Q3 2024 Conduent Inc Earnings Call
If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Giles Goodburn, Vice President of Investor Relations for Conduit. Thank you. You may begin.
Giles Goodburn: Thank you, Operator, and thanks, everyone, for joining us today to discuss Conduon's third quarter 2024 earnings.
Giles Goodburn: I'm joined today by Cliff Skelton, our President and CEO, and Steve Wood, our CFO.
Giles Goodburn: We hope you had a chance to review our press release issued earlier this morning.
Giles Goodburn: This call is being webcast and a copy of the slides used during this call, as well as the press release, were filed with the SEC this morning on Form 8K.
Giles Goodburn: This information, as well as the detailed financial metrics package, are available on the Investor Relations section of the Conduit website.
Giles Goodburn: During this call, we may make statements that are forward-looking.
Giles Goodburn: These forward-looking statements reflect management's current beliefs, assumptions, and expectations, and are subject to a number of factors that may cause actual results to materially differ from those statements.
Giles Goodburn: Information concerning these factors is included in Conduent's annual report on Form 10K filed with the SEC.
Giles Goodburn: We do not intend to update these forward-looking statements as a result of new information or future events or developments except as required by law.
Giles Goodburn: Thank you.
Giles Goodburn: The information presented today includes non-GAAP financial measures.
Giles Goodburn: Because these measures are not calculated in accordance with the U.S. GAAP, they should be viewed in addition to, and not as a substitute for, the company's reported results.
Giles Goodburn: For more information regarding definitions of our non-GAAP financial measures and how we use them, as well as the limitations to their usefulness for comparative purposes, please see our press release.
Speaker Change: And now I'd like to turn the call over to Cliff.
Cliff Skelton: Thanks Giles. Welcome everyone to our Key 3 Earnings.
Cliff Skelton: As we did last quarter, Steve will begin with the financials, and I'll follow with a status report on what's changed in the last quarter and a brief discussion on what continues to make Conduit's balance sheet, solution set, and growth expectations unique.
Steve Wood: But first, the quarter. Q3 adjusted revenue and adjusted EBIT are worth $781 million and $32 million, respectively, at a 4.1% margin, meeting or slightly exceeding our expectations.
Cliff Skelton: This is fully adjusted now for all completed divestitures.
Giles Goodburn: And these results continue to validate our previously described game plan for our growth trajectory.
Speaker Change: New business signings were 111 million dollars with a strong performance in commercial sales offset with some continued softness in government and parts of our transportation business.
Giles Goodburn: where there was less deal activity in the quarter.
Giles Goodburn: As you know, there can be lumpiness in sales performance by quarter, but overall we are on track for a 2024 sales year that meets our expectations.
Giles Goodburn: As expected, our net ARR number returned to positive territory.
Giles Goodburn: Steve will go deep on all these numbers here in a moment.
Giles Goodburn: But here are a couple of key points.
Giles Goodburn: We completed the initial phase of the divestiture program we communicated 18 months ago and we've deployed 75% of the 1 billion dollars targeted against debt prepayment and share repurchases.
Giles Goodburn: Clifford Skelton, Stephen Wood
Giles Goodburn: We've been consistent in our messaging for the last 18 months.
Giles Goodburn: We're on a continued path to those 2025 exit rate parameters of lower debt and debt ratios, sequential margin improvement, less capital intensity, and top-line growth.
Giles Goodburn: We will stay on course, both strategically and tactically, toward a narrower, more nimble, growing company with a clean balance sheet.
Giles Goodburn: Finally, with a more simplified board structure, we can now turn our attention on what's next.
Giles Goodburn: But first, let me hand it over to Steve to talk about the detailed results for Q3. Steve? Thanks, Cliff. As we have done in the past, we are reporting both GAAP and non-GAAP numbers. The reconciliations are in our filings and in the appendix of the presentation.
Giles Goodburn: Our reported numbers and the guide for this court have been adjusted again for the domesticure of the casualty claims business.
Giles Goodburn: We've published a full set of historical adjusted financials in our metrics file, which you will find in the Investor section of the Conduit website. Let's turn to slide 5.
Giles Goodburn: We continued to make progress in the quarter with our divestiture plans, completing the third transaction of 2024 with the closure of the sale of our casualty claims business, receiving $224 million.
Giles Goodburn: Gross proceeds on these three transactions were approximately $865 million, with approximately $60 million still to be received between Q4 this year and April next year.
