Q4 2023 Maximus Inc Earnings Call
Greetings welcome to Maximus fiscal year funding 23 fourth quarter and year end earnings conference call. At this time, all participants are in a listen only mode a brief.
A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star Zero and you kind of found keypad. As a reminder, this conference is being recorded and it is now my pleasure to introduce your host Jessica that.
This president and Investor Relations for Maximus.
MS <unk> you may begin.
Good morning, and thanks for joining US with me today is Bruce Caswell, President and CEO, David Mitra, and his 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 a of our most recent forms 10-Q and 10-K we.
We encourage you to review the information contained in our recent filings with the FCC 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 are pleased to report a solid finish to fiscal year 'twenty to 'twenty, three with 7.4% organic revenue growth and a 10% adjusted operating margin in the fourth quarter, reflecting healthy earnings tailwind that we expect to carry on through fiscal year 'twenty 'twenty four.
Last week, we announced that we divested several international employment services businesses, and our ongoing effort to strategically shape. The outside the U S segment and improved profitability and stability. We had robust signed contract awards in the fiscal year of $6.1 billion, which includes <unk>.
Successfully defending key recompete.
Our contract backlog that we report annually stepped up again from last year to $27 billion over four times, our trailing revenue.
We are executing on our stated capital allocation priorities with debt Paydown, yielding 2.2 times net debt to EBITDA at September 30th while also increasing our quarterly cash dividend to 30 cents in line with our commitment to grow the dividend with earnings over time, our fiscal 'twenty to 'twenty four.
New guidance reflects mid single digit organic growth and our earnings guidance implies at or above 30% bottom line growth over fiscal 'twenty to 'twenty three.
Finally, the essential nature of our work means that we have excellent insulating properties during periods of uncertainty around government budget let.
Let me Orient you to a revised definition of adjusted EPS. In addition to adding back intangibles amortization expense.
Now and going forward, we are adjusting for gains losses or other charges relating to divestitures. While these types of costs have not been large in fiscal year 'twenty 'twenty. Three we are underway with reshaping the outside the U S segment and that the process that could last for several more quarters, we have not added the costs related.
To the cyber security incident disclosed last quarter to our list of adjustment, but have provided a pro forma view, excluding these costs for improved visibility.
There's a slide in the presentation for today's call, which demonstrates the methodology change and identifies the cyber security incident cost in fiscal year 2023 for the full fiscal year total company revenue increased 5.9% to $4.90 billion on an organic basis revenue grew.
<unk> was 7.1% over the prior year and consistent with the mid single digit rate that we expect for the business.
The growth drivers were a combination of new work as well as growth on existing programs in the U S segment, which I'll add more color on in the segment discussion on.
On the bottom line the full fiscal year 2023 adjusted operating income margin was 8.0% and adjusted EPS was 383.
Three things to note on our full year earnings which are highlighted on a stand alone slide in the presentation today.
Number one the total impact of the cyber security incident in fiscal 'twenty twenty-three with $29.3 million or <unk> 35, we believe our analysis of affected individuals is complete and the largest component of costs. We've incurred has been related to the required notification.
This means adjusted EPS for the full year, excluding the incident was 418 and at the high end of our guidance range of four to 420, excluding the incident costs number two the second half of the year looked quite different from the first half as there were several sizable step ups in earnings power of the core.
Business as Medicaid Redetermination commenced in the third quarter and U S services and volumes ramped on both the veterans Affairs medical disability exam contracts, which comprised the V S business and the student loan servicing contract in U S Federal services.
Number three on a related note it's worth highlighting the fourth quarter of this year in which we delivered strong sequential earnings growth as we had expected.
U S. Federal services benefited from ongoing higher program volumes that I, just highlighted and U S services had a full period of Medicaid redetermination.
Adjusted EPS for the fourth quarter was 129 and adjusted operating income margin was 10.0%.
Five cents were adjusted under our expanded definition and relate to a $2.9 million non tax deductible asset impairment charge incurred in preparing the recently divested properties for sale. This charge was not contemplated in our fiscal 2023 guidance fourth quarter earnings also include.
And ninth and detriment from incremental costs incurred related to the Q3 cyber security incident, meaning excluding the incident adjusted EPS would be 138 in the quarter, Let's go to the segment results starting with U S. Federal services for the U S. Federal services segment revenue increased 6.4%.
To $2.40 billion.
All growth was organic and driven predominantly by continued ramp of volumes on the V. A medical disability exam contracts as the overall program grows to meet client expectations.
The operating income margin for U S Federal services with 10.4% in fiscal 2023 as compared to 10.4% in the prior year.
