Greetings, and welcome to the MAXIMUS Fiscal 2020 First Quarter Conference call. [Operator Instructions]. 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.

Good morning, and thank you for joining us. With me today is Bruce Caswell, President and CEO; and Rick Nadeau, Chief Financial Officer. I'd like to remind everyone that the 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 exhibit 99.1 or SEC filings. We encourage you to review the information contained in our earnings release today and our most recent forms 10-Q and 10-K filed with the SEC. 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 may contain non-GAAP financial information. Management uses this information in its internal analysis of results and believes this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results and providing meaningful period-to-period comparisons. For a reconciliation of the non-GAAP measures presented in this document, please see the company's most recent quarterly earnings press release. And with that, I'll hand the call over to Rick.

Thank you, Lisa. This morning MAXIMUS reported revenue for the first quarter of fiscal 2020 of $818.2 million compared to $664.6 million in the prior year period. Top line growth was driven by the expected increases in the U.S. Federal Services segment due to a full quarter contribution from the acquired business, the expected ramp-up of the Census contract and organic growth in both our U.S. Health and Human Services and U.S. Federal segments. This was partially offset by reductions in our outside the U.S. segment. Total company operating margin was 9.7% for the first quarter and lower compared to the prior year period. This is due to a greater mix of cost-plus contracts that generate lower operating margins and continued weakness in our employment services businesses in our outside the U.S. segment, which continues to be challenged by market conditions. For the first quarter, diluted earnings per share were $0.91 and better than our expectations, benefiting from strong operational and financial performance in our U.S. Health and Human Services segment and the timing of revenue and income within our U.S. Federal segment. I will now speak to our segment results in the first quarter. First quarter revenue for the U.S. Health and Human Services segment increased 6% to $312.3 million compared to the same period last year. All growth was organic and attributable to new contracts and expansion of existing work. The operating margin for the segment in the first quarter came in better-than-expected at 18.6%. The segment benefited from strong operational and financial performance across a number of health services contracts. Additionally, synergies resulting from the federal citizen engagement centers business acquisition in November 2018, continue to help this segment's margins. Revenue for the first quarter of fiscal 2020 in the U.S. Federal Services segment was $366.6 million,…

Thank you, Rick, and good morning, everyone. MAXIMUS delivered solid first quarter results driven by top line growth in the U.S. Federal Services segment and solid operational delivery and strong financial performance in our U.S. Health and Human Services segment. As Rick noted, we remain on track to achieve our fiscal year 2020 guidance. Our CCO program over-delivered in the quarter with open enrollment for Medicare and the marketplace, ending in December. Under both programs, we achieved favorable statistics during the 2019 open enrollment season. Under the Medicare program, we received more than 4.5 million IVR calls with more than $3 million answered by CSRs. Answered nearly 300,000 web chat contacts, 129% higher than last year and achieved a 93% customer satisfaction score and a 97% quality monitoring score. Under the state-based exchanges, we received nearly 5 million IVR calls with nearly 3 million answered by CSRs, completed an estimated 840,000 enrollments through CSRs and achieved a 91% customer satisfaction score and a 96% quality monitoring score. With the Affordable Care Act and Medicaid as underpinnings, the state health insurance landscape is still evolving. States are addressing their unique demographic needs with new Medicaid expansion initiatives and efforts to establish state-based marketplaces. In light of this, we were recently awarded the Get Covered New Jersey contract by the New Jersey Department of Banking and Insurance to help transition the state's marketplace from the federally facilitated marketplace to a state-based exchange. The New Jersey marketplace is targeted towards consumers who are seeking a medical and/or dental qualified health plan that do not receive employer-sponsored health insurance and do not qualify for Medicaid or Medicare. In addition to the consumer engagement center, the scope of our operations includes: assisting consumers with eligibility, consumer health plan choice counseling, supporting inquiries from brokers, navigators,…

[Operator Instructions]. Our first question comes from the line of Charlie Strauzer with CJS Securities.

I know it's a bit of a moving target, but can you share what impact you're assuming from the Australian bushfires and coronavirus kind of on a go-forward basis for the year?

Absolutely.