Giles Goodburn: Overall net proceeds will be approximately $780 million.
Giles Goodburn: This is right at the top end of the range I outlined for this initial set of transactions.
Giles Goodburn: I said 18 months ago that we were targeting $1 billion of deployable capital, and to date we've deployed approximately 75% of that.
Giles Goodburn: buying back a total of approximately 61 million shares and pre-paying $539 million of term loans with a further authority to pre-pay another $125 million, which we'd expect to do in the fourth quarter.
Giles Goodburn: Let's now turn to slides 6 and 7 and review our key sales metrics.
Giles Goodburn: Q3 was a strong sales quarter within the commercial segment.
Giles Goodburn: But this was offset with a lighter quarter in the government segment where there was less deal activity.
Giles Goodburn: And so our overall ACV attainment of $111 million was slightly below our expectations.
Giles Goodburn: We see the full year outcome being in the range of 500 to 550 million of ACV.
Giles Goodburn: Within that estimate, there are a couple of larger deals in our public sector market where precision in predicting timing can be an issue. Within commercial, we're expecting to see a strong finish to the year.
Giles Goodburn: Our clients continue to look to us for solutions to address cost, drive technology upgrades, and business transformation through outsourcing, both in the CX and BPAS spaces.
Giles Goodburn: We have a strong set of horizontal offerings in our commercial businesses that give us a breadth of capability to provide technology-led BPO solutions end-to-end across our clients value chains from the front office to the back office.
Speaker Change: On slide 7, you'll see that our net ARR metric rebounded this quarter.
Giles Goodburn: We'd expect to finish the year with this metric somewhere around $100 million.
Giles Goodburn: Now let's turn to slide 8 and discuss our Q3 2024 financial results.
Giles Goodburn: Adjusted revenue for Q3 2024 was $781 million as compared to $831 million in Q3 2023, down 6% year-over-year.
Giles Goodburn: This is in line with our expectations and my guide from last quarter when adjusting for the removal of the Casualty Claims business.
Giles Goodburn: The causals are consistent with the last couple of quarters with runoff from lost business partially offset with new business ramp and that gap continuing to narrow.
Giles Goodburn: Adjusted EBITDA was $32 million for the quarter as compared to $60 million in Q3 2023, and the adjusted EBITDA margin was 4.1% for the quarter as compared to 7.2% in Q3 2023.
Giles Goodburn: Again, this conforms to our guide, Adjusted for the Casualty Claims Business.
Giles Goodburn: It's also sequentially up, which again we expected as we get into our cost work around the removal of stranded costs from the divestitures and our other efficiency programs.
Giles Goodburn: We expect this sequential climb in the EBITDA margin now each quarter as we progress through the remainder of 2024 and into 2025 and towards the exit rates we outlined.
Giles Goodburn: Turning to the segment results on
Giles Goodburn: For Q3 2024, commercial segment adjusted revenues were $385 million, down 3% as compared to Q3 2023.
Giles Goodburn: The top line story for the commercial segment this quarter continues to be one of working off the effect of some prior year lost business, which is starting to work out of the compare.
Giles Goodburn: Adjusted EBITDA for the commercial segment in Q3 2024 was $35 million.
Giles Goodburn: up approximately 21% as compared to Q3 2023.
Giles Goodburn: Thank you very much.
Giles Goodburn: Q3 2024 revenues were $255 million, down approximately 12% as compared to Q3 2023. This is in line with the three discrete drivers I outlined last quarter.
Giles Goodburn: Adjusted EBITDA for the government segment in Q3 2024 was $60 million, down 37% year-over-year.
Giles Goodburn: The discrete items from last quarter's narrative remain what drives this, as well as some short-term elevated expenses related to a couple of implementations that should normalize later in the year.
Giles Goodburn: Transportation segment adjusted revenues in Q3 2024 were $141 million, down approximately 2% year-over-year.
Giles Goodburn: The transportation segment adjusted EBITDA was break-even in Q3 as compared to $3 million in Q3 2023.
Giles Goodburn: The primary driver here was revenue mix.
Giles Goodburn: specifically with the two contracts noted previously and partially offset by some improved operational performance.
Giles Goodburn: There's been a margin reset within transportation because of the divestiture of the curbside and public safety businesses.
