Greetings, and welcome to the MAXIMUS Fiscal 2018 First 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 Bruce Caswell, President and CEO; and Rick Nadeau, Chief Financial Officer. I'd like to remind everyone that the number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions. Actual events and results may differ materially as a result of risks we face, including those discussed in Exhibit 99.1 of our SEC filings. We encourage you to review the information contained in our earnings release today and in most recent Forms 10-Q and 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 except as required by law. Today's presentation may contain non-GAAP financial information. Management uses this information in its internal analyses 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 these documents, please see the company's most recent quarterly earnings press release. And with that, I'll hand the call over to Rick.

Thank you, Lisa. This morning MAXIMUS reported second quarter results with total company revenue of $612.8 million. As expected, total company revenue for the second quarter of fiscal 2018 decreased compared to the same period last year, primarily due to lower revenue in the U.S. Federal Services segment from contracts that ended. Total company operating margin for the second quarter was 11.6%. This was tempered by restructuring costs of $2.3 million or approximately $0.02 of diluted earnings per share. The restructuring is part of our ongoing efforts to right size resources in our UK Human Services business. As Mainstream employment services programs come to an expected end, we are pivoting towards providing a more holistic set of health and employment services to vulnerable populations with disabilities and complex health conditions. Better than expected income tax rates in the quarter offset the aforementioned restructuring costs. As a result diluted earnings per share were $0.84 for the second quarter of fiscal 2018. I will now speak to segment results, starting with the Health Services segment. Second quarter revenue for the Health Services segment increased 5% compared to the same period last year, driven by organic growth and favorable currency exchange rates. The Health segment delivered a strong operating margin of 17.2% in the second quarter. While we had a couple of items that bolstered operating margins in the quarter, the Health segment benefited from solid operational performance in some core contracts. Most notably the UK Health Assessment Advisory Service achieved full-year volume targets for contract year three and earned the related incentive payments. As a reminder, the three-year base contract ended in February, and we started the two-year option period on March 1 which will reset contract margins at a lower level. We also recorded some revenue and profit pick-up from a…

Thank you, Rick and good morning everyone. I'm now 40 days into the job and honored to be speaking to you today as CEO. With the guidance update, I want to open my remarks with the assurance that I'm deeply committed to making sure we, one, continue to execute well and deliver value on our existing work that serves as the foundation for future growth; two, remain focused on technology driven innovation particularly in the areas of clinical solutions and digital transformation; and three, make sure we're in the right markets, with the right solutions at the right time. MAXIMUS has a proven track record of growth, a team of seasoned operators and a portfolio of contracts that generates meaningful cash flow. We have earned a reputation as a trusted long-term partner who delivers outcomes that matter. As Rick mentioned, we are presently in an environment that's more challenging than in prior years but also one that we're well equipped to address. The job before us is to determine how we best position MAXIMUS for the future. I am reading a plan to help us comprehensively examine the best market paths for MAXIMUS for long-term growth. As we've discussed before, our markets are changing and we must be positioned to capitalize on these changes. For example, we see the convergence of Health and Human Services programs and employment programs serving job seekers with disabilities and health conditions as well as work requirements for health benefit programs like Medicaid. To accelerate our efforts, we're objectively analyzing our current markets where we think we should be playing a more meaningful role through augmented service offerings. Further, we're taking a fresh look at new adjacent markets particularly those impacted by macro trends that we believe can drive future demand. This includes demographic trends…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Charlie Strauzer with CJS Securities.

So if you can talk about the big news today on the kind of lower, can we talk a little bit more about why some of these procurements are pushed out to the right and what are the implications for kind of the second half of this year as well?

Hey Charlie, it's Bruce Caswell and I will direct that question to Rick Nadeau.

Yes, hey thanks, Charlie. As I mentioned in my prepared remarks and we disclosed at the beginning of the year that we had approximately 94% of the mid-point of our backlog options and extensions that were covered in our mid-point of our guidance that really means that we had a gap of about 6% in order to reach that mid-point of guidance. The gap was largely back loaded as you would expect having not won sufficient awards to creating your revenue; the resulting effect is lower revenue in the second half of the year as compared to the first half as you indicated.

Great. And also what does that kind of imply for more on next year as well?

