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MAXIMUS, Inc. (NYSE:MMS)

Bank of America Merrill Lynch Health Care Conference Transcript

May 16, 2013 11:00 AM ET

Executives

Richard Montoni - President and CEO

Lisa Miles - Investor Relations

Analysts

Kevin Fischbeck - Bank of America Merrill Lynch

Kevin Fischbeck - Bank of America Merrill Lynch

… for joining us early in the morning here. It's my pleasure to introduce MAXIMUS. MAXIMUS is probably the largest government process services company here in the U.S., as well as abroad. They have two main business lines as an enrollment processor on the government programs, but also at welfare to work program both in the U.S. and abroad. Presenting today we have Richard Montoni, President and CEO, as well as Lisa Miles from Investor Relations.

And with that, I'll hand it over to Richard.

Richard Montoni

Oh! Kevin, thank you for the invitation and the opportunity to be here, and I think you folk in the audience for choosing to participate in our presentation. What we are going to try to do here today is get through standard deck for those of you who are new to the story, I’ll give you a background and then I’d like to reserve enough time to get into Q&A.

MAXIMUS is a very unique company. I think we are very well-positioned in health and human services. And as you all can appreciate, this is really the eye of the storm here in the U.S. with health care reform situation, and I’d like to give you an opportunity to ask us questions and share with you some of the dynamics that we are experiencing. And frankly, we believe is a very significant driver behind our growth, not only the last couple of years but I think for many, many years to come.

So, with that, let’s get started. For those of you who don’t know MAXIMUS. We are a leading operator of government, health and human services programs. We do this worldwide. The worldwide is very, very important.

We think when you look at what's happening across many, many countries is that the economic and demographic factors driving social reforms and this would be in large government healthcare programs, large government welfare and welfare-to-work programs, as governments are compelled to take a hard look at their spend, to take a hard look at the efficiency and the efficacy of their program. This is increasing the demand for what MAXIMUS does and I’ll talk a little bit more about that in a bit.

We think we are very well-positioned in healthcare and welfare reform. I’m going to ask Lisa Miles on a couple of slides to present to you, what we do and give you a bit of a drill down in the two major segments, health and human services.

But we’re very well-positioned, whether its running Medicaid programs, with the majority of beneficiaries inside states across the United States well north of 50% of beneficiaries are served by the administrative services of MAXIMUS here in the United States or whether it’s the appeals that we processes for the Medicare program. We are the largest provider of appeals to the Medicare program.

And in the category of late breaking news, this morning we issued a press release where we announced that we’ve launched the appeals process that we will run for the State of California. The form of the work is two separate contracts and we will perform IME, IMR in independent medical reviews and what’s refer to as IBR’s, Independent Billing Reviews for that state for California's workers comp program.

We estimate that over the two-year period you. It will take a little bit time to ramp but over two-year period, we think that’s worth order of magnitude about $40 million in revenue to MAXIMUS. And I think this is one example where we are seeing the demand for what we do increase.

From a financial perspective, we have very healthy balance sheet. We had about $187 million in cash at March 31, ’13. We do have quarterly cash dividend program of which we’re quite proud. We have an opportunistic share buyback program and we have no long-term debt.

In terms of what we think is going to happen in this fiscal year ended September 30, 2013, we are excited and that we think we are going to grow our topline in the vicinity of 19% to 24%, and we think we’ll grow our EPS and this is our adjusted EPS in the vicinity of 27% to 33%.

From a revenue and adjusted earnings per share perspective when we look at history, over last five years we've grown our revenue on a -- at a compound annual growth rate of 12.8%. We are looking for this year to be revenue in the vicinity of $1.250 billion to $1.3 billion.

From an adjusted EPS perspective, our five-year compound annual growth rate 18.8% and we are looking for this year to be in the vicinity of $3 to $3.15.

The next slide I’m going to impose upon Lisa to walk you through the two segments and I’ll be back after few slides.

Lisa Miles

Thanks, Rich, and good morning, everyone. MAXIMUS as Rich noted operates in two segments. Based on fiscal 2012 revenue of just over $1 billion, the health segment was the largest at a contribution of 64% in total revenue and human services at 36%.

Across both segments, typical contracts are long-term in nature, predictable, visible stream of long-term revenue, average contact life is four plus years. Typical contract margins in both health and human services generally range between 10% to 15%, that’s operating margin and again, highly predictable revenue stream.