It's worth noting the segment continued its solid execution by delivering a 12.4% margin in the fourth quarter, which remained slightly above our expected margin range for this segment for the U S services segment revenue increased 12.7% to $1.81 billion.
All growth was organic and driven by new work wins and our successful conversion of some short term work into longer term contracts.
Examples include eligibility support contracts in Indiana in Arkansas long term care assessment work across the country and a multi year unemployment insurance contract with California. The U S services operating income margin was 10.1% as compared to 11.3% in the prior year.
Let me recap the margin trend of this segment.
Last year in fiscal 2022 the first half of the year with overweight from the last of the profitable short term Covid response work, while the second half of the year was underweight.
This year the first half remained underweight until the paused Medicaid redetermination commenced in the third quarter, yielding margin improvement in the back half of the year as we expected.
With a full period contribution of Redetermination U S services realized an 11.6% margin in the fourth quarter for the outside the U S segment revenue decreased 9.8% to $689 million. This is net of currency impacts, which reduced revenue by 4.6%.
The other two declines were roughly equal parts organic contraction from lower volumes on employment services programs across multiple geographies and divested businesses that we announced in the second quarter of fiscal 'twenty twenty-three.
The segment realized an operating loss of $9 million for fiscal 'twenty twenty-three compared to an operating loss of $15 million in the prior year.
This year's loss was attributable to the 14.4 million dollar revenue reduction in the third quarter of this year tied to lower estimate for future outcomes based payment. Meanwhile, the segment broke even from a profit standpoint in the fourth quarter, a slightly better result than previously expected.
We have acknowledged that this segment is not meeting our financial expectations and are executing focused efforts to reduce volatility.
As announced last week and completed in the first quarter of fiscal 'twenty 'twenty four we divested three more businesses specifically the employment services Division in Canada, along with Singapore, and Italy, which were exclusively employment services, let's turn to the balance sheet and cash flow items as of September 30th twenty-two.
Three we had gross debt of one point to $6 billion, and we had unrestricted cash and cash equivalents of $65 million.
We paid down approximately $60 million of debt in the fourth quarter, which brought our debt ratio to 2.2 times at September 30th and near the low end of our stated target range of two to three times.
This is down from 2.5 times, one quarter ago at June 30th as a reminder, this ratio is our debt net of allowed cash to pro forma EBITDA for the last 12 months as calculated in accordance with our credit agreement. We had strong cash flows in the fourth quarter to finish the year cash.
Cash flows from operating activities totaled $314 million and free cash flow with $224 million near the high end of our previous guidance of $190 million to $230 million days.
Days sales outstanding or DSO were 60 days at September 30th 20, twenty-three compared to 62 days for the same day last year.
Looking forward our capital allocation priorities are unchanged first we fund organic investment, which are typically a combination of capital expenditures and expenses.
Second we maintain a dividend that we intend to grow over time with earnings and as evidenced by the recent quarterly dividend increase announcement to 30 per quarter.
And third strategic acquisitions intended to accelerate organic growth, we will continue to evaluate acquisition opportunities with discipline and are strong and improving balance sheet provides capacity should good opportunities arise in fiscal year 'twenty four and beyond.
In the near term, we will continue to feather in debt pay down as part of capital deployment, while we still believe two to three times is an appropriate target leverage range supported by our long term contracts and high cash conversion and the current interest rate environment, we have a bias towards the low end of two time.
Looking forward our guidance for a step up in earnings and free cash flow absent M&A would enable a debt ratio of 1.5 times by the end of fiscal year 'twenty 'twenty four.
About 50% of our debt is fixed through interest rate swaps. So further delevering efforts will reduce the higher priced floating rate component.
Let's go to fiscal year 'twenty 'twenty four guidance revenue is projected to be between 5.05 and $5.2 billion.
Adjusted operating income is estimated to be between 488 and $513 million.
The midpoint of those ranges imply an adjusted Oi margin of 9.8% and within our target range of 9% to 12%.
Adjusted EPS is projected to be between 505 and 535 per share.
Based on the revenue guide the 5.125 billion dollar midpoint represents about 5% organic growth over fiscal 2023.
The major drivers are first in U S federal higher volumes and the V. A medical disability exam contracts and to a lesser extent new work across multiple categories.
And U S services, there is a full period of Redetermination, which as we've reminded before have a disproportionate benefit to the bottom line there.
There are also expanded clinical assessment programs contributing to organic growth in this segment.
