Greetings and welcome to the MAXIMUS Fiscal 2016 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lisa Miles, Senior Vice President of Investor Relations for MAXIMUS. Thank you. Ms. Miles, you may begin.

Good morning and thank you for joining us. With me today is Rich Montoni, CEO; Bruce Caswell, President; and Rick Nadeau, CFO. I would 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 and actual events and results may differ materially as a result of risks we face including those discussed in Exhibit 99.1 of our SEC filings. We encourage you to review the summary of these risks in our most recent 10-K filed with the SEC. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances. Today's presentation may contain non-GAAP financial information. Management uses this information in its internal analysis of results and believes this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results and providing meaningful period to period comparisons. For a reconciliation of the non-GAAP measures presented in this document, please view the company's most recent quarterly earnings press release. And with that, I'll hand the call over to Rick.

Thanks, Lisa This morning, MAXIMUS reported financial results for the second quarter of fiscal year 2016. Results in the quarter reflected steady progress on our programs in startup as well as solid organic growth. For the second quarter of fiscal year 2016, total company revenue grew 26% to $606.5 million compared to the same period last year. This was comprised of organic revenue growth of 13%, which was driven by the Health Services segment, acquired revenue growth of 15% and total company revenue was unfavorably impacted by approximately $10.6 million or 2% from the effects of foreign currency translation as compared to the second quarter of fiscal year 2015. Operating margin for the second quarter was 12.8% compared to 12.9% in the prior year. Operating margin in the second quarter of fiscal year 2016 benefited from out-of-period revenue and pre-tax income of approximately $6.6 million from modifications to the UK Health Assessment Advisory Service contract or HAAS. For the second quarter of fiscal year 2016, net income attributable to MAXIMUS was $48.8 million and diluted earnings per share totaled $0.74. This includes approximately $0.08 of diluted earnings per share from the aforementioned modifications on the HAAS contract. Now, I will speak to segment results starting with Health Services. Health Services segment revenue increased 22%. Nearly, all growth in the segment was organic. Revenue growth was driven principally by the UK HAAS contract and to a lesser extent new work and expansion on existing contracts in the US. This was offset by unfavorable foreign currency translation of 2%. So that on a constant currency basis, revenue growth would have been 24%. We completed the Ascend acquisition in the second quarter, which accounts for less than 1% of revenue growth. Let me focus my health segment commentary today on our HAAS contract…

Thank you, Rick and good morning, all. I’m pleased with our quarterly results and our ability to narrow our earnings guidance range for fiscal 2016. We’ve made meaningful advancements in the first half of fiscal 2016 to shore up and mitigate the risk of certain projects in startup mode. As always, we remain focused on delivering on our promises and contractual obligations to our government clients. Our number one goal is solid service delivery and the programs we operate to ensure that citizens are able to seamlessly access critical government programs and services. Let's start off with an update on our UK Health Assessment Advisory Service contract, also known as HAAS. As Rick mentioned, certain features of the HAAS contract had been modified to better align with the client’s programmatic objectives. At the same time, our current trends confirm that we are on track to hit full productivity by the end of the summer. This positive contractual change coupled with the progress we have made in the past several months provides us with an increased level of confidence that we are on a path to achieve our long-term operational and financial goals. We've also continued to receive any questions related to specific performance indicators under the HAAS contract. Unlike last quarter when we were able to provide a full update due to the timing of the public accounts committee hearing the day prior we are unable to provide specific statistical updates on a regular basis. The release of this information is managed through a very formal process by our client, The Department for Work and Pensions. Qualitatively, what I can say is that we're making meaningful progress on the contract on all key factors. Our productivity continues to improve as more of our healthcare professionals mature in their roles and…

Thank you. [Operator Instructions] And our first question is from Dave Styblo from Jefferies. Please proceed with your question.

Hi, good morning and thanks for the questions. Wanted to start out on HAAS and just get a little bit more insight about, first of all, the $0.08. Was any of that assumed in guidance, in other words, was that pulled forward from quarters that were – that you are expecting now to benefit or is that just something catch up from year one and then as we think about years two and three, I know you talked about lower revenue trajectory, can you be a little bit more specific perhaps about what’s your thinking? I guess the revenue came down 10% versus your expectations, but what sort of - what was sort of the expected ramp of revenue for next year or is it not really going to be a ramp in revenue now that there is a new modifications on the contract?

Okay. Good morning, Dave. And I think you put forth two questions. One is to give you a little bit of insight in terms of the $0.08 in the quarter relative to HAAS and with the reduced anticipated revenue what is in the end fiscal '17. I am going to ask Rick Nadeau, our CFO, to field both those questions.

