Greetings, and welcome to the Maximus Fiscal Year 2023 Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Batt, Vice President of Investor Relations for Maximus. Please go ahead, Ms. Batt. You may begin.

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 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 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 believe it may be informative to investors, engaging 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, and good morning. Our third quarter results reflect strong organic revenue growth and progress on our commitment to margin improvement, particularly in the U.S. Federal and U.S. Services segments. Our federal team is successfully ramping up to meet the unprecedented demand for clinical assessments for veterans. Our team supporting state customers have begun assisting beneficiaries in navigating the unwinding effort as redeterminations resume. Third quarter results include an expense of approximately $22 million for the cybersecurity incident that we disclosed last week. This charge represents our updated best estimate of costs to be incurred related to the incident for the total investigation, which is expected to be concluded this month, and remediation activities. The outside the U.S. segment realized a much greater than anticipated operating loss, driven in large part by macroeconomic factors that have caused our expectations to decline on our employment services contracts. Looking ahead, we feel confident in ongoing successful delivery to enable a step-up in earnings in the fourth quarter with our expectations for the quarter, largely intact from last quarter. Turning back to third-quarter results. Maximus reported revenue of $1.19 billion, which represents 5.6% year-over-year growth or 6.7% on an organic basis. This growth was driven by both the U.S. Federal and U.S. Services segments, which I'll cover shortly. Adjusted operating income margin, which excludes only intangibles amortization, was 6.9% and adjusted EPS was $0.78. This compares to 6.9% and $0.78, respectively, for the prior year period. To be clear, the approximately $22 million expense related to the cybersecurity incident I mentioned earlier is included in this quarter's results, reducing our adjusted margin by approximately 180 basis points and our adjusted EPS by $0.26. It is accounted for in other SG&A and not allocated to the segments. Absent these incident costs, adjusted operating…

Thank you, David, and good morning, everyone. I'm pleased with our progress executing on programs of national policy significance and importance to our customers and the citizens we serve each day. As we deliver on Medicaid redeterminations and enhanced benefits for our nation's veterans, our core business reflects strength we have not seen in several years. Operating margin improvement in our U.S. segments reflects the business operating at scale and momentum that has enabled us to more than overcome the year-over-year decline of short-term COVID work. Let me provide an update on return to repayment in our student loan business, where you'll recall, we act as a servicer of Federal Direct loans working under the rules and oversight of the Department of Education, Federal Student Aid, or FSA, and not as a loan originator. The suspension of federal student loan payments, interest, and collections has ended with payments beginning again in October 2023. Our teams are preparing now to ensure a smooth transition to repayment, a few details of which I'll share. First, communication with borrowers is key. For the loans we service, Maximus is supplementing FSA communications with more get-ready-for-repayment information. Second, Maximus began hiring and training in July to support the increased demand as borrowers enter repayment with forecast based on prepayment pause volumes. This will continue through August, well in advance of the first billing notices being sent in September. Finally, consistent with our strategic focus on customer services digitally enabled, Maximus continues to develop solutions, including chatbots, web chat, and web information to support greater opportunities for borrowers to self-service, thus creating reductions in call volumes and staffing demands. The restart of tens of millions of borrowers' student loan payments marks an unprecedented event, one that our teams are preparing to deliver on in a thoughtful…

[Operator Instructions] We will now be conducting a question-and-answer session. I'll turn it over to Mr. Francis.

I was quick there. Good morning. Welcome to the Q&A session. Let's first please go to the line of Charlie Strauzer with CJS Securities. Charlie, do we, have you?

Okay. Great. If we can maybe start off by talking a little bit more about the 2024 kind of initial views there in your top line in terms of top-line expectations and maybe a little bit more color just around the assumptions you're putting behind the initial look to next year.