Giles Goodburn: And this is one area where we have several initiatives underway to remove stranded cost, drive incremental operating efficiency, and continue to build scale back into our tolling and transit businesses, with new leadership now in place.
Giles Goodburn: Let's turn to slide 10 and discuss the balance sheet and cash flow.
Giles Goodburn: We ended the quarter with approximately $400 million of total cash on balance sheet, and our $550 million revolving credit facility was largely undrawn.
Giles Goodburn: We repurchased 3.9 million shares and have now completed this previously approved program.
Giles Goodburn: which included voluntarily prepaying the remainder of our Term Loan B and starting to prepay our Term Loan A.
Giles Goodburn: We have additional authority to prepay debt up to $125 million from divestiture proceeds on hand and still to be received.
Giles Goodburn: We'd expect to use the remaining authority before the end of the year.
Giles Goodburn: Our net leverage ratio decreased to 1.4 turns.
Giles Goodburn: This ratio will go up over the next couple of quarters as we annualize the divested EBITDA in the calc, partially offset by the sequential recovery in adjusted EBITDA as we work through our stranded cost and efficiency programs.
Giles Goodburn: Once this work is completed during the second half of 2025, you'll see this leverage returning to around 1.5 turns, and then moving towards the one turn that we've outlined in our midterm outlook as we exit 2025.
Giles Goodburn: Capital expenditure in the second quarter was 2.5% of revenue and we expect it to be about 2.8% of revenue for the full year 2024.
Giles Goodburn: Let's turn now to slide 11 and cover our Outlook for 2024.
Giles Goodburn: Now that we've completed the three divestitures we planned for 2024, our full year guide is adjusted to reflect all of these.
Giles Goodburn: In line with how I laid out last quarter, the casualty claims solutions divestiture removed approximately $150 million of revenue and about one point of reduction in the adjusted EBITDA margin.
Giles Goodburn: Therefore, we now expect full year adjusted revenue to be in the range of $3.185 to $3.215 billion.
Giles Goodburn: At the midpoint, that's about a 3% down year over year.
Giles Goodburn: At this point, we expect the year to land around negative $50 million, with around three-quarters of the reduction from last quarter's outlook driven by a handful of billing milestone adjustments on large contracts in our public sector businesses.
Giles Goodburn: These are timing events, not scope changes, and we expect the milestones to be reached early in 2025.
Giles Goodburn: Finally, you'll see capital expenditure reducing here, with the effect of the divestitures. Again, all in line with the prior outlines I've given you.
Giles Goodburn: Moving to slide 12, this remains our walk to the exit rates in 2025 and we remain confident in achieving these targets. We have a strong pipeline and multiple levers in our cost efficiency work to drive our margin outcomes.
Giles Goodburn: We will continue to be opportunistic about the portfolio in terms of additional transactions for the right multiples that could continue to enhance value.
Giles Goodburn: Special thanks to all my teammates who worked really hard to deliver on this initial phase of our divestiture program.
Giles Goodburn: That concludes my financial remarks for the quarter and I'll hand it back over to Cliff for the broader business update. Cliff. Thanks Steve. Now let's turn to slide 14 to talk about what's changed over the last quarter, what we've been working on and some trends, a status report of sorts.
Giles Goodburn: We have consistently stated that building a solid foundation of operational stability was foundational and precedent to growth.
Giles Goodburn: We're now at a stage where new leadership with enhanced relationships is necessary.
Giles Goodburn: We've hired three key executives to help us make this pivot.
Giles Goodburn: Mike McDaniel joined us from DXC and
Giles Goodburn: He now leads our commercial businesses as Group President.
Giles Goodburn: Anna Seaver joins us from Magillan
Giles Goodburn: She is now leading our government business as president.
Giles Goodburn: And Scott Koblentz joined us from Cubic as our new leader for tolling, part of our transportation sector.
Giles Goodburn: Meanwhile, we see continued improvement in both employee and client retention, and our sales pipeline remains strong, with a renewed appetite for offshoring to drive efficiency for our commercial clients.
Giles Goodburn: A year ago, we experienced strong sales performance from our government businesses, and our commercial performance lagged.
Giles Goodburn: This year, we see the opposite.
Giles Goodburn: This is where a diverse portfolio can take advantage of economic and policy swings.
Giles Goodburn: We believe that while the pipeline is strong end-to-end, our commercial businesses will continue to outperform.