Yes, thank you. Our revenue projection is approximately $225 million and our operating income is expected to be in the mid-single digits for fiscal year 2016. As I mentioned in the prepared comments, we expect this contract to perform in our normal targeted operating range of 10% to 15% future years and the revenue for fiscal year '17 we would expect it to be similar to what FY16 is around $225 million. I think as Rich said that new target for contract year two creates a straightforward path for us to achieving the targeted volumes and the targeted operating margins. So in another words, the new targets reduce the risk that we have and increase the likelihood of us achieving the contract volume targets. And as we mentioned in the prepared remarks, this provides us with an increased level of confidence that we are on target to make our financial goals on this program.

Thanks, Dave. Next question please.

Our next question is from Richard Close from Canaccord Genuity.

Great, thank you. Congratulations on a good second quarter here. My question is around Fit to Work and I have two or three combined into one here. Can you just give us what the original revenue guidance was for fiscal ‘16 on Fit for Work and now what are you expecting Fit for Work in your updated guidance. And then you say all options are on the table, what do you really mean by that, could you agree to terminate this contract just more clarification there. And then finally on Fit for Work, what is the profit drag so far through the first half of the year.

Okay, well let me take the all options on the table piece first and then Rick Nadeau can pick up in terms of revenue expectations for fiscal '16 versus - our current versus original and then the profit drag. On the all options on the table, I think the appropriate backdrop is to appreciate that when we work with our clients, we really strive to develop a partnership. So we are very sensitive to their needs, their desired outcomes, social outcomes and the real drivers behind even a creation of the program and oftentimes that will flow down in terms of the number of expected cases, the volumes et cetera and it's not uncommon to - as these programs especially those that are more novel in nature as Fit for Work is to get to the point where they require some sort of adjustment. And I will say that by the way, we do this very, very often with our clients and have adjustments usually it's the upside but in this particular case given the novel nature of this program, these volumes just have not materialized. And accordingly, it's appropriate to adjust the program in consultation in partnership with our client to the right level. And we are having active discussions from my perspective; I say all options are on the table, it could be rightsizing, so we take down the variable cost to do the appropriate level to serve the current level. And it could be a wind down of the program, and it could be a termination of the program. Rick on the financial aspects.

Sure. As a result of all of that we are only forecasting around $5 million of revenue from this contract for fiscal year 2016, which is well below our initial expectation and at this point built into our full guidance for fiscal year '16 we are presently forecasting that we will lose approximately $3 million more than what we had projected when we did our original guidance.

Next question please.

Our next question is from Charlie Strauzer from CJS Securities.

And just to expand a little bit more on the HAAS contract, I know you talked a little bit more about the profitability but maybe Rich can you talk a little bit more about some more color there on what exactly kind of changed there if you can expand on that. And then my second question as a follow-up would be that the Medicaid opportunities that could be emerging from your prepared remarks talking about the changes in Medicaid, what potential positive opportunities could there be down the road? Thank you.

Hi Charlie, I'll fill the first question and Bruce Caswell, our President is here with us today and Bruce as you would imagine has been immersed in these new Medicaid rules and Bruce is going to give us a highlight in terms of what it means, what they are and what it means to MAXIMUS more specifically. On the HAAS contract, I think I just mentioned the driver behind it that we work with our client to adjust these programs accordingly. In the HAAS situation, this really emanated from clients routine annual evaluation of programs and their budget and their programmatic needs, I do think there has been behind the situation need for UK to do a spending review on all of its budget and they came back and simply said given and I think part of is reduction in backlog but we think the volumes won't be quite as high and demand for the program in years two and three. So in partnership and negotiation with our client, the volumes were adjusted. At the end of the day, again as we work with our clients, I think we ended up with a better risk profile. I mean - the prior volumes were very, very - were very challenging in some regards, so with the reduced volumes, I view it as a better risk profile, we really do have a more stable footing for both the client and MAXIMUS with these revisions. Bruce?

