Greetings, and welcome to the Maximus Fiscal 2024 Second 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 and ESG for Maximus. Thank you, 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 believes 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 second quarter results were exceptionally strong, driving the second consecutive raise to our fiscal 2024 guidance. Demand remains high across our programs, which elevated volumes this quarter and perhaps more importantly is indicative of stability returning following the disruptive years of the pandemic. We are also acutely focused on cost management, which had a positive impact to this quarter and has added potential to further improve our bottom line in future periods. Turning to results. Maximus reported revenue of $1.35 billion for the second quarter of fiscal year 2024, which represents 11.7% year-over-year growth or 12.6% on an organic basis. Similar to last quarter, growth was driven by expanded programs in the U.S. Federal Services segment and a combination of resumed and expanded programs in the U.S. Services segment. Adjusted operating income margin was 11.1%, and adjusted EPS was $1.57 for the quarter, which compares to 7.2% and $0.81, respectively, for the prior year period. By our estimations, we set a high mark for earnings this quarter with the strength coming from no single area, but rather across our portfolio of domestic work. A portion of the overdelivery in the quarter came from extra volumes in U.S. Services tied to Medicaid redetermination. Let's go to the segment. For the U.S. Federal Services segment, revenue increased 20.1% to $702 million, which was all organic and driven by volume growth on expanded programs, including the VA Medical Disability Examination, or MDE, contracts. The operating income margin for U.S. Federal Services in the second quarter was 11.9% as compared to 8.2% in the prior year period. The segment margin this quarter was slightly better than expected, thanks to our MDE contracts exceeding their production goals and continuing to execute well in an environment with high demand for…

Thanks, David, and good morning. As David presented, we have just completed a very strong quarter. Revenue grew 12.6% on an organic basis. Adjusted EPS was $1.57, up from $0.81 for the prior year period. Adjusted operating margin continues to meet our target range of 10% to 14%, with updated guidance now implying a 10.6% margin for full fiscal year 2024. And finally, we're increasing guidance for the remainder of the fiscal year. This is a notable accomplishment for the company as a whole, following our solid first quarter. Congratulations to our program teams and our critical support functions, all of whom remained focused on quality delivery and are committed to meeting the needs of our clients. For the last several quarters, the company's top line revenue growth has been driven by expansion on current programs. This is not new for us. Building solid customer relationships through quality delivery has reliably enabled our teams to increase volumes and expand scope, ultimately benefiting our top and bottom lines. This quarter, in particular, we continue to see increased volumes in our VES business, where, as David mentioned, MDE claims exceeded their production goals. Growing current programs, including movement into near adjacencies, is fundamental to the Maximus business model. That said, we're also keenly focused on new work wins, which underpin our long-term growth goals. In this vein, and in the context of our Maximus Forward initiative, we are making investments in our business development, capture and proposal teams and their supporting tools to help ensure their success. Across all segments, we have made a number of key hires. These leaders come to us with years of experience and proven capabilities. More specifically, as part of a reorganization within our U.S. Federal capture and proposal teams, our leaders are now aligned to the…

[Operator Instructions] Today's first question is coming from Charlie Strauzer of CJS Securities.

Just a quick question. Yes, obviously, a very robust quarter, especially in Federal. Sales and margins kind of seeing some good uplift kind of ahead of schedule versus your prior guidance. Just when you look at that in the drivers, did you see any revenue pull forward? Maybe give us a little more color behind the drivers of that -- quarter?

Sure, great. This is David. So as I mentioned, there was no real single area that led to the Q2 overperformance. It was a broad strong performance across the portfolio. The VA MDE volumes in the Federal segment were certainly a component that were particularly strong in the quarter. I did allude to some benefit from extra volumes tied to the Medicaid unwind effort, which ends soon, though it remains difficult to precisely quantify that. But I would leave you with the impression that this was only some of the Q2 overdelivery. While I am on it more broadly about the topic of redeterminations and sharing what we see today, Medicaid enrollments are landing a little higher. And as we expected, we are seeing continued engagement from the portions who have been redetermined and retained on the Medicaid role. So that effectively means it's back to business as usual for us for the work tied to the annual Medicaid renewals. And the normal base of beneficiaries that existed pre-pandemic is engaging in typical fashion in the post-pandemic environment, which is good since that drives activities in our operations. Lastly, the fact that they're slightly higher population doesn't hurt either. And while I got the mic, as I reflect on the quarter, I'll offer one last thing that I'm especially proud as reflecting on the quarter for the team delivering on the financial commitments that we laid out back 2 years ago to the month in May of 2022 at our Investor Day. So we had said sustainable mid-single-digit organic growth, and we delivered 7% in fiscal year '23 and now guiding to near 7% this year. U.S. Services, in particular, which was in the midst of the public health emergency, we guided 11% to 14% margin. Once the redeterminations resumed, we just posted 14% in a peak quarter and guiding to the middle of that range going forward. U.S. Federal operating at the high end of their 10% to 12% guidance we gave. And then for the total company, we guided 9% to 12% adjusted OI margin. Our guidance for this year is now just above the midpoint of that. And now we're really focused on moving up further in the longer-term range that we gave of 10% to 14%. Then last week, we've also met our commitment to delever in the near term, having to cross below the 2x to 3x target. So a lot of milestones that we're proud of and much credit to the team here for delivering on these commitments.

