Greetings, and welcome to the MAXIMUS Fiscal 2018 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lisa Miles, Senior Vice President, Investor Relations. Please go ahead.

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 a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions. Actual events and results may differ materially as a result of risks we face, including those discussed in Exhibit 99.1 of our SEC filings. We encourage you to review the information contained in our earnings release today and our 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 another solid quarter of financial results. In conjunction with our quarterly results, we also announced that the Board of Directors has approved an increase to our quarterly cash dividend effective in November 2018. The current annual payout will go from $0.18 per share, which is a yield of 0.3% based on the current share price to $1 per share, a yield of approximately 1.5%. This increase comes in addition to our June 25th announcement of the expansion of our share repurchase program of up to $200 million. Our continued solid execution and cash flow generation, coupled with our strong operating and financial performance, provides us with the conviction to return more capital to shareholders while still maintaining enough financial flexibility required to continue to invest and grow the business, including strategic M&A. M&A continues to be a priority for the company. For the third quarter, MAXIMUS reported total company revenue of $597.9 million. Financial results in the quarter benefited from the signing of several change orders, which provided a $15.5 million uplift to both revenue and operating income. We signed the change orders during the third quarter, but the related costs were incurred in prior periods. This resulted in third quarter operating income of $82.6 million, yielding an operating margin percentage of 13.8% and diluted earnings per share of $0.91. The change order benefit was partially offset by certain large contracts in the health segment that were recently renewed and reset, as well as by the ongoing start-up of contracts in the Human Services segment. The operating margin of 12.7% for the nine months ended June 30, 2018, reflects a more normal margin profile. I will start my comments on segment results with the Health Services segment. Third quarter revenue for the Health…

Thank you, Rick, and good morning, everyone. This quarter, MAXIMUS delivered solid financial results. With several recent new wins, we are focused on excellent execution and strong cash generation, driving innovation through digital solutions to simplify citizen engagement with critical programs, and effectively balancing resources in geographies where full employment has reduced referral volumes in certain programs we operate. We continue to make meaningful progress on our strategic market evaluation and are turning now to execution, including alignment with our M&A priorities. As with any guiding strategy, our execution against this plan will continue to evolve, being focused and yet flexible, so that we can meet the needs of our clients and capitalize on emerging opportunities. Today, I want to provide an update on some of my key initiatives since taking over as CEO. As I mentioned last quarter, we established two new executive level positions as we expand our clinical capabilities and push a broader digital agenda. Since then, we have welcomed Dr. Michael Weiner as our Chief Medical Officer, Dr. Wiener will help our general managers drive the overall strategic direction, growth and oversight of our global clinical health services. He has extensive government experience having worked with the Department of Defense for much of his career. In addition to being a board-certified physician, Dr. Wiener also holds a master's degree in Information Systems Technology and is one of only a handful of physicians ever to be certified as a Chief Information Officer by the United States General Services Administration. Dr. Weiner's experience includes digital automation and innovation in the area of electronic health records, including the creation of a unified interagency, electronic health record for more than 125,000 providers and 18 million beneficiaries worldwide for the Veteran Affairs interagency program office. I am equally pleased to welcome…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from Charlie Strauzer of CJS Securities.

Bruce, I know that you're not going to give guidance until next call, but maybe give us a kind of a broad sense as we look at kind of fiscal '19, maybe give us some kind of broader strokes there?

I'll be happy to, Charlie, and thanks for the question. You're right, we normally give guidance in November and we will do that again this year, so I can't give you a broad sense at this time. I want to begin by emphasizing that, as I did -- as I -- we kind of closed the prepared remarks that the team is executing extremely well. We're generating strong cash flows and we are doing this in a robust global economy with near full employment in a number of the markets that we serve. So, as we've said, we've had some referral volume challenges in some of the programs in those markets. Further, we had several large contracts, as we know that reset after being rebid, extended, and where option periods were exercised. So, while a headwind in the near term, it's important to note that those activities, those actions, provide a solid foundation for our longer-term growth. So with that as the backdrop, as we look at '19 right now, we're looking at a rebuilding year with flat results as compared to FY18. As we discussed last quarter, it's going to take some time to see the benefits of the strategic initiatives that we are executing on. And needless to say, I -- and probably leading the charge as it relates to wanting to go as fast as we possibly can, we're very much committed to returning to growth. We've got a $2.9 billion pipeline, 65% of which is new work, and we've been actively marketing. We've got a series of bids that are out there and could positively impact late '19 and certainly into FY20, so it is still early days in this regard. Our new work win rates are definitely healthy. So the key here is getting the pipeline to progress through adjudication and having fewer deals that get delayed or canceled, often through the protest process as we've seen. Each year, as I've said before, we are very committed to doing more important work for our customers and the pivot that we've been executing here over the last several years to build capability and do more clinical BPO at scale, is one example of that. It's worth noting, we now have a book of business in the area of assessments and appeals that is approaching about $0.5 billion globally. So our efforts right now, as a reminder, are focused on the next three to five years as we position MAXIMUS for our next phase of growth and we are very focused obviously on driving long-term shareholder value.

