Greetings and welcome to the MAXIMUS Fiscal 2019 Third Quarter Earnings 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. It is now my pleasure to introduce 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 in 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 this document, please see 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 its financial results for the third quarter of fiscal year 2019. Revenue for the third quarter of fiscal 2019 was $730.7 million, which was lower than expected. Acquired revenue came in below our forecast due to a slower-than-anticipated ramp on the Census Questionnaire Assistance contract. Total company revenue was also unfavorably impacted by foreign currency translation of $9.1 million in the quarter. Nevertheless, in the third quarter, MAXIMUS continued its track-record of solid operational delivery, demonstrated by strong margins, earnings and cash flow. Total company operating margin was 11.4% for the third quarter, driven by the U.S. Health and Human Services and U.S. Federal Services segments. Operating margin in the prior year was 13.8%, which benefited from $15.5 million of revenue and operating income tied to change orders. GAAP diluted earnings per share were $0.97 for the third quarter of fiscal 2019, in line with company expectations. I will now speak to our segment results in the third quarter. As expected, third quarter revenue for U.S. Health and Human Services segment decreased to $291.1 million compared to the same period last year. In the third quarter, revenue was tempered from contracts that were rebid or extended over the past year. Looking forward, we anticipate revenue will increase as these programs mature and new contracts begin to generate revenue, which is expected to return the segment to organic growth in the fourth quarter. Operating margin for the segment in the third quarter was 18.6%, compared to 21.3% in the same period of the prior year. Within the U.S. Health and Human Services segment, the prior year benefited from $13.7 million of revenue and operating income tied to change orders. Excluding this benefit, operating margin for the segment would have been 17.7% in the prior year.…

Thank you, Rick, and good morning, everyone. While we have revised our revenue outlook for fiscal 2019 to reflect the issues Rick noted, we are seeing growth opportunities over the long-term. To capitalize on this, our strategic plan offers multiple paths forward through three key pillars. First is Digital Transformation or a cultural shift as we think about digital disruption within the government services market and new models for citizen engagement and operational efficiencies. Market-leading applications, advanced analytics and digital automation enhance our competitive position, enable new solution offerings and improve overall service delivery across our operations. Second, Clinical Evolution, as we see macro trends that drive demand for BPO services with a more clinical dimension, we maintain the foundation of our business, operating customer engagement centers and providing case management services. Third, Market Expansion, as we evaluate emerging markets, organically grow the portfolio and acquire capabilities and contracts to establish a foothold in these adjacent markets; we also consider our clients’ longer-term visions for reengineering their social programs and delivery models. We aim for expansion that is a natural complement to our core services globally. Today, I will focus my comments on both new work, as well as the expansion of our services in market adjacencies. With several new wins and a pipeline of developing opportunities in key markets, we are making meaningful progress on strategic execution as we offer integrated solutions across our geographies. We must, however, remain focused on winning work currently in our pipeline and reducing the levels of erosion on our existing portfolio. As I’ve previously discussed, we’re executing a technology transformation in our business and in the solutions, we provide our customers as part of our overall digital strategy. Fundamentally, to deliver digital solutions, we must also transform the platforms on which they are…

Thank you. We’ll now be conducting a question-and-answer session. [Operator instructions] Our first question today is coming from Dave Styblo from Jefferies. Your line is now live.

Hi, good morning. Thanks for the questions and I appreciate the color on some of the contract wins that you guys have had. So congratulations on those. My first question is about organic growth. I’m wondering if you could share with us what the consolidated organic growth was for fiscal 3Q. I think it was down about 8.4% in the first quarter and then that was only down 6.5% in the second quarter. Wasn’t sure, as I heard some of the pieces of what that would be for the third quarter. And as part of that, when you’re looking forward, what are you guys assuming for the fiscal year 2020 organic growth now that you’re blessing the Street’s over $3 billion of revenue?

