Welcome to the MAXIMUS Fiscal 2017 Fourth Quarter Conference Call. [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 thanks for joining us. With me today is Rich Montoni, Chief Executive Officer; Bruce Caswell, President; and Rick Nadeau, Chief Financial Officer. 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 non-GAAP measures presented in these documents, please see the company's most recent earnings press release. With that, I'll hand the call over to Rick.

Thanks, Lisa. Over all, Fiscal Year 2017 was defined by good execution, a healthy portfolio of contracts, solid margins and record cash generation, and this morning I will lead off with highlights from our fourth quarter results. As expected, revenue for the fourth quarter of Fiscal 2017 was comparable to the same period last year. However, fourth quarter revenue was a little bit better than we expected due to strong delivery by the Health Segment and a higher level of passthrough revenue from our Australian operations within the Human Services Segment. On the bottom line, fourth quarter diluted earnings per share were $0.81 and better than expected, primarily due to a lower income tax rate. Revenue for Fiscal 2017 increased 2% over last year. As expected, Fiscal 2017 revenue growth was driven primarily by the Health Segment. This was offset by the expected declines from our U.S. Federal Services Segment as a result of a large contract that came to an end in April 2017. Total company operating margin for Fiscal 2017 was good and increased 90 basis points, to 12.8%, compared to last year. As expected, net income and GAAP diluted earnings per share for Fiscal 2017 were favorably impacted by lower income tax rates resulting from research and development tax credits related to tax returns for years prior to Fiscal 2017 that were recorded in the third quarter and the tax benefits related to the vesting of RSUs and the exercise of stock options. As a reminder, a new accounting standard for equity compensation went into effect this year. The tax rate for Fiscal 2017 was 32.5%, compared to 37% in Fiscal 2016, which increased the bottom line. For the fiscal year, net income attributable to MAXIMUS increased 17%, and GAAP diluted earnings per share increased 18%, to…

Thank you, Rick, and good morning, everyone. We finished Fiscal 2017 on firm footing, with healthy operating margins and record cash flow. In today's prepared remarks, I will give a brief update on the Open Enrollment period for the Affordable Care Act. I will then highlight several recent new work awards that provide paths to long-term growth, as well as some successful rebids that help protect the base. Let's start with an update on the Affordable Care Act. The Affordable Care Act Open Enrollment period began on November 1, and, based on press coverage this week, initial reports from the federal Marketplace and several State-based Exchanges show that Americans appear to be signing up for coverage at a higher rate than last year. We're seeing similar early trends during the first few days of Open Enrollment at our State-based Exchange contact centers, with slightly higher call volumes compared to last year. It's hard to speculate exactly why the volumes are a bit higher, but, anecdotally, we received a number of calls from consumers who think they might be losing coverage as a result of the legislative efforts to repeal and replace ACA. On last quarter's call, we talked about actively planting the seeds for long-term growth; for example, applying our core competencies to new programs and for new clients. During Fiscal 2017, we converted several of these opportunities into new contracts in the U.S. and abroad. In the U.S., we further expanded our Long-Term Services and Supports assessments business, often referred to LTSS. We recently were notified of an award on 3 new contracts for Preadmission Screening and Resident Review services known as PASRR. These assessments help ensure appropriate placements in nursing facility or community-based setting for certain individuals and also help ensure they receive the required services regardless of…

[Operator Instructions]. Our first question is from Brian Kinstlinger, with Maxim Group.

You had a slide on guidance methodology and the actual attrition and mentioned there's typically 5% to 10% attrition per year. I may have missed it. Could you comment on whether that number is bigger in Fiscal '18 and, if so, quantify it? And then maybe go through the 3 buckets, I think this is a new slide, of which ones impacted you more than others.

This is Rich. That question on attrition and the components of attrition, which one is most impactful, I'm going to ask Rick Nadeau to handle that.

