.

Good morning, and thanks for joining marks let's first go to the line of Charlie Strausser of CJS Securities fleets.

The step up from Q3 to Q4 is more pronounced than we previously expected as a consequence of this.

Yeah.

Good morning, Thanks for taking my questions.

It's still early days as I noted in my remarks, and I think it's a fair point that some have made that there could be states along the way that encounter backlogs or feel like they need to pick up the pace of processing before the enhanced federal funding of six 2% expires at the end of the calendar.

Do you think that talk about if we could just starting off with the.

Redetermination restart.

Read somewhere.

Five states have already kind of started with Jason work there.

What you gleaned from that so far.

Other states on the runway that you have.

You've heard as well.

Here. So there may be other states thats still seek outside help from companies like Maximus I feel like we're very well positioned and we've had a lot of conversations in that regard.

Sure Charlie Good morning, its Bruce I hope Youre doing well.

I'll start and then ask David too as we often do to add some further color commentary so to give you a sense of kind of where.

There is a good balance in our portfolio between serving current clients as we restart redetermination activities with them that we've historically conducted and current clients for whom we are taking on new obligations to complete redetermination activities as well as new clients altogether, so with that David any thoughts sure. Yes I noted.

The various states are in the unwinding process Youre absolutely correct.

Five states completed their first cohort of activity in April 14 States will then complete their first cohort or batch of renewal processing in May and then we really get what we would have referred to historically the bolus of States 20 States in June followed by 12 more states in July .

In my prepared remarks that our prior assumptions are intact, which means that we still anticipate that 15% to 30 per quarter range that we've been talking about for several quarters I will reiterate that there is still uncertainty around how precisely the volumes will flow through our programs given that they depend in part on how beneficiaries interact with the process.

And those 12 states in July it's important are the larger states like California, and New York and Texas. So it's that dynamic that has fed into.

While we're now characterizing fiscal Q3 is a transition quarter for us for the Redetermination activity.

And we've also not wavered in our thinking that 15 per quarter is a reasonable floor for expected earnings contribution after the unwinding phase.

It's important also to note that we have more visibility now than we did last quarter and more refined profile as we transition into Q3 and execute.

And so that.

As I mentioned on the last call. If we do experience volumes that bring us towards the high end or even above the high end of that 15% to 30 range, there's more likely to be a component that's temporary surge in nature and that made the client after the 12 to 14 month period.

The step up from Q3 to Q4 is more pronounced than we previously expected as a consequence of this.

Alright, Thank you for that shifting gears to the federal segment looking at the work that you do.

When you see the data that you've seen so far you feel like your confidence is high in terms of the.

So there may be other states that still seek outside help from companies like Maximus I feel like we're very well positioned and we've had a lot of conversations in that regard.

The profitability margins of that.

<unk>.

Kind of ramping in the back half of the year.

Charlie.

There is a good balance in our portfolio between serving current clients as we restart redetermination activities with them that we've historically conducted and current clients for whom we are taking on new obligations to complete redetermination activity as well as new clients altogether, so with that David any thoughts sure. Yes I noted.

I give you some data and David can comment on profitability and so forth as we hit the back end of the year. So this is all information that has been publicly reported and federal news network or is available on the <unk> website. So I'll just kind of consolidated.

And it's a fair question because we.

Really our feeling quite confident about our ability to execute in the back half of the year on these volumes.

In my prepared remarks that our prior assumptions are intact, which means that we still anticipate that 15% to 30 per quarter range that we've been talking about for several quarters.

One of the recent data points is that.

There has been a 31% increase in the volume of new claims compared to the same period last year. So overall claim volumes are up.

I will reiterate that there is still uncertainty around how precisely the volumes will flow through our programs given that they depend in part on how beneficiaries interact with the process and we've also not wavered in our thinking that 15 per quarter is a reasonable floor for expected earnings contribution after the unwinding phase.

Another data point related to that is between August of 'twenty, two and April of 2023.

The claim volume composition has become two thirds claims received our non packed act in one third of the claims received our Pac deck. So you can see that.

And so that.

As I mentioned on the last call. If we do experience volumes that bring us toward the high end or even above the high end of that 15% to 30 range is more likely to be a component that's temporary surge in nature and that made the client after the 12 to 14 month period.

Volumes are up and mix is shifting now towards <unk>.

The VBA has a total claims inventory and buy inventory.

Defined inventory is disability compensation and pension claims that normally require a rating decision.

Alright, thank you for that.

Shifting gears to the federal segment looking at the work that you do.

And those are the claims that then lead to exam service requests that we receive that we then complete exam service requests.

When you see the data that you've seen so far you feel like your confidence is high in terms of.