And I might just add one other comment to the HAAS contract and that is that we as part of those discussions and negotiations with the client if I might, we are able to adjust some of the performance benchmarks and you think about that program, you ask Charlie what are the things that are different out, what are the things improving and we've made some adjustments to things like customer call waiting times that are required and call center waiting times and those are metrics that while they're still challenging we feel they are very much achievable. So we're pleased with the improvement that we see in productivity as more of our employees have graduated to become accredited. And we talk probably in prior discussions with you about how even when you're training employees, you're pulling other employees off the line to help train and mentor them. So consequently you get the benefit of those folks who are turning to the lines across the board, productivity capability improves, quality improves as Rich mentioned. So to summarize as Rich said we feel quite good about the footing that we are on. Turning now to your question about Medicaid rules, which is right, many of us have been in immersed I think is the right word in the 1,425 pages that dropped from CMS. It's still early days and a lot of folks are still on really trying to dissect them and understand what the potential impacts are going to be. And quite honestly, it could be some time before the states themselves digest them and figure out how they're going to operationalize the rules. We did hold the webinar two days ago and I was really proud that we were kind of first to market in that regard with a…

Thanks Charlie, next question please.

Our next question is from Stephen Lynch from Wells Fargo.

Maybe for Rich, I was wondering if you could walk us through some of the assumptions underpinning the new EPS guidance range, maybe volumes and margins for a different contracts whether it’s HAAS and jobactive that would support the low and the high end of the range.

We don't really call out specific contracts we did that run time with respect to HAAS because of the size of that contract but let me try as follows, I think it's really important that we focus on the fact that we do have a portfolio of contracts and that these contracts are really in different stages of maturity and different types of cost structures and contract structures that you have. There really are many things that drive our guidance and that we put into there, when we consider that we're making good strides on a lot of the key elements of the portfolio particularly the startups but there are all kinds of different headwinds and tailwinds inside that. The start-ups are an important component of our organic growth this year. I think that as you go forward and you look into future years, I think you would see a better operating income margin then you see this year because of those startups. And so I think when people think about startups they're really an important component of our organic growth. They're really advantageous to us and they're critical in our development of long-term shareholder value. That's really what allows us to drive in some year’s double-digit organic growth to start-ups. But then what you have in that circumstances, you have revenue that lags the earnings which is really a normal course kind of event. So you would tend to see this year being a year that you have revenue earnings like revenue, earnings like revenue, I say that backwards, sorry, earnings like revenue and I think you will see that normalize itself on the back half of the year and as you go into FY17. But obviously the big story line this year, I mean this quarter is HAAS and that does create a situation where we feel like we stabilize that contract and we have a better feeling of confidence with respect to FY16 guidance and that's why we are able to really manage the bottom end of our guidance up and effectively raise the midpoint. That answers your question?

Steven, do you have another follow-up?

No, I'll hop back into the queue for now.

Next question please.

Our next question is from Frank Sparacino from First Analysis.

Just hoping to get a little bit more color on the issues in Australia in terms of volumes?

This is Bruce Caswell, let me give you a little bit more color on that, one of things we always look at in situations like this is what the employment rate looks like in Australia and I want to begin by saying that our understanding is that most if not all vendors that are involved in the contract are experiencing similar volume related challenges, it's not unusual in a contract like this to see fluctuations from the estimates that were first provided as part of the tender process, it's worth noting that the Australian unemployment rate is fairly low, it's at 5.7% reported this past March and hasn't been that low since 2013. So while there are many factors that can ultimately factor into or play into the number of referrals that you get and the volumes that you're seeing, some can be related to public policy other to obviously broader market trends. [indiscernible] that it's simply tied to the rates that were previously assumed that the tender time versus what we're seeing today in terms of employment environment. But I do want to note that as we said this program is profitable. It's going to continue to improve in the back half of fiscal '16 at this contract continues to mature. And we're really focused now on really managing the margins, the contract because they obviously didn't turn out to be as robust as we might initially expected but we've got a great team working on it, we expect it to continue to improve this year.

Frank, do you have a follow-up?

I do not, Lisa. Thanks.

Okay, thank you then, next question please?

Our next question is from Brian Kinstlinger from Maxim Group.

I missed the prepared remarks, but I just want to be clear that HAAS contract was profitable before the unexpected 6.6 million in true-ups and based on the questions I heard from some analysts and I just want to be clear, the $6.6 million of benefits is completely separate from the $0.08 change request that we all expected right?

Yes, with respect to the second question first that $0.08 that we had talked about in quarter one related to a domestic program that we had and it was a change order that had that we had in our hands but it was not signed yet, so it was one that had been negotiated but had not been fully executed with the customer. The accounting rule is not allowing us to record revenue until we actually have the signed agreement. With respect to HAAS, yes, without that 6.6 million, we still had a profit this quarter too in fiscal year ’16. Did that answer your question?