So let’s start with the health services segment. What we do? The largest portion of the work that we do in health services really has to do with operating government health benefit programs on behalf of government. So working with Medicaid, CHIP, as well as the program called Health Insurance British Columbia.

In any program we help to determine eligibility and as well as then once eligibility is determined health people decide what type of managed care plan is most suitable for their needs, particularly in Medicaid and CHIP, and most recently in health insurance exchanges. We have some recent awards there where we are just launching work and we have some customer contact centers set to go live October 1 for open enrollment.

A lot of things that we see when we work with individuals on the things that they are looking for, when they are looking for a particular managed care plan would, I’ve seen this doctor in the past, I’d like to see him again or I live in this geography. I need to find the physician within in this area. I speak this language. And so we do offer choice counseling services to help them make the best choice for their current health need.

We are also as Rich noted the largest provider of Medicare appeal -- all parts of Medicare, and we do all of this work through multi-lingual customer contact centers. And in many cases we do speak over dozen languages and we do have the ability in many areas to go up to over 120 languages via language line.

Our health footprint today is predominantly in North America. We have talked about in our last earnings call looking to perhaps expand and extend those core services to other geographies.

And how we get paid? Most contracts in the health services segment are hybrid in nature, where we get a fixed fee component plus some transaction-based components as well, and we provided you with some transactions as example, so choice rate.

How many people actually made a decision, an active decision on the managed care plan they wish to go into versus an auto-enrollment, call volume and mailings? Number of applications, number of enrollments and all of these things are types of transactions that we will get compensated for within the health services segment.

Moving on to human services, the vast majority of the work that we do here is in welfare-to-work case management. We are getting paid to help people transition from welfare and into long-term employment. So that they can achieve economic independence and no longer be reliant upon public welfare benefits.

We do some job training as part of that and making sure that we have the employer network set up and an appropriate pool of jobs to pull from is also critical component of the work that we confirm in welfare-to-work.

We do welfare-to-work throughout North America, Australia, United Kingdom and most recently, we’ve a pilot program in Saudi Arabia. We also provide child support enforcement predominately in North America and all of these services are done through multi-lingual in-person customer contact center.

In the human services segment we typically get paid through attachment fees, which if you come in the door and you're looking for a job, we can get a fee for that to do your intake and assessment outcome fee. You're placed in a job or you're in job for certain period of time.

In the United Kingdom, we are able to achieve sustainment fees. So if we’ve been a job for more of than six months, we can collect fees based upon that and task completed and as well fee-for-service structure.

As we mentioned, we are one of the largest providers of Medicaid enrollment broker services here in the United States. We enjoy very sizable market share. What’s critical to that is that Medicaid is one of the cornerstones the Affordable Care Act and expanding coverage to millions of Americans.

A lot of the core functions and capabilities that we bring to the table of Medicaid are much the same functions required in customer contact center of a health insurance exchange, and so we feel particularly well-positioned to win a lot of that work as it relate to supporting states in those efforts.

We’ve actually put them in addressable market number on health insurance exchanges of $500 million in annual revenue, that’s just for Business Process Outsourcing. It does not include any technology and/or any additional services beyond that.

On Medicaid expansion we’ve tagged about $130 million to $200 million in annual revenue and we have not supplied the shop market opportunity.

Thus far 17 states and the District of Columbia have declared that they are going with the state-based exchange. Seven states are doing public partnership exchanges with the Fed and 26 are going purely with the federal exchange model.

Currently, we are performing work in Minnesota, New York, Connecticut, Vermont and California. We are also part of the team selected to operate the customer contact center operations on the federal exchange.

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

Richard Montoni

Thank, Lisa. I think that’s a great table setting satisfied and as you look at those slides I hope you start to think about some questions that just swirl through my mind as it relates to current events that are happening in this areas, in those two segment within which we operate, whether it’s all the dynamics related to federal health exchanges or state based health exchanges, the dynamics that are happening or conversations that are happening here in terms of work force improvement, finding jobs, creating jobs, improving the situation as it relates to jobs here in the U.S. And we see the same thing in many other countries or in the U.K. and Saudi Arabia where we’re seeing significant dynamics as it relates to, I'll call it their welfare program.

So again I want to save some time towards the tail end to talk about those current events. Talk a little bit more and give you some examples and what we do in the Workforce Services arena. And these are helpful examples to give you, let’s say, an additional drill down appreciation for where these programs are and what we do. Some of the model program in the United States we run TANF programs. We run Ticket to Work programs.