Sure. Thanks, Charlie, it's David. So yes, as I said in my remarks, we currently do see a good line of sight to continued mid-single-digit organic growth. And we look to Q4 as a good barometer for the run rate of the business going forward. So if you begin with the midpoint of our implied Q4 range for adjusted EPS, that's $1.2. Our current view today that this is in the range of the run rate we'd expect through fiscal year '24, which would result in significant earnings growth year-over-year. And the implied guide for Q4 is approximately a 10% adjusted OI margin, which is also consistent with our current thinking around what to expect for fiscal year '24. Now of course, that doesn't mean that earnings will be evenly spread over the year. So to elaborate on my prepared remarks, we now see the contribution from redeterminations actually growing from Q4 of this year into the first half and peaking sometime in the first half of fiscal year 2024 and then subsiding to a new steady state. The other big driver would be VES. And simply put here, we expect the strong demand to continue at least through fiscal year '24, and really for the foreseeable future. And then I'd caution while these are 2 growth areas for sure, that our business also has a normal component of erosion. That's typically at least in the mid-single-digit range, and that can result from many factors, including programs coming to a natural end, some portion of lost rebids or volume decline. That said, this year, we've certainly seen success at defending our major recompetes, which provides a good foundation. So all that put together, as I said, we currently have the good line of sight to mid-single-digit organic growth and then maintaining that Q4 level of adjusted OI margins of approximately 10%.

Great. That's very helpful. And then built into that, what are your thoughts on the kind of the redetermination uptick there, the $0.15 to $0.30 range that you talked about in the past, kind of what's the status of that if you win?

Charlie, it's Bruce. Great question. As we've done in the past, I'll start and provide a little bit of a policy backdrop, and then David can get you to the numbers. I mentioned in my prepared remarks that, obviously, this is an unprecedented journey that states are going on. And in fact, we laid out on the last call kind of the timing with which states are doing their disenrollments. And as you may recall, that began in April, as we said, with only 4 states, but really kind of has peaked and is coming to an end in July with the final 11 states beginning their disenrollment. And so all of that means that the process is a bit more back-end loaded than we would see kind of the crest of this wave, if you will, a little bit later and outside of this fiscal year, likely in the first quarter of FY '24. So it's made it difficult to forecast volumes, but we're learning a few things as we go along the way. And if I were to net out my prior comments from my prepared remarks, I would tell you that we're seeing meaningful month-to-month growth in quarter-over-quarter growth in the consumer interactions that we're having as people receive their redetermination packets and engage with us, and so forth. Certainly, the fact that there were these ex parte determinations that were done initially where the enrollment -- the reenrollment or the disenrollment was based on third-party available data contributed to the fact that we didn't get as many in consumer interactions in the early months. So there's a number of factors there, as I mentioned, that are contributing to the gradual ramp. We're learning that there are certain demographics are cohorts of beneficiaries that are harder to…

Yes. So just to add, our Q4 projection that is included in our guidance does have us in the previously communicated range of $0.15 to $0.30 a quarter benefit from those volumes. As I have noted before, isolating the impact precisely of the redeterminations is imperfect. And since we've now provided a fairly specific Q4 forecast inclusive of a full quarter of redetermination, we think this is more of a helpful way to guide than ongoing effort made the specific impact of this one component of our volume.

Great. And maybe we can have a little bit more of a discussion on the OUS segment. Just in terms of the employment contracts that have been causing you guys some problems there or just how fixable is it? And what are the steps that you need to take to kind of get the margins back on track to where you think you can get to that 3% to 7% range?

