Greetings and welcome to the Maximus Fiscal 2022 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. Please note that the slides on today’s webcast are user driven. It is now my pleasure to introduce your host, Ms. Jessica Batt, Vice President of Investor Relations and ESG for Maximus. Thank you. Ms. Batt, you please go ahead.

Good morning and thanks for joining us. With me today is Bruce Caswell, President and CEO; David Mutryn, CFO; and James Francis, Vice President of Investor Relations. 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 most recent Forms 10-Q and 10-K. We encourage you to review the information contained in our most recent filings with the SEC and our earnings press release. 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 also contains non-GAAP financial information. Management uses this information internally to analyze results and believes it may be informative to investors in gauging the quality of our financial performance, identifying trends, and providing meaningful period-to-period comparisons. For a reconciliation of the non-GAAP measures presented, please see the company's most recent Forms 10-Q and 10-K. And with that, I'll hand the call over to David.

Thanks, Jessica. This morning Maximus reported revenue for the third quarter of fiscal year 2022 which decreased approximately $118 million to $1.13 billion as compared to the prior year period. This is net of a $413 million decline of short-term COVID response work, which has largely concluded as expected. The decrease was offset by a combination of organic growth and acquired growth from acquisitions in the U.S. federal services segment. Operating income margin for the quarter was 4.8% or 6.9% excluding the expense for intangibles amortization, diluted earnings per share were $0.51, or $0.78, excluding the amortization expense. Third quarter results were negatively impacted by a contract in the outside the U.S. segment, which required a write down of $11.7 million or $0.14 of diluted earnings per share. I will provide further detail in the segments’ discussion. Absent the write down this quarter reflected our expectation for lower earnings caused by declines in profitable short-term COVID response work, while also facing lower volumes in our core programs, as Medicaid redeterminations remained paused. This quarter while organic revenue declined, if you adjust for the COVID response work, normalized organic growth would be approximately 21% as compared to the prior year period. As usual, we have included a table in the appendix of today's presentation showing a reconciliation of normalized figures. Let me take you through the segments. The U.S. services segment delivered revenue of $399 million for the quarter, which is a decline from the prior year period driven by expected reductions to short-term COVID response work. Normalizing for this, revenue growth for the segment was nearly 40% due to a combination of ramping of new core work, as well as COVID response work that evolved into longer term work with new customers gained during the pandemic. The new core work…

Thank you, David, and good morning, everyone. I'd first like to thank those who attended our Investor Day on May 24, where we unveiled our refreshed three to five year strategic plan, and our segment leader shared details on how we will continue to drive our business forward. I shared the three strategic pillars that will define areas of focus and priority for Maximus, which are first, the future of health, that grows our clinical capabilities to meet rising demand for independent and conflict free health services by governments. Building on our success first in the U.K., and more recently in the U.S., including last year's acquisition of VES. We see significant market opportunity to continue expanding our clinical assessments business. Second is technology services, where we apply advanced technologies for it modernization, and will expand our ability to transform complex but aging government systems in support of our customers missions. And third, customer services digitally enabled. Think of this as the extension and expansion of our already successful digital transformation strategy. Making greater use of the data we collect through our operations and leveraging Intelligent Automation and cognitive computing, such as natural language processing. We will also bring to scale areas of proficiency, such as robotic process automation or RPA. So collectively, we improve the consumer experience while driving greater cost efficiencies in our operations. Taken together, these pillars significantly expand our addressable market, which I noted now stands at an estimated $150 billion in annual value growing in the mid-single digits, technology services and clinical and health services represent significant portions of that figure. From a segment standpoint, there is greater emphasis on the U.S. federal market, but all three segments have strong opportunities. Finally, I shared our underlying goals behind this next phase of the company, which…

Thank you. Mr. Francis, the floor is yours for the Q&A session.

Good morning, everyone. I see we have Charles Strauzer from CJS on. Let's go to his line, please.

Let's start off with the outside the U.S. for last provision that you recorded in the quarter. And can we get a little bit more color there in terms of, do you have your arms wrapped around the issue now? And do you think you have the staffing in place to kind of move the contract forward at the pace you're looking for?

Yes, absolutely, Charlie. David's going to start and then I'll add some color commentary at the end.

Yes, sure. So this contract is for an implementation of a software product and it is a fixed price contract. So as I mentioned in my prepared remarks, we recognize revenue on a percentage of completion basis. And while that is not a common arrangement for us, we do have experience with this platform having implemented it before. And by not common I mean that in other parts of our portfolio, we tend to see configuration of customer systems using either time and materials contracts or fixed price level of effort contracts. So in the quarter the loss resulted from ensure our forecasted costs increasing, which required us to book the loss in the period. Anything to add Bruce?

