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Maximus, Inc. (MMS) Q1 2024 Earnings Call Transcript

Maximus, Inc. (MMS)

Q1 2024 Earnings Call Transcript

Company Participants

Jessica Batt - VP of IR & ESG

David Mutryn - CFO

Bruce Caswell - President and CEO

James Francis - VP of IR

Conference Call Participants

Charlie Strauzer - CJS

Bert Subin - Stifel

Presentation

Operator

Greetings, and welcome to Maximus' Fiscal 2024 First Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation station. [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. Mrs. Batt, you may begin.

Jessica Batt

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 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.

David Mutryn

Thanks, Jessica, and good morning.

We are pleased to report a strong first quarter as well as an improved outlook for margins, earnings and free cash flow for the full year. Our operational performance has been excellent, and our dedicated teams are meeting our customers’ increasing demand in complex areas including Medicaid redeterminations and veteran exams. The business is on solid footing with the ability to be resilient in an environment with budget uncertainty and capable of further margin expansion on top of demonstrated progress so far.

Moving to results. Maximus reported revenue of $1.33 billion for the first quarter of fiscal year 2024, which represents 6.2% year-over-year growth. Organic growth was 6.9% driven by expanded programs in the US Federal Services segment and a combination of resumed and expanded programs in the US Services segment. Adjusted operating income margin was 9.9% and adjusted EPS was $1.34 for the quarter, which compares to 7.9% and $0.94, respectively, for the prior year period. Earnings exceeded our forecast for the quarter, driven by performance across the segments.

I'll turn now to commentary on each. For the US Federal Services segment, revenue increased 9.5% to $677 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 the segment was 10.2%. The prior year's first quarter's margin of 8.3% largely reflected hiring in advance of the VA volumes that are now flowing through our operations. Segment income results for the first quarter of this year aligned to our previously communicated expectation for an improving margin across the full year.

For the US Services segment, revenue increased 11.5% to $490 million and was also all organic. The drivers were the resumption of Medicaid redetermination activities as well as expanded programs in eligibility support and clinical services. As a reminder, the redetermination activities are helping the top-line but have a disproportional impact to the bottom-line due to improved operating leverage. The US Services operating income margin was 13.5% in the first quarter of this year. The margin of 8.6% in the first quarter of last year reflected paused redetermination activities. We view the 13.5% margin this quarter as a high watermark for the segment for the near-term and expect modest margin normalization in the remainder of the fiscal year.

Turning to Outside the US segment. Revenue decreased 16% year-over-year to $160 million for the first quarter of this year. Of that, approximately 7% was attributable to divested businesses no longer in the portfolio. The other 9% was a combination of slightly lower volumes on employment services contracts and currency impacts. The segment broke even in the first quarter of this year as compared to an operating margin of 5.3% in the first quarter of last year, which reflected healthier employment services volumes. We remain focused on expedited efforts to reduce volatility and yield a desired portfolio capable of delivering consistent profitability. This process remains a priority for us this fiscal year.

Turning to cash flow items. Cash provided by operating activities was $22 million, and free cash flow was an outflow of nearly $1 million for the quarter ended December 31, 2023. First quarter cash flows reflected expected seasonality around timing of payments that we tend to have in this quarter. Our collections remained on target and our days sales outstanding were a healthy 59 days. We are increasing our free cash flow expectations for the remaining quarters, which I'll speak to during updated guidance.

From a balance sheet perspective, we finished the December quarter with total debt of $1.32 billion. Our net debt to EBITDA ratio improved from 2.2 times last quarter to 2.1 times as we continue to move towards the lower end of our target range of 2 times to 3 times. As a reminder, this ratio is our debt, net of allowed cash to adjusted EBITDA for the last 12 months as calculated in accordance with our credit agreement. As I articulated on the last call, beyond organic investments, our priorities for capital deployment are maintaining a dividend that grows with earnings and strategic acquisitions intended to accelerate organic growth. I should note that M&A opportunity evaluation remains an important part of our normal activities, and we remain opportunistic on deals that come to market in the future. In the meantime, we plan to continue to delever and build capacity.

I'll finish with 2024 updated guidance, where we are raising earnings and free cash flow projections and reaffirming revenue guidance of $5.05 billion to $5.2 billion. Adjusted EPS, excluding intangibles amortization and divestiture related charges, is now projected to be between $5.20 and $5.50 per share. This reflects a $0.15 raise from prior guidance. Adjusted operating income is estimated to be between $503 million and $528 million, which is an increase of $15 million from prior guidance. As a result of the improved earnings forecast, we are raising free cash flow guidance by $10 million to between $300 million and $350 million for fiscal 2024. The improved earnings outlook is driven by higher margin expectation. At the guidance midpoint, adjusted OI margin is 10.0%, up from 9.8% in prior guidance. Across the rest of the year, we expect a positive trend driving consolidated margins above 10% in Q3 and Q4, reflecting a combination of strong volumes on our portfolio of performance-based contracts as well as disciplined cost management.

For the US Services segment, we now expect the margin to run between 11% and 12% for the remaining quarters, which is notable because any temporary redetermination surge benefit will be finished as we enter the back half of the year. And given the strong Q1, the segment should land near the high-end of that range on a full-year basis.

For the US Federal segment, consistent with prior guidance, we still expect OI margins between 11% and 12% on a full-year basis, meaning growth across the remaining quarters from this quarter's 10.2%. We still expect Outside the US to be slightly above breakeven for the full year amidst our ongoing commitments to shape the segment to deliver consistent profitability....

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