Sure Charlie, it’s Bruce. I will go ahead and take that one. I do need to begin by reminding everyone that provide our formal guidance on FY 2019 in November as we normally do. But with that said, we do have a $3 billion pipeline as we talked about earlier at a 60% of that is new work. We've been actively marketing and shaping those opportunities and we have a series of goods out there that could positively impact FY 2019. Our new work win rates are healthy and that's an important point. The key here is getting the pipeline that we have to progress through to the point of adjudication so having fewer deals that are delayed or canceled as we've been seeing. Pipeline also expands our business lines and geographies and it's reflective of our focus on clinical services and digitally enabled business process outsourcing which I view as a very good sign. Each year, we want to do more important work for our customers. We strive to add greater value, provide secure solutions; we talked a little bit about that little earlier. Our pivot over the last several years to become more clinical is an effort to do more clinical BPO at scale is one example of that and we have a book of business now that's approaching nearly $0.5 billion related to the assessments and appeals work that we do globally. We think that there's whitespace out there in that area that is yet to be filled and we're taking steps to go and address that. I'm also pretty pleased, Charlie, that we're seeing proof points and confirmation of this strategy in some of our recent wins. And as I mentioned in my prepared remarks, I'm leading a comprehensive review of the overall business and making appropriate course changes so that we can best align MAXIMUS for future long-term growth. These efforts are tied to FY 2019 to get back to your question and frankly they're tied to the next three to five years as we position MAXIMUS for the next phase of growth and really drive long-term shareholder value.

Thank you, Charlie. Next question please?

Our next question is from Matthew Gillmor with Robert Baird.

Hey thanks for taking the question. I wanted to ask about the non-U.S. procurement cycles, you talked about the U.S. a lot in the past and I think you mentioned outside of the U.S. there was also some slowdown and maybe the $600 million of pipeline push out was related to international I can't remember if you said that or not but I just wanted to get some flavor for dynamics outside of the U.S. and what’s causing that slowdown?

Sure Matt, let me start with that and Rick would like to add to it on the back end, he will. We did mention that $600 million of opportunity came out of the pipeline and we also mentioned that in our markets we're seeing -- we are taking action but also incumbents are taking action to seek extensions to contracts and we benefit from that when we're successful in securing multi-year sole source extensions that really solidifies the base gives us a great foundation to then go move into these adjacent markets that we mentioned. But at the same time the competition looks at this and in some particular government areas outside of the United States where there are other uncertainties, you could use Brexit as an example creating uncertainty in the current market. You could use upcoming elections, we always see election cycles cause organizations to kind of lock down and not advance procurements and move more in favor of extensions or options. Some of the opportunities, one in particular that I can think of that comprises a significant component of that $600 million moved out because the program was extended for another year or so. So we'll see that procurement it will come back in rest assured. But it’s just a function of the environment which that procurement is being considered. Rick, would you want to add anything?

Just going to say, you’re right a portion of that $600 plus million really is international in that one big program you talked about.

Okay, that's helpful. And then the follow-up on the strategy refresh, you talked about reassessing adjacent markets and I think with the M&A commentary you talked about looking at opportunities that would be two adjacencies from the core, something you could give us a flavor for sort of what a two adjacency business would look like just so we can get some sense for the opportunities that you're considering?

Sure. Well, I'll give you some color on some of the areas of clinical evolution and digital transformation as I kind of go through that we can talk about where they fit from an adjacency perspective just to give you a sense. One of the points I made earlier was that we think that this whole area of assessments continues to be kind of underpenetrated by MAXIMUS. There are assessments that have a functional component, often have a functional component medical or clinical component and mental health component that are done by many governments not only to determine for example eligibility for disability benefits as we do in the United Kingdom, but also eligibility for benefits say for example for veteran. And this is a whole area where we think the capabilities that we've built that can now be evidenced by operating the HAAS program at scale can make a big difference in making us a very credible prime contractor in some of these areas. Occupational Health and Fitness For Duty is another area that is an adjacency and it's an adjacency because it likely would be for new customers. I mean you could think of Fitness For Duty as something that you see defense departments or ministries of defense on a global basis want to assess not only for their active duty military but for their reserves. And that's an area of occupation health in which we currently don't participate. Further in our commercial Occupational Health business primarily in the United Kingdom, we're seeing more and more demand for wellness and wellbeing solutions and the way to think about that is if an employer can make offerings to their employees that can prevent them from becoming short-term disabled in the first place and they can work upstream from that…

Next question, please.

Our next question is from Dave Styblo with Jefferies.