Have within them different disability benefit questionnaires that our clinicians complete and together they get bundled up and that completes the exam service request those volumes that volume of inventory is now over 800000 and that number has not been seen in terms of inventory probably about July 2013, So it's a significant.

The profitability margins.

<unk>.

Kind of ramping in the back half of the year.

Charlie why don't.

Inventory.

Which 27% are considered backlog in the VA.

It's a fair question because we.

Vba's definition of backlog is a claim that's been.

Really our feeling quite confident about our ability to execute in the back half of the year on these volumes.

Was it received has been in inventory for more than 125 days.

One of the recent data points is that.

So the VA has been tremendous and responding to this.

There has been a 31% increase in the volume of new claims compared to the same period last year. So overall claim volumes are up.

And also obviously with their vendor community about the VBA has grown their workforce by 15% over the past year and a half.

Putting all of this in context in terms of pack that claims veterans have so far filed about a half a million claims related to toxic exposure pack that's conditions that are better covered and.

Another data point related to that is between August of 'twenty, two and April 2023.

The claim volume composition has become two thirds claims received our non packed act in one third of the claims received our Pac deck. So you can see that.

And if you kind of look at this in total.

For the foreseeable future we feel that there is a very strong inventory demand is high across the spectrum of claim applications. Both pack related claims and non pack related claims and so it's with that that we have the confidence as we look at the staff that we've ramped up into productive capacity that we've created to address.

Volumes are up and mix is shifting now towards <unk>.

The VBA has a total claims inventory and buy inventory.

To find inventory is disability compensation and pension claims that normally require a rating decision and those are the claims that then lead to exam service requests that we receive that we then complete exam service requests.

That inventory in the claims volumes that are needed to deliver on our.

Outlook for the remainder of the fiscal year, David anything further you would add.

Have within them different disability benefit questionnaires that our clinicians complete and together they get bundled up and that completes the exam service request those volume that volume of inventory is now over 800000 and that number has not been seen in terms of inventory probably about July 2013, So it's a significant investment.

Yes, I guess I would just add that.

I've said in the prepared remarks, Q2 had kind of a timing impact on that business, meaning that costs are incurred ramping up staff, but also we're now confident that we have the capacity to meet the demand in Q3 and Q4, so that supports our.

Our view that the margin should improve over the rest of the year.

Tori <unk>.

Of which 27% are considered backlog in the VA.

Alright, Thank you very much.

Looking at the outside the U S segment, if we could talk about the <unk>.

Definition of backlog is a claim that's been.

Messengers their level of color behind that and other.

Was it received has been in inventory for more than 125 days. So the VBA has been tremendous and responding to this.

It is true that you see on the horizon to help bolster margins there.

I'll just comment that we.

And also obviously with their vendor community, but the VBA has grown their workforce by 15% over the past year and a half.

We have for some time and as you would expect and just in terms of good business hygiene continue to.

Putting all of this in context in terms of pack that claims veterans have so far filed about a half a million claims related to toxic exposure in <unk> conditions that are that are covered and.

Review composition portions of our portfolio that may not be considered core or strategic in their nature or are not meeting our financial objectives of the business and where market conditions allow and it's the prudent thing to do we take steps to divest those businesses and in this particular case.

And if you kind of look at this in total.

For the foreseeable future we feel that there is a very strong inventory demand is high across the spectrum of claim applications. Both pack related claims and non pack related claims and and so it's with that that we have the confidence as we look at the staff that we've ramped up into productive capacity that we've created to address that.

<unk>.

We had two businesses one.

Our commercial business in the United Kingdom, and the second our employment services business in Sweden that we were able to decide to end.

Take further action on in terms of divesting.

We will continue.

That inventory in the claims volumes that are needed to deliver on our on.

I can't point to any other particular business.

Frankly on the horizon, but we will just say that we continue to look carefully at the entire portfolio and are ensuring that we're being good stewards of capital and taking actions where necessary.

Outlook for the remainder of the fiscal year, David anything further you would add yes, I guess I would just add that.

I said in the prepared remarks, Q2 had kind of a timing impact on that business, meaning that costs are incurred ramping up staff, but also we're now confident that we have the capacity to meet the demand in Q3 and Q4, so that supports our.

Got it.

I'm going to ask David as I, often do okay.

I'd like to add just a little I guess I mentioned.

Our view that the margin should improve over the rest of the year.

A systematic review that I've mentioned in the remarks and that did result in two divestitures were also concurrently looking hard at the cost structure and addressing that in areas, where we've had either a decline or flattening of revenue.

Great. Thank you very much.

Looking at the outside the U S segment, if we could talk about the.

Divestitures, there a little more color behind that and other.

That is true as you see on the horizon to help bolster margins there.

So I guess lastly, we're also focusing on how we can grow revenue in areas that can sustain better margins in that segment. An example of which would be the new social case Survey program, we won last quarter, which unlike.

