Greetings. And welcome to the MAXIMUS Fiscal 2019 Fourth Quarter and Year End 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 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 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 will hand the call over to Rick.

Thanks Lisa. Fiscal year 2019 was characterized by consistent execution and demonstrated progress on management’s strategic plan to lead a digital transformation, grow our clinically related services, and expand in key priority markets and adjacencies. We generated healthy cash flow, completed our largest acquisition, and returned additional capital to our shareholders through an increase to our dividend. We finished fiscal 2019 with revenue and earnings growth driven by the acquisition of the U.S. Federal Citizen Engagement Centers last November. As noted in our press release this morning, total company revenue for fiscal 2019 increased to $2.887 billion, which fell within our guidance range of $2.88 billion to $2.9 billion. On the bottom line, total company operating margin for fiscal 2019 was 11%. While our U.S. Health and Human Services and U.S. Federal Services segments delivered good margins, we experienced downward pressure on our pretax income outside the United States. As expected, diluted earnings per share for fiscal 2019 increased 11% to $3.72 compared to the prior year of $3.35. Our fiscal 2019 tax rate benefited from work credits and R&D credits, which yielded an effective rate of 24.2%. I will start my comments on segment results with the U.S. Health and Human Services segment. Revenue for the U.S. Health and Human Services segment in fiscal 2019 decreased to $1.18 billion compared to last year. The anticipated decrease was due to contracts that were rebid or extended. It is worth noting that fourth quarter revenue increased 4% compared to the prior year period and was all organic. The segment delivered a strong operating margin of 18.8% for fiscal 2019, which was in line with our expectations and compares to 18.0% for the prior year. The segment’s full year operating margin also benefited from cost synergies resulting from the November 2018 acquisition…

Thank you, Rick, and good morning, everyone. As Rick noted in his opening remarks, during fiscal year 2019, we made substantial progress on the key tenets of our strategy to position MAXIMUS for future long-term success. When you examine the macro trends, we have aligned our plan with how the markets are evolving, how our government clients are seeking to address challenges and how consumers are best served through an improved experience in engaging with government programs. With demographic trends of aging populations with more complex health needs, we see an opportunity to deliver services at the heart of the intersection of clinical BPO and digital services. Today, I wanted to take the time to track our progress towards our three goals of digital transformation, clinical evolution and market expansion, and further provide you commentary on how these support our strategic trajectory moving into the new fiscal year. First, I would like to address digital transformation or the cultural shift towards digital disruption within government services we operate. We help lead our clients towards digital maturity by defining and operationalizing these technologies and innovations. We seek two primary objectives with our digital efforts. First, we aim to deliver a unique citizen experience. Second, we use digital technologies and innovation to improve our overall program efficiencies, and to operate smarter, using tools that propel our overall productivity. By meeting citizens where they are on their phones, computers and tablets, we are providing a better experience with unparalleled service, while lowering costs and delivering efficiencies for our government clients. We apply innovative tools that integrate with existing systems, maintain security and optimize workflow. The result is that we are seeing more and more citizens engaged through digital channels. For instance, between 2017 and 2019, we doubled digital enrollment volumes during open enrollment…

Thank you. [Operator Instructions] Our first question today is coming from Richard Close from Canaccord Genuity. Your line is now live.

Great. Thanks for the questions. Bruce, I was wondering if you could sort of help us out with the digital transformation and the clinical evolution. Specifically, I am trying to gauge in terms of, well, first on digital transformation, how much of that initiative do you think is provides the opportunities for incremental revenue versus maybe increasing your competitiveness on pricing and driving increased profitability for the company?