Yes. I underscore that this is a software product that we've owned for more than a decade. We've configured this successfully for other customers in the past. In this case, the project is for a larger customer with a more complex systems environment. And of course, it was undertaken during the pandemic, which was probably not optimal for either the customer or for us. But as I've mentioned, the tough labor market as a consequence contributed to the forecast reduction because the cycle times that it takes to find and train the resources that you need, as well as to replace underperforming resources have been elongated during this period. We're not pleased, obviously, with the recent challenges that we're facing. But I can assure you that we're applying experienced program management, including tenured technical leaders that understand the product, and have been with the company for some time. And we're focused on meeting our contractual obligations.

Great. That's helpful.

If you want to take further on that or like, yes, we'd like to move to another questioners, any further questions?

Yes. That's good and been very helpful. Thank you. If you could talk a little bit more about the potential exploration down the road of the PHE. David, you kind of frame the high-end of the range of -- you've had $0.30 per quarter being at higher end. Can you help me a frame what the range might look like in fiscal '23? And maybe more specifically, the lower end of that range? What that might look like?

Sure, yes, of course. So a rough order of magnitude, I'd say for the low end would be in the $0.15 range is I believe, we have a good line of sight to at least that level. It's worth pointing out I think, because we modelled different scenarios, the precise earnings impact actually depends on which month or which quarter the PHE ends and the redetermination volume must be considered in conjunction with what other volumes are already in the system and the corresponding staffing level. For example, at times, we may be able to carry existing staff to perform that work as it comes in. Whereas other times in the year it may require a greater restaffing effort. As I mentioned, we still expect this volume to be highly accretive but with all the moving parts on this code, there's a higher degree of variability that we do see potential for the margin to be slightly lower than in the previous forecast of a straight $0.30. I thought it may be also helpful to put this range into the context of the margin ranges that I provided last quarter and at the Investor Day. So for U.S. services, you'll recall I said we expect a range after the PHE ends of 11% to 14%. I still feel that this range is in the ballpark, the margins could fluctuate quarter-to-quarter for the reasons I've explained. And as a comparison, the U.S. services margin in the third quarter was 8%. So if you model a pickup of the equivalent of $0.15 per quarter at the low end, that would bring margins to maybe slightly under that 11% whereas $0.30 would bring the margin comfortably into that 11% to 14% range, in fact, even closer to the high-end. That helps?

Yes, very much. Thank you very much on that. And Bruce, maybe just shifting to kind of bigger picture with the PHE, the certainly doesn't seem to be much urgency coming out of Washington, in regards to letting the PHE expire, any thoughts there and with the midterms coming up, it seems like another extension seems likely here, but could they move even further down the road?

It's a good question, Charlie. And we hesitate to engage in political prognosticating. But I think you are reading as a tea leaves is likely accurate. I mean, the general consensus is that with up to 14 million or 15 million Americans potentially facing this enrollment through the redetermination process, the timing of this with regard to the midterm elections becomes a critical consideration. What we do know is that CMS has committed as you may recall, to giving governor's 60 days notice of the expiration of the PHE. And so that's a signal that everyone is watching for, since the current extension, as you noted, is set to expire in mid-October, we therefore look for that signal sometime in mid-August. So within really, almost 10 or 11 days from now. Also, I just wanted to maybe add a little color to why it's more challenging to forecast the impact of the unwinding than just kind of a binary event that leads to maybe a step function change in volumes kind of across the portfolio. So forgive me, as you know, my background and policy tends to make me want to explain these things a little bit more in a detailed fashion. So there's a difference between initiating a case action and completing that case action. So think of initiating a case action as reaching out for new information like an update on income or household composition or what have you. Completing the case action is either the continued enrollment of that individual or family or disenrollment. States have the flexibility to initiate case actions as early as two months before the end of the PHE. Hence the importance of the signal that I mentioned. Or they can have the flexibility to complete case actions, which is the enrollment event or disenrollment event as much as 14 months after the end of the PHE. So there was a broad time period here. And the point is that each state's going to do what they think is really best for their circumstances. So one thing that we can conclude is that when we see the signal or hear the signal, this work is going to spread out easily over the course of a year, depending on the priorities of the state. I hope that helps.

Very much. So thank you. And then, staying on the topic a little bit. There are pieces of the PHE that get funding like telehealth, et cetera, that potentially could be moved out of the cancellation, if you will, that can become a standalone items in another stimulus package.