The adjusted EPS guidance includes approximately $70 million of interest expense, which equates to about $14 million less than in fiscal year 'twenty twenty-three I'll briefly share our forecast on segment margin.
We expect the U S federal services margin to be in the 11% to 12% range, which represents moving up a notch from last year and the preexisting target range of 10% to 12% for this segment.
We expect our U S services segment margin to be about 11%.
Finally, we expect outside the U S to be slightly above breakeven for the year.
We expect a more straightforward quarterly profile in fiscal 'twenty 'twenty, four reflecting the improved stability of the business compared to prior years.
Our current view is that operating margin should improve across the year and therefore be modestly higher in the second half than in the first half.
While redetermination and U S services are helping more than the first half we expect margin growth across the rest of the portfolio to contribute to the profile of more steady growth over the year.
Lastly, we expect a small loss on sale in the first quarter tied to the completed divestitures, which will be excluded from adjusted EPS from a cash flow standpoint, we expect free cash flow between 290 and $340 million for fiscal 'twenty 'twenty four.
We currently expect a slightly negative free cash flow in Q1, as a result of seasonality and timing of certain payments as has been the pattern in recent years.
Some other assumptions around fiscal year 'twenty 'twenty four include an estimated $88 million of intangibles amortization expense.
The full year effective income tax rate should be between 24.5, and twenty-five 0.5% and weighted average shares should be between 62.2 and $62.3 million.
Before handing off to Bruce I want to highlight our resiliency during periods of budget uncertainty with our government customers, particularly those comprising the U S Federal government.
Anytime there is a focus on a potential shutdown it can be a difficult environment to navigate from an outside perspective for Maximus. Our primary focus is assessing any impact that might be expected in our U S. Federal segment, which is about half the business has.
Having recently coordinated with our federal customers, we anticipate a significant majority of our contracts would be deemed essential in fact, our current estimate is that less than 5% of our U S. Federal segment revenue could be disrupted during a shutdown representing less than 3% of total company revenue.
Therefore, we believe our guidance range can accommodate a temporary shutdown, which remains a possible scenario in fiscal year 'twenty 'twenty four.
And though we are cautious about potential collection delays during such an event, we have significant liquidity, including our 600 million dollar line of credit, which was undrawn at the end of fiscal year 2023 with that I will turn the call over to Bruce.
Thanks, David and good morning, our FY2023 results demonstrate the resilience of our business through unstable times and solid progress delivering on our strategy. We entered FY2023 in an unprecedented environment, both the ongoing public health emergency and the deferral of student loan payments impacted revenue inflation rates were growing.
And hiring of critical health care workers was challenging due to the recent COVID-19 pandemic.
The stable core of our business driven by a strong rebid year and our essential role in government program delivery enabled us to end the fiscal year with solid financial results and a clear line of sight for FY 'twenty four.
In May 2022 we presented our three to five year strategy with specific areas in which we would focus and grow and supported by an addressable market of $150 billion in annual government spending.
Only two quarters into the post P. H a period, we are pleased with the performance of our segments in meeting their strategic objectives.
Full year results for the U S. Federal services segment are well within the target range of 10% to 12% as are the fourth quarter results for U S services, which has a target margin range post phe of 11% to 14%.
Together these segments drove our ability to meet our total company margin target as David shared the fourth quarter resulted in an adjusted margin of 10% successfully delivering on our target of 9% to 12% over the longer term our expectation for further improvement to an adjusted operating income margin of 10% to 14% remains.
At Investor Day, we also communicated a commitment to increased growth in our U S. Federal services segment success of which is evident in both our backlog and pipeline just two years ago. Our U S. Federal services segment accounted for less than half of our backlog today. The segment makes up two thirds of our backlog.
Finally, we committed to mid single digit organic growth as David shared organic revenue growth for FY2023 was 7.1%.
And guidance for FY 'twenty four shows promise for a continuation of this progress during the quarter, we announced a 7% increase in our quarterly dividend raising it to 30 cents a share.
As we stated in the press release this dividend increase demonstrates our confidence in the earnings growth reflected in our guidance, we remain committed to periodically assessing our dividend and raising it further in line with earnings growth now, let's turn to fiscal year 'twenty 'twenty, four which is already off to an impactful start with recent changes made to the outside.
The U S portfolio.
Earlier this month, we announced the divestiture of our employment services businesses in Italy, Singapore in Canada.
Throughout fiscal year, 'twenty twenty-three, we shared our commitment to restructuring and optimizing this segment under appropriate terms and in a manner that aligns with our overall strategy.
We have now reduced our O U S footprint by three countries in support of that goal.
