MAXIMUS' CEO Presents at Barclays Global Healthcare Conference (Transcript)

Mar.12.13 | About: MAXIMUS, Inc. (MMS)

MAXIMUS, Inc. (NYSE:MMS)

Barclays Global Healthcare Conference

March 12, 2013; 04:45 p.m. ET

Executives

Rich Montoni - President & CEO

Bruce Caswell - President and General Manager of Health Services Segment

Analysts

Joshua Raskin - Barclays Capital

Joshua Raskin

So up next MAXIMUS, who has been at our conference now I think three years. When we started it was sort of a small cap name that [might be] [ph] interesting way to play Medicaid and now it’s outperformed pretty much everything I cover.

So we are fortunate enough to have Rich Montoni, who is the President and CEO, as well as Bruce Caswell, who runs the Health Services Segment for the company. They are going to split up the presentation.

I think we are going to do question’s here after, maybe we’ll get the mics off, but I know there’s a breakout room. So - I take it back. Is it in here? It is. [Lisa] [ph] knows more than I already, yeah, whose conference.. So we are going to stay here for the questions.

I’m going to turn it over to Rich to do the first part of the presentation and like I said, we’ll do Q&A as well. Thanks gentlemen for coming once again.

Rich Montoni

Thank you very much Josh. Great to be here; I think our third year and this is by far one of our most favorite conferences. Not only the location Josh, but we took a vote today and the food is by far the best of all the conferences where we attend, so thank you very much. Keep up the good work.

I appreciate the opportunity to share with you today a bit about MAXIMUS. I know we have folks in the audience who know us in detail and I think some of you are new to the story. So we’ll give you an overview.

I will tag team with Bruce Caswell. Bruce is on my left here. Bruce runs our Health Services Segment. He’s the President and General Manager of our Health Services Segment and I hope you find the words of Bruce, and insights that Bruce can share with you, as it relates to healthcare reform here in the U.S., to be insightful. I think he does a great job to keep us as a leading player, advancing healthcare reform in the many, many states and hopefully the federal government as we move forward.

I didn’t get the instructions on the machine here, so bear with me. There we go; thank you very much. I appreciate it.

MAXIMUS is a provider of business administration services, business process outsourcing services to governments. We do this worldwide and we focus on health and human services.

We think long-term growth drivers really come from the economic and demographic factors that are driving social reform across not only the United States, but many, many countries on this globe. We think we are very well positioned to grow from those drivers. Again, we focus on healthcare and welfare reform. We think we are very well positioned for several reasons.

A healthy balance sheet; we have $167.1 million in cash at December 31. We have a quarterly cash dividend program, an opportunistic share buyback program; we have no long-term debt.

Fiscal ‘13, we are looking for fiscal ’13 to be a great year. We are expecting our top line will grow in the vicinity of 19% to 24%, and we think that our earnings per share will grow 27% to 33%, and I’m delighted to share with you some special news that’s in this lower right hand box.

This is late breaking news that we have executed a five-year $265 million contract extension to our health insurance program up in British Columbia that will take us through March 31, 2020. So Bruce is going to share with you some more of those details as he gets up here, but that’s really a very exciting and very sizable opportunity for us. Stay tuned; Bruce will have more details.

From a growth perspective, top line and bottom line, when you look at the last five years and our expectations for fiscal ’13, our compound annual growth rate is 12.8% and you can see on that right hand tan bar, we are expecting our revenues for fiscal ’13 to be in the range of $1.25 billion to $1.3 billion; from an adjusted earnings per share perspective, we are also looking for healthy growth; we are looking for a CAGR of approximately 18.8%, which would take us to $3 to $3.15 per share in our fiscal ’13.

We have two segments for external reporting purposes; our Health Services Segment and our Human Services Segment. Bruce, you have actually you ran the Human Services Segment before the Health Services Segment, so you’re pretty knowledgeable about both of these right?

Alright, we’re going to pick on Bruce to see if he can give us some insights about these. He’s going to cover the next several slides and then I’ll pick up the closing slides.