Hey. Richard, good morning and thank you for the question. It’s a great question because there are several components to the digital transformation strategy that you have highlighted. Clearly, as we got started, we looked at how digital could really help us drive process efficiencies in our back office operations, and that’s going to drive profit improvement. It also allows us to redesign workflows and create more efficient workflows for the work that we do which can drive greater productivity. All of that enables us to maintain competitiveness and expand competitiveness and also obviously generate better margins, generating profit that we can invest to expand into more markets. I am really pleased with the progress that we have made in areas like robotic process automation. Recently, one of the big RPA tool vendors out there, Automation Anywhere, elected to post kind of case study of their work with MAXIMUS to talk about the bots that we have been developing and implementing and some of the savings that we have been driving and so forth. So there’s -- that’s definitely an important component to it. Also through a lot of those automation efforts, we can improve quality and assure quality in our operations, which is critical as well especially when we are held to SLAs in contracts. But at the same time, we have been working to improve the citizen experience, and the example I’d use to illustrate how you can drive an expansion and roll their scope and more revenue comes from the work that we are doing in British Columbia. We have got what is really an omnichannel customer contact center platform there; and to make a bit of a distinction, there is a difference between omnichannel and kind of multichannel. An omnichannel platform implies that there’s process choreography…

Yeah. I was just trying to get the sense of -- with digital transformation and then clinical evolution, how much you think that increases the company’s competitiveness and just like the overall contracts you guys can go after?

Well, at a high level, I’d say, there’s no doubt that as we continue to evolve our clinical capabilities, we increased the competitiveness of the company because there are a few companies that can operate in that domain with programs of such scale and complexity can deliver on the quality requirements and the service levels that are required, while having that work done by a highly trained clinical staff. A great example would be the Health Assessment Advisory Services contract in the United Kingdom. Similarly, as we look at additional markets, where we are not necessarily looking at providing direct clinical care delivery, but rather clinical services related to assessments whether it’s fitness for duty or pre-employment screening assessments or investments related to individuals applying for certain benefits. That -- by opening that aperture, and we can go even further, I mean, we are doing some work right now on further evolving our health-related strategy in the Federal business. We are seeing that opening new markets over the course of the next two years to five years quite substantially. So, I am confident that by pivoting in this direction and opening the aperture and becoming more clinical in the work that we do, we will reposition the company into new exciting adjacent markets. I think that makes us relatively unique in our ability to deliver this, as I said in my remarks, the combination of digital technologies and clinical services or clinical BPO, as we call it at scale.

Does that answer the question?

Does that answer your question?

That’s good. And then just as a follow up, we have got the new pipeline information and the new definition over this last year, obviously, the new work is going to be the driver to the reemergence of organic growth. Is there any sense you can provide us in terms of the pipeline, maybe how -- a breakout in terms of how much of that is near-term maybe over the next year or two versus longer term?

Yeah. There’s some helpful data, Richard, in our press release, I think, that will at least go a few steps towards answering that question and that specifically, we have got -- of the pipeline of $30.2 billion, $2.9 billion is proposals pending, pending decision, $1.2 billion is proposals in prep and the remaining $25.1 billion are opportunities tracking. And it’s worth noting again that that we are looking two years out in terms of the total pipeline due and this is not a probability weighted pipeline. So, as opportunities move in and out of those farther out stages, what we call the identified stage, it’s not uncommon to have the pipeline flux as values can change, as programs become either more definite or less definite.

Okay. Thank you.

Thanks, Richard. Next question please.

Our next question is coming from Charlie Strauzer from CJS Securities. Your line is now live.

Hi. Good morning.

Good morning.

First of all, thank you for the extra info that you gave us relating to the guidance, but I was hoping that you could provide us with some additional detail on the quarterly cadence that’s implied within the guidance.

Charlie, I am going to ask Rick to address that one.

Sure. Thanks, Charlie. We recognize that fiscal year 2020 has many dynamics and the Census contract being a large program that is ramping to pre-peak operations during the year in mid-year and then is expected to go into a ramp down does create some complications. I think as a result of that program, the timing of the revenue and the profit will cause some quarterly fluctuations in our results. Based on what we know today, revenue for the first half of fiscal 2020 should be greater compared to the second half of fiscal 2020. We expect revenue in the first quarter of fiscal 2020 to be sequentially higher compared to the fourth quarter of fiscal year 2019. This is driven by the Census contract and by open enrollment under the Affordable Care Act. Our second fiscal quarter is forecast to generate the highest level of revenue during the year, with revenue in the third quarter and the fourth quarter steps down as Census contract begins a slow ramp down. We anticipate that the earnings will be sequentially lower in the first quarter of fiscal ‘20 compared to the fourth quarter of fiscal ‘19. There are some start up contracts and some seasonality for contracts that are performance based that are causing that. Based on our present expectations, we are forecasting sequential improvement in earnings through the third quarter of fiscal ‘20. Our fourth quarter of fiscal ‘20 is forecasted to be sequentially lower compared to the third quarter as Census contract begins to wind down. I hope that’s helpful.