Sure, Charlie. Charlie, before I answer that, I think I got a little tongue-tied on my prepared comments. I do want to make one slight correction. The cash flow from operations number that is in the press release and that is in the presentation is the correct number at $87.3 million. Sorry for getting tongue-tied. Let me help you with that question now. While both of these situations are temporary, and it is impossible really to determine with certainty the true scope of the impact until we really understand the degree, the length of time and how quickly the region will recover. We did feel it's helpful to investors and to the analysts that we model some of the potential impacts for the remainder of the year. So based on what we know today, and I do want to stress and emphasize that there's a lot that we do not know. We would estimate the impacts of the problem in Australia to be in the range of $0.07 to $0.15, that's on a diluted share -- diluted EPS standpoint for the rest of the year. Now it is important to remember that it is a fluid situation in Australia. And as I said in my prepared remarks, the government took immediate measures to ensure the safety of their citizens and to enable people to return to stability quickly. And as part of this, the participants in the program that we operate are temporarily exempt from job searches until March 6. That's really what's causing the issue for us. Now Australia also has closed its border to incoming travelers who were recently in China. This will have an impact on sectors in the travel industry, where visitors from China do become -- are a large representative group in that population. Tourism has been a thriving industry in a good place to help job seekers get back into the workforce. So as I mentioned earlier, the reduced need for job seekers and tourism roles will have an impact on our business. But until we have a better understanding to what degree, to what length of time, how quickly the region will recover, it really is not possible with certainty to determine what the ultimate impact will be. And lastly, I really -- Bruce and I would like to thank our team in Australia. They responded immediately to help the community there by contacting all of our customers to offer support and mobilize resources such as psychologists to help in the most affected areas. The company's employees funded, not-for-profit, the MAXIMUS -- I'm sorry, the company's MAXIMUS foundation in Australia also raised $50,000 for the benefit of the bushfire relief efforts. Does that answer your question, Charlie?

That's great. And then just a follow-up -- just a question follow-up for Bruce, if I could. You talked a little bit about the M&A concentric circles. And obviously, with the policy change that you mentioned. Is that going to be an area of focus of trying to find companies to buy? And what does the pipeline look like currently?

Sure. We see a lot of opportunities that are brought to us. And I think I've said before that we're always looking at the characteristics of these deals in terms of what they really mean to the business in the long term. We want to make sure that as we look at specific opportunities, there really no more than about 2 adjacencies from our core. They've got a reputation for quality, they can provide sustainable revenue and the appropriate growth rate, good sustainable net margins, at least in the high single digits. A strong cultural fit the company as well. So we've been very selective as we've looked at opportunities and further, we've tried to be a bit more proactive, if you will, in our M&A strategy. So as we're looking down the road, and we are identifying areas where we can strengthen the company in terms of our technology assets and digital assets, where we can become more clinical in the work that we do, but also where we can get into new markets. We've begun dialogue with companies that may not currently be active in the market with the hopes that as things evolve over the coming years, they think about MAXIMUS as a home for a portion of their business. As it relates to specific policy, I'd be happy to address a little bit more on the OPM guidance that I mentioned in my remarks or any other potential policy shifts there. Of course, there have been the Medicaid block grant guidance that the administration has provided recently as well, which we can speculate about. So is there any more specific area of policy that you're interested in as it might relate to that strategy, Charlie?

No. I was just thinking just more in terms of the M&A company, types of companies you would try to buy that would support those new policies.

Well, without speaking about specific companies, I would say: number one, we certainly feel that we -- and we've long said that technology is a critical component of what we do. We really say that we deliver technology-enabled BPO services to our clients. And so companies that can fill specific gaps in our technology portfolio and can help us deliver more seamless end-to-end solutions to our clients, and that really are forward-looking and forward-leaning in terms of the technology that they bring to the table would be of interest to us. The digital arena just really continues to explode. And we feel like we've got a nice competitive differentiable position right now in our core programs, but Rich always used to say, and I agree with them completely. You can't keep your technology saw sharp enough. So that would be one area. We've also talked about how citizen transaction services and citizen engagement will remain a critical component of what government does over time. And we found that the citizens we serve expect more and more these days to be served as they would by traditional commercial companies, whether it's in the financial services industry or other sectors. So again, that kind of points back to technology-enabled citizen services as an area of interest. Then lastly, we've said for some time that the federal marketplace is a great market. The U.S. Federal Government is a very strong customer. And we continue to look at opportunities there to fill out our portfolio as they come along.