As I mentioned on our Q3 call our portfolio shaping will focus on reducing volatility concentrating our footprint, adding diversity to the customers we serve in country and broadening the capabilities, we deliver in line with our strategy, we will operate in markets with well established contracting processes and significant and growing address.
<unk> spending.
As an example, now a decade into our partnership with the government of the United Kingdom, We have a more diversified portfolio and are delivering broader capabilities than ever before let me take a step back and talk with you about our strategy as we head into the new fiscal year. The three pillars of our three to five year strategy are supported by significant.
And growing addressable markets.
Capabilities, we bring to our mission of moving people and technology forward and our ability to deliver on customer priorities with differentiation and sustainable competitive advantage.
With the relentless pace of technology, what was considered cutting edge two years ago is becoming table stakes as the market moves we are investing in anticipation of evolving customer needs.
While the obvious example is AI and its many forms there are others, such as provisioning and managing secure hybrid cloud environments cloud native development and digital modernization more generally leveraging Dev SEC ops capabilities.
With this evolution in mind, our teams are operating with agility mapping our capabilities to the priorities of our customers right now and with an eye toward what is to come let me share a few examples within our technology modernization pillar the strong pipeline of Federal agency I T systems procurements like the I R. S E dos contract.
[noise] reflects legacy environments, requiring modernization citizen demand for more digital government and today's cyber security challenges, we've refined the priorities of our strategy to include greater emphasis on cyber security, where we're focused on cyber automation Zero Trust engineering and operations and digital forensics.
We've also deepened our capabilities in cloud enabled services data management and hyper automation as.
As trusted advisers, we will empower our customers to make data driven decisions that advance their mission and enhance their customers' experiences.
Within the future of health pillar, we're supporting our government customers as they respond to trends such as an equitable access to care and increasing levels of chronic disease against the backdrop of rising costs.
Within our suite of services, we have long helped governments ensure equitable access to our independent and conflict free assessments delivered at unmatched scale in our markets.
Looking forward, we're focused on a balanced approach to using technology to further improve access and the customer experience, while supporting our thousands of clinical staff in their work with some of our most vulnerable citizens.
Already we are investing in solutions that improve areas, such as care navigation teller assessments and independent quality assurance.
I'm also encouraged by recent progress we've made in addressing population health challenges through our integrated lifestyle and well being services in the United Kingdom.
Finally within our customer services digitally enabled pillar our success developing and delivering award winning mobile applications and program specific portals has improved equitable access to critical benefits.
This has been especially important for example, with the resumption of Medicaid eligibility determinations for tens of millions of Americans.
Eliminating barriers like printed documents faxing and wet signatures in partnership with our customers incrementally improves access and health equity.
As we look forward our values will continue to guide our balanced approach to using technology to improve not only the citizen experience, but to support our employees.
To that end, our 'twenty twenty-three global employee engagement survey independently administered by price Waterhouse Coopers witnessed a robust 76% employee participation.
Of those surveyed 76% stated that they would recommend maximus as a great place to work well.
While we're proud of that result, our culture is to focus on how we can do better with the majority of our employees delivering essential services to citizens supporting them with competitive pay and benefits and providing opportunities for their continued development and satisfaction doing meaningful work remain our focus over the last few quarters we.
Shared details about our journey with innovation across our organization innovation creates differentiating capabilities and bolsters our efforts to be best in class, while remaining cost competitive in the past we've shared innovative technologies, we are patented as well as use cases and pilot phases.
Today I'd like to discuss two additional ways in which our teams are innovating.
First I'm excited to announce that we have established Maximus ventures, our corporate venture capital function.
Through this C V C, which will be spearheaded by our corporate development team, we will invest in innovative startups that share our forward thinking vision for government.
Our objective is to partner with innovative companies to learn about and gain unique access to disruptive capabilities, while creating growth opportunities for maximus.
The Maximus ventures team has developed a disciplined methodology that includes specific selection criteria based on identified innovation needs that are critical to our priority core markets and largest contracts.
And tested through pilot programs.
While we're in the very early stages, we've started to develop several relationships with seed to series C partners.
Through thoughtful investments will work with companies to challenge the status quo develop transformative solutions solve complex problems and re imagine the future of health and human services programs.
More information on Maximus ventures will be available on our website in the coming weeks.
Where the C V C demonstrates our efforts to generate new opportunities by way of external investments are internally focused maximus sparked tank elevates great teams and ideas.
Our employees have the greatest awareness of our day to day operations and are well positioned to identify and successfully implement opportunities for innovation.