Giles Goodburn: Within transportation, we're progressing well in our largest implementation in the state of Victoria and Australia, and believe upon completion that we'll have a quite impressive, state-of-the-art account-based ticketing system, among other solid attributes.
Giles Goodburn: Net-Net, while commercial is experiencing a year of solid relative performance, overall pipelines across all of our business lines are in good shape.
Giles Goodburn: Finally, divestitures.
Giles Goodburn: In this regard, our journey is not over.
Giles Goodburn: We see ongoing opportunities to further enhance our balance sheet, become more nimble, and better focus investments and bandwidth.
Giles Goodburn: More to come here, but our Board of Directors is fully supportive of our plan and ongoing efforts.
Giles Goodburn: Now let's turn to slide 15 to go a little deeper on that diverse portfolio I alluded to.
Giles Goodburn: Slide 15 is a snapshot of where Conduon is today. This is a very different picture than we would have been able to present just five years ago, and we've made a lot of progress.
Giles Goodburn: Our exit rates for revenue and margin percentages are consistent with how we've been narrating this journey for the last 18 months.
Giles Goodburn: As is the expected rate at which we estimate we can grow our new business sales.
Giles Goodburn: Conduit has a high base of recurring revenue.
Giles Goodburn: approximately 90% reoccurs each year.
Giles Goodburn: So, as long as volume stays constant, sales stay the course, and churn continues to slow, we are growing as expected.
Giles Goodburn: We have client relationships in 46 of the 50 states in the public sector, and we service approximately 50% of the Fortune 100.
Giles Goodburn: Our top 20 clients have an average tenure of 20 years.
Giles Goodburn: The most significant opportunity is in those large commercial clients where cross-selling is available.
Giles Goodburn: We've worked very hard over the past four to five years to drive meaningful improvements in the things that are most important to our clients.
Giles Goodburn: And our Net Promoter Score, or NPS, is now up 30 points.
Giles Goodburn: How this translates into financial outcomes is through improved client retention, which is 40% improved since 2021.
Giles Goodburn: The inverse of this is annual churn, and we've seen that come from a rate of over 11% to around 7%, and line of sight to that going lower. Our near-term target is to be below 5%.
Giles Goodburn: All the above is testament to the work we've done to stabilize our company and we're positioned well for growth as we move into 2025.
Giles Goodburn: Importantly, the divestiture work we've done over the past 18 months has resulted in approximately $780 million of after-tax proceeds.
Giles Goodburn: which we've deployed to strengthen our balance sheet through prepaying debt as well as repurchasing around 25% of our outstanding shares.
Giles Goodburn: even after this initial round of
Giles Goodburn: with over 90% of our solutions underpinned by proprietary technology.
Giles Goodburn: and over 500 patents across key technology capabilities including automation, analytics, AI, digital payments, and mobility.
Giles Goodburn: I'd like to take a few minutes to recap on how we're thinking about those assets on slide 16.
Giles Goodburn: At this point, our commercial segment represents about 51% of the overall business from a revenue perspective.
Giles Goodburn: And we think about the solutions broadly in two categories.
Giles Goodburn: We have a rich set of horizontal BPO capabilities at the core of our commercial business that can be deployed across multiple industries.
Giles Goodburn: These are our cross-industry solutions.
Giles Goodburn: Our attach rate across clients here is approximately 1.6 solutions for a top 200 on average. And we expect to drive that higher with more dedicated efforts around cross-sell.
Giles Goodburn: Our CX business is almost exclusively focused on higher tier work, more complex work if you will, where continuum of service is important and quality is a primary KPI.
Giles Goodburn: Nearly half of our clients in this area have other conduit products and solutions.
Giles Goodburn: We see this business as the tip of an integrated sword, and don't think of this business as a competitor with a traditional customer experience company.
Giles Goodburn: Our industry-specific solutions are platform assets that support key business outcomes for our clients unique to a particular industry, including loan servicing, e-discovery analytics, health care claims, and specialty drug eligibility.
Giles Goodburn: Across our commercial business as a whole, more than a third of our revenue comes from the health care client vertical, with financial services, auto, travel, and logistics being other important verticals.
Giles Goodburn: But healthcare is where we stand apart from other BPOs, as a ubiquitous provider of service. Because healthcare is not only an industry where many can play, but it's also a set of products where fewer can play. We bridge those gaps, unlike others in the field.
Giles Goodburn: Thank you.