Hi there good morning, Bruce. This one is for you to just stay on the longer-term strategy I guess over the 24 months, I have been instantly hearing why is an assessment over that period of time as opposed to 12 months, what was dictating the timing around that and were all set and done with that two years from now, what do you sort of hope to achieve with that, is it something where the portfolio may look dramatically different than what it is today, is it really just advancing a lot of the growth opportunities that you just highlighted a minute ago, I'm thinking of things like the Health Services business for you guys now you're talking about that business structurally being more challenged in the mid-single-digit margin. Does that even make sense to being anymore, is that a good business or should we not be surprised if that is divested over time, just trying to get a more granular sense and then do you expect at that point to revise your long-term financial targets?

Okay, Dave. Lot of questions there let me try and impact it a little bit. First of all I want to be clear that the study itself is not a 24 month Endeavour, we're well underway with the study and the analysis and in fact the work we were doing began with top of the funnel had over 225 potential adjacent new market areas that we continue to refine and filter and boil down, if you will, to a much smaller subset and we're in the process of prioritizing those and putting plans together as to how we will execute on them. For competitive reasons, I don't want to go into a lot of the details of what those specific market areas are and I think I've provided a great deal of color already in the last answer in some potential areas, but there certainly are others. And I'm excited about that work is yielding some great results. My expectation is that over the course of the next 24 months, we will implement that plan and we will absolutely see benefits from that plan along the way. There will be milestones, measurable milestones and tangible results that we'll see from that some areas returning returns to us sooner than others. So just to be clear, I'm expecting that over the course of next 24 months, we continue to make that pivot and we continue to move into some of those new adjacencies and that we will see the results of those efforts. So with that said you asked a question about the current Human Services business and our perspective on the margins there. The Human Services business is a portfolio of other businesses across a number of business lines. One of the areas that Rick mentioned the Employment Services business…

That's helpful. Thanks. And then just on a pipeline so in the bridge there I guess it's down a $200 million to $3 billion. Are you able to say how much of that was Australia moving out and then if I think about the bridge, you’ve got $600 million of delays that have moved out of that window that you talked about, but you must have backfilled some of that it means because your new work has remained pretty stable with about $1.8 billion of pipeline there, can you talk about if I'm right about out that what sort of backfilled the activity that got pushed out?

Yes, I'm going to ask Rick to take that?

Yes, let me give you a couple of data points I think that the new work pipeline portion of that pipeline is actually up and I think that that is a positive. So yes we did talk about more than $600 million that moved to the right and we did get really good backfill on that and actually the portion of the pipeline that's new work pipeline is up period-to-period. And yes your premise on the International is right, I would say roughly less than half but a pretty significant number of that $600 million really related to that international program that moved to the right.

Next question, please?

Our next question is from Jamie Stockton with Wells Fargo.

Hi, good morning. Thanks for taking my questions. I guess maybe the first one just a big picture on capital allocation I know, I think Rick said that they weren't going to be any big changes we've seen a number of quarters where the cash is building on the balance sheet, it sounds like a lot of the assets that you guys are looking at are more pricey then what you would like to pay. So I guess I'm wondering, if just in general what's your temperature on getting more aggressive with buybacks? And then may be related to that what are your thoughts around in this period of kind of slower growth maybe setting some sort of goal for earnings growth that hey if we're not going to get there through the top-line or what's going on with margins will pull the buyback lever to achieve it.

So Jamie this is Bruce. I'm going to ask Rick to take that and I may reserve the right to add a little color commentary.

Yes, certainly, Bruce. Yes, thanks. I think the bottom-line is that we are committed to sensible uses of cash and we will remain disciplined in the way that we deploy cash. I think we, as I said, I think we have been and will continue to be committed to being good stewards of capital. And I think that what we've seen is what I would call lofty valuations and acquisitions that we've passed on and I think we've done the right thing those were the right decisions that we made. I think that you can ask questions about whether or not we've been too choosy, I think really we followed couple of things that we passed on in the marketplace afterwards and we remain committed to our view that we did the right thing the fact evaluations. Look our preference would be to use M&A, to use our capital for M&A as we go into the new adjacencies and new growth platforms that Bruce has talked about. We talk about dividends, we talk about share buybacks continuously, but I think at this point we want to continue to use share buybacks opportunistically. And I think that we talk about the dividends but I think that at this point we are comfortable with the current level of the quarterly dividend that we have. Bruce?