The spark tank provides a support structure throughout our gated process that starts with a business case and ends with investment and implementation.
Personal favorite gate in the processes of course, the spark tank session during which selected teams are invited to pitch their business cases to a diverse panel of organizational leaders.
I had the pleasure of attending the most recent session and witnessed the passion our teams bring for how their solutions will bring us closer to our customers and their missions.
Maximus ventures, and the spark tanker just two examples of the many ways teams across the organization are being encouraged to collaborate and drive innovation.
With respect to FY 'twenty four I spent some time discussing the refinement of our strategy and our commitment to innovation now let me turn to our pipeline.
For the fourth quarter of fiscal 'twenty twenty-three signed awards totaled $6 $1 billion of total contract value up from 4.3 billion last quarter. Further at September 30th there were $878 million worth of contracts that had been awarded but not yet signed these awards translate into a book to bill of approximately 1.2.
Times for the trailing 12 months period.
Let's turn our attention to our pipeline of opportunities.
Our pipeline at September 30th was $37.1 billion compared to $32.1 billion reported in the third quarter of fiscal 2020 three.
This September 30th pipeline is comprised of approximately $1.2 billion in proposals pending $967 million and proposals and preparation and $34.9 billion and opportunities tracking of our total pipeline of sales opportunities, 76% represents new work.
<unk>, 60% of the $37.1 billion total pipeline is attributable to our U S. Federal services segment with fiscal year 'twenty 'twenty four largely ahead of US. Many companies are commenting on global conditions, creating an unprecedented environment of luca or volatility uncertainty complexity and ambiguity.
In our view however, we see a return to a more stable macro.
For the first time in many quarters, our core business long an engine of growth itself is delivering its full scope of services to our federal and state customers.
Our reshaping of the outside the U S portfolio has progressed and while not complete means we're on a path to reducing volatility and performance the.
The essential nature of the services, we provide governments provides welcomed insulation from the uncertainty of a budget showdown or even government shutdown.
The complexity of challenges facing government, such as modernizing legacy systems environments benefits companies like ours that have proven capacity to deliver technology and services at scale.
And finally, we are unambiguous in our focused execution of our three to five year strategy and continued progressive achievement of the 10% to 14% total company adjusted operating income margin and mid single digit organic growth targets, we have established.
In closing as I've mentioned on prior calls we recognize the importance of optimizing our organization for the future.
To that end through an effort we call Maximus forward, we continue to evaluate benchmark and in some cases clean sheet design processes and resources that drive our delivery.
With a balanced approach to improving efficiency and investment in the future. Our Max MS. Forward initiative is central as well to keeping us an employer of choice in creating greater opportunities through growth for our thousands of valued employees and with that we'll open the line for Q&A operator.
Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.
Formation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment may be necessary to pick up your handset before pressing Mr. Keith. Please ask one question and one follow up question and we queue for additional questions. One moment, while we poll for questions.
Our first question is from Charlie Strausser of CJS Securities. Please proceed.
Hi, good morning.
Good morning, Charlie how are you.
Good. Thank you could we talk a little bit about the guidance and.
Looking back at the August call.
And how you're using Q4 as a good run rate proxy for next.
Next year and such but it just.
The ranges feel a little conservative and hoping to get a little bit more color and commentary.
<unk> you don't mind.
Yeah.
Sure I'll take a Charlie.
I'll start by saying that we believe are our official guidance here look very much like our early view of the year than we did share in August so that was based on our Q4 adjusted EPS forecast of $1 22 to $1 42 to $1 32, being the midpoint and that would be $5 28 on an annualized basis.
It would fall between our guided midpoint and high end, which is $5 35. So we do feel good. We also said on the last call that we saw a good line of sight to mid single digit organic revenue growth and 10% adjusted Oi margin, which is right on the mark of artificial guidance here of about 5% organic growth and nine 8% adjusted Oi.
At the midpoint.
Great. Thanks.
Looking at U S sources.
You're starting to see some good top line growth there.
You know obviously.
It looks like there's some room to improve the margins there and ultimately the bottom line.
<unk>.
He has some room to improve that.
Yeah, Great question, so stepping back we guided them at 11% adjusted Oi margin, which is at the lower end of the 11% to 14% range that we've set out for them.
First maybe I'll cover just to kind of the Redetermination impact there Walt again, I always say, it's difficult to precisely estimate we do continue to see that contribution in line with the 15 to 30 range that we've given before.
I think you can see just by looking at the total U S services, Oi, which in Q1 and Q2 of fiscal year 'twenty three with more in the $40 million range per quarter.
