Maximus, Inc. (MMS) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings, and welcome to the MAXIMUS Fiscal 2021 First 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Lisa Miles, Senior Vice President of Investor Relations for MAXIMUS. Thank you, Ms. Miles. You may begin.
Lisa Miles: Good morning, and thank you for joining us today. 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.
Rick Nadeau: Thank you, Lisa. This morning, MAXIMUS reported revenue for the first quarter of fiscal 2021, which increased 15.6% to $945.6 million. Revenue for the first quarter was in line with our expectations. Our revenue growth was principally driven by new work related to the COVID pandemic response where MAXIMUS continues to play an integral role in contact tracing, disease investigation, vaccination support, unemployment insurance programs, and other key initiatives. For the first quarter of fiscal 2021, our COVID response work contributed approximately $160 million in revenue. As expected top and bottom line growth were offset by ongoing impacts of the global pandemic tied to program changes on volume-based contracts that were implemented at the direction of our customers. As we discussed last quarter, these changes including halting Medicaid redeterminations in the United States are designed to ensure that beneficiaries have uninterrupted access to vital government benefits during this global health crisis. Total company operating margin was 9.3% for the first quarter of fiscal 2021. Diluted earnings per share were $1.03 per share. Both operating margin and earnings were in line with our expectations with some variability by segment. Our operations outside the United States delivered results favorable to our expectations, which offset lower operating income from the U.S. federal segment due to the timing of finalizing a contract, which will now be recorded in the second quarter. Let me review segment financial results in our typical order starting with U.S. services. First quarter revenue in the U.S. Services Segment increased 23.3% to $384.9 million. While revenue growth was driven by an estimated $114 million of COVID response work, the operating margin was depressed by temporary program changes and lower revenue from performance-based contracts as a result of the global pandemic.
Bruce Caswell: Thank you, Rick, and good morning, everyone. Last month, MAXIMUS announced the planned retirement of our friend and trusted colleague, Rick Nadeau. While we still have a few more earnings calls before his departure. I wanted to say that it has been an absolute privilege to work alongside Rick for these many years. And I wanted to thank him for his endless commitment and invaluable contributions during his time at MAXIMUS. David Mutryn, Senior Vice President of Finance will assume the role of CFO effective December 1, 2021. I look forward to working with both Rick and David over the next nine months as we continue to execute our corporate strategy. With the election of President Biden, we’re cautiously optimistic regarding the stated policy initiatives from the administration and the potential favorable tailwinds that maybe created for companies like MAXIMUS. The administration has already taken actions to increase access to affordable insurance for Americans through the Affordable Care Act and Medicaid. Over the course of the administration, we will likely see a meaningful increase in funding for social welfare programs and of course, public health programs. Improving access to affordable healthcare is a top priority of the Biden administration. And the President has advocated building upon the Affordable Care Act among other measures to broaden coverage options for Americans.
Operator: Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question is from Brendan Popson with CJS Securities. Please proceed with your question.
Brendan Popson: Good morning. Just want to ask real quick on the draft is out on the CCO that it started the draft RFP for one hour Medicare and just any surprises there or any thoughts on that?
Bruce Caswell: Hey, Brendan. It’s Bruce. Good morning and thanks for the question. Yes, we’re pleased to see that procurement is progressing and really first schedule and to see the RFP. And I would just offer you two notes. One is the scope of services that are collected in the RFP is consistent with the current scope of services and work that we do for CMS. And secondly, it’s remains a single award procurement, which we think is a reflection of the comfort that CMS has had and administrating the contract with a single vendor and their intent to do so going forward. Any other questions?
Brendan Popson: Great. Thank you. Yes, just to follow-up, you talked about some in the prepared comments with the new administration coming in. But could you provide any detail – any more color or detail on the impact of recent executive orders than the new administration and any new opportunities or even just expanded opportunities on what you currently do?
Bruce Caswell: Sure, Brendan. Let me give you a little more color. Interestingly, there was an executive order that obviously was created very early in the process here to reopen healthcare.gov on for what’s known as a special enrollment period or SEP. And that will take place between February 15 and May 15. You likely know, individuals can already purchase policies at healthcare.gov outside of the open enrollment period when they have certain qualifying life events, but this special enrollment period is adjacent now to adjust ended open enrollment period. And it seeks to provide access to individuals who would otherwise not qualify with qualifying life events during this time. Because of its proximity to the recently ended open enrollment period, that pool of potential enrollees is likely smaller than if it were to have occurred later. However, that means it’ll be – really the uptake will be a function of outreach and advertising and awareness efforts. And we note that HHS is committing $50 million to such efforts. As I was reading a bit more about this, the Kaiser Family Foundation estimates that nearly $9 million of the remaining uninsured Americans could qualify for free or subsidized coverage under this special enrollment period. And there’s an additional $6 million that could qualify for unsubsidized coverage. So again, marketing and advertising is going to be critical. From a state perspective, state-based marketplaces and I make this up because as you’re aware, we have the privilege of providing call center support for the federal marketplace and the states that remain on that also for a number of state customers. States are encouraged, but not required to offer similar special enrollment periods and many are going ahead and doing that. So what does it mean for MAXIMUS? We think that given all of these dynamics, the guidance range that we’ve established that Rick spoke to in his prepared remarks, likely covers the potential tailwinds that could be created from the executive orders. And obviously the effects of efforts to increase marketing and advertising and so forth will go well beyond the May end date of this special enrollment period and likely would manifest themselves in higher volumes of enrollment in the next open enrollment period in the fall. Hope that helps.