I'll just comment that we.

We have for some time and as you would expect and just in terms of good business hygiene continue to.

Employment services programs, which makes up a large portion of that segment is a little less reliant on certain economic conditions for a full water pressure so.

Combination of all these efforts that will take some time to them all of the segment we're committed to.

The prudent thing to do we take steps to divest those businesses and in this particular case.

Reaching our mid to high single digit objective for us and we think we're looking at all the right levers.

We had two businesses one of the commercial business in the United Kingdom, and the second our employment services business in Sweden that we.

Alright, thanks for that and then shifting back to federal.

IRS contract.

Out of the protest phase and it sounds like it was resolved can you give us some color on in terms of how that was.

We were able to decide to end.

Take further action on in terms of divesting.

It was resolved in a sense of the.

We will continue.

Can't point to any other particular business quite frankly on the horizon, but we will just say that we continue to look.

Sure for Maximus of that contract value.

Sure.

It can be pretty brief with this there are four awardees on the contract.

Carefully at the.

The entire portfolio and are ensuring that we're being good stewards of capital and taking actions where necessary.

<unk>.

The.

Accenture and Maximus being the initial two that had received previous rewards predating the protest and I believe two other companies Booz Allen.

Got it got it.

I'm going to ask David as I, often do if he has any.

I'd like to add just I mentioned.

And IBM have been added to the mix at this point when we look at that though we don't just say well, what's the ceiling contract value and divide by four and Thats kind of the potential for the business that would be an incorrect move.

A systematic review that I've mentioned in the remarks and that did result in two divestitures.

Also concurrently looking hard at the cost structure and addressing that in areas, where we've had either a decline or flattening of revenue.

Our view is that that.

I guess lastly, we're also focusing on how we can grow revenue in areas that can sustain better margins in that segment. An example of which would be the new social case Survey program, we won last quarter, which unlike.

Contract vehicle puts in place now the environment in which task orders will be executed that are aligned with the modernization and innovation needs of the IRS and we feel extremely well positioned given our history at the IRS and being a very significant technology provider and maintainor of.

Employment services programs, which make up a large portion of that segment is a little less reliant on certain economic conditions for a full water pressure so.

A number of the core legacy systems that will be subject to modernization. So we feel very good about our position and our ability to be extremely competitive on the task orders as they as they are released we're hopeful now that with the protest resolved.

Combination of all these efforts will take some time to move this segment we're committed to.

Reaching our mid to high single digit objective for it and we think we're looking at all the right levers.

There is a clear path for the IRS to release task orders through the summer and ideally worked through the award process. So that we would see meaningful contributions from those task orders in our fiscal 'twenty four.

Great. Thanks for that and then shifting back to federal the.

IRS contract.

Out of the protest phase and it sounds like it was resolved can you give us some color on in terms of how that was resolved in a sense of the.

That helps.

Helpful. Thanks, Bruce just throughout May appear just when you're looking at the allocation of capital.

Sure for Maximus of that contract value.

Sure.

M&A is always something that.

It can be pretty brief with this.

The forefront there.

There are four awardees on the contract.

Where do you think you would like to see the the leverage ratio get down to it first before you.

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The.

Kind of resume M&A activities.

Accenture and Maximus being the initial two that had received previous rewards predating the protest and I believe two other companies Booz Allen.

Yes, I'll take it it's David.

Move back now to the middle of our target range, which is two to three times debt to EBITDA, albeit in the near term we are still committed to further debt paydown.

And IBM had been added to the mix at this point when we look at that though we don't just say well, what's the ceiling contract value and divide by four and Thats kind of the potential for the business that would be an incorrect move in fact, our view is that that.

And I'd say our capital allocation.

Acacia strategy has not changed over this period, we do continue to believe we can create a lot of shareholder value through strategic acquisition in particular, if they can accelerate organic growth, which has a high return.

Contract vehicle puts in place now the environment in which task orders will be executed.

So as always acquisitions are opportunistic in nature and the timing is difficult to predict exactly when the right acquisition will be available and we'll be able to complete them.

That are aligned with the modernization and innovation needs of the IRS and we feel extremely well positioned given our history at the IRS and being a very significant technology provider and maintain or of a number of the core legacy systems that will be subject to modernization. So we feel very good.

So it's certainly possible that we will reach the low end or lower of that two to three target range, but in any event I want to I think it's worth pointing out that we're not going to waiver or deviate from our discipline around valuation and strategic fit of target and.

About our position and our ability to be extremely competitive on the task orders as they as they are released we're hopeful now that with the protest resolved.

In all cases, we look for return exceeding our cost of capital.

And again anywhere we can look for revenue synergies that accelerate organic growth. We think that can provide a much higher return than our cost of capital.