And then in Q4 was at $55 million, so kind of a 15 million dollar increase.
The increase is really driven by the Redetermination.
To your point that we have seen a lot of growth in that segment revenue grew 12, 7% in fiscal year 'twenty three and some of that growth has come in at a lower than average margin and it is putting some pressure on the overall segment margin.
And this combined with our normal course business erosion has had a slight shift in the mix of contract profitability in the segment.
But I would agree with you and we're optimistic that there is a room for improvement here. In this segment is well suited for margin improvement with further adoption of technology in many cases, which we control.
Also a natively higher mix of performance based work. So we do see good opportunity for improvement from here.
Great. Thank you I'll jump back in queue.
Great.
Our next question is from Steven <unk> with Stifel. Please proceed.
Hey, good morning, and I. Thank you for the questions.
Sure Good morning, Bert it's Bruce.
Hey, Bruce and Hey, David.
David I think this is really just sort of a follow up question for you on the margin front.
Can you maybe give some color on how to think about that 15 to 30 range on redetermination.
Is that you know.
Operating closer to 30 in the first half of the year baked into guidance or is that an opportunity and then just sort of longer term on the margin front you had given the near term range of nine to 12 longer term 11 to 14, you know sort of sitting here at 98 for this year. Despite what would seem like very accretive tailwind for re determinations in the VA.
Business. So you can just maybe give us a walk on how to think through the margins getting up to at some point a 12, 5% number from from where we are today.
Yeah, Greg I'll start and tended to Bruce your comments as well on the Redetermination as I said, we are in that range and I'm hesitant to give you a precise number because it's impossible to get too precise on it but I think I would point out.
That is a result of the volume the higher volumes and during this unwind period, we do expect a slightly higher margin than the U S services segment in the first half of our fiscal year 'twenty for that in the second half as those volumes will moderate down somewhat.
As we previously said the peak of those Redetermination will occur in the first half that remains our assumption and we're saying it that way, maybe I'll pass to Bruce for the longer term margin sure.
No.
We've been saying the midpoint of our FY 'twenty for guidance implies a nine 8% margin, but we do have confidence in our ability to to get to the 10 to 14 over time. So there are three to five year strategy laid out.
The achievement of that attention and focus and some very specific areas I want to highlight three of those areas. If I can on two of the pillars of our of our strategy, our technology modernization and future of health and the work associated with those tends to have higher margins generally so as we get more of that work in the pipeline and convert that backlog that will naturally help us.
To achieve our targets and I would just say our pipeline I feel that our pipeline is well weighted in those areas. The second point would be that we've had some internal programs that were focusing on that are that are really focused on ensuring that <unk> set up for success over the longer term and the execution of this strategy and that includes an improving efficiencies I mentioned.
I mentioned during my prepared remarks, the program Maximus forward and how that's a balance of really rethinking and driving greater efficiencies in the business, but also making investments in our future.
And that those are important initiatives that will continue to execute on and that we would expect to see.
The benefit from as we roll through FY, 'twenty, four but really more in FY 'twenty five.
And then finally, we're continuing our efforts to properly shape and size that outside the U S portfolio in that segment of business and we would expect that through our further actions there we'd see an improvement in total company margins. So number of those things really taken together.
Provide us.
The confidence that we can move into that range as we mentioned.
Okay got it that helps but maybe just a clarification before I from my follow up before my follow up for.
David on the prepared remarks, you said you expect margins to build sequentially through the year. So I guess, you're highlighting the fact that there are I guess better tailwind in the second half even relative to that peak performance on redetermination for the first half.
Yeah, and I'm glad you asked because that's a good thing to highlight that.
The fact that redetermination, they're expected to contribute a little more in the first half than the second half we see the rest of the portfolio more than overcoming that and therefore, we do see sequential margin improvement in total over the course of the year.
Okay got it.
And just for my follow up.
You know, maybe I guess focusing on the other side on sales.
Recompete profile pretty low this year and you have several dozen notable tailwind you highlighted between the VA Medicaid and other new work.
Do you think about the potential to get from mid to high single digits. This year.
You know what would what would have to happen for that to play out is that just a function of new aware of New awards.
Materializing faster eat hours task orders coming out are there specific items that you'd be watching you know that gets you to may be above or below the 5% range. When it's all said and done.
Sure Bert it's rich I'll take that you're headed in the right direction with your assumptions your intuitions on that I mean, as you said that what's really underpinning the growth as it presently stand is really strong performance in the VA medical disability exam area as well as Redetermination and certainly you know further surges in volume and activity in those areas.
