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MAXIMUS, Inc. (NYSE:MMS)

Deutsche Bank dbAccess Health Care Conference Call

May 29, 2013 01:30 pm ET

Executives

Richard A. Montoni – President, Director and Chief Executive Officer

Lisa Miles – Senior Vice President of Investor Relations

Analysts

Scott J. Fidel – Deutsche Bank Securities, Inc.

Scott J. Fidel – Deutsche Bank Securities, Inc.

Good afternoon. I am Scott Fidel, managed care analyst with Deutsche Bank. Very pleased to have our next presentation from MAXIMUS. MAXIMUS provides services primarily in the health and human services markets to government customers. Here with the company to represent today is Rich Montoni, the President and CEO and we also have on the podium, Lisa Miles, Senior Vice President of Investor Relations and Corporate Communications. So with that, I will pass it on to Rich.

Richard A. Montoni

Thank you, Scott. Delighted to be here. Thank you Deutsche Bank, thank you folks for coming to listen in on our presentation. And what we’re going to try to do here today is to walk through the basic presentation and then I would really like to save some time towards the end, and I can see the clock ticking in the background. Here we’ve got 32 minutes and 53 seconds left. I'd like to leave some time for Q&A.

I think that’s important because as Scott will attest, MAXIMUS is in a fortunate position to be pretty much in the eye of the storm as it relates to a number of social dynamics, government related dynamics including not only healthcare reform, but also some very interesting programs we have in the United Kingdom, Saudi Arabia. And it really constitutes the growth – the drivers that we see for many, many years to come. So, we’ll leave some time towards the end of this presentation to talk about those pieces.

And also I'm going to impose upon Lisa Miles over here on my left. Lisa is our Senior Vice President of Investor Relations. There’s a couple of slides that I would like her to present. So she and I will tag team. So with that let's move on.

Now for those of you who are not familiar with MAXIMUS, we are a leading operator of government health and human services programs. We do this on a worldwide basis. We choose to focus on health and human services and on business process outsourcing within those segments and we’re very big believers that when you focus, you differentiate yourself in the marketplace and the way governments behave they place an incredible premium on the vendor's ability to provide quality, reliable services.

And what’s behind our growth has been for probably since 2006 when this team took over up to this point in time. And I think we will be here around for a very, very long time, our economic and demographic factors that are driving social reforms in the area of health and human services.

We are very well positioned as a leading brand in this marketplace. We have a great balance sheet, about $187 million in cash at March 31. We have a quarterly cash dividend program of which we are very proud, we’d like to continue, and we have an opportunistic share buyback program. By the way, we have no long-term debt much to the dissatisfaction of our investment bankers, but in either case we have a very healthy balance sheet.

And for fiscal 2013, we have the September 30th year-end. We think fiscal 2013 will be a great year for growth. We think our growth – our top line will grow in the vicinity of 19% to 24% and our bottom line earnings per share and this is normalized should grow 27% to 33%.

Let’s talk a little bit about what we’ve done over the last five years historical. And we also lay out our expectations to the right most bars in these two graphs for our fiscal 2013. And from an annual revenue perspective, our five year compound annual growth rate has been 12.8% and we are expecting fiscal 2013 to land at a $1.250 billion to a $1.300 from a top line perspective.

The green bars on the right hand side show you what has happened with our adjusted diluted earnings per share. During this five year period, the compound annual growth rate was 18.8% and we are looking for fiscal 2013 to be in the range of $3 to $3.15. And with that, we have two segments. Lisa Miles is going to talk about each segment and then she will hand it back to me.

Lisa Miles

Thanks Rich and good afternoon. We reported our financial results under two segments; the health services segment and human services segment. It’s really important to recognize that both of these segments provide us with a highly predictable stream of long-term recurring revenue. The typical contract margins in both segments are generally between 10% to 15% and that’s operating margins.

