Greetings, and welcome to the MAXIMUS Fiscal 2021 Second 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, James Francis, Senior Director of Investor Relations for MAXIMUS. Thank you, Ms. Francis. You may begin.

Good morning. And thanks for joining us. With me is Bruce Caswell, President and Chief Executive Officer; 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 the risks we face, including those discussed in item 1A of our Annual Report on Form 10-K. 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 analysis of results and believes this information may be informative to investors in, gauging the quality of our financial performance, identifying trends in our results, and providing meaningful period-to-period comparisons. For a reconciliation of 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.

Thank you, James. This morning, MAXIMUS reported strong second quarter for fiscal 2021 with revenue increasing 17.3% to $959.3 million over the prior year period and diluted earnings coming in at $1.29 per share. The company's operating income margin was 11.8% for the quarter. Our better-than-expected results were driven by the high level of COVID response work revenue in the U.S. segments and employment services work in Australia, which experienced higher-than-expected volumes of activities. Since our February 4th call, we have continued to win a substantial amount of new work, as MAXIMUS plays an integral role helping government customers, serve their citizens during the pandemic. Our revenue attributable to COVID response activities such as, contact tracing, unemployment insurance, CARES Act communications, and vaccine communications were $242 million for the second quarter and $402 million year-to-date. We project COVID response revenue will now range between, $800 million and $850 million for the full fiscal year. Our Australia Employment Services business achieved a high-level of performance in the quarter, as job seekers were able to find and sustain work as the Australian economy opened up. The performance on this contract has improved faster than we projected, resulting in higher second quarter revenue and profit for our Outside the U.S. segment. The organic growth rate for the second quarter of fiscal 2021 was 12.8% or, 29% excluding the census contract revenue reduction. Results for the quarter included one month of Attain operations from the acquisition date, of March 1st, which added approximately $20 million of revenue and $3 million of operating income after the expense related to amortization of intangible assets. I will now take you through our segment results starting, with U.S. Services. Second quarter fiscal 2021 revenue in the U.S. Services segment increased to $448.2 million driven by, an estimated $175…

Thank you, Rick and good morning, everyone. Since I transitioned into the CEO role in 2018, I've spoken about our three-pronged strategy to accelerate our progress and drive the next phase of our growth through. First, digital transformation within the Government Services market, enabling new solution offerings to address the mission requirements of our customers and improve overall service delivery across our operations. This began with improved tools for citizen engagement and process automation and is evolving to include new capabilities in artificial intelligence and machine learning, natural language processing and advanced analytics to enhance our competitive position. Second, clinical evolution to address long-term macro trends driving demand for independent and conflict-free business process management or BPM services with a more clinical dimension, while maintaining the foundational elements of our business, operating customer engagement centers and providing case management services. And third, market expansion as we evaluate adjacent and emerging markets, organically grow the portfolio and acquire capabilities and contracts to establish a foothold in these markets. We also consider our customers' longer-term visions for reengineering social program delivery models and of course macro trends. We aim for expansion that's a natural complement to our core services globally. Today, I will focus on how recent efforts are aligning with these three strategic priorities including the two acquisitions, recent wins and COVID-19 implications. As you know in March, we announced the acquisition of the federal business of Attain furthering two of our primary strategic pillars. By first, accelerating our digital transformation by strengthening our technology capabilities in application development and modernization, enterprise business solutions, cybersecurity and the data sciences including advanced analytics and machine learning. These capabilities address federal IT spending imperatives and priorities, while also being applicable to our BPM solutions. And secondly, expanding further in the US Federal market…

Thank you. We will now be conducting question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Charlie Strauzer with CJS Securities. Please proceed with your question.

Good morning. This is Brendan Popson on for Charlie. Fantastic quarter obviously and I want to dig into the outside the US. performance. You guys have alluded to this talking about Australia, but the high single-digit margin was unexpected. And I know you talked about the employment services being strong and high retainment going on with the employees. I wanted to ask just like how sustainable that margin is? And if you could just dig more into the puts and takes there and what we could see down the road?

Hey Brendan, good morning, it's Bruce. Thanks so much for the question. I'm going to turn it over to Rick to address and I'll add a little color commentary perhaps at the end. Thanks so much.

Yes. Thank you. With respect to Australia first the first quarter we told you that they were coming out of a lockdown and they had strong demand during that Christmas period due to the fact that there was a lot of pent-up demand from the employers who needed to quickly fill some of those retail and travel-related jobs. Those are industries that that we typically place a lot of people in. In Q2, our fiscal year Q2, they also achieved good financial performance on their caseload metrics and sustainment or what we also call regional retentions. This really means that more people more people are being placed and therefore, able to sustain their job to retain them. And that shows that Australia has really come out of their pandemic better than other countries around the world. The macro trend should really be in our favor down there. There is difficulty though in predicting what happens quarter-to-quarter due to the pandemic but Australia looks very good and is doing really well. I think embedded in your question is really also about the OUS start-ups, the outside US start-ups. Those are in multiple geographies some of which are countries we've operated in for several years and others which are newer to us. Those are outcomes-based contracts which typically take time to build up the volumes. This gives you economies of scale over time. However, in the early phases of a contract our costs ramp-up at a quicker rate and that will create initial losses. So, the revenues will come slower than the costs that ramp up. So, we anticipate several quarters of losses on these contracts before they turn profitable. This will be a bit of a drag to the OUS segment results in FY 2021. And as I noted, I think these start-up contracts will drive an operating loss in the fourth quarter of our fiscal 2021. As Bruce mentioned, we do believe that these contracts are a good investment for us. They make sense due to the overall favorable economics over the lives of these contracts. We do expect these contracts to deliver 10% plus operating income margins over their life. Does that answer your question, Brendan?