Giles Goodburn: As we continue to develop our commercial business, we see further opportunity to reshape the portfolio, narrowing in some places, partnerships and tuck-ins in others, as well as continuing to work on the onshore to offshore mix to improve margins.
Giles Goodburn: Let's turn to the government and transportation segments on slide 17.
Giles Goodburn: Our government and transportation segments combined make up approximately 49% of our revenue.
Giles Goodburn: We continue to believe that our assets in the public sector have strong defensive characteristics against broader macro headwinds.
Giles Goodburn: And therefore, having a set of businesses that address public sector markets continues to make sense.
Giles Goodburn: government and transportation can be thought of in three unique set of solutions.
Giles Goodburn: Government Health Care Technology and Medicaid services.
Giles Goodburn: state and federal benefit payments distribution, primarily through open and closed-loop prepaid cards, and tolling and transit services within our transportation business.
Giles Goodburn: Each of these business areas are unique.
Giles Goodburn: The overall contract length is typically longer than in the commercial businesses.
Giles Goodburn: and the government margins are certainly superior.
Giles Goodburn: The buyers within state governments and agencies are often independent from one another, and the work itself is different.
Giles Goodburn: Government health care is primarily a technology play.
Giles Goodburn: Government eligibility and enrollment is primarily a service play.
Giles Goodburn: Electronic Benefits Card Program is a closed-loop prepaid card program and payment card programs are an open-loop program branded primarily by MasterCard.
Giles Goodburn: Tolling is primarily a technology and servicing business, and transit is primarily an equipment and technology business.
Giles Goodburn: We think about our commercial business as a business with embedded technology, whereas our public sector businesses are technology businesses with embedded service capabilities.
Giles Goodburn: Now let's turn to slide 18 to wrap up.
Giles Goodburn: across all these businesses, public and commercial.
Giles Goodburn: We're infusing new talent to continue to drive growth and optimize margins, as I've previously discussed.
Giles Goodburn: We've demonstrated over the past 18 months through our divestiture work that there's significant value in the underlying assets that make up conduit.
Giles Goodburn: We will continue to look at the portfolio through the lens of maximizing shareholder return, be that through running, combining, or in certain cases, monetizing assets within what is still a very broad portfolio.
Giles Goodburn: There's a lot of trap value in this diverse portfolio.
Giles Goodburn: The key is to focus and increase scale, organically or inorganically, to compete with fewer peers, allowing for more simplicity and more optimized bandwidth utilization.
Giles Goodburn: I'm confident we have Conduit on the right trajectory, moving our business to sustain top-line growth.
Giles Goodburn: Sequential Margin Improvement
Giles Goodburn: less capital intensity, and improved cash flow conversion.
Giles Goodburn: As always, I'd like to thank our shareholders, our clients, and our 55,000 associates for their support.
Giles Goodburn: Thank you everyone for listening and I'll now turn it back to the operator for questions. Operator?
Speaker Change: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Giles Goodburn: In order to allow for as many questions as possible, we ask that you each keep to one question and one follow-up. One moment please while we poll for questions.
Speaker Change: Thank you. Our first question comes from the line of Pat McCann with Noble Capital Markets. Please proceed with your question.
Pat McCann: Hey, good morning. Congrats on the quarter and thanks for taking my question.
Pat McCann: Hey Pat, it's Cliff. It's a great question. Here's the way I think about it.
Pat McCann: Our business in the public sector is mostly entitlement and transportation businesses.
Pat McCann: Very rarely are those businesses affected by political swings.
Pat McCann: Now from time to time there are policy swings around subsidies and
Pat McCann: and things like that, that can...
Pat McCann: that can can affect, you know, revenue streams.
Pat McCann: in the public sector business. But generally speaking, it's pretty even-keeled. We were, you know, I got here at the, you know, last part of the first Trump administration, and then, of course, the four years of Biden-Harris. And we saw very little differentiation between how it affected.
Pat McCann: our businesses. So, generally speaking, I'd say, you know, from a revenue and a sales perspective,
Pat McCann: perspective, pretty much unaffected. From a corporate perspective, I mean, we're like any other corporation that has impacts from, you know, corporate tax rates, etc., etc. So I would say we're thinking no effect on what we're trying to do.
Speaker Change: Great. Thanks so much. And just my other question was regarding the MMIS business. I was just, you know, curious if you could dig a little deeper into that specific business as far as states doing RFPs and it just seems like a nice opportunity for you and that Medicaid management information.