There are also long lumbering contracts that – and so the average weighted contract life across both segments is four plus years. So a very visible, predictable stream of recurring profitable revenue.

On the left hand side, I will start with the Health Services segment. 64% of FY12 revenue of about $1.50 billion. And so what we do in health services? We do eligibility enrolment. So we support state operations in helping determine eligibility for programs like Medicaid, the Children's Health Insurance Program. And once someone is deemed to be eligible for one of these programs, we work hand-in-hand with those beneficiaries to help them choose the right managed care plan that’s suitable for themselves and their family. And so we do things such as consumer education and managed care plan, choice counseling.

So for example, a typical question we get is, I live in this area and I’ve been to this Doctor, what managed care plan is thus suitable for me in order to see that Doctor again? Well, I speak this language or I have this particular specialty need? We are also a provider for health insurance exchange operations, primarily in service center operations.

So we are looking to run the functionality of the call centre operation and working with beneficiaries, again who will be eligible for a subsidy to help them determine eligibility and enrolment to the right health plan for them, much of the same functionality that we do in both Medicaid and CHIP.

We run all of this through multi-lingual customer contact centers; generally they are centralized in nature and nearly all the time need to be in the state with which we are providing those services. We are also the largest provider of Medicare appeals to CMS and we probably run about 80% to 90% of the Medicare appeals.

So how we get paid? Most far traditional contracts in the health services segment are hybrid in nature; that means that there is a fixed fee component plus transaction type components that go along with that. Those of these things like call volumes, number of mailings, choice rates. So it does not mean that a beneficiary made an active choice into a health plan or were they auto-assigned, outreach and field operation support staff, number of program participants, and in the case of Medicare appeals were compensated on the number and type of health appeal that we do.

Going over to the human services side; 36% of fiscal 2012 revenue. The lion share of the work that we do in human services relates to welfare to our case management. So we are helping people get off of welfare and move into long-term, sustainable employment. So moving them from benefits into a tax paying job, as part of that we do job training. It’s very important to have employer networks as a component of this as well. Also in human services we do child support enforcement and all of this is done through in person case management centers.

So how we get paid? In the case of human services, it has to do with attachment fees. Someone comes in the door, we intake a case, we will assess that case. We get paid for that. Outcome fees, we place them in a job, or they’ve achieved a sustained employment.

As a result of our position in Medicaid and CHIP where we are the most established player here in the United States, we believe that we are very well positioned for future opportunities in Healthcare reform. Medicaid is the cornerstone of the Affordable Care Act and the expansion of coverage there. And as I mentioned we are the most established player.

We have addressed the market at $500 million of total annual revenue for the health insurance exchanges and $130 million to $200 million in new annual revenue from Medicaid expansion. Thus far, we have won a number of jobs as it relates to the individual health insurance exchange in New York, Connecticut, Vermont, and several others.

So where are we today in the universe, or what states are choosing to do? Right now, although this has 17 states, late breaking news is that, two of these states will no longer be doing a state based exchange in year one. Both in Mexico and Idaho, we will use the Federal Exchange and year one they can’t need Readiness Testing.

So far seven states are going to do a partnership exchange and 26 states we will move forward with the Federal Exchange. As I mentioned we are performing work for state based exchanges in Minnesota, New York, Connecticut, Vermont and in California we have been brought on to help states do training.

We’re also being selected as part of the team, for the customer contact center operations for the federally-facilitated exchange. And with that I will turn it over to Rich.

Richard A. Montoni

Thank you, Lisa. Lisa has given you an overview of what we do in our health segment. I am going to talk about global expansion and then I would like to talk a bit about what’s happening from a global perspective in our human services world as well as domestically. And this one is important and it’s a very important part of our strategy to grow internationally. These two pie charts start to make the point. In 2006, we had 14% of our revenue derived from international operations and that grew in 2012 to 26%.