Great. Hey, Dave. Good morning. It’s Bruce. Hope you’re doing well. I’m going to ask Rick to take the first question there related to the organic growth in the quarter.

Yeah. Dave, we’re going to file a Form 10-Q here today, later today. We do have a table that we do inside the Management’s Discussion, MD&A. And we actually walk the revenue from the respective comparative period in the prior year to what it is this year. And what you’ll see in that is that currency, the $9.1 million is actually 1.5% of erosion to that. The acquired revenue was $163.4 million. I think that was in my remarks. And so, the difference is the net organic impact, which is about 3.6% for the quarter overall for the company. Was that your question, Dave?

Great. That does for the third quarter. And then can you speak to what you guys are thinking about for next year?

Well, I think that in my prepared remarks, I did talk about the fact that we thought that as we started our look into next year that what there was in the First Call consensus is generally in line with what we believe at this particular time. Now, it’s also early days and we have a lot more analysis to do. We will do the formal guidance in November, and that is well about three more months away. So we’ll continue to go through the annual process of planning. Look, we have to also recognize that in this particular environment, currency fluctuation has been pretty heavy. And I think that will be one of the real wildcards that we will have. I mean, that British pound has bounced around a lot recently. And we have generally suffered from erosion, not benefited. But that will be a key element to this also.

Okay. Yeah, that’s – I guess what I was trying to get at was just the organic growth component of what you’re seeing so far for next year, including the FX.

Yeah. It’s a great question, Dave. Let me help you with a little bit of math there. I think that if you look at the guidance that we gave for this year and you look at $2.88 billion to $2.90 billion, if you took the midpoint of that that would be $2.89 billion. I think we’ve also disclosed that we think the Census contract will give us about $150 million tailwind. And I think that we’ve also, and it will be in the 10-Q when we file it today, the revenue that we estimate that General Dynamics IT, GDIT, had for the one-and-a-half months prior to the acquisition was about $98 million, $100 million. So if you put all those together, that gives you a pro forma for fiscal year 2019 of about $3.14 billion. So when we look at the First Call consensus at $3.18 billion, that’s about a $40 million net organic pickup. Now, that is obviously net of what we expect to see from currency and from erosion that we have naturally from our existing contracts. But, yes, we do project that we will begin having modest organic growth in fiscal 2020.

Got it. That’s great. Thanks. And then, just real quick on the new work in the pipeline that we can back into using the math, it looks like on my math that was up about 24% sequentially. Can you speak to what is coming into the pipeline, which business line that might be in? Is that a smattering of just a bunch of opportunities that the business development team has been working on? Or is there some larger contracts that seem to have kind of clipped into that two-year horizon now?

Hey, let me start, and then Bruce will pick up. But I think it’s in our U.S. Federal segment primarily. But all segments are participating in that pickup in the pipeline. And, yes, you’re right, that new work pipeline is about $20 billion at this point. We don’t comment on specific items, for competitive reasons, that are inside that pipeline. But it’s across all segments and across all geographies, with a bias toward that U.S. Federal segment. Bruce?

Absolutely. The only other color I’d provide is that we are starting to announce the opportunities in the United Kingdom that are a little larger in nature that would contribute to FY 2021, come into the pipeline and get picked up in the tracking, so – and 2021/2022 fiscal year impacts for those opportunities.

Thanks.

Thanks, Dave.

Thanks, Dave. Next question, please?

Our next question is coming from Donald Hooker from KeyBanc. Your line is now live.

Great. In the U.S. Health and Human Services segment, the operating margins continue to be lofty and impressive. And I know you’re doing a lot of work there with RPA, and you’re going through a data center migration, which I think is still early stage. I’m not sure. But can you – how are you thinking on the steam of looking into next year? What is the right margin there? I mean, are those efficiencies going to remain going into next year? Or how do we think about the U.S. Health and Human Services segment operating margin?

