Maximus Inc (MMS) 2016 Q2 法說會逐字稿

Greetings and welcome to the MAXIMUS fiscal 2016 second quarter conference call. (Operator Instructions). As a reminder, 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 Rich Montoni, CEO; Bruce Caswell, President; and Rick Nadeau, CFO. I would like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such things are only predictions and actual events and results may differ materially as a result of risks we face, including those discussed in Exhibit 99.1 of our SEC filings. We encourage you to review the summary of these risks in our most recent 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.

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.

With that, I will hand the call over to Rick.

Thanks, Lisa. This morning MAXIMUS reported financial results for the second quarter of fiscal year 2016. Results in the quarter reflected study progress on our programs and startup, as well as solid organic growth. For the second quarter of fiscal year 2016, total Company revenue grew 26% to $606.5 million compared to the same period last year. This was comprised of organic revenue growth of 13%, which was driven by the health services segment; acquired revenue growth of 15%; and total Company revenue was unfavorably impacted by approximately $10.6 million, or 2%, from the effects of foreign currency translation as compared to the second quarter of fiscal year 2015.

Operating margin for the second quarter was 12.8% compared to 12.9% in the prior year. Operating margin in the second quarter of fiscal year 2016 benefited from out-of-period revenue and pretax income of approximately $6.6 million from modifications to the UK health assessment advisory service contract, or HAAS. For the second quarter of fiscal year 2016, net income attributable to MAXIMUS was $48.8 million and diluted earnings share totaled $0.74. This includes approximately $0.08 of diluted earnings per share from the aforementioned modifications on the HAAS contract.

Now, I will speak to segment results, starting with health services. Health services segment revenue increased 22%. Nearly all growth in the segment was organic. Revenue growth was driven principally by the UK HAAS contract, and to a lesser extent, new work and expansion on existing contracts in the US. This was offset by unfavorable foreign currency translation of 2%. So that on a constant currency basis, revenue growth would have been 24%. We completed the Ascend acquisition in the second quarter, which accounts for less than 1% of revenue growth.

Let me focus my health segment commentary today on our HAAS contract, where we have completed several contract modifications. Some of the HAAS modifications were normal course cleanup items that can be required at the end of a contract year, and in this case, contract year one, which ended on February 29. These modifications included changes to certain performance benchmarks specified in the contract. The contract was modified to put a greater emphasis on carrying out face-to-face assessments at a reduced level. This will achieve DWP's services goals, while at the same time achieving greater value for money overall.

The financial impact from the HAAS contract modifications had an immediate pickup of $6.6 million of out of period revenue in income that was recognizing in the second quarter of fiscal year 2016. These modifications are expected to lower our future revenue run rates in contract years two and three. As you may recall, the contract years straddle our fiscal year, and as a result, we now expect revenue from the HAAS contract to contribute approximately $225 million in fiscal 2016. This compares to our original November guidance of revenue from the HAAS contract in the range of $230 million to $280 million for fiscal year 2016.

While our revenue expectations are lower, we have made tremendous operational progress and we believe that we have achieved a stabilized level of operations. We are confident that this program will be profitable for fiscal year 2016, with an estimated margin in a mid-single digits for the full fiscal year. We believe that this contract will yield operating income margins in our typical range of 10% to 15% in future years. Rich will provide a brief update on the ongoing operations of this contract.

Let me speak now to the US federal services segment. Second-quarter revenue for the federal segment increased 51% compared to the prior year. Acquired revenue growth from Acentia was offset by expected organic declines in the legacy MAXIMUS business. As we mentioned last quarter, this included the expected closure of a customer contact center in Boise, Idaho, where we provided support for the federal marketplace. Second-quarter operating margin for the federal segment was 10%.

Let me finish the operations discussions with the financial results for the human services segment. For the second quarter, revenue increased 13% compared to last year, driven principally by the Remploy acquisition. The segment was unfavorably impacted by a 5% decline from foreign currency translation. As expected, operating margin in the second quarter was lower compared to the prior year and was 7.8%. The expected reduction in margin was a result of an ongoing start up of the new jobactive contract in Australia.

We still expect that the new contract will achieve an operating margin in our target range of 10% to 15% sometime in the second half of fiscal year 2016. However, overall volumes in the new contract have been lower than both the client and vendors anticipated. This means that while our startup is progressing well, and this is a desirable, contributing contract, the revenue and operating income will not be at the level initially anticipated.