And that kind of is a good segue into my follow-up question, which is on the pipeline in looking at the federal pipeline of opportunities there, especially with Alliant 2 kind of now coming out of protest, maybe give us a little update as to what you are seeing in terms of opportunities on the federal side?

Yes, absolutely. Thanks, Charlie. So, Alliant, it's worth remembering Alliant 1 is still in place and it runs until April 2019, so nothing has come out yet. Under Alliant 2, no RFPs or RFQs, so we're in the marketing phase. This is the time when you are out in the agencies having the conversations about opportunities that should be ideally procured through that vehicle. There was an Industry Day that our team reports was very productive and at this point, we expect the GSA is going to be issuing actually a forecast of RFPs to come out under Alliant 2 in early 2019. So if you kind of think through that from a procurement perspective, RFPs in early 2019, procurements, awards, we're really looking at 2024 revenue to flow through the Alliant contract vehicle.

Thanks, Charlie. Next question, please.

Our next question is from Dave Styblo of Jefferies. Please go ahead.

I want to just come back to describing just maybe some of the headwinds and tailwinds on the business. I guess, when we entered this year, you guys had spiked out about $0.11 or $0.12 worth of start-up costs embedded in this year's guidance. And I'm curious to understand how that has evolved, that changed that much, because certainly there is the HAAS contract in Australia and so forth, and those are a drag? I'm wondering if there was just additional start-ups that are creating pressures such that relating back to your comment of flat results next year, I wasn't sure if that was revenue and EPS or just the top line comment. But I guess I would have thought there would have been some EPS benefit and to look for EPS to grow next year, but it sounds like maybe that won't be the case just given the nature of the start-up of the contracts. Can you just help us understand the ebbs and flows of that?

Sure, Dave. So I'm going to ask Rick Nadeau to provide some comments on the nature of the ebbs and flows and the start-up effect of the contracts. Like you said, we have had a portfolio of contracts that have been in the start-up phase across really our international business lines, mostly in the Human Services area, and they had presented about $12 million or $0.11 impact. It's important to know that obviously they don't all exit the start-up phase at the same time and as we transition into next year, we get an increasing benefit from exiting that start-up phase, but that's a bit backend loaded. But why don't I ask Rick to say a little bit more about those dynamics.

Yes, Dave, I think, you actually have two parts to that question. First, let me talk about the start-ups that you referred to and they really are progressing as expected. I want to remind you, these are performance-based contracts. That's really where revenue was recorded after certain outcomes have been reached. We do not generally get outcome-based payments in the early months of the contract, but rather they come toward the later stages of the work that we perform on the individual person and they do tend to increase over time. Once matured, then they should get a steady flow of outcome-based payments. We did say that we would have a $11 million to $13 million operating income drag during fiscal year '18 as a result of these start-ups. And we've previously said that we would think those contracts should be about breakeven in fiscal year '19. I think that in my prepared comments, I tried to leave the note in there that with respect to the new revenue recognition standard that -- although revenue for any individual contract will not change, the period in which you recognize revenue can change and we do think based on our preliminary work that the revenue will tend to be recorded earlier on these outcome-based contracts. So I think it'll be a little bit better in FY ‘19 than previously we had indicated as a breakeven, but I don't think that will be significant. The second part of your question, I think Bruce did a good job of talking to and that really is, when we have a typical BPO contract, the margins on those contracts will improve over time as we come down the learning curves and as we introduce innovation and things like that. So I think when I use the words margin maturity or program and margin maturity, I'm trying to leave you with the impression that over time, once you -- you bid a contract, let's say, it's a three or four-year delivery, you're going to do better from a margin perspective over time. Then when you have a restart on that program, you'll have a reset and the margin will come down, but then it will again grow over the remainder of the life of that contract period.