Brian, that's a number that's reasonably typical for us, and as we've gone back and looked at it over the prior 5 years, having that kind of attrition level between 5% and 10% on an annualized basis is typical. Obviously, you would think that the mix of those will change over time. I think as we studied FY17, I don't think there was any one piece of that that affected us more than the others. It was pretty much across all of those different categories.

But it is in that range, is what you're saying, still?

Yes.

Okay. And then my follow-up, on the Human Services contracts that are impacting in the short term the margins, what is the potential of those on a revenue run basis when they're ramped up? And what kind of margins can we expect from them maybe long term?

Brian, once those are fully ramped, we would expect that they will contribute annual revenue in the $80 million to $100 million range. Of that, approximately $25 million to $30 million of that would be incremental new work. And the margins on those, as in our Human Services Segment, would be to the lower end of our targeted range of 10% to 15%.

Our next question is from Charlie Strauzer, with CJS Securities.

Would it be possible to get a little bit more detail on the breakdown by segment for the guidance for the top line next year, if possible?

Guidance by segment top line. Rick, what do you have to say about that?

Well, Charlie, we haven't typically given that, but I can tell you that if you go back and you look at what we've disclosed historically over the past couple of years is that it's typically been driven by and led by our Health segment. I would say that the Federal segment is a growth segment to us. We did suffer last year the loss of that contract that we indicated had $63 million less of revenue than it did in the prior year. Without that, it would have had modest growth. But our Health segment will lead our growth in the future, followed by our U.S. Federal segment.

Excellent. And then if you look at the new work that was added back to the pipeline, can you maybe give us a little bit more color as to what kind of opportunities they are, maybe by segment, as well?

I'd be glad to talk about pipeline a little bit, Charlie. When I think about pipeline and pipeline dynamics, I think about how much of the pipe did you manage to convert to new wins, how much of that did you manage to refresh and then what's the ending composition of the pipeline as it relates to new work versus just rebid work. So when I think about the dynamics, when I think about those variables this quarter, I think, clearly, a very, very significant amount was converted. We talked about details and the significance of those conversions. So I was really pleased with the extent of backfill in the normal course. Whenever that happens, you'll see a significant decrease in the backlog and the sales pipe itself. So as it relates to our ability to backfill that, nearly $1 billion, which I think is quite substantial in such a short period of time. As a result, while it was down, the amount of new work in the ending sales pipe was actually up sequentially. It was about 60% of the ending pipeline, roughly $1.4 billion, which is up sequentially from the new work of roughly $1.3 billion at the beginning of the quarter. So, over all, I was very pleased with the dynamics relative to the pipe.

Our next question is from Richard Close, with Canaccord Genuity.

Just on the startup costs associated with, I guess, Human side, this is the first time you're really, I think, calling these out and providing specifics in terms of the startup costs and adjusted EPS. So just to be clear, was there any startup expenses in Fiscal '17 that should also be called out, just so that we have apples-to-apples?

Our practice has been to call out the impacts of startups when they move the consolidated needle. And certainly, the one that resonates most with me was back in circa Fiscal Year 2011 when we had a very significant startup relative to work in the United Kingdom. We called that out. And I think in the last couple of years we've talked extensively about the EPS and the impacts of the HAAS startup and the boomerang impacts of it. So, Rick, I don't know if we have public information about the impact of startups in Fiscal '17 that's available?

No. But I think, Richard, we called it out because it was incremental as compared to the prior year. So when we looked at it and we were trying to understand why we came up with our GAAP guidance, the margin was lower than it had been in the prior year. That is really the factor that creates it. I think if you go and you look at the supplemental schedule and you look at the add-back of those startups, you see that our margin comes right back within the range of what we had in FY17. So we called it out because it was incremental.

Okay. And my follow-up is off of Slide 19, protecting the base and the key rebids. You call out the annual revenue of California, $75 million to $80 million. Curious how and if that did change. And then, Texas was only a 1-year extension. Can you talk about those two contracts?

Sure. Two aspects. Rick, in terms of the call-out on the other ones?