Let me move on to discuss cash flow and balance sheet items. Days sales outstanding were lower on a sequential basis and were 70 days at March 31. This is in line with our targeted range of 65 to 80 days. Subsequent to quarter close, we collected some significant past-due receivables from one state, which was responsible for DSOs of three days at March 31.

During the quarter we completed the acquisition of Ascend, using cash of approximately $39 million. For the second quarter, cash provided by operating activities totaled $20.5 million with free cash flow of $11.3 million. For the remainder of the year, we would expect solid net income, improved cash collections, and benefits from the timing of tax and other disbursements to drive an increase in cash from operating activities.

At March 31, we had cash and cash equivalents totaling $60.8 million, with most of our cash held outside of the United States. We did not repurchase any shares during the second quarter. At March 31, we had an estimated $139.4 million remaining under our Board authorized program. We maintained adequate liquidity with our available line of credit, and we continue to have a range of flexibility in our capital deployment plans. The management team remains focused on the most prudent and sensible uses of cash in support of our longer-term strategic growth plans.

Lastly, guidance. MAXIMUS operates a portfolio of contracts, which includes a number of programs in startup. Coming into this fiscal year, we had four sizable programs in the startup phase. This includes the Department of Education contract, the jobactive contract in Australia, as well as the HAAS and Fit for Work contracts in the UK. Today, three of the four startups are making steady forward progress. Fit for Work is the single contract that is underperforming.

The nature of the business is that we will always have puts and takes in the overall model, and some programs will over deliver compared to initial plan, and others may under deliver. Each quarter, we complete a bottoms-up review. We consider the effects of currency, startups, rebids and contract mix, risks and opportunities. This analysis is the basis for our forecasting model and guidance each quarter.

As a result of the overall solid progress on our programs in startup, most notably HAAS, we have modified our fiscal year 2016 guidance. We are maintaining our revenue guidance, and still expect to be in the range of $2.4 billion to $2.5 billion. On the bottom line, we are tightening the range for fiscal year 2016. We are bringing up the lower end from $2.40 to $2.50, so that we are now expecting diluted earnings per share to range between $2.50 and $2.70 for fiscal year 2016.

As a reminder, income and earnings in the second half of fiscal year 2016 are expected to be driven by the steady operational and financial progress of certain programs in startup as they move towards maturity, as well as the contributions from new work. We still expect the total Company operating margins for fiscal year 2016 will be in the lower end of the 10% to 15% range. We still expect our tax rate to run between 37% and 39%, but more towards the lower end of that range.

Our cash flow guidance remains unchanged. We expect strong cash flow generation in the back half of fiscal year 2016 and stable CapEx spending. We still expect cash provided by operating activities to be in the range of $200 million to $230 million for fiscal year 2016. We expect free cash flow to range between $130 million and $160 million. Thanks for your continued interest and now I will turn the call over to Rich.

Thank you, Rick, and good morning all. I am pleased with our quarterly results and our ability to narrow our earnings guidance range for fiscal 2016. We've made meaningful advancements in the first half of fiscal 2016 to shore up and mitigate the risk of certain projects in startup mode. As always, we remain focused on delivering on our promises and contractual obligations to our government clients. Our number one goal is solid service delivery in the programs we operate, to ensure that citizens are able to seamlessly access critical government programs and services.

Let's start off with an update on our UK health assessment advisory service contract, also known as HAAS. As Rick mentioned, certain features of the HAAS contract have been modified to better align with the client's programmatic objectives. At the same time, our current trends confirm that we are on track to hit full productivity by the end of the summer. This positive contractual change, coupled with the progress we have made in the past several months, provides us with an increased level of confidence that we are on a path to achieve our long-term operational and financial goals.

We've also continued to receive many questions related to specific performance indicators under the HAAS contract. Unlike last quarter, when we were able to provide a full update due to the timing of the Public Accounts Committee hearing the day prior, we are unable to provide specific statistical updates on a regular basis. The release of this information is managed through a very formal process by our client, the Department for Work and Pensions.

Qualitatively, what I can say is that we are making meaningful progress on the contract on all key factors. Our productivity continues to improve as more of our healthcare professionals mature in their roles and others continue to receive accreditation. This means that we can complete an increasing number of assessments. Equally as important, we are continuing to see steady improvements in the quality of our assessment reports.

There has also been speculation within the investment community that the HAAS contract was under review for cancellation or significant changes. I want to dispel that myth today. We maintain a collaborative working relationship with our client. To this end, we've had personal assurances from DWP that the Secretary of State has not expressed concern over the continuity of the HAAS contract. Further, there is no current plan on making substantial changes or terminating the HAAS contract.