That is very helpful. Thank you. And then just switching gears a little bit to the kind of rebids and upcoming contracts. I know that the U.K. is not releasing our fee for the integrated service contract but any sense of timing with that?

Yeah. You are right. They have not and so from a timing perspective, the current contract is going to run through June of 2021 on Health Assessments Advisory Services and we are standing by to await further news or see an RFD as it relates to next steps on the integrated services contract that Rick talked about.

Great. Thank you.

Thank you, Charlie. Our next question please.

Sure. Next question is coming from Donald Hooker from KeyBanc. Your line is now live.

Hey. Great. Good morning. So it’s good to see, I guess, the pipeline continues to warm. I guess, my question is, in the pipeline, there’s a big number there of opportunities tracking and I am wondering if you could provide some sort of context there, are these renewals, I guess, there’s that big CMS renewal that’s now captured in there. So my first question is, is there any way you can kind of how much of that is renewal versus new work? And then, secondly, how much of that -- how do we think about that from a discretionary project versus sort of less discretionary products considering that we have a Presidential election next year?

Great questions, Don. Let me start and ask Rick to add some color or commentary if he has some at the end of my answer. I guess, first of all, you are absolutely right. There is a large opportunity that we talked about previously. I think it’s at about $5 billion in the pipeline related to the renewal of the CMS customer contact operations or CCO contract. We have got -- I would also say in terms of giving you color, 67% of the total pipeline that we talked about is new work related and I think there’s strong representation in that pipeline, there’s a weight towards federal in that pipeline, but there is representation across our geographies and across our business line. And I think that’s fundamental to the discussion that we had about the return to organic growth that we are driving. I’d also say, as you would expect for a company of our, nature there will be some larger BPO deals in that pipeline that we would be chasing again across the segments of the business. And in some segments of the business, you see a preponderance of relatively smaller transactions that are maybe more related to the IT services types of contracts that we have or even the consulting type business that we have in our U.S. Health and Human Services. So it’s a reasonable mix, not dissimilar really to what we have had historically as a BPO-driven company. Your question though about what’s -- kind of which programs are have kind of staying power across administrations and which ones don’t. It’s interesting. I would tell you, fundamentally, our business is a business that, obviously, as you know, is linked to long-term demographic trends and is linked to critical social benefit programs that governors -- governments…

Got you. And then maybe my other question would be maybe any updated thoughts, I mean, now you just gave guidance for fiscal ‘20. But I guess as you think about beyond fiscal ‘20 with the Census contract rolling off, what is sort of the -- so how are you maybe quantitatively or qualitatively sort of managing that drop off in revenue, can you reallocate resources, I mean, I am sure you get -- been getting this question a lot, but maybe just update us on sort of on fiscal ‘21 really with regards to Census rolling off?

I am going to ask Rick to start by just speaking to the dynamic of fiscal 2021 and then I’d be happy to add to the number the actions that we are taking to address that?

Sure. In our second quarter earnings call, we estimated that Census revenue to be about $200 million for fiscal ‘19 and about $350 million for ‘20 and less than $50 million for ‘21. We -- as you heard from my prepared remarks today, we came up a little short on FY ‘19 and the actual results were approximately $185 million. However, we do expect to recover that shortfall next year with about $175 million of incremental revenue for total FY ‘20 revenue from that Census contract of approximately $360 million. If there will be some revenue similar to what we said in the second quarter call, that goes into FY ‘20, but you will have a step down there, and that revenue should be less than $50 million in FY ‘21. Let me kick that back to Bruce, I mean, you can rest assured that we are going through and we will doing -- do everything we can to make sure that we right-size and evaluate all of our programs, but, Bruce?