And I get asked sometimes, well, how much could be international piece? I just think, under certain scenarios, it could be 50% of our business, on the other hand, our domestic folks are (inaudible) won’t be and they got to run this horse race and they are going to keep their fair share, but I do think what’s driving all of this is the macro forces whereby governments around the globe are forced to rethink their social programs, their health programs, their welfare programs. And this is increasing the fundamental demand for what we do. I do think and this is a subset of globalization.

I think that governments around the globe are now compelled to reconsider these social programs and it’s interesting when I have an opportunity as CEO to visit different governments around the globe, these are the same social programs that we deal with. We deal with helping governments find jobs for people who otherwise aren’t able to find their own jobs and keep their own jobs and in which case, they are on the welfare door. And also help governments deal with people who need healthcare and can’t afford their healthcare.

And the demographics as I mentioned on slide one, that’s driving all of these is there are just more people on this planet and more of them can't afford their own healthcare and more of them are elderly, so they need more healthcare. That's what fueling the long-term growth for MAXIMUS and I also think what's happening, a very interesting observation, as these governments have same common challenges, they tend to share best practices. We have seen this historically state-by-state where in the United States, the states will share lessons learned, good lessons and bad lessons. Now I see this on a global basis.

So in the case of the United Kingdom, which is very much compelled to reengineer its welfare program, they actually put together commissions that study how other countries handle their welfare program. And if we were to do that, you would land on two premier programs once referred to as Wisconsin program, which was advocated by Tommy Thompson. So any of the audience may remember Tommy Thompson and also the Australian model, which is renowned as being the best practices model.

MAXIMUS is one of the proud operators of the Wisconsin model in Wisconsin. We are also the largest operator, full process operator for the country of Australia's program. So it’s no surprise to us that we received an invitation to visit with the elected officials in the United Kingdom when they where reengineering their welfare program. And I'll follow on with the next chapter momentarily.

So what we do? Here is some examples of what we do in the workforce space. And again this is important because these models service the precursor to those countries that want to reengineer their programs. In the U.S., we run TANF programs, for the federal government, we run the Ticket to Work program, which is a program within the SSA administration. I had mentioned Australia, we were the largest provider of job services Australia, disability employment services, and this one is interesting and could represent a meaningful growth opportunity as we move forward, for the Department of Immigration and Citizenship, which is a relatively new program. That country has a problem.

Australia has on average a couple of both today as immigrants that are trying to make their way to Australia illegally. And when they do secure these boats, they have an obligation to take care of these individuals and often times they are young kids. We help them with their whole process. And it’s good for us, but the challenge for Australia is helping with an immigration program and you can rest assure, we have our eyes on opportunities here in the U.S. as this country starts to reengineer its immigration programs.

In the UK, the work program, we operate about 5% of that country’s work program and much like the Australian program, where that country, what they will do is, they will reallocate work to the top performers from the bottom performers. This is a feature that the UK feathered into its program when they studied the Australian model and MAXIMUS, the reason we grew in Australia and I will share what you we call our clamshell slide to make that point, but we focused on performance.

We delivered the outcomes that were important to this government and we are doing the same thing in the United Kingdom. And the United Kingdom, they first published the results of the work program last November. MAXIMUS is very, very proud to help them measure to be in the top quantile. I think our performance has continued to be very strong.

The government in the UK has said that they have published the second round of results. I think that’s scheduled to happen in June 27, I am told. That will be an important day. And that really becomes the scorecard upon which the government in the UK said they will reallocate work. So I think our ambition is to pickup additional work in the UK based upon that performance.

I mentioned one other here and I do want to get to the clamshell slide and that’s Saudi Arabia. A couple of years ago, as we look at different countries where we may have opportunities, I didn't put Saudi Arabia high on the list in terms of the country that would be likely to be interested in the services that we offer, but to my surprise and pleasure this is turning out to be quite an opportunity for us for different reasons. This is not due to state fiscal pressures if you will, but rather from a social perspective, the King of Saudi Arabia is very concerned about unemployed populations, about unemployed citizens of Saudi Arabia. I think perhaps it's what happened in Egypt that sparked this concern.