Well, California has basically the same scope of work, Richard. Is that your question on California?

The $75 million to $80 million, is that comparable to what it was in Fiscal '17?

Yes, basically the same scope of work, yes.

Okay. And Texas?

And the second question relates to Texas, a 1-year extension. I think that's normal course. We've been dealing with this client for quite some time, and not uncommon to receive an extension. We're pleased to receive the 1-year extension. So I think while we clearly welcome 5- and 5-year-plus type contracts, this was not a rebid, per se. It was just an extension. So I think it's good news.

Our next question is from Jason Gurda, with KeyBanc Capital Markets.

I was curious how your view of the current industry pause environment, how that devolved over the last quarter or two?

That's a really good question in terms of what's going on from an industry pause perspective. I would say this, that in the U.S. here and perhaps to a lesser extent in the United Kingdom, but certainly here in the U.S., we continue to see longer procurement cycles, less deal flow from opportunities. And this is most notable in our Federal business. And I think it's all in part and we've got a new administration and they're trying to sort through their priorities. And as a result, I think it's most impactful to our Federal business. There is some trickle-down effect to the state-level business, most notably, obviously, in our Health segment, particularly as it relates to some of the pending waivers for the Affordable Care Act that are out there and some changes to the state health programs. Is that helpful, Jason?

Yes, but I was curious as far as how your thoughts on how long this may last, the duration of the pause and how it -- I'm curious just to how your experience of pauses in the past, how you would expect this might play out.

This is trying to forecast an ice melt. But I think this, first off, there's good news here, in that business continues. The lion's share of what we do is mission critical. So it continues. It's not as if we've got a freeze on the work that we're doing today. So it gives you, I think, a certain comfort level that at least we're going to maintain the status quo. In the interim, what is happening until such time as we see a more meaningful free-up is the discussions we have are on the margin improving the programs with our clients, and it's really focused on efficiency, but it becomes on-the-margin type progress. So I think we'll see those types of opportunities. We'll see rebids come out and some of which we'll pursue as non-incumbent. So we hope we can pick up some work in that regard. And I think that, if I were to handicap this, I think we could see continuing melt to the point where it's a noticeable difference, I'm going to say, 6 months to 2 years from now, but there's no guarantee that that's the case. It's highly political at this point in time. And I'm hopeful that we'll see increasing momentum in terms of change from the federal government perspective. And there is, I will say this, there's a very large appetite, not just at the federal government but all government levels, to look for efficiencies, to look for new technology, to modernize government. That's a very sincere initiative, and we're having daily meetings with those individuals in charge of those areas. So I think we're going to continue to see acceptance and improvement and change, but it will be more on the margin of these existing processes, as opposed to holistic legislative change.

Our next question is from Matthew Gillmor, with Robert W. Baird.

On the quarterly financial trends you called out for the first half of Fiscal '18, I think you mentioned disaster support and then the change order that you talked about in the healthcare segment. Can you maybe size up how much of an impact that will have on revenues in the first part of '18? And then, will that hit in the first quarter or the second quarter?

So your question is on the forecast for the first half of the year, the amount of work we're going to do in the disaster area. Rick, do you want to field that one?

It's actually in process right now. So that will be a Q1 and a Q2 event. I can't really call out a number. When we build our guidance, we build it with ranges. This one we called out and identified for you because it's quite variable and depends on the volume of calls that ultimately come in. I will say that it is a meaningful number, but it could be subject also to a fair degree of variation. And in our analysis we've been prudent in trying to put it in there at a figure that is reasonable.

And it's fair to say, Rick, we see this as largely a Q1/Q2 event and non-recurring after that.

Well, yes. And I think that, yes, it depends on how long the calls last. And so the disasters occurred in the quarter ended September 30. So to go much past February would not be logical.

And Matthew, I think there was a second part to your question relative to the change order that Rick mentioned in this call.