Thank you. And then the question I have got is, if I understand it correctly, the new change order, which places some focus on face-to-face meetings is going to make it easier for MAXIMUS to achieve your productivity goals and essentially your target profitability for that contract, is that right?

Yes. And I don’t think it’s the fact that it’s a shift to more emphasis on face-to-face, Brian, but really the reduced volumes.

Thanks, Brian. Next question please.

Our next question is from Allen Klee from Sidoti and Company.

Yes, good morning. Question one is, what was your previous revenue expectation for the HAAS contract for fiscal 2017? And then secondly, a bigger picture question. Since you mentioned that one of the factors for why the contract is reduced on volumes is the budget, just in general, thinking about operating in the UK, do you think that given some of the budget issues there that’s – how that could impact you in some other programs?

Rick, why don’t you take the first one. I think the question was, what’s our previous expectation for revenue on the HAAS contract, was it – Allen, was that ’17 or ’16?

You said ’17 Allen, I will answer ’16. That was $230 million to $280 million, was what our expectation was for revenue for HAAS for fiscal year 2016.

So a hindsight, the revised expectation is really at the lower end being at $225 million.

And we have not provided specific guidance relative to the HAAS contract in fiscal ’17.

Correct. The second part of Allen’s question I think was given the decreased volume, really the amendments on this contract and UK situations in general, what is our expectation. My view is, I don’t differentiate between the UK and other governments that we serve, they are and we’ve said this folks, it’s really the intersection of these two drivers that sparks our growth, our long-term growth. And governments are dealing with the fact that they have to serve more people and more people are looking to their governments for some form of welfare and at the same time, they have budgetary pressures that they need to deal within the UK and I think it’s a responsible thing does go through and analyze each program and toggles [ph] or adjust each program accordingly. So in some cases, we see downward adjustments, in other situations, we see upward adjustments. I will say from a macro market perspective, we are seeing in general and this is in general, but better employment rates. Lower employment rates in many of the markets where we serve, which as you can appreciate, that means there is fewer people looking for jobs and that has an impact on our programs. On the other hand, what we are seeing is government shift their emphasis from the classic just long-term unemployed to those with disabilities and other challenging situations. So we are seeing the market shift in terms of what they are looking for. In aggregate, I think it’s still a growth situation. I don’t think it’s a net reduction in the demand for what we do in that area.

Thanks, Allen. Next question please.

[Operator Instructions] Our next question is from Shane Svenpladsen from Avondale Partners.

Good morning. With the new set of regulations mandating competitive bidding for one-stop operators of workforce development centers in the US, are you seeing more RFP activity as a result of that and have there been any changes to the competitive landscape?

Bruce, why don’t you fill that.

I would say, we are beginning to see some changes in the competitive field there and some additional RFPs coming to market that we haven’t been historically seeing from clients that maybe haven’t even historically outsourced this function. And you would expect the competitive landscape to include kind of a broad competition of not just for-profit vendors, but historically, you’ve seen a lot of the smaller non-profits and community-based type organizations locally providing services to workforce investment boards or WIBs that have been active in those types of programs. So yes, I would say, it is a bit of a shift in the market, I wouldn’t call it a seismic shift at this point.

Okay. That’s helpful. And then –

Go ahead, Shane.

And then related to the new work and health program RFP that’s out, other than a change in funding, are there any contract-specific changes that are worth calling out?

Well, I might just provide a context, if that’s okay Shane on work and health. First of all, as we have been talking about, here the UK is experiencing really historically low unemployment. So as a result, as Rich mentioned, governments are shifting their focus to reducing the employment gap for people with disabilities, and also -- focusing also on improving productivity and the work salary progression. So work program historically is focused on long-term unemployed individuals, but that group interestingly has decreased by almost 75% since 2011. So while there was significantly more money allocated to the work program, none of the participants or vendors in the work program really ever achieved the funding levels that we had been previously in vision due to those decreased caseloads. So the government has now shifted and it created a new smaller program called work and health that’s expected to absorb both the work program and work choice. And that new program is going to be focused on people with health conditions and disabilities. And as you probably well know and others, serving individuals of disabilities are core competency of Remploy, the organization with who we combined last year. So we feel like we are very well positioned for that change. To give you just a sense of the economics, because I know that would be top of mind for you, combined the work performed by MAXIMUS and Remploy presently for both programs, work program and work choice program runs at about $80 million to $85 million a year. But our profitability expectations for both of those programs are pretty low, in fact comprising less than $0.05 per share in fiscal ’16. So any proposed reduction under this new work and health contract that we might see in overall funding, would likely be a bigger hit to the topline and relatively immaterial to the bottom line.