And I would just take the second part of your question, in a period of constrained opportunity and from a pipeline standpoint and therefore putting pressure on top-line growth, absolutely we're focused on bottom-line and how over time we can continue to deliver bottom-line returns. And the number of the programs that we've mentioned earlier including things like Robotic Process Automation ways that more appropriately automate labor-intensive processes as Rick will tell you of substituting that type of capital for labor capital is not a bad move in our business, in a BPO business that will be our focus and so yes, you can guarantee we'll focus on our EPS growth during this period where the top-line remains of a constraint.

Our next question is from Frank Sparacino with First Analysis.

Hey, Frank.

Hi guess, hi first question on the U.S. federal services side of things. Can you may be just parse out what you think is internal execution versus the macro environment and particularly Bruce in light of some of your peers, just trying to report some improvement from a macro perspective?

Sure. I'd be happy to do that. Let me start first of all with the peers. And I did appreciate your note and the lot of great details in there. We've looked at the public press announcements from a number of those contractors and asked ourselves are those deals that we could've what it should have a bid on and the short answer is they're really in sectors that don't overlap with our core offerings. Many of those peers that are -- or in their peers in the sense that their federal government contractors are more defense oriented and they're benefiting from a significant surge in defense spending in the current budget and importantly the solutions that they develop and deliver are highly technical often very scientific and much more oriented toward mission support obligations for those agencies. So I can't speak in detail look to those other companies I think there's an important difference between their businesses and why they're seeing some cracking in the ice and thawing because of the surge in spending in those areas as opposed to in our markets. And another dynamic that you'd ask how much of this is kind of internal execution, well look we've said, we recognize that we needed to step up our game from sales perspective in the federal organization, so we took action to do that and we're really thrilled to have two new very senior executives Allison Patrick recently joined us from Accenture and she was the Managing Director and sales leader for Accenture Federal. And she is just bringing a great deal of experience in this marketplace, previously to that she was at SAIC in the Federal Civilian Customer Group and she also spent eight years at SRA International. So she's no stranger to the Washington marketplace…

That’s helpful. Thank you. And then just a follow-up when you look at the transformation maybe over the next couple of years as you get more towards clinical BPO and some of the digital capabilities. How does that change the long-term operating margin profile that we've known which is historically been 10% to 15%?

Yes, this is Rick. I think that's a great question and then Bruce put it well when he said what you're really doing is substituting capital for labor and when you do that, you should see margin expansion and we do expect to see margin expansion. And I think that really should allow us to go to the top end of those ranges as you know, with our health business we've been at the top end of that range and I think that we should be able to continue to find margin expansion. I mean I wouldn't want to kid you and tell you we're going to go to anything like 30% operating income margin or anything like that but yes I mean using capital in place of labor should make us more efficient and should help us do that. I think the great thing about technology and innovation though was that it also helps us improve the quality of our services and really helps us create some opportunities to deliver more value to our customers. They are key differentiators and I think they make -- they put a distance between us and our competitors. So that's really I think that's the good news story of course you know our competitors don't sit around and watch us do this without reacting. So with the constant pressure on our part and we're working hard here every day to try to do things in a smarter fashion.

Thanks, Frank. Next question please?

Our next question is from Richard Close with Canaccord Genuity.

Great. Just as a follow-up to that with respect to the margins you talk about the HAAS resetting, Rick could you just give us a little bit of directional in terms of how much the margin resets there?

Sure. Richard as you remember, we finished the third year on February 28 of 2018 throughout the life of that contract we improved margin over time and we were toward the upper end of our normal range when we finished that. When you have a reset on a program like that you wind up having to give back a little bit to the customer, they have program imperatives that they have and I would say that you would tend to go more down towards the middle maybe even a little bit below the middle of that range. But then you start the process all over again and we continue to introduce technology and innovation and so over time we will ride the wave back up as we work back toward the top upper end of that operating income margin that's the job of management is to constantly improve. So I think that answers your question?

Sure. And then on the Human, you talk about those $1.8 million you did not recognize when does that get recognized and did you already incur the expenses, so does that $1.8 million just drop down to operating income.

The answer to the second half of the question is yes. We have to record the cost as we incur them. And the revenue and therefore the associated profit come in at 1 point I mean so basically the revenue comes in with 100% margin because the cost have already been incurred on it. We were hoping to get that extensions signed by March 31, we continue to work on the program. We will report revenue at the point that it comes in I expected to come in, in the third quarter if it doesn't, it should come in within the fourth quarter we're not concerned about it ultimately getting signed it's just a matter of timing.

Thanks, Richard. Next question please?

Our last question comes from Brian Kinstlinger with Alliance Global Partners.