That change order is in a big state in the United States, and it really -- we were hoping that it was going to hit in FY17. It did not. But we do now think that that will come in in FY18, Q1. And that will give you a lift because what you wind up having there is when you sign a change order like that you get the revenue, but the costs have already been recognized in a prior period. So that's one of the reasons why we told you on the guidance for the first half of Fiscal Year '18 we'll get a little bit of a bump.

Okay. That's helpful. And then following up on the Medicaid work requirement discussion and some of the waiver discussions, I think CMS signaled a little bit more flexibility earlier this week with respect to waivers, and I think they specifically mentioned work requirements. So I was curious if you had any thoughts in terms of when we could see some of those approvals. And then, more broadly, do you think there will be any helpful impact in terms of the flexibility around waivers, in general?

Well, I know we have lots of thoughts about that, Matthew, and I'm going to ask Bruce Caswell to share a limited number of those thoughts.

Interestingly, as you're aware, there are a number of waivers pending in front of CMS. And we're tracking probably roughly about a dozen waivers, and those waivers have different components. So the work requirements are a component of about 9 waivers that are pending approval presently. But states also introduce other items in their waivers like cost sharing and premium changes, lock-out time and time limits, incentivizing healthy behaviors, waiving retroactive eligibility periods. So the waivers are complicated, and for CMS to get through them in an expedited fashion does take some time. Interestingly, of the 9 waivers that have a work requirement, 5 of them are presently pending review at CMS, and several of them we think are highly likely to get approved in the relative near term. You're absolutely right that CMS did just this week issue further guidance to the state Medicaid directors, in the form of a CMCS information bulletin that came out on November 6. And they talk about process improvements that they're implementing for the Section 1115 demonstration waiver process, which is really what's being used for these state waivers. And they'll do things like help ensure that if there's a waiver that's substantively similar to one that's already been approved for another state, that it follows an expedited approval process. They're providing better fast-track templates available to states and technical assistance, and so forth. So I think that the message that was delivered at the NAMD conference by the administrator really indicates that they're working not just to clear the path and make the process faster for 1115 waivers, but, as you know, there are other ways that states modify their Medicaid programs, like 1915 waivers and state plan amendments. So given all of that, I would think that we'd see waivers beginning to be approved through the late fall/early winter period. And generally, we would allow for probably 6 months post approval for those to be translated then into operational programs and operational opportunities for us by our state clients. So I'd view these to be really more in the back half of FY18, and I think we've said before, particularly as it relates to the work requirements, that that's probably more of a singles and doubles type opportunity for us. Because when you look at the work eligible population, it, by historical standards, and Kaiser has written on this, is about 27% of the Medicaid population, many of whom are already in some form of work. So we need to keep that in context.

Our next question is from Frank Sparacino, with First Analysis.

First, maybe on the pipeline. I know on the Slide 20, in terms of the additional unsigned, that's mostly driven by rebids or existing work. Of the $1 billion that was signed in the quarter, can you tell me how much of that was rebid versus new contracts?

Frank, historically we haven't provided that metric. At the end of the day, we'll take that and feather all of it into our guidance on a go-forward basis. So I'm not able to provide you that metric at this point in time.

Fair enough. And just my follow-up is, a year ago, as we headed into '17, you guys sized up the work around HealthCare.gov and the federal and state exchanges. And I'm curious as we head into this year, given it's obviously a lot more -- there's a lot more uncertainty, how we should think about that. And also, how have you sort of factored that work into your guidance, particularly around HealthCare.gov, given projections around pretty significant enrollment declines? So just trying to size up sort of the risk there and how you're thinking about it.

I think that's fair, Frank. You do have good recall. We've talked about HealthCare.gov, the federal exchange, the State-based Exchanges, how much work we have on the table as it relates to the Affordable Care Act, how much is at risk. So, Bruce, you want to field this one?