Our next question comes from the line of Richard Close with Canaccord Genuity.

With respect to the OPM memo, Bruce, it sounds like that seems to be a little bit more of a longer-term opportunity. So if you can just sort of gauge that for us? Or just your thoughts there on maybe the size of the opportunity and timing as you have these discussions with states.

Absolutely. I wanted to put this, Richard, in a little context as well. The memorandum that I spoke of was released on November 27, 2019, but it was really a follow-up, and it provided a lot more clarity to initial guidance that was provided and notification that was provided by OPM that was published in the federal register back in April of 2019. So this is something that's kind of been developing over time. The memorandum went to heads of executive departments and agencies. And it really clarified that these executives have to certify that the system of personnel administration for federally funded state administered programs that they operate that are called grant made programs is satisfied by government employees that meet these merit system principles, but also it doesn't preclude the same program from utilizing contractors that are consistent when that is consistent with prevailing state law as well. And you might -- it makes a lot of, what are these merit system principles. And not to go on a dissertation on this, but to give you a sense of what they are because they do apply to both government and contractor employees. It's things like -- the government recruitment selection and advancement of employees based on their merit, provision of equitable and adequate compensation, training to ensure their high-quality performance, separation of personnel -- inadequate performance can't be corrected, nondiscrimination principles, of course, and the elimination of political influence. So we're excited about the flexibility that this gives states. And it's important to note that to frame it, that this is a change to an interpretation of a 50-year-old law. The Intergovernmental Personnel Act or IPA of 1970. And there's no requirements that states change anything, but it gives states a great deal of freedom. So pivoting to…

Okay. Lisa, I have two questions. One is housekeeping. So if I could ask that. But Bruce, or -- yes. So if you look at the investments in the UK. Are you foreshadowing something there? Is there like a bolus of contract opportunities there? And then my housekeeping question is, did you guys say $0.07 to $0.15 headwind from the fires and the virus as a headwind for the current year. So essentially, you would have raised your diluted EPS guidance without the fires and virus?

Richard, I'll handle both of those. And let me do them in reverse order. I did say $0.07 to $0.15. So you are correct on that. Of course, this would put pressure on the guidance, and it puts more pressure, obviously, on the profit numbers than it does on the revenue numbers. But really, we are only one quarter into the year. And we do have a healthy pipeline of opportunities, the range on our EPS guidance is $0.20. So there's always the potential for us setting upside to defray some of the downstream impacts from this event. I did want to make sure that I stressed again that this is a temporary situation, but it really is too early to determine the full impact because of the uncertainty that's involved with it. I mean, these events are still unfolding, and we really don't know. But -- we're only one quarter into it -- into the year. And I think we feel like the guidance range is appropriate, and it is a $0.20 range. On the other issue of the UK, both Bruce and I have spent time in the UK, and we've met with key stakeholders and are devoting a lot of time to discussions with the team. We both believe that there is a clear demand for partners like MAXIMUS, who are financially stable and have a strong track record of delivery. We see a number of vital opportunities that will diversify our portfolio while leveraging the core skills that we have as well as our digital and our technology assets. So I think we believe it's the right time to invest more heavily in the UK, and that it is time for us to start looking at a variety of opportunities. Some of these have longer runways than others. But I think, basically, the bottom line is that our efforts could prove to be pivotal in expanding the portfolio in the United Kingdom, particularly since we are a very financially stable contractor.

Our next question comes from the line of Donald Hooker with KeyBanc Capital Markets.

Well, I want to ask about the Medicaid block grant regulation. You mentioned earlier, there's a lot of puts and takes there. And would love to hear your opinion as how that might impact MAXIMUS if it went into effect over the next few years?