I think it's a similar concern in other states, but Saudi Arabia being the largest and have move forward very aggressively with what they call Ta'qat program and under this program, there are about 6 million immigrants providing services within Saudi Arabia, the King’s goal is to move 1.5 million of those jobs to its citizens and it is a very prescripted program in place to compel employers to open-up these opportunities and also part of that program is MAXIMUS and we are one of I believe three other providers that facilitates individuals, citizens of that country identifying these job opportunities, preparing for them, applying for them and securing those positions.

In last August, we launched this pilot by design we though we negotiated what I wanted was a one-year pilot because we didn't know the country, didn't know the customs and were uncertain as it relates to our ability to identify jobs and individuals to work in our offices. That's turned out to be very good.

Our expectations have been hit. We are very pleased with the results and we think we're in a position to not only extend that pilot but also to pick up additional work in Saudi Arabia. That pilot or the magnitude has been – I think we’ve said, $12 million to $15 million in revenue for one year. If things go as we like them to, we think we could solidify that to be even two or three times net run rate.

Our fourth is global expansion program. It is best described is land and expand. We've done this satisfactorily in Canada. We've done it satisfactorily in the United Kingdom. In this example here is Australia, where we acquired a small company in 2002. At the time it had a run rate of about $15 million. And what you need to understand about Australia is they don’t bid price, they determine the price that they will pay and I think this is a very, very smart thing to do. They will determine what they will pay for an outcome and in this particular case the pay points were finding somebody a job and them sustaining that job and that being the case we chose to focus on performance. We want to be a top performer and pick up additional work from the under performers and here is what happened.

In 2002 we had a run rate of about $15 million and through 2012 this businesses grew and all of this was organic such that it topped out about $165 million for the year-ended September 30th 2012 and by the way we target our portfolio to deliver fully loaded operating margin 10% to 15%. This particular revenue in Australia is well within – frankly the upper ends of that range.

So very, very exciting, down on the right we make a very important note in our fiscal 2012. We renewed a three year contract, actually signed in extension for $450 million over three years which was a delightful contract.

So what we do for our government clients? You can read the check marks which lay out many things. I think the best way to communicate this to you is to tell you a story about one of our most important clients at the State of Texas. In the State of Texas last year embarked upon a program where they wanted to move a lot of beneficiaries from fee for service to managed care. In that context, they went and they effectively redistrict the entire state. They went and they received bids from a number of manage care firms and as a result they basically had to re-enroll effectively everybody in that band which was effecting the southern part of Texas, that real brand area.

In addition they were moving- by definition you had to take folks and they had to select their plans. But as Lisa explained to you what we do is, we do our reach programs, we inform the communities, we have worked with non profits to identify individuals. We intake the applications, process those applications and help them make choices.

That is a lot of work for million lives. To do that in a three months period, we leased up built out, hired up a facility that accommodated about 800 people to complete that work in a very, very short period of time. And that particular case was such a steep ramp that we had to ramp up to 800 people. And then we now downsized that such as stays that – excuse me steady state, that’s about 500 individuals in that one facility. Okay, so what happens beyond 2013, into 2014, 2015 and as soon as we start to look at the wrap-up of 2013, we will share with you what we see beyond 2015.

As I said in the front-end, I think its large macro drivers, demographics and fiscal challenges to governments. The intersection of I’d say those two vectors, that’s really increasing the demand for what we do and use of the specificity too in terms of what we’re experiencing today and I think these are multi-year growth drivers.

We are a very large provider to operate health insurance exchangers. Lisa has shared with you the math. We think that’s a $500 million total addressable market and I am quite confident we should pickup our fair share of at least 20% to 25%. The companion opportunity is in Medicaid expansion where we see there is a $130 million to $200 million opportunity, because we have such a significant large installed base if you will, providing the enrollment broker work of roughly 59%. I think a fair share of that particular increase in total addressable market is more in the vicinity of 50%.