Thanks, Shane. Next question please.

Our next question comes from Richard Close from Canaccord Genuity.

Yes. Just one of the follow-up on my Fit for Work questions, Rick, you didn’t give the original revenue guidance and the original operating loss. You gave us some update, but what is that compared to?

Richard, we don’t generally give that. We don’t call out specific programs. I will tell you that $5 million is substantially less than what we had projected for this coming year, and that $3 million loss is reasonably worse than what we had expected.

And then my – I guess, my follow-up is, there is some pretty strong positive commentary throughout your slide deck, specifically you talked about the long-term outlook being very positive and favorable trends. It seems like just reading your body language or your text here that you guys are pretty optimistic on your business, it sounds over the next couple of years. I was wondering if you could just provide any additional commentary on that level of confident?

Richard, glad to do that. I think that – again, this is – the nature of our business is multiyear, we are dealing with governments and programs that take several years to go from concept to legislation, to program, to rule, to operate and to startup and then to real mature operations. And I do think the nature of these programs is such that in some form, regardless of the party that’s in play, these programs will continue. So when we think about this, we think we have a long-term growth drivers. I’ve said several times that I think those growth drivers translate into 10% topline and bottom line growth potential year-in, year-out. There will be within years, we will see situations where we may dip below 10% benchmark. But I think that really will be attributable to the various programs and the various stages. So there will be situations like we are this year where we have inordinate amount of startups. And as Rick said earlier, what startups tend to do is that the revenue leads and the earnings lag, and in the following years, you will see the flipside of the equation. So that was really the intent. We remain very excited about the long-term drivers to the business. The pipeline remains I think handsome, so we remain optimistic about our future growth prospects.

Next question please.

Our last question today is from Dave Styblo from Jefferies.

Hey, thanks for the follow-up. Following off of Richard’s question there, I did want to ask about the pipeline, which was pretty noticeably up above $400 million sequentially and it seems like quite a bit more of it is pending. I am wondering if you could talk a little bit more, if that new business is driving the increase of reprocurement, I know there is some comments there that over 50% is new. I am wondering how that also compares to recent levels that have been in there. And then finally, Rich I know for some point, when we sat down, you talked about beefing up the business development with the mandate, look for opportunities sort of the mountain, maybe into the next two years away. Can you talk more specifically about what you’ve done in there and sort of early take on that?

I would be glad to do that, and I know Bruce will be very proud to tag team on the latter part of your question. As it relates to pipeline, Dave when I think about the pipeline, I think it has been of late several quarters running higher and I think we continue that trend with the quarterly statistics and we do pulse how much of it is in the form of new work versus the form of rebid. And I think as I already mentioned on my call notes, a good portion of it happens to be new work and it’s interestingly spread across all of our businesses. It’s not predominantly in any one area or any one segment. As it relates to the rebid situation, I think it’s important for folks to remember that 2016 is a light year versus other years from a rebid perspective. In terms of statistics where we are today, coming into this year, we had I think as you are aware 10 contracts worth of $170 million as it relates to contract value and rebids. Thus far, we have won or extended I believe two of those. Basically we have a significant amount to go, but again, we feel comfortable to rebid situation. And on the options, they continue to come in at I think effectively in baseball terms of batting a 1,000% as it relates to options. So on the pipeline, I think it’s strong, and most importantly, a lot of it is new, so I think that’s good. On the business development side, you are right that we’ve historically focused our pipeline metrics on what we call tier 1 and tier 2, those are situations where we think the RFP is going to be on the street within six months. We had a strategic direction to open our aperture and look beyond that into what we call tier 3. We have made investments in business development and resources and we have honed and we will continue hone our methodology really to look for new emerging opportunities, so we can out there ahead of the pack with solutions into our – frankly focusing our M&A program strategically on what we think will be new growth areas for MAXIMUS, either one or two adjacencies away. Bruce, anything to add on that one?

I think you’ve said it perfectly. The only thing I might say is and we do this on a global basis. We have a great integrated business development community that gets together quite frequently, shares an awful lot in terms of capabilities and I think that really furthers our broad strategy at ensuring that we can take the full capabilities of MAXIMUS to our clients on a global basis, but deliver those at the local level. So that emphasis on tier 3 is really something that cuts across all geographies and all business lines.

And that’s maybe behind part of the growth and the pipeline.

Yes.

Well, thank you very much for joining us today. There are no additional questions in the queue, and we look forward to future conference calls. Have a good day.