Brendan Popson: Okay, great. Thank you for the detail. Appreciate it.
Lisa Miles: Thanks, Brendan. Next question, please.
Operator: Our next question is with Richard Close from Canaccord Genuity. Please proceed with your question.
Richard Close: Great. Can you hear me, okay, first of all.
Bruce Caswell: Fine Richard. Hope you’re doing well.
Richard Close: I am. Thank you. Rick, congratulations. Looking forward to the next couple of quarters with you or three quarters, but congratulations on the retirement.
Rick Nadeau: Thank you.
Richard Close: So Rick, first just a quick housekeeping and I appreciate the information with respect to the census and COVID, but the 13.5% organic growth in federal, unless I’m doing the math wrong, if I backed out the $60 million at per census this year and the $70 million for last year. I’m getting like a 16.4% organic growth number, not taking into account the COVID. But am I missing something there? Is there an acquisition or something else that you’re backing out to get to the 13.5%?
Rick Nadeau: Yes. A good question. Yes, we’re backing out the effects of that CQA contract. That’s about 4.4%. The organic growth from other contracts is 12.5%. And the disposal of the businesses is 0.4%. So all of that together is a 16.5% change.
Richard Close: Okay.
Rick Nadeau: And Richard, we’re going to file our Form 10-Q right after this call and those calculations are in the MD&A. We actually roll forward from the – and we do advice segment, we do a roll forward of the three months revenue ended December 31, 2019 to three months ended December 31, 2020. And we’ll show you the effect of the CQA contract, which I think you’re basically right. It was 60 and 70. So about a reduction of $9.6 million and then the amount of the disposal of the business, that’s a business that we had a potential conflict of interest or a perceived conflict of interest with other work that we were bidding. And we were asked to dispose of it with the rest of it being organic.
Richard Close: Okay, great. I just figured there were some other moving parts in there. I wanted to talk a little bit about the redeterminations, obviously Secretary Azar extended the public emergency. I think into April, I’m not sure the specific date there, but then the results of speculation from the Biden administration, I think there was a letter sent to some individuals about maybe extending the public health emergency through 2021. So I’m curious your thoughts on redeterminations, whether if the emergency does get extended. Are there opportunities that the states, they’re getting the FMAP funding, but is there opportunities where redeterminations begin or would they be extended all the way into 2022?
Bruce Caswell: So Richard, I’m going to pick that up in just a second, but first I wanted to return to Rick. So he could clarify something from your prior question.
Rick Nadeau: And Richard, I think I read the percentage from the wrong column. I read the revenue correctly, but what it is we went from $366 million, $571 million of revenue to $405 million, $245 million for 2020. CQA contract did go down $9.6 million and the disposal went down $1.1. That gives you an organic growth of 49.4%. That’s 13.5%, $49.4 million. So that gives you 13.5%. It’s a clarification of that. I’m sorry. I was reading the gross profit. I read you the correct numbers on the dollars. And I read the percentages from the gross profit. My apologies.
Richard Close: No problem, thank you.
Bruce Caswell: Maybe I’m getting a little bit that. I don’t know.
Richard Close: Pull that forward.
Bruce Caswell: The wisdom is priceless. So let me go to the public health emergency. You’re absolutely right. Acting Secretary of Health and Human Services, Norris Cochran sent a letter to governors on January 22. And it’d be easy to find and I’ll quote from it saying to assure you of our commitment to the ongoing response, we’ve determined that the public health emergency will likely remain in place through the entirety of 2021. When a decision made to terminate that the declaration or let expire HHS provides States a 60-day notice prior to termination. So based on that, it seems like the handwriting’s on the wall at the same time, as you know, we need to continue to work with our customers to get their guidance to. Because on the one hand, this would lead to further likely, further suspension of certain work such as eligibility redeterminations and so forth. But on the other hand, the prolonged conditions that would unfortunately cause the sustainment of the public health emergency thereby enabling States to qualifies, as you’ve also noted for the 6.2% enhanced FMAP would suggest that at least certain COVID related response work would continue well through the end of the current fiscal year. So given all of these considerations, when Rick and I looked at our guidance, we felt that it’s wide enough to accommodate multiple scenarios in a public health emergency to be clear remaining in place for the entirety of fiscal year 2021 would likely result with us being a bit more in the middle of the fairway. So we always say it’s kind of hard to predict COVID work. And interestingly, some of the temporary headwinds and program changes that we’ve seen relate to the public health emergency, for example, the pause and redeterminations is clearly linked to the maintenance of effort requirement for Medicaid to ensure individuals remain enrolled and that’s a qualification requirement for the enhanced funding. So unlikely, right that States would – unless they’re willing to give up that enhanced funding begin redeterminations or other kind of program administrative actions prematurely. However, there are other programs that we administer, for example, the debt management program for federal student aid or outside the U.S. the HAAS program that aren’t linked to this public health emergency. So our guidance kind of accommodates all of those. Last thing I’d say is that the secretary retained a great deal of discretion, not just in the declaration of the public health emergency and when it’s over, but also discretion to selectively modify the terms of it to reflect conditions and policy priorities as they evolve. So all I can tell you right now is that, if you look at guidance range we’ve provided is accommodate these – the variability, and we’ll take guidance from our customers and respond to the conditions that they dictate for the administration and programs.