Sure. So Charlie, I'll take that and, of course, welcome David additional comments. We've stated pretty clearly that we're not satisfied with the financial performance of the business, and we're very committed to shaping the segment. Bearing in mind that there are macroeconomic headwinds that we're facing. And we're seeing low unemployment rates in a number of countries, including the United Kingdom. And in the U.K., in particular, there's persistent high inflation across the board, and that includes with wages. So it's a difficult environment to operate in. I will say we're seeing early indications in the United Kingdom that the unemployment rate may grow in the next year. There are certain macroeconomic predictions that are being made that would suggest that unemployment would bottom out at about 4.1% in calendar '23 and then increased to 4.5% in calendar '24. Depending on whether we see that and see that outcome there and maybe in other economies like Australia, that could provide an increased flow of job-ready beneficiaries into the system and provide some relief to that dynamic that we've been seeing. Overall, though, I guess I would back out ways and just say the key to improving margins in the OUS portfolio, in our view is to continue to scale the business and diversify the business. But in those geographies where you can really have a larger footprint. So we see our established geographies like the United Kingdom, followed by Australia and Canada as being those anchors. We're also excited, I should note about our growth in the Gulf region, which has been fantastic. We've been operating there for over a decade now. And I think that we've really earned a position as a trusted supplier to governments there. There are increasing demand for government programs from their citizens and certainly, that environment is supported by strong government balance sheets. So what this means is we're going to continue to focus our efforts on addressing the underperforming less strategic areas of the business and the portfolio with all options being considered. Getting back to breakeven is our first objective. And we believe, over time, a well-diversified but narrower footprint can deliver acceptable margins even above the near-term target that we've established at 3% to 7% toward the higher single-digit margins. But David, would you want to add anything further to that?

Sure. I would completely agree, and we certainly aspire to at least high single-digit margins in this segment, albeit the timeline to achieve this would likely be over a multiyear period. So what we're doing now really with urgency is moving to be at least at breakeven, if not better.

Thanks, Charlie. First, David, I've got a couple of emailed questions here for you. So first, if you -- or as you look forward to results normalizing at higher margins across each segment, how should we consider the cadence of improvement from VA exams and redeterminations? That is to say, do we see unusually strong performance in those businesses near term that ultimately wanes? Or does that remain a growth driver beyond FY '24?

Sure. This is David. I'll begin with the VA exam. When we look at the VA claims inventory log, which is publicly available, we see that the number of claims in the queue is growing every day even with the added capacity by us and the VA and the other providers. So this certainly supports our expectation that the strong volumes here will continue for the foreseeable future and shortly through fiscal year '24. We're also continuously implementing technology and process enhancements to further optimize our operations there, of course, being done in concert with the VA, leveraging our close partnership. So turning to redeterminations. I touched on this a bit already. While the unprecedented nature of the unwind has made it difficult to forecast with precision, we've definitely learned more and are applying this to our future forecast. And based on that, we do now believe that redetermination volumes will continue to grow, reach a peak in the first half of our fiscal year 2024, and then settle into a range that is steady state and still very accretive compared to the pandemic period.

Thanks, David. Last question. Free cash flow, any early thoughts around FY '24?

Yes. So I would go back to what we committed and guided to in our Investor Day last year, which should still hold, which is that we would expect at least 1.3x free cash flow to GAAP net income, and that's really as a result of our noncash expenses like intangibles amortization and stock comp expense. And then just a reminder that cash flow can certainly be lumpy quarter-to-quarter based on changing working capital needs and sometimes just the timing of certain payments or collections.

Great. And Bruce, last one for you. What's the latest on EDAS, and how do you see task orders helping FY '24?

Well, we still expect to see task orders. The first half quarter is on the IRS DOS program coming out soon. We know that they've stood up a program office and they're working with their counterparts internally to determine which task quarters put through the pipeline initially. Our other view is that in FY '24, we're not currently dependent on a high contribution from this new work from EDAs. -- but rather it's really a program that's going to be multiyear in nature and support to a certain degree, FY '24, but certainly the out years. DOS contract is a vehicle that we announced last quarter. And as folks will remember, and due to its nature, it effectively has a zero dollar value in our reporting of the award. So the subsequent task orders that will bid on will carry the value and come through our pipeline and ultimately be bid on, obviously, by us and the other awardees.

Great. Thanks for joining us, and that concludes the Q&A session. Operator, back to you. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.