Sure. I’m going to – Don, I’m going to start just with a comment or two on the efforts that we’re making, as you’ve noted, and the timing of those; and then ask Rick to kind of pick up from there. I think we’ve said that for this year, we’re expecting 18% to 19% in that segment as we close out FY 2019. And you’re right, we’re really trying to step on the gas pedal as it relates to our RPA program. The last I checked, we had about 12 docs that were in production, another 49 or so that were actually in the shop being worked on, and getting ready to get deployed. And so, we should see a bit of an uptick in terms of their contribution to the operational efficiency of the business next year. And at the same time, we are in the early days as you note, in terms of our data center migration project, as we move to the cloud across the business. And we’re also, as I said in my prepared remarks, in the early days of the completion of our microservices initiative and the deployment is that new microservices platform across the business. So all of those, we see as helpful tailwinds in keeping that business able to deliver high operating income margin, recognizing that as we – in any business cycle, in any fiscal year, right, we’re going to have rebids or we’re going to have opportunities to extend current contracts, where we’ll have to give back to our clients. And that can provide a bit of a headwind in the process. So I think when you balance all that out, we’re pretty comfortable, as you said, and very pleased with the performance of that segment. But I’ll turn it to Rick for further comment.

Yeah, remember that we give formal guidance in November. We’ll be doing a lot of work between now and then. I think earlier in the year, we also explained that when we had this acquisition come in, that gave us some good operating income margin lift across all of the segments. What you’re really doing is you’re taking your SG&A, your fixed SG&A and you’re spreading it over a bigger base. So although the acquisition fell into the U.S. Federal segment, it gave a lift to all of them. We’re also, as I said, previously getting another lift and FY 2020 in that Census contract, another $150 million of incremental revenue. Now, as we look forward, I mean, we’re also spending wisely, as Bruce said, on RPA. And we’re trying to spend wisely on microservices and things like that. But we’re also going to be spending on selling type of expenses and making sure that we’re putting enough into the growth engine. So with all that said, I mean, I don’t think you’re going to – I’m not going to talk about a big deterioration in those margins. I think they should stay pretty strong. But we’ll be able to give you more tangible and concrete guidance on that in November.

Okay. Maybe just continuing on this theme of margins, I think we all understand why the Outside the U.S. segment margins are low. I think in the past – and correct me if I’m wrong – you’ve talked about margins there getting into the 5% to 10% range. That’s sort of the goal over time, I believe. I guess my question will be, like what is the timeframe there? Is that all – I mean, I assume that’s not all next year. How should we think about walking our margins up in that segment over the next couple of years?

This is Rick. For the Outside the U.S. segment, we are striving to achieve 5%-plus Alliant margins in FY 2020. And then we want to continue to improve those margins in future years. I talked about it in my prepared remarks, the ramp-down of the accretive component of one of our primary contracts in Canada has negatively impacted the margin outlook for Outside the United States segment, as we head into FY 2020. I’ve also indicated we are making investments in business development across the portfolio. We’re working on a lot of large newer procurements, as Bruce mentioned. So I think that the nature of those sales opportunities are longer run in nature. So I think that those will be things that will keep us from springing back too fast in that Outside the U.S. segment. We should see margin improvements in the occupational health business in the United Kingdom. We’ve made a lot of investments in clinically related technology platforms to enhance the customer experience, and the clinician experience also, and to improve our competitive position. We’ve also worked hard with our UK human services, employment services contracts that have been in the startup in the U.K. They are getting better. And so, we should expect to see that. I think that the Outside the U.S. segment will improve. I think, as I said, we’re going to be working hard to get them to 5%-plus in FY 2020. And then we want to move them up in FY 2021 and future periods.

Super. Thank you for the color.

Yes.

Next question?

Thank you. Our next – our next question today is coming from Charlie Strauzer from CJS Securities. Your line is now live.

Hi, good morning.

Good morning, Charlie.