Bruce Caswell

Thank you Rich and good afternoon everyone. It’s great to see some familiar faces and as Rich mentioned, we have some new news to share today about our British Columbia contract, which is great. We’ve received an extension through 2020, to continue providing services to the province and I’ll tell you a little bit more about the services that we provide in British Columbia, because it actually pertains to the health work that you see on the left side of this panel.

We provide the administration of the medical services plan for the province and also the pharma care plan for the province, which includes the registration of the healthcare providers, the processing of over 110 million claims in British Columbia on an annual basis and the registration and enrollment of the citizens of the province of British Columbia.

We are proud to say that we’ve had that contract since April of 2005 and we’ve met all of the service level requirements since November of that year. So again, some late breaking news and very exciting development on our work in BC.

So I’ll tell you a little bit more about the work that we do in our segment. Our Health Services Segment, fundamentally we help individuals get access to public health benefit programs and become enrolled in those programs. So we do that as the leading provider nationally for the Medicaid program, for the Children’s Health Insurance program and we also are the provider of in excess of 80% of the appeals work for CMS for the Medicare program, across all parts of Medicare, parts A, B, C and D.

The functions we perform you can see outlined here, including running multi-lingual customer contact centers to help individuals, not just get through the eligibility determination process, but make an informed selection of a health plan.

We are paid in the health services business, generally in a manner that includes a fixed component and a variable component to our payment. So we like to have contracts that are structured where there’s a fixed element that covers the fixed operating cost of the business on a monthly basis and variable payments that are tied to achieving specific outcomes for our clients.

Those outcomes might be achieving one of the points you see here and I won’t take you through all of them, is a choice rate. Now a choice rate in the Medicaid, Medicare program is that portion of the enrollee population that’s actually made an informed selection of a plan, versus being auto assigned by an algorithm into a plan. We are proud to achieve choice rate in excess of 80% in many of our contracts and often can receive a performance bonus if you will, for achieving even higher choice rates.

The health services business comprises about 64% of our revenue as of FY’12. The remainder is the human services business, the other 36%. And to put that into sound bite, we help individuals get employed. We help people find jobs in human services, our welfare to work case management service line, really has grown quite substantially internationally.

But it began in the United States going back to the first W-2 program that Tommy Thompson ran in Wisconsin, where we became the number one provider, and that’s the model that’s really been replicated internationally as people talk about replicating the Wisconsin model.

We do some work in the Child Support Enforcement arena, helping non-custodial parents gets orders established and support orders followed and collections made, both in the United States and in Canada and again, just like in health services, we do these through multi-lingual customer contact environments and where case managers work with individuals.

The nice dynamic about both of these business segments is that we enjoy an average weighted contract life in excess of four years, not uncommon to have contracts with a two or three year base and then an additional two or three year option.

We like to have relationships that are decades in length and clearly as the British Columbia announcement today indicates, we’ll have been there 15 years by 2020 and hope to stay even longer if we can. Our typical contract margins are in the range of 10% to 15% and this model really provides highly predictable revenue for the business.

I’m going to speak a little bit more about how we fit into the Medicaid, managed care and CHIP supply chain, and you can see that we’ve broken this chart out into kind of two components; those activities that are related to serving beneficiaries directly and those that are more related to managing the delivery system.

To understand MAXIMUS, it’s important to understand that we are really the first part of that process. So we work with a number of our state clients, through third parties sometimes like community based organizations and others in reaching out to individuals and handling the intake process, getting them into the application process.

We then help complete the eligibility process by being, we like to refer to it as the Sous-Chefs for Medicaid eligibility, because by federal law, a merit based employee, state or county employee makes that final eligibility determination.

The next step in the process is we reach out and engage consumers and we like to engage them on their terms. So we produce printed materials, written materials, run call centers, have websites that are multi-lingual and gear towards the appropriate reading level for individuals, because cultural and linguistic sensitivity is key to the engagement process. And then ultimately we help enroll individuals in a health plan of their choice, ideally achieving a high choice rate as I mentioned previously.

We work with other entities in that process, community based organizations. In many or our programs we have field based workers that are stationed out in county public health departments, working through doctor’s offices and so forth. At the end of the day though, our clients are the state Medicaid agencies.