Pat McCann: systems and I was just wondering if if there's anything you could say about the timing of new contracts and how soon maybe more states will be looking to you know pick new vendors for that
Speaker Change: Look, there's all these opportunities in that space. I can't comment on the exact timing of any individual state.
Pat McCann: the RFP scheduling, etc.
Pat McCann: But what I can say is, when CMS mandated modularity, it changed the landscape, the MMS landscape. It's no longer this behemoth.
Pat McCann: go for everything kind of RFP. There's various opportunities across the five or six different modules in the MMS suite.
Pat McCann: where we could go after a financial module, you can go after, you know, enterprise data warehouse module, the claims module.
Pat McCann: Giles Goodburn, Clifford Skelton, Stephen Wood
Pat McCann: There are some supportive attributes with people, but it's primarily a technology business.
Pat McCann: The key is to be getting left of those RFPs.
Pat McCann: Getting into the state houses and the decision makers and forming relationships
Pat McCann: that will generate those sales that we're after when the RFP actually drops. Because once the RFP drops, it's very strictly regulated. And you can't, you know, you don't really have an opportunity to use anything else. So, we see real growth opportunities there, we just got to get after it.
Speaker Change: Excellent. Thanks so much. I'll hand the
Pat McCann: Thanks, Pat.
Pat McCann: Thank you.
Speaker Change: Thank you. Our next question comes from the line of Mark Riddick with Sidotium Company. Please proceed with your question.
Mark Riddick: Thank you.
Mark Riddick: Thank you for warning.
Speaker Change: Hey, Mark.
Mark Riddick: So I was wondering if we could start with the thoughts around the portfolio rationalization and kind of where we are there and whether sort of maybe what ending we're in or thoughts as to the benefits of your program and and and what what might be further ahead at this point.
Speaker Change: Yeah, well, the baseball analogy is an interesting one.
Speaker Change: because I can't tell whether we're going to go to x-ratings or not, but what I can tell you is that we see opportunities continuing. In other words, there's good bones in this portfolio. There's still a lot of scarcity value in this portfolio. We still believe that our portfolio is too wide.
Speaker Change: We still believe that narrowing it can help us.
Speaker Change: get more nimble. And so I would say that we're going to be opportunistic and continue to be opportunistic into the future with respect to portfolio rationalization and certainly what we do with the proceeds. But the game, to use your analogy, is not over. We're not in the ninth inning.
Speaker Change: It seems as though, and I know from prior commentary and prior remarks, I guess maybe I want to just sort of...
Speaker Change: clarify it seems as though you're the pieces that you have you feel as though can grow and yet there's still some opportunities there if you choose to go down that path is that a reasonable way to to say it
Speaker Change: Generally speaking, we think all of it can grow. This is, there's no, but do we have bandwidth?
Pat McCann: and depth and scale to get there at the rate we want to? And the answer is not always.
Pat McCann: you know, how we want to rationalize or continue to rationalize the portfolio.
Speaker Change: Yeah, I there's there's no question there's and no excuse
Speaker Change: No I well I would I would just add on to that I mean clearly if you think about the last 18 months
Pat McCann: We've divested three assets, three discrete assets at pretty attractive multiples.
Pat McCann: We've been able to carve them out. We've been able to find strategic buyers for them that have been able to fit them very nicely into how they're thinking about their businesses.
Pat McCann: and some of those fit together very nicely into...
Speaker Change: We'll continue to, you know, find that sweet spot between, you know, what we think works together in the portfolio versus things that we can get attractive multiples for on the outside. And that, as Cliff said, that remains going to be one of the levers that we'll continue to pull here as we...
Pat McCann: I'm going to continue to get the business to where we want to get it.
Speaker Change: Okay, that's very helpful. Thank you, and then I wanted to shift gears...
Speaker Change: situations, races, results, anything that you think might be beneficial or we should be keeping an eye on for going forward.
Pat McCann: Look, I mean, most of our public sector contracts, as you know,
Pat McCann: are contracts with states.
Pat McCann: Thank you.
Pat McCann: The states are always trying to do the right thing for their constituents, regardless of party.
Speaker Change: Thank you.
Pat McCann: you know, they're, they're
Pat McCann: You know, episodic events, for example around SNAP, where, you know, states, if the federal funds dry up, the states may not want to fund 100 percent of.