Some of the modifications that were made to our contract were done in parallel with a government spending review. These changes were done to better align contract year two and three volumes to the client's needs and circumstances. This is commonplace. As a result, we have lowered our revenue expectations on the contract, and at the same time reduced cost for the client. Above all, we remain fully committed to the contract and our focus continues to be delivery of high-quality assessment services. Even with these changes, this contract is a positive contributor today, and when fully mature, will fall within our targeted portfolio range.

Separately, DWP has confirmed with us that the Secretary of State is focused on potential changes to the Fit for Work contract. This is consistent with information provided in our 8-K filing on April 7. It is important to put this in context. The Fit for Work program is not achieving its intended goals, as the volumes simply have not materialized. As a reminder, this is a voluntary program that is free to businesses and their employees. The program provides access to occupational health services for those employees who are out sick for more than four weeks, so that a return to work plan can be developed. The program is not mandated by law and also requires a referral from a general practitioner.

As we disclosed in our last quarterly filing in February, the Fit for Work project is losing money and we are moving forward with changes. We've been actively working with DWP on a number of fronts as it relates to the Fit for Work project. At this point in time, it is fair to say that all options are on the table. Our discussions with the client are ongoing and we are optimistic that we will achieve a solution that is beneficial to both parties.

Moving on to the US health business, just last week the Centers for Medicare and Medicaid Services finalized managed-care regulations and federal standards for the Medicaid and Children's Health Insurance programs. This is the first update since 2002, and much has changed. Not only has the Medicaid program grown substantially, but now more than 80% of enrollees are in managed-care plans. While our teams are still dissecting the 1,400 page release, CMS has clearly outlined its long-term goals. Our read of the rules is that there will be a continued effort on enhancing support for consumers, including improving healthcare delivery and quality of care, providing greater access to healthcare, and ensuring a modern set of rules that better align with the marketplace and Medicare Advantage plans.

The new rules reinforce the ongoing efforts to modernize and streamline the enrollment process and the continued value of independent choice counseling, both of which are core competencies of MAXIMUS. Other services that MAXIMUS currently deploys to our customers, such as document processing, data collection and analysis, and customer support centers, can help states meet the administrative and managed-care oversight responsibilities which are also included in the new rules. As Medicaid programs continue to modernize, states are taking greater leadership in managing provider networks, including quality and access to providers.

They are also evaluating new approaches to delivering long-term care services to the most vulnerable of Medicaid populations. We have a good success in creating an expanding list of qualifications in both of these growing areas. Let me start with the provider services. Here in the US, Medicaid providers must undergo a rigorous credentialing on a state-by-state basis. Many states are choosing to manage this important process, and MAXIMUS has played an integral role for supporting these efforts. Our work in provider credentialing started more than a decade ago. Our portfolio has since grown to include six contracts, along with a healthy pipeline of additional opportunities.

While each of these individual contracts is small, together, they comprise a nice portfolio of strategic contracts built off our core business, demonstrating our land and expand strategy. The same can be said for our entrance into the long-term services and supports market, also known as LTSS. Many governments are looking for innovative solutions to best deliver public benefits and services to diverse populations and address demographic challenges. One of these challenges is supporting the increasingly complex disabled and elderly populations, which includes a rise in the number of elderly people who face functional and cognitive limitations.

The general trend in LTSS has been to ensure that individuals are in the right setting and receiving the right level of support and care. Most individuals would rather receive care at home or in a community-based setting rather than institutional facilities. Therefore, providing LTSS has been recently directed to community-based settings. In response, MAXIMUS provides governments with solutions for their LTSS programs that combine technology, enhanced customer service, and workforce strategies. We offer states conflict-free, independent assessment and review services to help states connect the right set of services to the right beneficiaries. The new Medicaid regulations further strengthen the importance of independence in these programs.

We recently broadened our LTSS capabilities through the acquisition of Ascend. Based in Tennessee, Ascend is one of the largest health assessment providers on behalf of US government agencies and offers conflict-free assessment services to assist them in determining the most appropriate placement in healthcare services for program beneficiaries. Ascend provides a broad array of services, including preadmission screening and resident review, supports intensity scale, inventory for client and agency planning, utilization reviews, and other specialty and standardized assessments.