In addition, we have benefitted from and I think we will continue to benefit from the shift to managed care from fee for service and I did give you an example of the UK work program. I think that will continue to grow and open additional doors. Beyond that, I think we will have significant opportunities to expand our health business in those countries; Canada, UK, and Australia as we move forward.

So in summary, I think we have some great growth opportunities. We have great brand recognition. We are very well positioned to cease this growth and manage this growth. Our financial strong position is another enabler and most importantly we have a management team that I think is second to none. I hope you have an opportunity to meet some of the management team members, I think you will be nothing but impressed. It’s a great team. I'm very excited about it and I hope you are as well. And with that we’ve got about 8 minutes for questions, so I'd love to jump into the question.

Question-and-Answer Session

Scott J. Fidel – Deutsche Bank Securities, Inc.

Okay, great. I’ll kick it off with the question. Rich, just interested in your thoughts on where we stand now in terms of the broader infrastructure build for particularly the Federal exchange and as a company MAXIMUS clearly has a lot of experience in terms of understanding the logistics and technology and what's required in terms of building out these new infrastructures for new government sponsored programs. And I used the analogy before that, sort of this federal exchange build out is sort of like the Manhattan Project of healthcare program build outs given how many different government agencies, carriers, distribution, states are all involved in this process along with all the different contracted vendors and companies like MAXIMUS. As you throw all of those different groups into the tea pot, how do you think we’re trending here as we’re getting closer and closer to the go live date for the federally sponsored exchange?

Richard A. Montoni

Scott, I think that – I think clearly the federal exchange will be the mother of all exchanges. It will be larger than any state based exchange. I think one – the components of an exchange are fundamentally the same. I mean you have to have an intake function, you have to have a tracking function, you have to have an eligibility determination function, you have to have a choice function where people choose plans that have been preselected.

Clearly the challenge to such a large undertaking is to break it into its component pieces and I think for years running now that has been happening. We know there are firms out there that have signed contracts, several years ago to design and build the infrastructure, the software, the portal, that I think is very much in place and will be available on day one.

When these are opened, we also know from a MAXIMUS perspective, we have an interest in three of the modules. I mean this is really a mosaic that makes up the entire solution. We have an interest in the – what’s referred to as the CCO, the Call Center Operation. In that particular case, we were the successful bidder along with GDIT as prime, where we will be a provider of the call center operations. Basically there to answer questions that citizens may have in those states that are part of the federal exchange.

There are two other bids out there that are important components to this mosaic; one is the appeals process which will probably be the last one to be awarded, but we think we have great qualifications to handle the appeals process as we are the largest provider of appeals to the Medicare system.

And in addition, there is a third component out there that’s referred to as eligibility support or ES and we also think that we’re very, very well qualified for that award. Keep in mind that of the two remaining awards that are yet to be made, that’s of interest to MAXIMUS, the appeals and the eligibility support, you can only win one because the appeals as you can appreciate needs to be – the provider of appeals needs to be independent of the processing of – the handling of eligibility support.

So we have three opportunities that fit for us. One, we have secured the CCO opportunity. We have two others out which we are hopeful we might win one of those opportunities. To answer your question in terms of how is it going, how is it going to go. I think it’s going well. I think a lot of this is complete and ready to go. That being said, I do think that there will a lot of confusion on the front-end, this is just – it’s a very complex program. I think there are a lot of folks out there who won’t understand what it means to them on the front-end.

So it’s going to take a lot of tender loving care to explain to folks how to handle this, how to make the right choices, how to participate. So I do think there will be a lot of frustration on the front-end. But I do think all of this is clearly doable certainly from a technology perspective. And with the passage of time those additional speed bumps will be ironed out and we will be out there running these programs as intended.

Scott J. Fidel – Deutsche Bank Securities, Inc.