Pat McCann: of the SNAP payments. And so sometimes we're looking at trends between red and blue and which states are going to.
Pat McCann: are going to be more supportive or less supportive, but that's pretty much normalized out now. So I just, you know, Stephen, unless you have comments, I just don't think they're, I don't see anything from the election regardless of a party that's going to impact our business.
Stephen Wood: Yeah, Mark, I would add to that. As we think about that state government business and technology needs,
Stephen Wood: Clifford Skelton, Stephen Wood, Clifford Skelton, Stephen Wood, Clifford Skelton, Clifford Skelton,
Pat McCann: most of the programs, almost all of the programs that we run.
Pat McCann: You would regard them as being critical programs that they're not they're not at the edges of policy They're about about maintaining
Pat McCann: That have got to go on in those state infrastructure programs around around health and supporting citizens For many years to come and that's that's a far more important
Pat McCann: I mean, there'd have to be more monumental changes.
Pat McCann: in government spending around Medicaid, Social Security, unemployment insurance, it's VA benefits, etc, etc, that even if there are changes, it's a long tail to the work. So it's just
Pat McCann: you know those entitlements are just not going to dry up in the near term and those are primarily where we get our revenue so look we're we're we think we're on a consistent ride here
Speaker Change: I appreciate it. Thank you very much.
Speaker Change: Thank you all.
Speaker Change: Thank you. Our next question comes from the line of Chris Sakai with Singular Research. Please proceed with your question.
Chris Sakai: Hi, good morning.
Chris Sakai: As we look out...
Speaker Change: Yeah, absolutely. That's on slide 12 in the deck, Chris, but I'll kind of highlight the kind of key components of it.
Speaker Change: There's $50 million of stranded cost work that we've got to do, specifically around the divestitures. We've got all of that identified.
Pat McCann: And some of that, most of that is, you know, it's got plans around it in terms of how we're going to remove that as we go through the rest of 2024 and into 2025.
Pat McCann: We've got another $50 million of cost-efficiency work that we're going to work out across the business.
Pat McCann: Goodburn, Clifford Skelton, Stephen Wood
Pat McCann: that should be challenging for us to achieve against this notion that we're going to continue to think about ways to put the portfolio together to make it more efficient.
Pat McCann: The Margin Expansion Component is going to come from
Pat McCann: I...
Pat McCann: a targeted and well-understood
Pat McCann: We've got some specific pricing levels that we're going to go after to get that. And then the balance of that bridge to the exit rate is going to come from the natural fall through that we're going to get as we get the business starting to grow from a top line revenue perspective. So those are really the four components that are laid out on that slide, and that's how you think about the walk.
Speaker Change: Okay, thanks for that.
Speaker Change: The loss of the government health care contract had a pretty good impact on Q2 results.
Pat McCann: and it's expected to continue affecting performance through Q4.
Speaker Change: Are there any similar high-impact contracts up for renewal in the near term that investors should be aware of, and how are you looking to mitigate potential losses?
Speaker Change: That's a very good sign for us, that's fundamentally a proof point around the repair work that's being done.
Speaker Change: to stabilize all aspects of the base of this business over the last four or five years. There's been some really critical work.
Speaker Change: to get us to that point where, you know, our client retention or churn is where we need it to be. And at a level that we've got confidence that our sales teams can continue to grow over the top of.
Pat McCann: So that's the first part of the question. The other part of the question is in relation to the MMIS. I think those discrete drivers that I laid out for you last quarter
Pat McCann: in terms of the three components of what's going on in the government segment, one of which related to that MMIS contract, are the way we continue to think about the margins, and so...
Pat McCann: Chris, you know, I don't think you can, in my opinion, pick out any one thing like renewals as a predictor of where this puck is going.
Pat McCann: The where the puck is going is a combination of volume, expectations.
Pat McCann: It's a combination of renewals that you just talked about, it's a combination of add-on volume that we can get from our current portfolio, and we're somewhat under-penetrated in the commercial space compared to what we can achieve, and it's a combination of new business sales. Those are all offset by
Pat McCann: Project Revenue Rolloff and Losses. And we think that when we put that all in the mixer in the equation, we see line of sight to an exit rate that's above the waterline when that's all put into the into the math equation.
Speaker Change: Okay, great. Thanks for the answers.
Speaker Change: You bet. Thanks, Chris.
Speaker Change: Thank you. Ladies and gentlemen, this concludes our question and answer session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.