Great. And just some housekeeping on the guidance. You talked about Q3 being stronger than Q4 in the back half. Any sense of the cadence from Q2 to Q3 that we should factor in?

Sure. Well, yes, a couple of things. I mentioned in my remarks that we have some planned investments in the fourth quarter. So first, I'll talk about kind of Q3 to Q4 and why we -- a little more color on why we guided Q3 being higher than Q4. So a component of those investments are the start of expensing on some new internal capitalized software efforts. I've shared before on prior calls that we have increased investments in technology, particularly in the Federal business, that will provide enhanced efficiency, especially in highly scaled areas of the business. So in this area, in particular, the fourth quarter is expected to be a transition period where we've been prudent in anticipating some duplicative costs. So in fiscal year '25, we expect the legacy cost to sunset, while the savings and the return on those investments would continue forward. So all that means is the fourth quarter is more of the outlier in our view that may be a bit below the core run rate, which would be manifested in the U.S. Federal Services margin. We are also forecasting some moderation in U.S. Services volume both from Q2 to Q3 and then also a little bit more from Q3 to Q4. So that's a piece of the Q2 to Q3. So looking forward from Q4, our continued efforts that Bruce mentioned in his prepared remarks, including the Maximus Forward initiative that we described do give us confidence that there's more opportunity for continued margin improvement beyond fiscal year '24, which would mean continuing to move up in that range that I just quoted, the longer-term range of 10% to 14% adjusted OI margin. And then, of course, Outside the U.S., our continued work shaping and improving the profitability there should also support further improvement.

The next question is coming from Bert Subin of Stifel.

Maybe I'll start on the VA side. So I mean, like, if we look -- go back last year, I thought that was going to be a tailwind with PACT Act and anything that's played out more so than anyone could have anticipated. And if we look at where current inventories are and sort of where the burn rate is, changes, but would indicate somewhere in the 1.5 to 2.5 years of sort of continued excess demand. I guess as you think about the recompete, what do you think changes? One of your competitors said they think that will wrap up by September. I'm curious if you think that's the case. Does that become -- does that drive pressure to your margins in the business? Is it an opportunity to get more share? And I guess, do you agree with the runway sort of laid out potential sort of the runway for MDEs to be strong for a longer period of time?

Bert, David is going to take this one, and I may add a little color commentary at the end.

Great. yes, a few things about the pending rebid. As Bruce mentioned in his remarks, the way we view it, this is a required action by the government, which is more procedural in nature due to hitting the ceiling on those claims volume. So really the result of some good news with the volume growth. Not only do we anticipate continuing to work uninterrupted until the process is complete, but we're still making investments to increase capacity in an effort to drive high-quality and ongoing improvements to the veterans experience. The key really for us and any provider is the ability to operate at scale. This is a large program. Our experience tells us it's complex with an extensive nationwide network of clinicians. And while we'll be appropriately paranoid in the recompete process, as always, we do anticipate being able to maintain scale and volumes, given significant operational advantages and experience that we believe we possess. Therefore, we would agree with your assertion about the volumes remaining elevated for the foreseeable future as evidenced by the inventory, as you said, that we think it will take some time for that to return to kind of normal levels. Based on the time line for the rebid we've seen thus far, we also agree with what you said that the new contracts would essentially align with the start of our next fiscal year, so around September 30th time frame. So worth pointing out no impact on our fiscal year '24 expected. And as far as the financial details, I think at this point, we can't really speculate what may or may not change as a result of those.

I would agree with that, Bert. In fact, I'd only add one thing in that David mentioned, we're making significant investments in internal use software to further streamline processes and build capacity in that business. So we feel that those investments. And when they will come online and be productive for us, overlap well with this redetermination process. And so that, in total, as we exit this fiscal year and go into the next fiscal year, we should be in a solid position in terms of capacity to handle the volumes in the newly completed program.