That gives you a sense of the work that we provide in Medicaid; I will only just caveat that by saying in the CHIP program the work that we do actually includes the full eligibility determination process and the collection of an initial payment or co-pay. So when you start thinking about health insurance exchanges, the parallel is actually closer to CHIP in terms of the full functions that need to be provided, so let’s segue to Health Reform.

Health Reform in America obviously a major, major national topic and initiative and one that we have been planning for, for a number of years and one that we really see the top two opportunities for MAXIMUS being the implementation of the individual health insurance exchanges, which we sized as a $500 million addressable market on an annual basis, annual contract value; and the expansion of Medicaid, which itself is about a $100 million to $200 million in additional addressable market value and I’ll talk to you a little bit about how we got to those numbers.

So Medicaid expansion nationally, if everyone who were eligible to enroll up [to 138%] [ph] of the federal [poverty] [ph] level did, that would be about 15.6 million additional beneficiaries. On average MAXIMUS attributes revenue for an enrollment broker case of about a $1 per member per month or $12 per year, so the simple math there creates this addressable market of $200 million. Of course not every state is going to be expanding Medicaid, but many are.

As of the most recent count that we refer to, which is produced by the advisory board, there are 29 states that are either committed to or are likely to expand Medicaid. Those 29 states comprise about 6.3 million of the 15.6 million beneficiaries that I mentioned.

The other major opportunity of course is the individual exchanges. We came at that in a similar fashion looking at all the functions that need to be performed and how collectively in order to run that exchange one can do that effectively by its component parts. So intake, application, eligibility determination, enrolment, ongoing case maintenance and we size that to be about $500 million.

We often get the question, does that include the federally facilitated exchanges? And the answer is, absolutely. That model is regardless of whether it’s a state based exchange, a partnership exchange or the federally facilitated exchange, it fits into that.

As you can see when you run the numbers out and the Congressional budget office updated these estimates in February 2013, very, very fresh you get about 11 million additional Medicaid beneficiaries and 27 million individuals on the exchanges when you kind of hit the full run rate in the outer years, 2018, 2019. So the collective impact is about 38 million individuals being brought into the market.

And then lastly I though I’ll talk a little bit about the options for state based exchanges and federal exchange. The slide kind of lays out for you some of the component parts. I won’t take you through each detail. Just, I’ll give you a quick sense of where the market’s headed.

There are 26 states that have declared that they are going to follow the federally facilitated exchange, 7 that will follow the state partnership exchange and another 18 that will be state based exchanges.

Now those state based exchanges need certainly to perform a number of key activities as we’ve outlined related to application intake, eligibility enrolment and so forth. MAXIMUS is very well positioned to support those states and in fact we’ve already spoken to a couple of states, we’ve have spoken publicly about a couple of states where we will be providing those services.

In particular, in New York where they are going to be transforming the New York Enrolment Center contracts which MAXIMUS had previously been awarded. That would become the service center for the health insurance exchange. In addition to that, we recently announced the win in the state of Connecticut, where we’ll be running the service center for the exchange.

Now the state partnership exchanges, there’s only seven presently, but just by reading the local press in the last couple of days and the national press really, there are efforts afoot to try and get more and more states to take on some of those responsibilities and the current option states have are to handle health plan management and in person consumer assistance.

I think the key takeaway I’d like to leave with you on this is, however the mix that I told you about isn’t the mix forever. There will be many states that over time will migrate from the federally facilitated exchange or a partnership exchange to state based exchanges, and we feel that based on our heritage in the Medicaid and CHIP program, we are well positioned to support that migration and in addition to that, there are many activities that remain the responsibility of states when they are in a federally facilitated exchange that must be supported at the local level. So we see opportunities for the company in each of those models.

And with that, I’ll turn it back to Rich.

Richard Montoni

Thank you Bruce. Do you remember the first slide and the first bullet where I talked about the social factors, demographics that are driving social reform? When we take a look at global expansion, that’s really what’s behind it.

Since 2006 we’ve seen a significant shift in the percentage of our revenue that’s derived from international operations; 14% in 2006 and 2012, 26%. It’s exactly these macro forces that are compelling governments to rethink their social programs two of which MAXIMUS focuses on, that will be health and welfare.