And I think that's pretty well understood by investors. I guess I'm struggling to understand, what doesn't quite make sense to me is, if you've got the $0.11 or so, that should be a tailwind for next year, and it sounds like there's really no new start-up contracts going into place, why wouldn't we see earnings grow next year? Seems to be like there is some offset, especially when you have ASC 606, should be an additional benefit. I guess, I'm just trying to understand what's the additional pressure that offsets the tailwind from those contracts coming off? And then more broadly, can you give us a sense of how much of your business is in the start-up phase, so we can get a better sense of beyond '19 until 20' or '21, what the earnings boomerang or tailwind would be from these contracts as they reach the maturity into that 10% to 15% typical margin?

Are you referring to the contracts that are in start-up or contracts more generally?

The ones that are in start-up that are creating a drag right now.

So the contracts that are in start-up pertain to about $80 million of revenue overall. And I think we said in a previous call that created incremental revenue of $25 million to $30 million or something close to that. So, I think that FY19 will get a little bit of a lift. I don't think that's going to be that significant, but it will get a lift from the new 606. What I'm trying to convey is that we have many contracts, a lot of contract set and it's a portfolio of contracts that start off in the early stages with less operating income margin than they finish with. And we have had several of those contracts that have gone through resets in FY18. So I do think that what you're going to see is, we have at least two or three pretty good sized contracts that are in a reset position. Meaning that, they may have had a margin that was 5 or 6 percentage points better than you would have thought, but they'll come back to a more normal level and go to the bottom end of the range of reasonableness and then over time, over the life of the contract build back up. So it's not a matter of just looking at the start-up contracts in the Human Services, the portfolio will give you a little less operating income margin next year than this year.

Thanks, Dave. Next question, please.

The next question is from Frank Sparacino of First Analysis. Please go ahead.

Maybe on the pipeline itself, so if I look at the pipeline tied to new work, it's up substantially year-over-year. But the existing is down materially and I don't know if that's simply a timing of function in terms of when contracts come up for renewal, or what other factors, dynamics are driving that.

Thanks, Frank. I'm going to ask Rick to address that.

Yes, Frank, I want to make sure that when we talk about the pipeline, included in the pipeline is what we would call new work and rebid. So when you see the new work pipeline up, that is a good thing. Overall, if the pipeline is down because of rebids, that just means that there is less being rebid this year as compared to prior periods. So I just wanted to make sure that that was made clear. Was that your question or is your question.

Yes, I think -- No, and I think, I mean it's -- and that's really a timing function, right.

Yes, you can get a bigger pipeline overall in a big rebid year. So if I've got a bunch of my contracts and they don't come out in a linear fashion, they do have a tenancy to, this is a bigger rebid year than that year, it will be some of the discussions we have around here. So, in a bigger rebid year, you're going to see a bigger pipeline, but that's a matter of the timing.

Sure. And then maybe just following up. So if I look at the UK and the new contract or I guess new framework, right, that you're able to bid under, can you give us a sense maybe just timing associated with that and then also what you think the opportunity is there of the TAM associated with that framework?

Sure, Frank. I will take that. So the framework, as we mentioned, it's really hunting license. So we've got an opportunity now to bid on RFPs that will come through that framework. I will notice, it's pretty exciting from our perspective because we've been awarded a lot now that really focuses on providing the support services for self-care programs aimed at enabling people to live with greater independence. So this is really well aligned with this shift toward more digital services and clinical services in the organization. In fact, the service offerings that we will be able to provide under the framework will be a mix of clinical and digital interventions. That build on and make use of the digital wellbeing platform that we acquired as part of the Revitalized acquisition last year. And it's worth noting, that platform already has several hundred thousand subscribers that are available to them largely in commercial work environments. And so it's something that is white labeled and provided at a large scale. And so this is a great asset that we can use to bring into this framework. Some of the applications that we will be able to provide that are kind of self-care oriented including -- include wellbeing services, tele-assessments, tele-care and coaching, prevention services, and a range of supports for adult and social care. So it's very timely. It's a great win from a timing perspective. Again, like I said, I'd always love things to go more quickly. We expect that the initial tenders will start to come out under the framework in 2019. And so while we are pre-qualified now, we can bid on those tenders. It's probably realistic to think that we would anticipate to see any revenue from it until 2020 from a fiscal year perspective. I probably can't put a total addressable market, I think I heard you say TAM, so I can't put a total addressable market size on that at this point since it is very much early days.