I certainly hope that's the case. I, again, not in a position to comment on the politics of that, I will say we had the great fortune of being able to host Senator Mark Warner in our offices recently. And that is specifically a topic that he spoke to about the -- what we've really learned during the pandemic of the importance of telehealth and really its viability as a sustained kind of engagement in patient engagement and treatment modality and a way that, I think out coming out of the pandemic we ought to be adjusting our policy to and reimbursement policies to support telehealth going forward. So I know that that's something that's absolutely being talked about. And clearly, there's another dynamic at play here, which my understanding is incorporated in the legislation that's been developed between Senator Schumer and Mansion, and that is, how the subsidies that have supported individuals in the exchanges, the enhanced subsidies, if you will, during the pandemic can be sustained going forward to avoid significant likely increases in premiums that individuals could face in many instances as high as 50%. So there's a lot happening from a policy perspective that as those pieces fall into place, we'll create the environment that states will then have to navigate in terms of how they move individuals that may not be eligible any longer for Medicaid into some form of continuing coverage. In fact, some states have contemplated the idea of effectively, temporarily or presumptively moving individuals that are no longer qualifying for Medicaid into, if the state has a basic health plan, for example, which is usually an income threshold above Medicaid, but below the exchange, put them there, or maybe even into the exchange, and then go through the process of further determining, based on their eligibility, they're kind of long-term plan for coverage. So there's an awful lot on the table here and interrelated points, I guess, I'd say one final thing, and that is there have been individuals, certainly in the Congress that have talked about decoupling the Medicaid continued enrollment provision from the PHE, as well, and for any reasons that we've discussed previously, but fundamentally, because states want to ensure in many instances that people are getting the appropriate coverage that they qualify for their income and other factors. While we haven't seen that, incorporated in any potential legislation, since the original build back better act, we're familiar that that's something that's still being discussed in some circles. So I guess the final point would be stay tuned. Right, Charlie?

Sounds that way. Shifting back to the new awards and pipelines. You had a fair amount of signed contracts, 4 billion in the quarter. Is it safe to say that the CCO extension is the largest in that bucket? Or is there other contracts in there that you'd care to talk more about?

So, Charlie, yes, I think it's safe to say that that one-year extension that provides continued funding was likely the largest component, but I will say a close second was the Indiana project that we mentioned that moved from the awarded unsigned to the awarded signed category in the quarter. And I will anticipate maybe a follow up question and just as I indicated in my prepared remarks, note that the schedule for the award of the CCO lead bid contract remains late summer as we understand likely late August notification. So that's where that's in.

Great. And then, just touching on the pack bags. Any more context there you can provide in terms of the length of that potential contract and the types of uplift overtime on that as well as potentially the margin profile behind that?

Well, I'll tell you what we know at this point. Fundamentally, the passage of the PACT Act is not necessarily changing the contract that we currently provide these examinations under that contract remains as it was when we combined with the ES and acquired that business and we can provide you some further insights on as we go forward here on the end date of that current contract. But the point that we're focused on is that there will take -- there'll be a little bit of time between the anticipated signature of the PACT Act, and the beginning of the ramp up of the volumes, likely about 90 days. So we expect the volume initially there to be an initial surge of new claims, as the VA has been already beginning to talk about the importance of this new benefit for veterans. And you can imagine that very excellent veteran services organizations out there that work with veterans every day have been promoting the importance of veterans coming forward and filing these claims. So we expect there to be an initial surge, our current expectation is that we would start to see those volumes toward the end of the first quarter of fiscal year 2023. And indeed, we're already in the planning phase for this with the VA and the VSOs. And as they provided some guidance to veterans. The ongoing question of, what then is an important one, in our view, and I think, also supported by some of the modeling that's been done by the VA, we expect a sustained volume of claims related to the Act. And this is largely due to the fact that many veterans have not yet really manifested the onset of health conditions that the Act makes presumptive. So over time, these…

It's great. Thank you for taking all of my questions. I appreciate that.

Thank you, Charlie, we appreciate it.

Okay. We have one shareholder question here, Bruce and David, can you give a quick update on the labor market pressures?

Why don't James -- why don't I start with that, and I welcome David's further thoughts and comments on it. So that's that in my prepared remarks, the tightness that we're seeing in the labor market is particularly impacting our ability to attract and retain technical and certain political talent. In the OUS segment, again, as I mentioned, previously, we experienced higher than normal attrition on a complex technology project that was a contributing factor to the write down this quarter. Continuing to offer people more flexibility helps put us in a better position to attract and the right kind of talent for our business, certainly. But at the same time, we're realizing as we go forward, as I think many businesses are, that some work is just best done with teams working physically together. And I'll note that this is a discussion I've had with peers in the industry. And they're finding the same thing as we get kind of further into this quasi=post pandemic period. We're learning as others do. And I expect that the current allure of offering 100% work from home at very high salaries and unlimited vacation so forth for technology workers will inevitably adjust over time. So on the positive side, and likely while we've made very good progress with the clinical skills that I mentioned, during the call, we have a very strong brand. And if anything that was strengthened during the pandemic. We work hard every day to provide competitive compensation and benefits for our people. And then once they're here, we focus on additional training and skill development to give them what they need to continue their career here at Maximus. And I would probably conclude by noting that over time, higher wage rates affect all market participants, and they become reflected in the rebid and the new work that everyone is bidding on. In the meanwhile, for current contracts that are a fixed unit rate or performance based in our portfolio, we work very hard to offset labor cost pressures through greater use of technology. That said, I want to be clear that we also don't shy away from seeking equitable adjustments from our clients in cases where the market difference from the bid model to where we find ourselves today is particularly profound. So with that, I know I've covered a lot of ground David, I don’t know if have anything further you'd like to add.

Nothing else to add. Thanks.

Excellent. Well, that concludes the question-and-answer session today. Operator back to you.

Ladies and gentlemen, thank you for your participation and interest in Maximus. You may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.