Let’s talk a little bit about what we do from a work force services provider perspective. It seems as if internationally, it’s the international welfare to work programs that are leading as it relates to change. A couple of examples of what we do will be talent programs, ticket to work programs, in Australia we run the job services. Australia program, well it’s referred to as JSA; the disability employment services or DES.

We also have programs in the Untied Kingdome. We’re a key provider to the work program. We have a new program there called Day One Support for young people. By the way the number one social issue that we are seeing in the countries where we do business and where we have prospects is the high rate of unemployment with youth and we think that’s going to be a growing opportunity for MAIXIMUS.

In Canada we run an employment program up in British Colombia and in Saudi Arabia we have a pilot program that we are operating and I think its running quite well. We are hopeful we’ll get additional opportunities. That country has a very rigorous formalized program to provide more job opportunities to its citizens.

Our global expansion strategy really can best be described as land and expand and the best example that I can give you of land and expand is what happened with our Australian business. We purchased a small business in 2002 in Australia. At the time it has a run rate of $15 million. You need to understand Australia and how they do business; it is a country that doesn’t bid price, it really bids performance. And then make awards to providers based upon their anticipated performance of the outcomes that are important to that government.

So we chose a strategy in Australia to focus on performance and remember what happened is we were awarded we new work over time. The government will reallocate work based upon performance ratings, they call them star ratings, such that we are awarded new work and closed out our fiscal ’12 with growth, and all of this growth is organic by the way of $165 million. Quite a significant growth, and this is really our model as we look to expand into other countries.

On the bottom right, and this is great news in fiscal ’12, we signed a three-year extension to that contract, which for three years should amount to a total contract value of $450 million.

We are often asked what’s our value add to our clients, critical and I think I’m going to use that as an example, a recent experience that we had with our valued client, the State of Texas. The State of Texas had a fairly ambitious program to move quite a few lives from a fee per service into managed care and as part of that they also reconfigured all of the territories and re-bid the managed care plans to the providers, such that we had to enroll approximately a little bit over 3 million lives, is that right Chris, 3.3 million in a very short period of time. And we had to staff up an operation, up to 700 FTEs, 700 employees to accommodate those re-enrollments or those transfers and that was an awful very short period of time.

We took that – about five months it took and then that backed down to a normalized rate in the vicinity of 300 FTEs. I think that’s just an example of the flexibility that we provide our clients, and the ability to scale and get these programs up and running on an accountable basis. That’s just one great story out there.

So we are very excited about fiscal ’13. We provide specific guidance one year out. So we have specific guidance for fiscal ’13, but we are often asked what do we see beyond fiscal ’13. In an attempt to help you understand that, lets talk to one of our most favorite slides and we are going to start with health services.

We think health insurance exchanges were just starting to see the early traction. We were fortunate in our most recent quarter. In our December quarter we talked about some work that came on earlier than we expected. That was the New York Health Insurance Exchange work, the early sates. We expected that work will continue to get increasing traction in the rest of ’13 and it will run into ‘14 and ’15.

I personally think it’s going to run beyond ’15. As Bruce talked earlier, we think there will be states that initially go on to the federal exchange that chose post 2015 to move back to a full state-based exchange and we remain very, very tuned for that opportunity.

In fiscal ’12 into ’13 and we think beyond the shift of populations from fee per service on to Medicaid Managed Care has been and we think we’ll continue to be quite significant. And as Bruce talked about Medicaid expansion, we think that increase in the total addressable market represents great opportunity, great growth opportunity for MAXIMUS.

Down in the human services side, we have laid out this one particular program, the U.K. work program which was a startup in fiscal ’12. We knew because of the back ended pay points that it will generate a loss and according to our plan it did, and our goal was and we did achieve that goal to get that program to breakeven by the end of our fiscal ’12 and we have started out in great shape in fiscal ’13, so we’ll see increases in our top line and our bottom line as that program matures.

I also think on the international basis, and that’s the line that you see toggling both human services and health services, we’ll see other international reform efforts. We’d really like to get some international opportunities in the health areas in those countries where we are established from a human services side of things. So stay tuned as we try to develop those opportunities.