Yeah. And then the other side of that, Donald, is the growth side, right? And so we have been very focused, if you will, on first of all, the reconstruction and growth of the federal sales organization, which has really driven excellent pipeline expansion, where we are now able to field opportunities from other agencies and departments and to take our capabilities deeper into the federal marketplace. We are running a similar play if you will in the U.S. Health and Human Services business. We had an excellent sales leader join our organization in the third quarter, who’s in the process of building up a sales team there and we have made good progress in making some strategic hires in that marketplace. Fundamentally, they have to have something to sell and markets to address and I will go back to kind of a paradigm of it that I have spoken to you earlier about growth. One and that is we kind of look at it through three lenses or three rings if you will. The innermost ring being our teams need to do everything they can to sell off the current contracts and expand the core business driving volume increases and taking new opportunities to our customers into core programs that we serve. The second ring would be call it markets or services that we currently don’t offer, but really don’t require an acquisition to be completed. So we can do it with organic growth initiatives, a great example in our U.S. Health and Human Services market would be earlier this year the Office of Personnel Management clarified some critical fed regulations as it relates to whether private sector contractors can perform certain functions for public benefit programs. And that regulation and that clarification was quite clear that as long…

Yeah. Thanks for the commentary. Appreciate it.

Thanks, Donald. Next question please.

Thank you. [Operator Instructions] Our next question is coming from Dave Styblo from Jefferies. Your line is now live.

Thanks much and good morning. Thanks for the questions.

Hi.

First one I have was related to the Outside the U.S. segment. You guys talked about reaching a 5% margin target for all of fiscal year ‘20. The guidance here is implying something a little less than that low single-digit. So I was curious is the slower progress on that again related to the new U.K. contracts that are that are working through maturity right now or is there some other new headwind that’s on that book? And then as you guys talk about getting to the high single-digit margin target over the next three years. Can you help break that down and help us understand how much of that is self-help if you will versus needing some help from a more favorable economic backdrop?

Great. Great question, Dave. And Rick’s going to jump in there.

Sure. First thing, Dave is, we are not satisfied with that Outside the U.S. margin and we do have a goal to achieve 5% plus margins in the near term. I consider this to be a goal for us to reach by the end of fiscal 2020. However, when you look at it, we should fall a little bit short of 5% for the full year, but as I said, 5% toward the end of the year. I also mentioned the three-year timeframe. This is our goal of aiming to get that margin into a more acceptable range, and I do say, we want to achieve that at 10%. As I mentioned in my prepared remarks, the combination of robust economies and the ramp down of that accretive contract component in Canada has negatively impacted our margin outlook in the near-term. We are making investments in business development across the portfolio and we are working on several large new procurement opportunities. The nature of these opportunities are longer sales cycles, and so, I think, you will see revenue contribution not expected to affect this year but fall into the future years. You are right that we have had the startup programs in the United Kingdom that have -- that are working and achieving toward profitability over time. I don’t think there’s really anything new. I think it’s just the same things that we have been talking to you about over the last year. I do think those programs in the U.K. are coming to profitability a bit slower than we would have liked. But they will be profitable and they will be programs that we are happy to have in the long-term. I think that you should also see improvement in our Occupational Health business in the United Kingdom. We have made some investments that are now in place relating to clinically related technology platforms that really will enhance the both the customer and the clinicians experience and should improve our competitiveness there. And so, I think, all of those combined its better operations and winning more work and we do have some good large procurements that we are working there. Bruce, do you want to add anything else on that?

Just as related to the last question -- last element of your question around macro drivers. I mean, clearly, we are affected by cyclicality on our employment services business and I think that just places an emphasis on our land and expand strategy where we continue to work to diversify our portfolio outside the U.S. So that we have opportunities to move into the health space and address other needs of government during a period of otherwise unprecedented low unemployment. It’s also worth noting that, priorities of government change in this environment and they focus a bit more on first of all employing the, call it, structurally unemployed individuals that have had the greatest challenges to finding and sustaining employment. But also they look at up skilling and training requirements, they look at job retention issues and so you can imagine that as we look at those areas, including labor mobility and cross-border labor mobility, we want to design programs that address the immediate needs of government in this macroeconomic climate.