Great. Thank you for taking all my questions.

That helps.

Thanks, Charlie Thank you Charlie.

Helpful. Thanks, Bruce just throughout May appear just when you're looking at the allocation of capital I know you saw it.

We have one shareholder question here, let me close to you.

We have an idea of what led to VEGF.

M&A is always something thats kind of at the forefront there.

Between the two.

Where do you think you would like to see that leverage ratio get down to first before you kind.

More of a supply issue or more of a production issue.

Sure. This is Bruce I'll start and then turn it over to David It's a great question and there are a few kind of moving pieces here that I would like to explain.

Kind of resume M&A activities.

Yes, I'll take it it's David.

Move back now to the middle of our target range, which is two to three times debt to EBITDA, albeit in the near term we are still committed to.

A great deal as we've gotten into the processing of these new types of claims and had a full quarter of pack volumes under our belt.

Debt Paydown.

And I would say.

As I mentioned previously.

Our capital allocation strategy has not changed over this period. We do continue to believe we can create a lot of shareholder value through strategic acquisition in particular, if they can accelerate organic growth, which has a high return.

Previously the VA has received about a half a million pack related claims already.

And we've as we've done this work.

I think customary with any new initiative of this nature.

So as always.

These are different types of cases different types of claims they have their own complexities and theres, a correspondingly ramp up or a learning curve for both organizations for the vendor support in EMEA and for the VA itself. So in this early period of transition.

Acquisitions are opportunistic in nature, and the timing is difficult to predict exactly when acquisitions will be available and we'll be able to complete them. So it's certainly possible that we will reach the low end or lower of that two to three target range.

Both in the process of formalizing, our procedures and ensuring that we have kind of a group swing. If you will for handling. These types of cases, it's not uncommon for new claim types of this nature for there to be a back and forth between the vendors and the VA declare fi issues address questions and so forth.

But in any event I want to.

It's worth pointing out that we're not going to waiver or deviate from our discipline around valuation and strategic fit of target in all cases, we look for return exceeding our cost of capital.

And again any where we can look for revenue synergies that accelerate organic growth. We think that can provide a much higher return than our cost of capital.

Another interesting data point is the BBA has reported recently that the average number of days.

Great. Thank you for taking all my questions.

Two process from start to finish a pact act related claim is about 156 five days as a data point in the second quarter. Another one of the elements of the moving parts here was the utilization of our staff was a bit below our potential we had more staff completing training and therefore fewer in.

Thanks, Charlie Thank you Charlie.

We have one shareholder question here, let me close to you.

When you have an idea of what that is eef.

It's recurring.

More of a supply issue or more of a production issue.

Sure. This is Bruce I'll start and then turn it over to David.

<unk>, which led to more over time.

Than what had been anticipated for the fully productive step that we already had and as I noted in my remarks, though demand is building at an increasing rate and so since late FY 'twenty two you'll recall that we've been making investments in lining up the business to meet the anticipated demand and we're very confident in our ability to have the <unk>.

Great question Andrew.

There are a few kind of moving pieces here.

To explain.

A great deal as we've gotten into the processing of these new types of claims and had a full quarter of pack volumes under our belt.

As I mentioned previously.

Previously the VA has received about a half a million pack that related claims already.

The capacity in place required to achieve our forecast, but that David anything further to add yes.

And we've as we've done this work.

I think customary with any new initiative of this nature.

Lay on to Bruce's remarks, while revenue was a bit lower than we had forecast in the quarter. The bottomline impact with amplified due to the higher costs as you mentioned with the ramping up of staff to meet our expectations for Q3 and Q4.

These are different types of cases different types of claims they have their own complexities and theres, a correspondingly ramp up or a learning curve for both organizations for the vendor supporting deviate and for the VA itself. So in this early period of transition.

That concludes the question and answer session. Thanks for joining us today, operator back to you.

Ladies and gentlemen, thank you for your participation and interest in Maximus you may disconnect. Your lines have log off the webcast at this time and enjoy the rest of your day.

Another interesting data point is the BVA has reported recently that the average number of days.

<unk>, which led to more over time.

Than what had been anticipated for the fully productive step that we already had and as I noted in my remarks. The demand is building at an increasing rate and so since late FY 'twenty two you'll recall that we've been making investments in lining up the business to meet the anticipated demand and we're very confident in our ability to have the product.

The capacity in place required to achieve our forecast, but that David anything further to add yes.

Right.

This concludes the question and answer session. Thanks for joining us today, operator back to you.

Ladies and gentlemen, thank you for your participation and interest in Maximus you may disconnect. Your lines have a log off the webcast at this time.

Enjoy the rest of your day.

Okay.

Yeah.

Yes.

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