Got it. Very helpful. I guess maybe following on to that, like if we think about some of the outperformances here, MDEs have definitely helped, redeterminations returning and the peak activity have helped, can you maybe just give us or frame for us what's your expectation for like the next leg of growth is? It sounds like MDEs will continue to contribute to growth and profit. Redeterminations, I guess, there's some opportunity perhaps to pick up states and in just a higher population count will keep that steady. But you're operating sort of on the higher end of mid-single digits, almost in the high single-digit organic growth range and your margins have been pretty strong. I'm just trying to get a feeling for sort of your confidence for that to continue as some of those tailwinds at some point start to moderate.

Sure, Bert. I'll take that. So I would say, look, first of all, we continue to be very focused on executing on the 3 pillars of the strategy that we laid out back in May of 2022. And the one that I focus on right now is the technology solutions or technology modernization initiatives. Clearly, an area that's had a lot of focus and attention is the IRS EDOS contract. And that contract, in our view, is really just getting started in terms -- and so still very much in the early stages. It's been noted that the original awardee alongside of us has been awarded 1 award funded it at a funded value of about $35 million, and that's the highest award thus far. So we feel like we're still early days on EDOS and that there remain excellent opportunities, and we remain very bullish on our ability to be recognized as a valuable partner in providing solutions to the IRS through that vehicle. At the same time, it's probably worth broadening the aperture and just speaking for a moment about IT modernization more generally in the Federal environment. And I noted in my prepared remarks that we're very pleased to have been awarded the BPA with the Department of Energy, which includes specialized software, application development, technology consulting services. And as I take that and kind of look at the broader pipeline that we see out there, we do see a strong pipeline of new work opportunities that really align well with the technology-focused competencies of the organization that are really a combination of the 2 combinations we did or acquisitions we did going back to 2015 with the Acentia business and then the Attain Federal business in 2021. Those competencies and they're in high demand, presently are…

Yes. And Bert, just further on your margin question, at the risk of being repetitive, we do intend to continue to drive margin improvement up in that 10% to 14% range with what I mentioned before is kind of it continued focus on standardization and operational efficiency through the Maximus Forward program as well, of course, with our ongoing efforts with the Outside the U.S. portfolio.

Great. Just one last one for me. Can you give us a -- you highlighted the [ VIFD ] recompete and the CCO recompete. I guess just maybe like a two-part clarification, on the CCO, would you still be interested in bidding that if the terms change significantly? Like what's the time line on that in your view? And then are there other recompetes to be aware of? Or is your profile pretty thin otherwise?

I'll go ahead and address the first piece, the CCO rebid. And I don't want to offer too many comments as it relates to strategy here, obviously, because it's an active procurement process. When you really look at the context of the reprocurement and consider that, as I outlined in my prepared remarks, it's interesting, but not entirely surprising that we're seeing continued action by the government here. I noted that there was communication posted last week suggesting an RFP date on or around May 16, and that the procurement would cover a contract for a transition period plus 9 option years. It's important to note that no further details are provided, including any specifics related to the planned labor harmony agreement requirement, which we understand is really the sole basis for triggering this premature rebid of a successfully performing contract. Also, as I mentioned on the last call, the procurement of this size in complexity can typically take up to a year or more to complete, and it's not uncommon for the process to take up to 3 years. So we'll note that there's a strong likelihood that an RFP could trigger a pre-award protest to the GAO and potentially further, given the unprecedented nature of the anticipated labor harmony requirement. It's also important to note here that further complicating the path forward is that there are significant operational impacts that would need to be accommodated and considered under resulting new contracts, including slowdown requirements to significant small business subcontractors, who may be, in our view, least equipped to comply. So it begins to get complicated when you kind of take theory and put it into practice. I mentioned in my prepared remarks that we remain very committed to continued high-quality services. While the rebid matter plays out. And -- but we do have genuine concerns regarding the impact of the rebid on the ecosystem of small disadvantaged businesses that have been put together to support this program. And in many communities, they're the primary employer. So the theory behind the labor harmony agreement is to ensure continuity of operations. And yet we've repeatedly noted our record of service continuity. And indeed, our view of the evidence suggests that any reprocurement only increases the risk of service failure to tens and millions of seniors. So in summary, while the RFP -- when the RFP is released, we'll evaluate it comprehensively, we'll determine our appropriate course of action at that point in time, giving due consideration to all of our available options. So at this point, I'd probably stay away from speculating further on the competitive environment, but I'll just note that it's a major area of focus for the business.

And Bert, on your second point, nothing else large on the -- in the near-term horizon to call out.

Ladies and gentlemen, this brings us to the end of the question-and-answer session. We would like to thank everyone for their participation in today's conference. You may disconnect your lines and log off the webcast at this time, and enjoy the rest of your day.