Thanks, Frank. Next question, please.

[Operator Instructions] Our next question is from Jamie Stockton of Wells Fargo. Please go ahead.

I guess maybe the first one, there have been a bunch of questions about 2019. It seems like you guys have been kind of taking a step back looking at your portfolio of businesses, trying to assess what you feel like the longer-term growth prospects are. I was just wondering if you could give us an update on your thoughts there versus kind of the legacy 10% top line growth goal?

Jamie, it's Bruce. Thanks for the question. I wanted to begin by -- I'm just providing a bit of a backdrop and reminder on the review done that we've been conducting, that we mentioned on the last call. And the whole purpose of the review, like you know, is to take very much a fresh look at our current markets, emerging opportunities, and our strategy overall. It's an internal review and the design here is to look at the best market paths for MAXIMUS for the long-term. So that said, there are four components to our activities. The first is, we're objectively analyzing our current markets where we think that we can be playing a more meaningful role through augmenting our service offerings, and really growing out some of the current markets that we're presently in. A good example is the federal book of business where we think that our BPO and technology solutions can add value to additional programs and agencies. I will say that in the last few months, being in my new role, I've been out visiting with a number of our projects and talking to our clients, and it's clear to me that the capabilities that we've been developing, particularly in the area of assessments, are just beginning to tap what I think is a very significant market for us. The second area is that we're taking a fresh look at new adjacent markets. And those are particularly ones that are impacted by macro, demographic, and economic trends. Third, we are considering whether some of our current businesses need to be managed differently. So, for example, to support the convergence that we've been seeing between Health and Human Services programs, do we need to address that market differently. There's obviously a lot of energy right now…

And then maybe just one other one on the digital focus. I'm curious, and this is a little bit of a qualitative question here. But when you think about digital, is it ultimately going to be something that helps you really improve your cost structure? I guess, that would be one bucket that I think about helps you take business from competitors for existing contracts that are already out there that someone else has or do you see there's something primarily that's just going to open up new opportunities where there is works that has not really been outsourced, but because there are incremental capabilities, it's something that you will see disproportionately outsourced in the future?

Right. Jamie, actually I'd see it affecting all three categories that you've outlined, and I think those are the right buckets. Our immediate focus has been on the first. It's been about ensuring that we're doing everything we can to run the most efficient business possible. So we have been focused on things like robotic process automation, we've made a lot of progress. We've got, I would say, north of a half a dozen, and probably just shy of a dozen programs in one stage or another of development from an RPA standpoint and execution. We've been looking hard at, and, I will say, we've begun to apply machine learning capabilities and through some of the innovation, research, and development projects that we've been implementing. And we're certainly looking at how things like augmented intelligence and artificial intelligence can help us streamline complex decision processes in our business. So all that kind of fits into that bucket of helping us drive efficiency and effectiveness. The buckets are overlaid -- are overlapped, if you will. They are interrelated because secondly -- certainly with these capabilities that we're building from a digital standpoint, we're able to take business, we're able to differentiate ourselves from our competitors. We've had several bids where the digital component to the bid was noted as a difference maker and a key discriminator by the source selection officials. So no doubt. And then thirdly, opening up new opportunities. The best example of that that I would point to is, there are certainly customer contact centers out there that maybe historically haven't been available for outsourcing, whether they are highly unionized environments or what have you. With some of the technologies that we're talking about like natural voice recognition, human assisted IVR , things like that, you can go to a customer and, say, hey, look, you shouldn't view this as necessarily a threat, this is something that helps you make the most of the workforce that you have and improve service delivery. Many of the customer contact centers that fit into that category have extremely high abandonment rates and are not providing good customer service. So we can lead with the digital offering that enables us to come in and automate and reduce volumes and help that program perform more effectively without necessarily challenging some of the underlying goals of the government customers, so it can open up new markets as well. Hope that helps.

There are no additional questions at this time. So this will conclude today's conference. You may disconnect your lines. And thank you for your participation.