Absolutely, Donald. I'll put on my hat as the resident policy wonk here a little bit and talk about that. Interestingly -- first of all, it's important to note that this guidance on Medicaid block grants really applies to just a portion of the Medicaid population. So it applies to adults without children. Back when we talked about the food stamp program, they have an acronym they use called ABAWD Able Bodied Adults Without Dependence. So these are adults without children that largely obtained coverage under the expansion of Medicaid. Some folks have speculated that the block grant guidance is an effort by the Trump administration to kind of bring along those states that have not yet expanded Medicaid for those populations by giving them this additional flexibility. Now as we talked about block grants in the past, they can be a double-edged sword, because on the one hand, they provide a lot more flexibility. On the other hand, they end up capping funding. And without going into the nuances of per capita funding cap versus CPI-based funding cap or various models. I think what we're seeing is states are cautious, right, about -- and they're doing the ROI calculation to say, is it worth the benefit of having flexibility for these populations. When I also understand the risk that I could end up having to fund more of this program myself, if it expands into down economy, and often, obviously, Medicaid expenses would outstrip other measures in a down economy. So that said, populations that are not included in the block grant, and this is important, are children, people that qualify based on disability, people needing long-term care, folks that are 65 and over. So that's the first point. The second point would be, with this flexibility comes also…

Super. Okay. And then maybe more on the nitty gritty of the numbers. The U.S. Health and Human Services segment operating margins continued to impress there. And I wonder, is there going to be a step down at some point, these levels are for multiple quarters now have been sort of trending above your guidance for that segment. How long can we hope for those margins to remain high.

But you're correct, those margins have been higher than we had previously signaled to you all. I think it's -- you need to remember that the acquisition we did last year, the Citizen Engagement Centers acquisition did have the effect of having some of the home office costs, the SG&A costs gets spread over toward the Federal group and away from U.S. Health and Human Services. So that helps -- I think that will be -- and I think, ultimately, the margin will be a function of how much work we also win. I think that you have a pretty good portfolio there. I think we've done a good job of operating it. We are aggressive in bidding that and trying to expand that portfolio. And as I've said previously, we generally try to bid in the area of 10% to 15% over the longer-term for contracts. So I think that if we are successful in expanding that business. I think you'll start to see those margins come down more towards that 15% that we've talked about previously. But you're right, it has been quite good for a number of quarters here, and I think that's a tribute to the quality of our operators.

To 15% in that segment?

Yes.

[Operator Instructions]. Our next question comes from the line of Frank Sparacino with First Analysis.

Rick, maybe first for you, what is the organic growth in the Federal -- U.S. Federal Segment?

The organic growth this year in this quarter. So when we file the 10-Q, we do put a very good chart in that -- in the MD&A section, and we do a chart that rolls forward the prior year income -- I mean revenue, cost of revenue and gross profit. We roll it from the prior year all the way through. And it is kind of a complicated situation this year because we had that acquisition mid-quarter in the first quarter of fiscal year '19. And actually, so I'm reading from that, we started and reported $216,987,000 was the revenue last year in federal. In the period from October 1 through November 15. I'll call that the pre-acquisition period last year. We estimate that the revenue that we received -- that we would have received if we had done the transaction at the beginning of the year was $98.429 million. So I really look at it as our pro forma as if the transaction had occurred at the beginning of the of the first quarter of fiscal 2019 would have been $315.416 million. Now we broke the growth into two pieces from there: one, because that Census contract is big, and it's in the ramp-up period, we had growth from the actual contracts that we bought in the first quarter of last year, that's $38 million; and then we had organic growth from other contracts. You might call that the core, the -- what federal was before the acquisition, and that's $13 million. That $13 million is 4.1%, if you work off of that pro forma number. Now the growth from the -- from the contracts that we had is another 12%, but I just want to make sure I broke that into 2 pieces. So we did have nice organic growth in the core of 4%. And then very nice growth in the -- in that Census contract as we've been signaling consistently through the last 7 quarters. And that will be in the MD&A, Frank. So you can see the exact numbers, and you can see the cost -- I mean, those are the exact numbers, but you can see the cost of revenue and also the impact on gross profit.