Yes. Yes, that's great. But I also want to ask about the pipeline. Bruce was talking about with the increase obviously from VES and Attain. And what's assumed in the pipeline from that? And then more than that I guess what's the potential pipeline expansion from the acquisitions?

Sure. Brendan I'll take that to begin with and ask Rick to chime in as well. Important I want to note that there's no VES in the pipeline because this transaction has not closed, right? And also historically, I can just to give you a little more color, historically, VES really hasn't had kind of a business development function. They have been completely focused on serving their VA customers as well you could imagine. And so if there's deals that will be additive to the pipeline once the transaction closes it will likely be synergy opportunities that we've identified as part of the process of getting to know VES understand their capabilities and taking a longer term view of where their capabilities could be applied to other kind of areas of white space in the federal government. I want to also however say that likely those pipeline opportunities would be more like two to four years out and not immediate because we are absolutely 100% focused as we come together with VES in working with the DVA on the inventory as I mentioned in my prepared remarks that's built up during the COVID pandemic period and also to ensure that they are very well-positioned to address the needs of veterans for whom it's a dynamic program. And periodically, Congress will authorize new benefit categories and that creates demand that needs to be addressed. So, that is absolutely our focus which is bringing capacity and scalability and further capabilities to serve the VA. And then we would hope that over time in due course and appropriate time there would be additional pipeline opportunities for us to pursue. So that's the VES piece. Rick mentioned that we did see a meaningful uptick, a small uptick in our pipeline. As we came together…

Yes, definitely. I'll hop back in the queue.

Thanks, Brendan. Operator, next question, please.

Our next question comes from the line of Donald Hooker with KeyBanc Capital Markets. Please proceed with your question.

Great. Good morning. A lot of moving parts here. I guess maybe I'll ask a question about the state Medicaid redeterminations sort of the pause there. Can you help us think through kind of – I'm sort of imagining that there will be a release of work for you, some sort of bolus release of work for you at some point maybe in fiscal – maybe next year I don't know. But can you help us think through kind of what that could look like? I mean how do you see these Medicaid programs getting back to sort of normal operations with these redeterminations?

Sure. Don, it's Bruce. Why don't I go ahead and begin and then ask Rick to add to this? I think it was, I want to say January 22nd, there was a letter that was sent by the then acting Secretary of HHS to all the governors indicating the intent of the Biden administration to extend the public health emergency through the end of calendar year 2021. We are taking our guidance side off of that if you will which would – and therefore everything that we've spoken to in terms of our view of when redeterminations would resume and the impact on the fiscal year is that this public health emergency will extend through the end of the calendar year at the very I guess earliest, given what's been said publicly. You can imagine that there will be then a period of a couple of months probably after the end of the calendar year as things ramp up and get going again. Our view would be that certainly, there's a backlog that has been building up because common practice is to redetermine eligibility for certain tranches of the existing population on a periodic basis. And with that not having been done it needs to be caught up. And so we would expect there to be some backlog related to that that will need to be worked through as we turn the corner into the next calendar year. That work historically has benefited from the scale economies of our operations. In other words, once we've already stood up an operational center that has a back-office processing capability, a mail room, a document sorting and effecting function eligibility staff that review applications but can also do redeterminations. You can imagine that incremental volume related to redeterminations can be handled with a lot of existing infrastructure. So we expect that work to be more accretive in nature when it comes back on than the standard kind of base eligibility work that we do. But Rick, would you add anything further?

Yes just three quick little quick things. First off we are assuming – we are not assuming the pandemic related headwinds abate during the remainder of this fiscal year. So we're assuming that, it does not help this fiscal year. Logic does tell us that there should be backlog. When this becomes work for us, it's really tough to determine but Bruce is right, when that does occur that should be profitable work whenever that catch-up happens.

Okay. And then in terms of – you guys mentioned some employment services work in the Outside the US segment. I think you mentioned some countries that I'm not familiar with MAXIMUS being involved in I think Sweden, South Korea, Italy, I think you have some work in Saudi Arabia. But are these new geographies for you? Does this open up potentially new doors for MAXIMUS over the next few years in these countries?