So, just my two quick questions are – first on the ramp of the Census contract. Do we feel like now that we’re kind of into Q4, that’s starting to kind of ramp more in line with expectations originally? And then any additional color there would be great. And then, my follow-up is more for Bruce, where you look at the pipeline and just its nice sequential build in the total pipeline, and kind of what’s your confidence level on being able to convert that to new work?

Great. Charlie, I’ll ask Rick to take the first one, and then I’m happy to take the second.

Charlie, it’s about the CQA revenue, is that your question?

Yes, Census contract there.

Yes, all right. Yeah. So the Census Questionnaire Assistance contract, as a reminder, what we’re doing is we’re offering telephone assistance to citizens, using multilingual customer contact centers and really providing assistance to the respondents with respect to specific questions and items that they have with respect to that 2020 Census. I think our miss in the quarter was due to a number of factors, including the timing of the facility build-out on those contact centers and some staffing ramp. We also incurred less vendor pass-through expenses that yielded lower revenue in the period. But as you know, those are really low or no margin type of things. I think as I said in my prepared remarks, we still expect to achieve revenue over the life of that CQA contract, in line with the disclosures that we made last quarter. Bruce?

And, Charlie, regarding your question on pipeline confidence, just to go back to a few of the statistics, as I said in my prepared remarks, about 68% of our pipeline of $29.6 billion is new work. About $5 billion of it is though that rebid for the CCO contract that came out – is coming out as expected, in June of 2021. We also noted in our press release that of that $29.6 billion contract about $1.8 billion are proposals pending and $1.9 billion are proposals in preparation. So then to frame it, obviously, we’ve got a significant component of that two-year view contract sitting in the zero to six months. And further, we don’t really disclose the specific categories across that pipeline. But I think as a general comment, I would say, I’m pleased with the, first of all, the volume of the pipeline that we’re seeing, and the benefits and effect of the investments that we’ve made in business development, particularly in our federal organization. Number two, I’m pleased with progression of the opportunities that we’re starting to see across that pipeline. We always talk about, if we’re seeing a lot of, what we call BRC, our Business Review Committee meetings, here at MAXIMUS is a good thing, because that means people are bringing their deals through for review, and discussion and approval. So we like the volume of that. I also get the sense just from talking to folks in the industry, that it’s a busy summer here in Washington all around the government contracting community. I think that as we’ve commented before, the government slowdown, or shutdown, the 38-day shutdown that we had, didn’t really affect us from a revenue perspective, but it certainly affected a lot of agencies as it relates to RFP progression. And I’ve seen some statistics, where there are a number of RFPs that got pushed out at least six months. Well, now we’re getting into a point where with the budget year shifting as we come to the end of September, agencies are moving to get procurements completed. And so, it’s a fairly busy season. I think all those are fairly positive indicators. I will say at the same time, for the very largest deals, you always have to keep your eye on whether there are protests, either kind of protests that precede the award of the deal or, obviously, protests afterward. And for the biggest deals in the pipeline, that’s always a dynamic that we have to follow. So while the agency, for example, might have you complete your proposals and get them submitted, that can happen in the context where there are still outstanding Court cases that have to be resolved to determine whether that procurement will advance. So the boxcar-size deals always have that dynamic, because they attract, obviously, that kind of attention and there’s a lot at stake. So, hopefully, that provides a bit more color for you.

That’s great. Thank you very much.

Thanks, Charlie. Next question, please?

Thank you. Our final question today is coming from Frank Sparacino from Final Analysis – First Analysis. Your line is now live.

Good morning.

Hi, guys. Maybe just following up on that Bruce commentary around the pipeline, I know you guys were approved as part of at least one or two large government vehicle contracts. Has there been any movement yet in those?