Great. And maybe, Bruce, on the provider management side, can you just talk in a little bit more detail. I'm not sure what's new in that market, both from an external as well as maybe internal perspective, if there's something new on the technology side that you guys have done, but maybe just a little bit more color there?

Sure. From an internal perspective, really, I think it was the Affordable Care Act that created new requirements right around provider credentialing and really has kind of stimulated that provider credentialing and enrollment and provider management marketplace. And with those requirements, for example, and I don't have them all memorized. But I think that there are strict requirements as it relates to which types of providers require actual physical presence in their facilities to get through the certification process for Medicaid and so forth. That created a nice pipeline of opportunities because I think states in order to qualify for federal funding, have to move within a certain time frame to meet those requirements. We are already a fairly well-established provider of those services in a number of state marketplaces. And you can imagine, as we looked at that as a potential for growth. This kind of fits into our organic growth strategy. We did look at our technology and whether -- how our technology, which originally was interestingly developed in response, believe it or not, to the HITECH ACT years ago that created the requirement for meaningful use payments to go to providers that implemented EHR and EMR systems. That original platform which we deployed in Tennessee, led to us having effectively a full database of the provider network, and we were able to pivot that and turn it into more of a credentialing asset. Over time, we've continued to invest in that platform and modernize it. We've also looked at other platforms that are out there. In fact, configurable cost products and so forth. So we're trying to go to market with a suite of solutions that enable us to meet the requirements of the customers and their budgets. The last thing I would say is that this is part of a broader marketplace of Medicaid modularity solutions. And as CMS continues to push the modularization of what have historically been large monolithic MMIS platforms, provider credential enrollment is one of those natural modules that states can kind of break off from that larger monolith and procure separately. And in fact, there are certain states that are coming together to buy in a cooperative fashion through cooperative purchasing agreement, these types of provider credentialing services and other modules of Medicaid. So we feel good about the market. We feel like we've got competitive technology. We've got -- I'm going to say around a half dozen states where we provide these services. And we've got a decent pipeline of opportunities ahead of us.

Our final question comes from the line of Richard Close with Canaccord Genuity.

Great. I got two quick ones here. Rick, I was wondering if you could just go over again. The reason for the pull forward of that $10 million? And maybe on the change order push from second to third quarter, any type of magnitude there. And then I do have a follow-up.

Okay. Sure. Let me do those in -- what was the second half of that question.

Change order.

The change order. Okay. Yes. So when we did the analysis at the beginning of the year when we gave the guidance and reported to you in the third week in November, we had a change order that we were anticipating would get signed in the quarter ended March 31, the quarter that we're in today, the second quarter. As we look at it and we look in the crystal ball, we think it's more likely that, that change order will actually go in the third quarter. So based on that, we actually said that the third quarter will actually be a little stronger than we thought. And the second quarter will be more consistent with what the first quarter [Technical Difficulty] the acceleration of revenue was really in our federal group and had effect of about $0.01, and it really was an over-delivery of a variety of contracts, as I said, primarily in the U.S. Federal, but a couple also in the U.S. Health and Human Services business. But as we looked at them, and we do a full analysis every quarter and look at our guidance, we concluded it was really timing and things that we thought were going to hit the second quarter that hit in the first quarter.

Okay, great. And just my final question here, Bruce, maybe thoughts regarding the pipeline -- we're in an election year, obviously, very hard to handicap, but what usually happens in an election year in terms of potential contracts out there? Are there any types of people pull back on the process? And any thoughts in and around that as we go throughout the rest of calendar 2020?