Okay. That’s great. And then just a second one on capital deployment, you guys have little over $100 million of cash now, some calculus there suggest that you grow to maybe nearly $350 million by the end of fiscal year ‘20 after considering your free cash flow expectations and inclusive of dividend payments. So that amounts to 7% of your market cap, obviously, gives management a lot of flexibility, curious how you guys are balancing and deploying that towards buybacks versus waiting for the right acquisition. I know you have been very disciplined and want to make sure you are getting the right asset for the right price. But how aggressive does management want to be on buybacks versus willingness to use some of the cash and then, perhaps, lever up for a deal?

So, Dave, this is Rick. We have been consistent and we will remain consistent at M&A and strategic M&A will be our number one priority. We do run an active program. We look at a lot of things. I am very proud to say that I think we have been very disciplined. There’s a lot of things that we look at and we just don’t think that our profile and we don’t think are worth the price that some people are asking for them. And I think that having a good clean balance sheet like ours allows us to be opportunistic with that and when the right deal comes along, I think, we will pull that trigger. With respect to buybacks, we do say that we are opportunistic with respect to those buybacks. So I don’t think we are going to lose that discipline. I think we will continue to look at it and when it’s a good opportunistic situation, we will do buybacks. I have $146 million of authorization from the Board of Directors with respect to that topic and we will use it at the right time but opportunistically.

Great. Thanks much.

Thanks, Dave.

Thanks.

Next question, please.

Thank you. Our next question is coming from Frank Sparacino from First Analysis. Your line is now live.

Hi, guys. Just one from me maybe, Bruce, you had made a comment earlier just around the ACA marketplace, and obviously, it looks like enrollment this year will be down again versus last year. Maybe, first, just talk about what impact that would have to MAXIMUS. I assume that was in your forecast. And then, secondly, related to the marketplace, if you could talk about just the state level activity, I guess, there’s a number of kind of moving pieces, some positive, some negative, clearly, Medicaid expansion still may be happening in some of these states. It looks like the work requirements have taken a step back in a number of states. And then, at the same time, you have some states launching their own marketplaces and trying to move away from healthcare.gov. And I don’t know if when you look at all those factors together whether you think that’s a positive opportunity for MAXIMUS in the future, but that would be helpful. Thanks.

Absolutely, Frank. Good questions. So it’s kind of early to comment on ACA enrollment since we are in the middle of open enrollment now. And so, I will note that, I think, we had there was about a 4% decline last year relative to 2018, but that one is in the rearview mirror so kind of stay tuned. What I would tell you is that, before we completed the combination with the General Dynamics customer engagement centers, we studied this dynamic pretty extensively and took the advice of the third-party advisers as well and really modeled out what we expected the declines to look like over time. And there are dynamics that -- relate not just to the ACA market as you reach historically low rates of uninsured. But also the dynamics in Medicare as a greater portion of the population coming into Medicare may elect to have Part B managed care plan. All of that is baked into our forecast. And I would say, the trends that we have seen are consistent with what we expected based on our pre-acquisition modeling. So that’s that piece. In terms of state level activity, you are right. You have got a number of dynamics. I’d probably say, the positives out -- the positives basically counterbalance any negatives. I don’t have an overall view that it’s creating a growth of market opportunity nor do I feel concerned about it putting pressure on our business. The dynamics are positive for us in states that are expanding Medicaid with what’s going on in Virginia, for example, and the outcome of the election there, strong support for Medicaid expansion moving on to implementation, it’s one of the states that we support. We are thrilled to support the Medicaid program there and have for years. Similarly, you…

Does that address your questions, Frank?

Yes. Thank you.

And do you have any others.

No. That’s it. Thanks, Lisa.

Our next question please.

That does conclude our question-and-answer session. 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.