Hey, great. Thank you so much guys. Obviously we've talked about the Human Services margins with the economy, so I guess I'm curious given the solid economy are you not able to adjust the cost structure given the volumes are so much lower, so you can maintain profitability and if not what does a normalized margin look like in this economy?

Yes, it's a great question. This is Rick. Really I think volumes matter in the context of where we can operate within our normal ranges. When volumes are really good we can have really good margins. Now the great thing about the business is that as the volumes are constrained we still make money. I think at this particular point a normalized margin for our Human Services business is probably 7% or so now we've operated above that. I can go back and look at the 10-year history which I did looking at the call and there have been times when we've been in a double-digit situation there are times now where we're a little bit more constrained. But I think it reflects the fact that in a full employment economy around the areas of the world that we operate that we're going to be working hard to stay in that high-single-digit area like 7%. When unemployment rates are higher, volumes are better; we're going to do better from an operating income margin standpoint. But yes, it is a variable cost model it's just that we operate at a more efficient way and use our direct, our -- we absorb our indirect costs in a more efficient fashion.

Got it. My second question is I'm a little confused on the HAAS reset margins, it sounds like a couple hundred basis points. So you're getting -- is all that based on price, you drop prices that much to retain the contract and then you have to try to regain that inefficiency?

I don't just feature notion that the margins are going down. I think, yes, I mean I think you agree with price reduction but you also in the context of that need to learn how to operate your business in a more efficient way too. Constantly you're working on technology and innovation over time. So let's say I begin the program and I work it out for three years. At the end of that three year period I should be able to be operating in a more productive fashion. The workforce that I have out there are able to handle more volumes. What we know at the point that you have to reset some of this the customer is saying hey you know we think, we've a sense that you're making margins above what we'd really like, we want to do this for the for the program et cetera et cetera. And you make some concession in order to keep the business and to keep it out of a re-compete type of situation. So you get the option exercise. So at that particular point you sit down and the operator say hey I'm going to do this with the way that we move data around or we might figure out some way to build a better mousetrap at that point if you will so it's an efficiency and effectiveness type of thing and I want to go back to the prior question and just make one slight clarification. In the Human Services segment also I mean volumes matter but I think also that you have the over time you've had the customers changing the structure of some of those contracts and they've made them more performance-based. And I think when they're become more performance-based they will become more variable based on volumes. I think that you'll wind up having more return possibilities, but obviously when the volumes aren't as high I think you're going to have a little bit more difficult time going to the high end of the margin range. That makes sense?

Thanks, Brian. Next question please?

We do have one final question from Rohan Abrol with KeyBanc Capital Markets.

Hi, everyone just wanted to touch on revitalized and can see how that acquisition perform thus far with respect to internal expectations and may be how should we think about the evolution of actually using that asset as a springboard for expansion into some of the, tele-assessment, tele-monitoring capabilities you referenced earlier?

Hi, Rohan, it’s Bruce. I am really pleased to report that revitalized acquisition has gone quite well and it is performing absolutely to our expectations when we combine with them. Great company, great assets and we've seen some nice wins in the core business of well being applications that and well being services that they provide to our core commercial Occupational Health business and we're seeing strong demand in that business for those types of services. So real good confirmation that it was a nice acquisition to do. As you very well noted that another great benefit of combining with revitalized is that they bring a technology platform that lends this well itself quite well to the tele-health, tele-assessments kind of Telecare space and so we've been making good progress in that area. We've achieved what we define as a minimum viable product in that space using that technology and I think the next stage will obviously be to figure out how we bring that into certain market segments. There are logical ones, one that I mentioned earlier is long-term services and support where that type of capability can be of use and also assessments. Often the real constraint to me able to do tele-based assessment is more from a policy perspective than a technology or operational perspective. So we see some good indications that we'll be able to make broader use of that platform and I'm eager also to see how we can bring that to customers outside of just the United Kingdom there's some nice demand occurring in other geographies for that very type of solution, so all in all, very pleased.

I appreciate those comments and since you did reference the policy standpoint is that more related to reimbursement or just overall just kind of like opening the floodgates?

It's actually more related to kind of the historical thinking that assessment is going to be done correctly it has to be done face-to-face. Kind of a different mindset right, yes the clinician in the room with the individual kind of face-to-face. And so it's that aspect of policy, it doesn't really relate to reimbursement at all.

Thank you, Rohan.

Ladies and gentlemen we have reached the end of the question-and-answer session, and are out of time for today's call. MAXIMUS thanks you for your time and participation. You may disconnect your lines at this time.