It's a great question. And I'm going to actually answer it, if I can, at an international level as well. To begin, we thought that actually Brexit might slow down the UK pipeline. But interestingly, as the election there so definitively place the conservatism power and really created a long runway for them, we've seen them with some confidence, continue to progress pipeline opportunities that we thought otherwise might have been slowed down. So that's a positive outcome there to see things continue to progress. Rick always talks about our adjudication rate, wanting to make sure that is one thing to happen in the pipeline though, ultimately, it's another to have it through the adjudication process and either awarded or not. So secondly, back to the U.S., the majority of the work we do, as you know is related to kind of mission-critical programs supporting vulnerable citizens. And as we bridge away from the BPO opportunities and more into the technology opportunities, often that work similarly is supporting kind of the core mission of the departments and agencies, whether it's maintaining IT infrastructure or whether it's modernizing and assisting with the modernization of certain platforms. We talked, for example, on the last call about the work that we do at the IRS, particularly now managing a portfolio of cybersecurity initiatives. So as I think about across the portfolio of contracts, it's difficult to see any specific opportunities that might be more of an initiative of a -- the administration that would be subject to further revision in the election year or maybe slowing down in the election year because of potential change in the administration. That's not to say there aren't some, and you never really know how policies might shift over time. Certainly, programs that have been put in place as kind of stop GAAP measures to provide supplemental resources. I think about, for example, in the VA and other areas are subject to change as the policy interest of the administration change. But programs that are more kind of core and fundamental, like supporting the Medicare program and supporting the student loan population and so forth. We find to be stable across administrative transitions.

Our next question comes from the line of Donald Hooker with KeyBanc Capital Markets.

Just one quick follow-up. I've meaning to ask. With these employment contracts in Australia and other countries that are being negatively impacted by low unemployment. And now you have the fires in Australia and the coronavirus and other issues. I mean, they're not clearly -- you're struggling with profitability there. I would imagine others are as well -- other contractors are as well. I mean, have you guys had any kind of conversations with your partners and counterparties in those governments about the structures of those contracts because it seems kind of rough on you guys, given the environment and sort of just curious how those -- at some point, these things are going to renew, or is there a need to sort of change how these contracts are structured so that they can at least be somewhat profitable for the contractors?

Yes, let me begin and then I'll turn it over to Rick for some further color. One of the questions we always ask is, I know that this tough sledding. And we push the teams to manage their costs as tightly as they can while still delivering the quality of service that the customers come to expect from us and so forth. And we always ask, how are we doing compared to the competition. The answer actually is that we're doing quite well. We're often the top performer or near the top performer in the markets and with the contracts that we're providing. So yes, everyone is suffering, and we work to ensure that we maintain a high-quality of service and that we're delivering on our commitments. That's always been a core value, obviously, of ours such that if you can then get into a conversation about a rebid and how that should be structured, you're doing it from a more of a position of strength. As a consequence, our -- one of our customers came to us and said, look, we like you to be the voice, if you will, and the focal point for collecting input from industry from all the other providers as to how these contracts need to be reformed and modified so that they can be more attractive and lead to a more sustainable supply chain in this area. So we are exactly doing that. Separate from that effort to -- in pulling together kind of the input from all the players, as you can imagine, we're engaging in direct conversations with our clients. And I'll kind of pivot to that with Rick because we view that as a team effort that we're engaged in.

Yes. I just want to stress -- we're not happy with where the margins are. And -- but our operators are doing a good job of trying to contain costs where we can and still meet the requirements of the contract. But I did want to make sure that I pointed out that we talk about -- we do our accounting on a fully absorbed basis. So when you see operating income, you're seeing an operating income after allocation of all the indirect SG&A costs. So when we analyze the businesses, we look at the gross profit, we look at the operating income before SG&A and before home office allocations from SG&A and net operating income. So we look at all of them. And there are many of them. Although, they're not giving us the operating income margin that we would like and that we would like to drive the businesses toward. We do look at that gross profit line, too, and make sure they are making good, healthy contribution to indirect costs. And if they're not, then that spurs us to further and more dramatic action.

And John, I might add one more thing. Our customers want to ensure that there is a sustainable market to provide these types of services and a healthy stable of providers. And so it's not as if our pleas fall on deaf ears. In fact, as we've sat down to have these conversations, they've been very engaged and very concerned and want to ensure that they have the ability to continue to provide these essential services to their citizens and that they have healthy suppliers to do that. There have been examples in some of the government customers that we serve, where there's been market failure and ultimately, collapse of the supply chain. And so they're, I think, particularly attentive to that. And as a consequence, our -- we think that our message is landing as it should.

Thank you. We have reached the end of the question-and-answer session. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.