Do we have a question from the audience?

Unidentified Analyst

Thanks. Approximately how much exchange business of the $500 million have you won so far and how much of the two big federal RFP worth?

Richard A. Montoni

Thank you, Scott for that question. I am going to have to be a bit circumspect in that, one of the things that handicaps us for having a delightful precise answer to all of the add is our client base. And until such times our clients give us permission to quantify and award. We have to try to deal in at least direction type comments. So in this situation, we have, let me start this way and say, on the health insurance exchanges we size that market to be a total addressable market of $500 million.

We felt our fair share and as I tell the team, a little bit more, we targeted 20% to 25%, win rate. At this point in time, we have work from Minnesota. And that’s actually not in operations, but to help we are coordinating the build of that states health insurance exchange. We have the add-on work to run the health insurance exchange for the state of New York. We announced the Connecticut and Vermont awards and we continue to provide some services to California.

So you can count those as five states through which we are doing work. We’ve won one federal bid, which is the sixth opportunity. So we haven’t provided a summation number Scott to tell you of those five states, how much it adds up to? We have told you that the Vermont – with permission from Vermont, we’ve announced that to be approximately $12 million annual award, annual contract value. In Connecticut, we shared with folks that that’s about $7 million per year.

So we’re going to ask you to run with that limited information, but I think by influence it’s a good indication that we think we are well on track to get our fair share of the health insurance exchange market. And I think that’s true even if we stick with the one bid that we’ve already been awarded and if we are very fortunate to an additional work, then I think it could very well put us over the top in terms of our expectations. Hope that helps Scott.

Scott J. Fidel – Deutsche Bank Securities, Inc.

I want to ask a follow-up question on the Medicaid revenue opportunity, the $130 million to $200 million. First, what is that predicated on in terms of, is that based on the number of states that have already announced Medicaid expansion or what the maximum opportunity would be if all of the states expanded Medicaid. And then maybe if you can talk a bit about if there is any variability between margins and the federal healthcare work that you do relative to the states or do both of those generally run at consistent margins within that 10% to 15% target range?

Richard A. Montoni

Okay. Now, let me take the second question first and as it relates to margin, I do think that, our portfolio, we expect to deliver 10% to 15% operating margin. It’s fully loaded. And within the portfolio, we will still have some that are not only at the tails but outside the tails of that range. In case in point if we have the contract where we take on more risk. Let’s say volume risk or outcome risk that’s more than usual we would expect that contract to deliver north of 15% operating income.

Country wise, like the federal government often times will bid cost plus where they take on most of the risk as is appropriate with the situation today with the federal health insurance exchanges. You just don’t know, you don’t want to know what the volumes are going to be. You don’t know when the volumes will come out to you. So that contract is bid, will be on a cost plus basis where we take on less risk Scott and as a result, the market place will perform that risk – will perform that work at a lower margin. So we see federal work that can be as low as 5%. I think this bid – this work will come in at 5% to 7% range.

Scott J. Fidel – Deutsche Bank Securities, Inc.

So on that aspect if you have more state based exchanges from a returns perspective that could be more attractive to you than more Federal?

Richard A. Montoni

That’s exactly right. And I think well, initially we expect to sell we thought more states than have stepped at now, they have their own exchange. It’s tending to mix towards more federal than we originally anticipated. I do think, but this is going to be more of a fiscal 2015, 2016, 2017 event where some of those states had initially – are going Federal or then want to move back and have their own exchange.

Okay. And then to answer your other question on the 130 to 200, very quickly, the 200 is more towards all of the states choosing to expand Medicaid. And we doubt on the other side, the 130 is recognizing that not all the states to move forward. So that’s kind of our lower end expectation

Scott J. Fidel – Deutsche Bank Securities, Inc.

Okay. Perfect. Well, Rich and Lisa, thank you very much.

Richard A. Montoni

Thank you folks. Thanks for your interest.

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