Richard Close: Okay. Thank you. I appreciate everything you’re doing for the States and federal government during this time. Thanks.
Bruce Caswell: Thank you.
Lisa Miles: Thanks, Richard. Next question, please.
Operator: Our next question is with – is from Donald Hooker with KeyBanc Capital Markets. Please proceed with your question.
Donald Hooker: Thank you. Good morning, everyone. So I was curious on your Slide 7 you guys commented and highlight that you think you can get the kind of 10% to 15% operating margin, which is obviously a ton of upside in that out of the U.S. segment. When like – can you time scope that a bit just remind us kind of when would that margin potentially be achieved?
Bruce Caswell: Thanks, Donald. It’s Bruce. And I do want to note that the commentary on stage seven I’ll begin, and then I’ll hand it off to Rick. The commentary about the 10% to 15% margin is over a program life and the illustrated program is employment services programs, right. So you have to consider the portfolio of contracts that we have outside the U.S. as you think about the long-term margin dynamics for that business. But I’ll let Rick offer for the commentary.
Rick Nadeau: Sure, thanks. Yes, exactly what Bruce said, and I think the simple chart on that page tells the story when we go through and we are considering how to be in a program, we have to respond to that request for proposal that’s sitting in front of us. We’re really winds up happening in most cases is that the cost as you incur are relatively flat overtime. But you build volumes throughout the programs life. And so accordingly winds up happening is that your cost are steady that your revenue growth overtime. So in the early parts of the program, you’re negative – you have negative operating income, and you can see the area under the straight line shows you a negative OI for the first periods of the program ad then that builds. And so what we do is we try to make sure that when we price the work, that when we put all of the periods together, that we’re having an operating income margin that’s in the 10% to 15% range, which is the average that we see for the work that we did that is fixed price type of work. Does that help you?
Donald Hooker: Yes, I guess I was trying to put you a little bit on the spot in terms of you guys, I understand that’s not the entirety of the outside of the U.S. segment, but you guys are talking about a breakeven margin in the outside of the U.S. segment and then you talk about a 10% to 15% margin for this. You can put on the contracts, which are – which is a big part of the outside of U.S. segment. And would that be like fiscal 2022 or fiscal 2023? I mean what is the – I don’t know if you can sort of time scope out, it would take a couple of years to get there and that is a big jump in operating margin. Even if it’s not all of the segment, I would certainly have material impact on seeing if I could get any clarity around how quick that ramp.
Rick Nadeau: Sure. Well, yes, I think that it’s pretty obvious that the Outside the U.S. Segment is segment that’s been most damaged during the pandemic. We’ve had over 50% of the work that we do outside the U.S. is unemployment services and closed economies in Australia and United Kingdom have been very detrimental to us in that regard. So I think that when we look forward and come out of FY2021 and looking to FY2022, we’ll obviously be somewhat dependent on a pandemic, further we have a big program in the United Kingdom where we are scheduled to do 780,000 face to face assessments in this last contract period and we’re doing none. That cost contract is profitable, but not at the level that we would have projected if we were doing those face to face assessments. So I think that the return to open economies in Australia and United Kingdom some of the new geographies that we’re working on with the employment services, a return to normality in United Kingdom reviving us to do those face to face assessments. And those new contracts that we talked about are all tailwinds that ought to be able to allow us to improve the operating margin outside the U.S. over time. I can’t sit here today and promise you what that’s going to be in FY2022, but it will be an approving align margin profile over time.
Donald Hooker: Okay. I’m not sure if I get to the follow-up or not, but maybe I’ll…
Rick Nadeau: Yes, go ahead with follow-up…
Donald Hooker: Yes, quick one, really quick one, you guys detailed the census revenues in the fiscal first quarter than December quarter. What – can you remind us? And I apologize that I missed it. What would that ramp down to in the March, June and September quarters?
Rick Nadeau: So you sort of set expectations.
Bruce Caswell: Yes. That program is very close to being over it’s in a heavy wind down period. I think you’re going to see less than $10 million of revenue going forward from January 1, 2021 forward.
Donald Hooker: That’s it. Thank you. Good luck with your thanks.
Bruce Caswell: Thank you.
Lisa Miles: Thanks, Donald. And Next question, please.
Operator: We have reached the end of our question-and-answer session and are out of time for today’s call. MAXIMUS thanks you for your time and participation. You may disconnect your lines at this time.