Could contribute meaningfully to our growth rate higher than the current mid single digit that we're seeing.
At the same time, you know, we're now kind of in the back half of the Redetermination window and that activity will come to an end and kind of the I'd say the may maybe June timeframe of 2024, so the likelihood that.
Significant states wait at this point and say well, we need additional health and so forth.
Is diminishing that said.
Since the last time, we were together on a call.
I'm pleased that our work in that area has picked up and in fact, one of our state clients. Our current state clients really asked for a great deal more assistance and that's reflected in the numbers that we've talked about today. So the underpinning as you said is exactly those in kind of those two areas, but I would highlight two others you talked about pipeline.
We're seeing a nice growth in clinical work in our U S services business as well as a solid pipeline of states that are progressing toward.
What are called modular Medicaid management information systems, our MMA assistance and that movement toward modularity continues.
And in particular, one of the solution areas that we're focused on is <unk>.
Medicaid provider Credentialing and enrollment we provide those services to a number of states presently there's a healthy pipeline for that type of work and so we're going to continue to prosecute that and we would think that you know further awards and conversion to backlog there could be beneficial.
<unk>.
The growth of the company this year and certainly into next year and then <unk>.
Secondly is really you touched on the federal it modernization area and more specifically pipeline opportunities relates to cloud enablement cyber security systems management needs and so forth.
Federal agencies.
<unk> is a good example, we're pleased to see an initial task order flow coming through ethos.
And we feel like we're very well positioned for that work.
I should note that we don't contemplate a significant contribution presently from Utah's task orders in this fiscal year. So you know any further task orders or.
Significant wins in that through that vehicle would be meaningful but also there are a number of.
Procurements in that technology modernization space, that's been held up the protests that if it were to be resolved in the early quarters of this year and fall in our favor we could see them contribute more meaningfully as well in FY 'twenty four so it's really it's a mix of things, but David is there anything further that you would add just to sort of pull the string on one thing you mentioned.
Entering in any year, we tend to have strong visibility into our revenue guidance, meaning more than 90% of our guided revenue is typically already in backlog. This year is no exception. There in fact as you mentioned, we've really had two really strong years of rebid success.
And we do see FY 'twenty for having lower EBIT volume, which provides an even higher degree of visibility and we made they normally have coming into the year. So while there's a component of new business.
We assume there there is potential for additional success there to drive further top line growth.
Very helpful. Thanks for the answers.
We now have a follow up from Charlie Strausser with C. J S Securities. Please proceed.
Hi, Thanks, just a couple of quick follow ups first of all on the cyber security breach.
Dissipating anymore for potential expense leakage into next year.
In your guidance.
Yeah, I'll take that as I said in my prepared remarks, we're substantially complete with the analysis of impacted individuals and the largest component of the costs. We've incurred to date have been related to those required notifications that came out of that.
So right now based on our best forecast of current proceedings and the associated costs, our guidance for fiscal year 'twenty four it does not contemplate material costs for further notifications are legal and consulting fees, which has been most of what we've incurred to date. However, we should point out that as detailed in our forthcoming 10-K, there are a number of class action suit.
That had been filed related to the incidents and we're not now able to determine or predict the ultimate outcome of any of those proceedings or provide an estimate or a range of the possible outcome of those.
Got it. Thank you and then just shifting gears to the international business itself. Obviously this divestiture divested a few of them already.
Could we expect to see some more news on that front in terms of.
Portfolio optimization, if you will.
Yes, Charlie it's Bruce I'll take that I mentioned in my prepared remarks that we really we feel that that our work there is not done and it will continue into the coming quarters of this year and at the same time as I did in the on the last call I wanted to kind of lay out what the characteristics are of.
The business that we see in the future outside the U S. And the example, I used in my prepared remarks was really with United Kingdom Kingdom and the work that we do there. It's a customer that we probably entered that market easily a decade ago, maybe a little bit more and have over time.
Our broad and increasingly diversified business in terms of the services that we provide.
While the department for work and pensions remains our single largest customer I've been pleased with our ability to move work into other departments and agencies in the UK has long been a government that has a very I think fair.
Model N for contracting with the private sector.
We have found it to be a good customer to work with them and in fact over time have become really known as a strategic supplier in that market. So.
I think the net net is that we're comfortable with a smaller footprint concentrating our efforts.
And and areas like that where we can offer the full range of services and capabilities that we have as a company and most importantly quite substantial markets on my right Moe latest recollection, what that the UK represents a 6 billion dollar addressable market and it has meaningful growth characteristics that align with the strategic capabilities that we've outlined over a three to five years.