Interestingly, you may have seen, Frank, that in the very first few days of the Open Enrollment period there was actually a surge in enrollments on HealthCare.gov. About 200,000 Americans chose a plan on November 1, and that's more than double the number of consumers that signed up last year at the same time. Traffic was up, according to a report in the Washington Post, by about 33%. So, interestingly, I think folks are aware that they've got a shortened enrollment period, 45 days, to get through that at the federal exchange level, and volumes are kind of commensurate with what you'd expect trying to get that large population through the process. At the state level, as Rich noted, we're seeing kind of largely business as usual in state exchange operations, with some nuance. One would be for states that have really funded the outreach activities and have lengthened their Open Enrollment periods, it's very much business as usual. For other states that are under a reduced funding situation or a shorter Open Enrollment period, the uncertainty around really the Affordable Care Act itself has led to, anecdotally, some increases in volumes in calls in the first part of the period. To give you a sense of the ACA-related revenue, we had previously indicated about $160 million was in our FY17 guidance. And as we think about FY18, we presently estimate that revenue from our contracts directly tied to the Affordable Care Act will be lower than '17. The biggest change that's driving that is that our appeals work that we do for the federal Marketplace is down a little bit year-over-year. We had back in FY17 a backlog of employer-related appeals that we've since worked through. So we expect that in FY18 we're returning to a more normalized level of revenue for that component of our business.

[Operator Instructions]. Our next question is a follow-up from Richard Close, with Canaccord Genuity.

I was wondering, Bruce, if you could handle with respect to the Open Enrollment in terms of any guess in terms of how conversion rates are going with people coming back into the exchanges?

Richard, I'd like to say that we've got good optics into that right now. I've not seen any significant data that would kind of break out how much of this is folks that are re-enrolling versus new enrollments. I know that's a question a lot of folks are asking right now. I think, if anything, just to give you a little bit more color, we are seeing a lot more calls related to Medicaid eligibility in some limited states, because some people think that the Affordable Care Act actually has been eliminated. There's been so much confusion in the marketplace that folks are saying, well, what else might I qualify for? Do I qualify for Medicaid? So those calls go up. But breaking out kind of returning folks versus new enrollments -- I think the one other component of color that I could give you is I think it's more likely that in the early days of Open Enrollment you've got folks obviously re-enrolling who have a need for that insurance and a fairly immediate need for that insurance. And so the concerns that I've been reading about are whether this kind of sustained uptick in enrollments that we're seeing presently will actually -- what will it be like in day 40 or day 45? Because you really actuarially need the young invincibles to come in and fill in that pool, and they're likely, given the fact they don't have pressing health conditions, generally, going to be later in the enrollment cycle. Does that help?

Yes. A second question here would be, Rich, maybe if you could talk a little bit more specifics on your comments position for the next wave of growth and the move to adjacent markets? Can you provide us any additional details there? Or just is that just general commentary?

I'll be glad to provide you some, I'll say, additional commentary as it relates to really our growth strategy, how we look at the growth environment, Richard. I think that's a very germane question. And when we think about reasonable long-term growth, obviously there's a lot of things that come into play in terms of when that might happen. We remain very confident that the long-term macros continue to be in place, and you've heard this many times before, that those macros are simply the increasing number of individuals and the mix of individuals that are looking for more help from their governments in the area of health and other human services. We see this around the globe and the compounding factor that governments just are not able to accommodate this. So governments really are compelled to look for more efficient ways to help these individuals. The complicating factor has become legislation and reform efforts and when the government is willing to spend more on these social programs and all of the hoops and hurdles that come along with it. But really helping governments to transform and modernize these programs, as I mentioned earlier in the Q&A, I sense is a very significant demand out there. So our growth strategy sits on top of that thinking. And as we move forward, and some of this we've demonstrated already in the past, we are actively looking at new adjacencies, expanding the services we offer to our existing core and where we offer it. We're looking for new platforms. So, for example, in the recent quarters we acquired Revitalised, which is a new platform for us in the United Kingdom. It gives us new capabilities which I think that government is very excited about. We have an expansion in Singapore, which is a good example of our intent to move into new geographies. And the Singapore situation is but one pilot program at this point in time, but it's progressing satisfactorily. And our plan is that that's going to be a good testimony to the leadership in that part of the world that we do deliver value. So I do expect that we'll see more opportunity like that geographically. And lastly, the digital capabilities. I think it's fair to believe that citizens will demand from their governments an ease of doing business with their governments using the technology that's now available to us, and it's going to take the better part of at least 5 years, if not a decade, to get those governments there. And those governments are going to look to trusted partners like MAXIMUS to help them move along. And we've had dozens and dozens of examples of early successes in that regard. We've built applications such that with some of our state clients their citizens are able to renew their participation or sign up for participation in their Medicaid program and other programs. So we're quite excited about that. Is that helpful, Richard?