We referenced the Alliant 2 contract and we also referenced the GSA IT 70 SIN contract, which is perhaps not as it sounds, they’re actually for contact center procurement. It is – I’ll give you a little color on that. Alliant 2, as I have said I think in prior prepared remarks, it has both an offensive and a defensive component. There are agencies that have historically used other contract vehicles, like particularly the [TIPs] [ph] vehicle at the IRS, that we understand are going to shift into Alliant 2 for procurements in the future. So it’s important to be on the bus and able to respond to procurements through that vehicle. Secondly, a couple quarters ago, agencies were still kind of preparing their procurement strategies, getting those submitted. I would say we’re pretty pleased with the volume of deal-flow through Alliant 2. And we’re also fairly pleased with our win rate so far. I wouldn’t call it a torrent. But at the same time, I would say it’s kind of delivering as expected at this stage in its life cycle. The GSA IT 70 SIN, we were the initial awardee on that and we were the only one, which is not a bad position to be in, if there are agencies with urgent requirements that need to get something procured. They’ve continued to add some additional companies to that SIN. And I will say our teams are using it as a very effective marketing tool to go to customers. Now that we’ve got the assets that we acquired as part of the GD IT transaction, we are the largest provider of customer engagement center services in the U.S. federal government, and one could argue to government in the world. And with that vehicle available to us, as a prime contractor, it’s a very attractive tool to use in our marketing. So I’m pleased with how the teams are positioning deals and trying to shape and steer those deals into that vehicle as well. Does that help?

It does. Thank you. And then, maybe just following up on the workers’ comp programs you guys are involved with, trying to get a sense, I mean if you looked at that on a large-scale basis, how big that opportunity is, I don’t know how many states you’re working with currently outside of California and then New York, which you just alluded to, but just trying to get a sense of the opportunity there.

Sure. That is I will say not the first time we heard that question, Frank. So first of all, couple things. We do work somewhat similar to this in several other states, but it’s not of the volume or magnitude of the programs in New York or California, kind of point one. Point two, this is an area where we see there to be a real opportunity because, I mean look at the statistics alone from California. The savings that have been generated as it relates to workers’-comp-related medical-costs, the decrease in the prescription or over prescription of opioids in the setting of worker’s compensation setting, the decline in the advisory rates that are used to set insurance carrier rates. So it’s very attractive. There have been some whitepapers published by independent entities, Florida Tax Watch being one example that really publishes a very positive commentary on this program. We have stepped up our game by hiring a new Vice President in this area that’s leading our sales and business development efforts. We’re taking a higher profile role at industry conferences and really ensuring that the message is getting out there. This is an area that plays really to the strengths of MAXIMUS in a number of dimensions. One is the independence that’s required in order to complete these reviews. And the other, and I don’t want to get to wonky here, but is you really have to be a URAC accredited independent review organization. And that’s a designation that doesn’t come easily and it’s something that speaks to your ability to provide independent and conflict-free review services. So I’m really pleased with the way these programs have developed. And in New York in particular, the reason this opportunity came around was, back in 2010, they implemented new medical treatment guidelines that really changed the delivery of healthcare to injured workers. And those medical treatment guidelines had provisions that allow for pre-authorization reviews and then subsequent reviews depending on the care that’s been authorized. They also then in 2017 were required to establish this new drug formulary that I mentioned in my prepared remarks. That has a component for prior authorization for non-formulary drugs in particular. And given these two dynamics, the state’s facing a highly variable volume of requests and they need to ensure they have a partner that can really handle the volumes above their current capabilities. And so, we as an independent review organization, can perform these reviews, so we can look at prior auths for drug formulary, requests for prior approval under these medical treatment guidelines and other types of authorizations related to the program. Importantly, our review really just leads to a recommendation to the Workers’ Compensation Board on how to resolve the request. It’s a recommended resolution that we provide. So I think it’s just a custom fit for the services that we have as a company. And we’re optimistic that we can take this to additional states. Hope that helps.

That’s great. Thank you, Bruce.

Sure.

Thank you. We’ve reached end of our question-and-answer session. And ladies and gentlemen, that does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.