In Australia, we are the largest provider to that country in a program they call Job Services Australia. We have over 100 offices last count I think. Across that country, we also run disability employment services programs for that country. And we also have an interesting program to help that government deal with daily bulk loads of attempted immigrants into that country. We help to manage those individuals so that’s an exciting situation.

It kind of points us to the direction as we monitor what's happening here in the United States for immigration. Is there an opportunity for MAXIMUS there? In the United Kingdom work program -- big work program that we engineer their welfare program. We are participant and run about 5% of that countries welfare work program. We also have another program called Day One support in Canada.

We run an employment program for the province of British Columbia. In Saudi Arabia and this one really interesting, this one caught me by surprise. I often times get asked, Rich where do you see new opportunities country by country which country is poised to move forward and reengineer either their health system or their welfare system. And we have program to monitor that and pulse that. And we forecast which ones we think will move and granted government’s move with glacial speed, but they do move.

And in this particular case, Saudi Arabia caught us by surprise. We had not forecast them to move forward with a very aggressive, I’ll call it a welfare reform program. We did not think that country was compelled from a fiscal prospective to reengineer its program. But when you look at it, it was for social reasons.

And this is actually what’s referred to as the Kings programs as opposed to going through the normal government budget. But king has the right to anoint certain programs. They have certain privileges under the King’s program. It means they get handled expeditiously and they are less budget conscious. But in his mind, it was very important to deal with a long-term trend in that when you 2X the number of national Saudis, who are not gainfully employed. It’s not good from the social perspective.

So that program, there are about 6 million individuals who work in the country of KSA, who are immigrants and that country has goal to move about 1.5 million of those jobs from immigrants to nationalized Saudis and where one -- where a firm is helping them do that. We have a pilot program that’s soon to wrap up this summer.

I think our performance is very strong and our relationship with our client is very good. It is client that does appreciate performance first-class and that our goal. That’s our differentiating in market place. And we are hopeful to renew that pilot and fingers crossed to even grow that work for that very important client even further.

As an example, again drilling down a bit more, I want to share with you the story of Australia. And this is a country that if you study its history, I think you will find in the 90s, is the country that moved significantly away from the classic model of government owned and operated but little to know partnership with firms like Maximus to partnership type model. And they moved to an outcomes-based approach, whereby less emphasis on a cost per unit. More on, are we really getting the outcomes that are important to our people? And in the case of welfare-to-work program, are you really finding those people who need jobs, are you finding them jobs and keeping them employed?

And in Australia, that country advertised that they were going to focus on awarding based upon performance. As a strategy, we choose to then naturally focus on performance. So we bought a small company. It’s our preferred way to land in 2002, at a time this company had revenues and were sitting at $15 million.

And as we moved forward and as we delivered superior results overall, we were awarded additional work and we grew that business not only in 2004, ‘8, ‘9, ’10, we closed our fiscal ‘12 with revenues of about $65 million. So a tenfold increase in a decade I think is a great example of how you grow a business to create shareholder value.

There are many examples of where I think we add value to our clients rather than go down a checklist, I think I will let you do that. I will give you an example. One of our largest clients is the State of Texas and with the back room for the Medicaid program and it’s an integrated eligibility program.

And that state had a challenge about a year ago to, they were redistricting their Medicaid programs and reallocating work amongst the providers of healthcare of the plans. So we had to reenroll folks and we also had to add additional folks in the southern part, as they expanded and went from fee-for-service to managed care.

Our responsibility was to help them go through that process. So in a three-months period, we leased out, stood up, operationalized, hired over 800 people to accomplish that and this was several millions of individuals where we had to reregister, enroll, process. And do that in a three-month period of time and then to wind it down in a responsible fashion, it’s really first-class management and government is very much -- big governments in particular are very much appreciated.

So, I think of the many, many stories that we have out there I think Texas is one of which I’m very, very proud. But again, we have many, many other stories that have given some time I would love to share with you. So where do we go from here? And this is really important.

I’m really proud of what the teams done over last several years and we are really confident that 2013 will continue to be a solid growth year. But I really do believe that the growth drivers in our space, there are not quarters long, they are not years along, they really are decades long. Here in the United States, we have done a great job I think to reengineer the healthcare system.

We have got a lot of heavy lifting ahead of us. Maximus is fortunate to be -- I’d say in the eye of the storm. But when you step back and look at it, what we are really doing thus far is addressing the universality of healthcare in the U.S. There will be additional chapters written, but it is quality of healthcare, the cost of healthcare and I’m confident Maximus will be a player as we go forward with the additional chapters.