Yes Don, let me catch up a little bit on that and then ask Rick again to comment. So to begin, the significant opportunity that we're seeing, obviously we spoke to the UK Restart opportunity. But we do – we had completed previously and it gets maybe lost in the – like you say a lot of moving parts here, a small tuck-in acquisition in South Korea. And that small tuck-in acquisition was in response to market trends that we identified where the government was going to be requiring companies of much larger sizes than had been required historically to use privately provided employment service providers to place displaced workers back into employment. So we always look at and kind of going back to the conversations we had with Rick Montoni, not just the propensity to outsource, but a change in the propensity to outsource. And that policy signaled a shift. The reason we approached it with a tuck-in acquisition is that time was of the essence because that policy is being implemented quickly and we didn't have the opportunity to enter organically. By contrast, while we did recently organically begin operations in Sweden. And that was in direct response to the major policy plank of the coalition, the primary majority party of the coalition government that had really run on a premise or principle of reforming the public employment system, which they felt was not successful for Sweden. So there are – there's an existing program but also a new program that is being administered where cases are being transferred to the new one the programs being expanded. And we felt as we looked at that situation we had the ability to create the business and build the business organically. And that's exactly what we've done. As it relates…

No, that's a very complete answer.

Yes, that's super helpful background. Thank you. Thanks so much.

Hi, Don we'll keep your line open. Do you have any other questions for us?

Sure. And then maybe for the -- have you all quantified, sort of, as you think about fiscal 2022 some of the UK deals? The two -- the Restart program, kind of, when that sort of ramps? It's a big, big program for you guys when that would sort of hit full run rate? Is it a year, two years, three years? It's a multiyear program so when would that hit full run rate and margin?

Yes. That's obviously hard to gauge. We're generally thinking it takes us a while to get that going. But I would think the second half of fiscal year 2022 would be when you would see those revenues catch up. What you really have happening Don is that the costs ramp up and we're serving the citizenry, but the volumes take a while to catch up with that. And so as I said I think it's about four quarters the second half of fiscal year 2022.

Great. Thank you.

Thanks. Operator, back to you.

[Operator Instructions] Our next question is a follow-up from Brendan Popson with CJS Securities. Please proceed with your question.

Thank you. I just wanted to ask real quick on the redeterminations are there -- obviously there's different policies that different states are following and some states are doing have more restrictions than other states. Is there a difference in some of your -- are some of your states going to come back sooner than others, or is it kind of -- is there some kind of central authority that means that not much of it will come back until after the public health emergency is over?

Yes. It's the latter, Brendan. The way it works is that in order for states to continue to receive enhanced federal matching funds during the pandemic, they have to agree to what historically have been referred to as kind of MOE or Maintenance of Effort on the program. That means they can't erode any types of services that they're providing or diminish any services they're providing. And that means they need to do everything they can to keep existing Medicaid beneficiaries on the roles. There are some mechanics that we can share with you maybe offline would be best in terms of once the public health emergency has been declared to be over there's a period then when they can resume these activities. As I mentioned previously it's not absolutely immediate and I think it's actually tied to when they last received funding related to the program. But we will clarify that for you. The point being though that all states have to follow that same set of rules that have been laid out by CMS. And you're right, while there are differences in the way states administer their programs in this specific instance, as it relates to this population, they can't I guess they theoretically could jump the gun and begin the process sooner but they would lose out on the enhanced federal money and nobody really wants to do that.

Okay. Yes, that makes sense. And then I just want to ask about a capital allocation question. You guys had talked about your pro forma leverage. What's your view on deleveraging? Is that going to be a main priority? Are you comfortable letting EBITDA grow into it, or what's your priority there?

Yes Don its Rick. I'm sorry Brendan, its Rick. Yes, these are two respected companies that we want to do a very good job on with integration. This integration is going to take us a while I think say at least two quarters to really get it done. We have good free cash flow each quarter. And I would say that we will pause significant M&A get the integration done right and have our debt paid down below 2.5x. That is really our aim is to keep our leverage below 2.5x. We're starting off at an area of 2.7x that we're comfortable ,with but I think overall over the long term staying below 2.5x would be our aim.

Okay.

Operator, next question please.

Our next question is a follow-up from Donald Hooker with KeyBank Capital Markets. Please proceed with your question.

Great. Yes one question I meant to ask, I appreciate your time here. In the Federal Services segment, you mentioned that the addition of VES would sort of create a close to 10% margin I guess for the full year if you include that. That looks like you're signaling a fairly large step-up in operating margin I guess in the fiscal in the September quarter. So, I guess as we go into next year, can we think about like what -- can you help us think about what a normalized pro forma operating margin would be for the Federal Services with the higher-margin VES business? I'm thinking that's a pretty material change for next year.

Yes Don. Yes, I do think that as we look forward that should be able to give us a 10% or better operating income margin. I would say that you have to always recall that we have a large cost reimbursement style contract in that 1-800-Medicare contract that carries a lower margin. But yes, we should have higher margins from both Attain and VES and some of our legacy work has also been somewhat tamped down by the pandemic and that should come back. So, we should have 10% plus operating income margins in US Federal in fiscal year 2022.

Okay. Thank you.

Thanks, Don. Any more question. If not, we’ll go back to the operator.

Thank you. 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 today. You may disconnect your lines at this time.