Our next question is from Dave Styblo, with Jefferies.

I joined the conference quite late. So I apologize if this has been asked in advance. But have you guys talked a little bit about more about the macro environment where we're sort of in a single-digits growth environment that you characterized over the past few quarters? Do you have a little bit more color or visibility as to things that might be evolving where that number might be changing at this point as you go forward, not obviously for '18, but maybe for '19 or '20, such that you might be in a range to return to the 10%-ish type growth that you had in the past? Obviously, the new work in the pipeline stabilized, stopped declining. So that was a good sign. But curious to hear any other anecdotes that you could provide about your confidence in the top line environment returning to what it used to be.

Dave, I think that's a great question. And when we think about 10%, in the vicinity of 10% growth, a couple of thoughts that come to mind. And I just touched upon the macros. So I think the important thing for people to understand is that the macros remain in place. If anything, I think they're gaining in significance. But also, concurrent with that, I think to get back to a double-digit growth rate, I think it requires more than simply the same solution to the same customers. And to that end, we are working on new solutions. We're working on the adjacencies, platforms and other opportunities. So getting back to my prior answer, it's going to be new geographies. Strategic acquisitions will play a role in that, and that will lead and complement new service offerings. So I think as we go forward we will see that as we move into these new adjacencies successfully, and it will take 2 or 3 adjacencies as we pursue new opportunities, I think that provides additional lift to our existing strong book of business, which I think is the first way to grow a business, just keep and service your existing customers. And I think as demonstrated in this past quarter, we're doing a really good job in that context. So concurrent with, I'll say, a thaw in the pause and our adding new capabilities and looking for new geographies with new capabilities, I think you're got the raw materials there, the raw ingredients to get to double-digit growth.

Okay. That's helpful. And then, the follow-up question would just be on the earnings tailwinds that you might have from these new contracts that are creating initial drag. I think it was $0.12 to $0.13, or so, in Fiscal Year '18. So how much revenue is associated with that drag? And how do we think about that as a boomerang? I think back to slides a few years ago where you guys started up 3 or 4 really large contracts, and there was quite a bit of pressure early on. And I think you actually called it the boomerang slide, where earnings would improve in the out-year. I'm curious to understand what sort of boomerang effect these contracts have and how much new revenue is associated with them.

Okay. I think that's a fair question. I think Rick Nadeau touched upon that a few minutes ago, but, Rick, you want to field that?

The new revenue component of that would be about $25 million to $30 million. The total revenue for the contracts that are related to those startups is really in the $80 million to $100 million range. With these outcome-based payments, what you will find is that those outcome-based payments will be zero right at the beginning, because you haven't reached the milestones. Your milestones will improve over time. So if you go forward to FY19, you should be able to take these startup losses back toward breakeven. And then over time you'll get yourself to a more normal margin. So no different than we had with the HAAS contract where we started off in a loss position in the first year. We then had high single digits in the second year, and then we moved up into the more targeted range in the third year. You're going to see the same kind of effect over time. But in this particular case, we'll go from startup losses to a more breakeven type of a range in '19, and then toward 10%, which is our normal Human Services margin. Ladies and gentlemen, we have reached the end of the question-and-answer session for today's call. MAXIMUS thanks you for your time and participation. You may disconnect your lines at this time.