So.
Hopefully that gives you a bit more color in terms of art.
Direction of travel.
That's great. Thanks, Bruce and then just a quick housekeeping for David.
Interest rate assumption.
The interest expense assumption for us.
The coming year.
Yeah sure. So you know that's always our all of our guidance is organic in that it doesn't include any M&A activity that hasnt been complete so that means our interest forecast is consistent with that.
And therefore reflects our excess cash flow paying down debt or their over the air.
As far as the rate goes as a reminder, we're about half fixed rate through interest rate swaps. So for the half that is floating.
We do use the sofa forward curve to forecast what the rate will do over the air.
And as we do pay down.
Intend to pay down the floating rate, which is currently at a higher rate than what we get back.
Got it and just a sense of the average the average rate currently.
Currently it's about 6%.
Yes.
Great. Thank you very much.
Our next question is a follow up from parents to ban with Stifel. Please proceed.
Hey, thanks for the follow up.
To piggyback on that question on the interest expense side.
I guess, where do you want that to go $70 million, that's quite a decline this year, but if I look back a few years. Your interest expense was obviously much lower.
At what point do you stop paying down debt and something like share repurchases become more interesting.
Okay.
Yeah. It's a good question I mean, I think I in my prepared remarks, I mentioned, our current bias towards the low end of that two to three times debt ratio range will continue to use that range as the guidepost for what are we going to be in the long term.
Well acquisitions continue to be our priority for capital deployment beyond dividends.
They can be they are opportunistic in nature right. So it's hard to predict when they come so we will be evaluating over time kind of the benefit of having that dry powder available for acquisitions should they come.
As well as the interest rate environment, and where we are relative to that two to three times debt ratio. So those are kind of what we consider in that formula.
I might also add.
If I might the corporate venture capital capability that I talked about in my prepared remarks, we envision those being relatively small bets that we have in place. So they wouldn't rise to the level that it would move.
Move that ratio meaningfully, but at the same time, it's a it's an important either I'd say smaller element of our capital deployment strategy to increase our innovation and competitive advantage over time.
Got it Okay that helps and then just my final question could you give us some I guess, an update on where things stand on the VA exam business. We've heard from some of your competitors. There you know it's been really really strong of late and it sounded like the incentive fees have been pretty additive and should remain additive into next year.
How should we think about VA exam business from here or is there still a lot more growth in the pipeline or do you start to get concerned that maybe that turns the other way.
Late 'twenty four 'twenty five.
Yeah.
Well I'll I guess I'll start where you ended which is I don't have that concern, but let me come to that true.
More logic, so the fact that as you know.
It started in Q2 of FY 'twenty, three and then across Q3 and Q4, we saw a pretty meaningful step up in volumes. So today, we are operating at significantly increased capacity and that's necessitated by the customer and it's across the system. If you talk to our competitors are listening to them you'd hear the same thing.
The application rate is significant inventory levels are significant in fact.
Publicly available data on the website that shows the current cases in inventory and I think I'm correct in saying that Thats a record high north of a million you can also follow backlog and backlog would be cases in inventory for more than a 125 days I have found it interesting and I think reflective of the capacity that's been.
Building into system, among the vendors that backlog, obviously, it's not not.
Increasing at the same rate as inventory, but inventory levels remain very high.
So that means there's a lot of work that's waiting attention by the VA and then examination vendors like us that are downstream.
So we see as we look at FY 'twenty for the revenue or the contracts that comprise our work in this area, increasing but increasing at a gradual rate over through the course of the year not a not a significant.
Spike if you will kind of a gradual increase.
I will note that the bulk of the hiring that we feel that we need to do to support that requested capacity has been completed.
And you know other indicators that we look to.
To really say, what's beyond FY 'twenty four good indicator is what's the V a doing themselves and they've they've hired a great number of employees and there's public information out there about their intentions to.
To further grow their head count in FY2023 they grew their overall headcount by 20% and they intend to hire an additional 4000 employees in FY 'twenty four.
Our view would be that yes, they see God. There's work here and the volumes that are required to you know to get through that work containing continuing well into the next fiscal year as well so our competent and confident in that I would just commenting on the incentives and disincentives I would just say that that's a program that.
Is that the V a.
Obviously, you had implemented but has made adjustments to over time and we feel that that's you.
You know that's that's an area that they'll continue to fine tune with the vendor community as they go forward and so we don't have a significant reliance in our estimates for FY 'twenty four on those types of payments.
Thank you.
Sure.
This will conclude today's conference you may disconnect your lines at this time and thank you for your participation.
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