And I also think in the U.K., that government is very, very determined to improve its operations. I think we’ve got great brand there. We are a top performer in work program. Our growth strategy include in those areas where we’ve developed good brand and run a big program for government, but a single source in that single segment. And most of our international operations are biased towards the welfare program. But I know there is a demand for what we do on the health side of things.

So we’ve challenged our folks to make sure that once we have an opportunity, or a contract in the human services sides for example, let’s go get some health work. So, that’s our goal over the next several years. I think that’s just one meaningful driver to future growth.

So, in summary, I hope you have an appreciation today. The global opportunities that are ahead of us and our positioning in both segments, the financial position speaks for itself. We are well-positioned not only to finance growth, but we do have an active M&A program to look for opportunities that position us from a strategic perspective and our financial position enables us to do in a responsible fashion.

And the one thing I would hope you would get to, if you decide to invest in Maximus and if you are investor, what's really important is our management team. We just have a great management team that is not only excited, but very, very capable. And at the end of the day, my belief is that that’s what drives growth and it helps create shareholder value.

So with that, let’s open it up for questions.

Question-and-Answer Session

Unidentified Analyst

Good morning. Two questions. One, could you expand a bit on the new win on the General Dynamics contract? I’m curious on the metrics there. Number two, who do you compete with in most of these bids and can you give an example of a contract that you lost in a recent renewal? Thank you.

Richard Montoni

Okay. Great. I will give it a go. At least make sure that I’m thorough with my answer here. For those of you who aren't familiar with the GDIT, that’s General Dynamics Information Technology. They are, what’s referred to as the incumbent in a very large call center contract to manage the calls of Medicare beneficiaries. And that contract was up for renewal in an addition, the government -- the federal government contract, U.S. federal government contract.

The government decided to add to it, add additional scope to it, which would be the call center operations for the federal health insurance exchange. And Maximus, we filed an 8-K recently to advise the investing public that we serve as a subcontractor to GDIT in a bid.

And I believe that GDIT and/or the federal government have announced the award. It has been made to GDIT. So we feel comfortable that we are in a winning team. Beyond that, it’s a little difficult to get into details because as you can appreciate and as a subcontractor, you very much have to respect the wishes and usually it’s the prime that leads in concert with the clients as it relates to details and disclosures.

So, I know a lot of folks were very anxious to hear things like well, how big is the contract and what’s your share of the contract, and how long will it be? I think, unfortunately until the government and GDIT move forward those disclosures, we are going to have to remain in the camp. We’d love to share with you, but we are a bit handcuffed in that context.

Lisa Miles

Good.

Richard Montoni

Do you have anything more to that?

Lisa Miles

No, I think that’s exactly spot on.

Richard Montoni

Okay. Your second question is, who do we compete with? And I think it’s helpful to sort the universe into two categories. Here in the U.S. on the health side of things, we tend to compete with larger providers of these outsourcing services.

Historically, it would have been an EDS now owned by HP. It would have been an affiliated computer services now owned by Xerox. Couple of smaller competitors and it would have been Policy Studies Inc. out of Denver which we acquired last May 1st. And that would be on the health side of things, a little bit of overlap, especially with the PSI and Workforce Services arena.

And then, in addition, in the U.S., in Workforce Services arena, particularly as you get more local, you’ll find smaller non-profits with whom you compete. Our solution by the way, I think tends to play best and create most value for big government. And the reason for that is that put yourself in the shoes of a commissioner running a big, big program in, let’s just say Texas, where you’re deal with millions of people.

You have to communicate in writing and in verbally in over dozen languages. You’re dealing with complex technology to get it done. Database to database special programs et cetera calls for a tier 1 solution and that’s really our solution. The more you get down at tier 3, smaller states, I think it becomes more competitive with the locals in the non-profit.

In the U.K., we tend to compete with some of classic firms there that really are Europe/U.K. centric. So it would be a Circo, an Atos, Captiva would be some of the larger names that you might see there. Ingeus Deloitte, there is a partnership between Ingeus and Deloitte. Deloitte is provider to that welfare -- to that work program in the U.K. And I think you also said an example of something that we lost.

Lisa Miles

We just recently talked on our last earnings call about a child-support job that we lost in a rebid process due to price. And then that contract was just under $5 million in annual contract value.