So in summary and I’m anxious to get to Q&A, which Josh I understand we are going to do here in this room. We think there is a lot of growth ahead for MAXIMUS. We think we are very well positioned in the right segments. We think the drivers are there and I think they are multi, multi years in length. I think we are very well positioned not only from a financial perspective, but I think we’ve got a great management team that’s up for the task.

So with that, lets turn it over to questions. Thank you.

Question-and-Answer Session

Joshua Raskin - Barclays Capital

On the international side, are the new contracts that you guys are procuring, are they push or are they pull? These countries that are seeing success or changes in other markets that are saying, okay, we need to start embracing certain types of systems like that and calling you, or is this you going to them and saying, look at the success we’ve had in Australia, UK, Canada, whatever and you had…

Rich Montoni

I think its more pull than push. I think it’s a very challenging business model to go out there and try to convince governments to re-engineer their programs. We describe our markets as glacier in nature, meaning they are very, very large, but governments do impact them slowly.

So I think the key to success is being at the right sport at the right time. You don’t want to push them away of something when a request or proposal comes out Josh. You want to be attuned to it, preferably a year before the request of proposal is going to come out. So its very much knowing the different countries, who is moving in what direction and when they are likely to change that system.

Unidentified Participant

Okay. What was the impetus for the extension of the British Colombia plan? If I saw the chart right or the slide, it’s a five-year extension to 2020, right?

Rich Montoni

Right, that’s right.

Unidentified Participant

With this in, do you think that was supposed to be renewed now, a few years out?

Rich Montoni

It’s been an option in the contract since the original contract was written. And obviously with the original contract scheduled in 2015, you know we’ll be in the process of negotiating that and work through that with the province to achieve that five-year extension. So kind of an in plan event, but that’s getting completed at this point in time.

Unidentified Participant

I’m just curious to hear your thoughts about some of the news out of Arkansas now. There is some speculation that their Medicaid expansion could take place via the exchanges, and if that does happen, how does that affect your visit in more states. Florida could be a great example if they do incorporate that. How would your business be affected, because I know you guys do benefit from Medicaid expansion, so…

Bruce Caswell

A couple of ways to think about it. First of all, one question is what is Arkansas really doing under the federal, kind of rework of federal laws and requirements. What they are doing is a premium assistance program, PAP, which has been around for a while and generally there is a metric that’s applied, which is that if the insurance is more affordable by using the federal dollars to buy into the commercial insurance than it is to the Medicaid, then it makes sense to do that.

I think the jury is out a little bit as to whether the policies are going to be more affordable in the commercial markets then they would be for Medicaid given the provider reimbursement differentials, and so whether this is something that could go on a more national scale I think is opened to question.

I think the other function as to what makes it attractive or not is how mature the MCO market is for Medicaid already in that state, because you could also do Medicaid expansion in a state with a very mature set of private offerings for Medicaid and achieve effectively the same purpose, private insurance options for beneficiaries.

So setting that side, interestingly I think a lot of the details of how this gets implemented still need to be determined. In fact whether for example the beneficiaries, because they are being paid for with 100% of their money, they don’t qualify for advanced premium tax credits or cost sharing reductions.

Are they technically still Medicaid beneficiaries, and would they therefore still need enrolment type assistance? I think regardless of whether it’s a classical enrollment broker model, its important to look at some of the experience and fire enhances such as was written up in Health Affairs back in January, where individuals surveyed in the Common Wealth Connector Experience in Massachusetts, 70% of them said they either made use of or would have liked to have better assistance as they went through that health plan selection process.

So to be determined a little bit in terms of what the roll and opportunities would be, I like the fact that you motioned Florida, because Florida now is very actively debating what model they would want to use for Medicaid expansion and indeed, Florida Senator yesterday stated that, well lets look at what we currently have and one of the platforms that currently would be available is called the Florida Healthy Kids Program, which for over 20 years has provided that full range of services from application and eligibility to enrolment and initial premium collection.

And in fact that Senator said, if we are to do this, lets do it on Florida Healthy Kids, on that platform, and that’s just described to be the incoming vendor to be supporting Florida Health Kids later this summer as they transition that program from another vendor. So I think it creates opportunities in that regard.

Rich Montoni

One last question. I think we are good. Thank you very much folks.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!