Richard Montoni

The only footnote I would add to that is it, it’s very important to differentiate between rebids, we are the incumbent -- where you’re the incumbent in just pure new work. In a rebid situation, my study of the industry indicates that the incumbent has a huge home-court advantage. The incumbent wins 90% plus, and I’d almost say 95% plus of the time whereas new work with it’s open competition, no incumbent. We do well, but not nearly at the 95% level. So we’re in the vicinity of 20% to 25% in new work type situations. And if you lose, boy, most of the universal rule is based upon price, not performance, not quality.

Unidentified Analyst

Thank you.

Richard Montoni

You’re welcome.

Lisa Miles

Any other questions?

Kevin Fischbeck - Bank of America Merrill Lynch

You mentioned the exchanges. So did the federal exchange contract for all the states that they're running the federal exchange on, or is that being done on a state-by-state basis?

Richard Montoni

No. This would be the -- the federal exchange would be the exchange through, which Lisa mentioned the number of states that is 26, I think….

Lisa Miles

Correct.

Richard Montoni

…who have chosen to go through the federal exchange, and there is a very important follow-on to that situation. That would be the system that pose 26 changes -- 26 states used, Kevin. So even that alone for those 26 states connecting into that federal exchange from a systems perspective, there’s a lot of requirement. The GDIT contract would be for the call center, just a process. It’s one component of that federal exchange. There's many components to that federal exchange. That is but one component of the federal exchange.

Unidentified Analyst

And is there an opportunity to participate elsewhere?

Richard Montoni

There are.

Unidentified Analyst

Lisa, you are anxious to give it a go.

Lisa Miles

So there are two contacts in addition to the inbound customer contact center, which is part of the 1800 medicare rebids that we’ve talked about. The second contract is for eligibility support services as procurement is in process. We’ve talked about the fact that we’ve actually bid on the contract and we’ve not provided a size or value given that it’s a highly competitive procurement.

Eligibility support is said to do all the paper-based support for eligibility to termination force those subsidies and then the health insurance exchange. And then the third bid is for eligibility appeal. On that procurement is also in process as we speak. And that essentially would be to determine an appeal if someone is not determined to eligible they have an independent appeal process to go through. However, if you win eligibility support, you are not able to win eligibility appeal. So you can win one of the other of the remaining two bids that are currently out there.

Unidentified Analyst

Okay. And I think the another option has been the bridge program. So you got the Medicare extension, you got the exchanges and then some say that California, you are having a bridge program kind of in between. Is that something that you are looking at?

Richard Montoni

By the bridge program, you mean those states that initially go with the federal exchange and then decide to?

Unidentified Analyst

States have the option of on top of the Medicaid expansion income level to create another statement program with 200% of the population in California?

Richard Montoni

That’s the expansion program. That’s correct. So under ACA, states can expand their Medicaid program to include individuals up to a certain percentage of the federal poverty level, that's 133. If they do that, the federal government will pay 100% of that cost for, I think, next several years. And then it starts to ratchet it down at 90%.

So you’ve probably been reading in the newspapers that many governors have been arm wrestling as with their providers in the state, Texas being one, Florida being another. We’ve got to think Arkansas in the whole mix. They have been saying do we accept this 100% federal money or not. Virginia is another one. And it’s a big debate that we happened to be -- since we run over 50% of this state program as the state decides to expand, we’re the beneficiary of those who decide to expand.

And really that’s been a big driver -- a big driver to our growth over the last couple of years. I think we’ll continue to see it. There is no time horizon here by the way. So we know for example that Texas is not likely to move forward. The legislature is disbanded. They have gone for another couple of years but they may come back and choose to expand.

The other thing I would like to make sure you’re aware of and that is, let me finish this out and that is, I do believe that well there is 26 states that have chosen to piggyback on the federal exchange and not have their own, I think just the nature of the states, I think many of them will chose to move forward down the road and create -- get off the federal exchange and create their own state-based exchange.

And I think that’s a great opportunity for MAXIMUS, who will play a significant role in the federal exchange. We have the -- the lion share of state-based exchanges that we’re operating here puts us in a great position to help those states over the next few years transition off the federal exchange into their own state-based exchange.

I don’t think that becomes an event until I can’t -- it would an exception what the state would decide in 2014, which is really the launch here. But this is really going to be more, lots of discussion, 2015 and then I think you will see a lot of motion in action in 2016. And I’m very excited about that.

Kevin Fischbeck - Bank of America Merrill Lynch

Great. I think that's all we have time for. Thank you very much.

Richard Montoni

Okay. Good. Thank you, folks. Thanks for sitting in.

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