While the US LTSS market is largely still in its infancy, we continue to see a growing interest around the world for independent assessments and appeals. In December 2015, MAXIMUS established another foothold in this emerging market with the acquisition of Assessments Australia. Assessments Australia delivers assessments as a means to identify what support services may be required in order to make individuals successful in a community environment. Their client base includes government, nongovernment, and private organizations who are trying to make informed decisions about patients' needs. This acquisition has been integrated into our human services segment.

I am pleased to share that the acquisition of Assessments Australia has already generated a small but strategic win in the disability services market. MAXIMUS will be providing information gathering services for the majority of the trial regions across Australia through phone and face-to-face interviews of individuals with disabilities. By taking a core capability and applying it to different government programs and new populations, MAXIMUS continues to build a strong portfolio and expand the business.

Moving onto our new awards in the pipeline, we had solid awards in the second quarter with year-to-date signed contracts at March 31 of $1.1 billion. We also had an additional $143 million in new awarded, unsigned contracts. Our sales pipeline at March 31 was $3.2 billion compared to a pipeline of $2.6 billion for the same period last year. On a sequential basis, the pipeline is up from $2.8 billion reported in the first quarter of fiscal 2016. As part of our long-term growth strategy, we monitor a much broader pipeline that lays out our opportunities over the next 3 to 5 years, and that will drive fiscal 2018 and beyond.

In closing, our longer-term outlook remains very positive. We continue to see favorable trends, as demonstrated by the strength of our pipeline, which contains new opportunities across the segments and in all of our existing geographies. We will continue to deploy capital in a prudent fashion, and look for strategic acquisitions, like Ascend, which further strengthen our foothold in the emerging global assessments and appeals markets.

Above all, the management team is working hard every day to deliver long-term shareholder value. So, while it is too soon to speak specifically to fiscal 2017, we remain confident of our continued growth prospects given the favorable macro and demand trends that we see in the market. With that, let's open it up for questions. Operator?

(Operator Instructions). Dave Styblo, Jefferies.

I wanted to start out on HAAS and just get a little bit more insight about, first of all, the $0.08. Was any of that assumed in guidance? In other words, was that pulled forward from quarters that you are expecting that to benefit, or was that just simply a catch-up from year one? And then as we think about years two and three, I know talked about a lower revenue trajectory. Can you be a little bit more specific, perhaps, about what you were thinking? I guess the revenue came down 10% versus your expectation. But what was the expected ramp of revenue for next year? Or is there not really going to be a ramp in revenue now that there are new modifications on the contract?

Okay. Good morning, Dave, and I think you put forth two questions. One is to give you a little bit of insight in terms of the $0.08 in the quarter relative to HAAS. And then with the reduced anticipated revenue, what does it mean to fiscal 2017? I'm going to ask Rick Nadeau, our CFO, to field both those questions.

Yes, thank you. Our revenue projection is approximately $225 million, and our operating income is expected to be in the mid-single digits for fiscal year 2016. As I mentioned in the prepared comments, we expect this contract to perform in our normal targeted operating range of 10% to 15% in future years. And the revenue for our fiscal year 2017, we would expect it to be similar to what FY16 is: around $225 million. I think as Rich said, that new target for contract year two creates a straightforward path for us to achieving the targeted volumes in the targeted operating margins.

So, in other words, the new targets reduce the risk that we have and increase the likelihood of us achieving the contract volume targets. And as we mentioned in the prepared remarks, this provides us with an increased level of confidence that we are on target to make our financial goals on this program.

Thanks, Dave. Next question, please.

Richard Close, Canaccord Genuity.

Congratulations on a good second quarter here. My question surround Fit for Work, and I have two or three combined into one here. Can you just give us what the original revenue guidance was for fiscal 2016 on Fit for Work? And now what are you expecting Fit for Work in your updated guidance? And then you say all options are on the table. What do you really mean by that? Could you agree to terminate this contract? Just more clarification there. And then finally on Fit for Work, what is the profit drag so far through the first half of the year?

Okay. Well, let me take the all options on the table piece first, and then Rick Nadeau can pick up in terms of revenue expectations for fiscal 2016 versus -- or current versus original, and then the profit drag. On the all options on the table, I think that the appropriate backdrop is to appreciate that, when we work with our clients, we really strive to develop a partnership. So, we are very sensitive to their needs, their desired outcomes, social outcomes, and the real drivers behind even the creation of the program. Oftentimes, that will flow down in terms of the number of expected cases, the volumes, etc.

It is not uncommon to, as these programs -- especially those that are more novel in nature, as Fit for Work is -- to get to the point where they require some sort of adjustment. And I will say that, by the way, we do this very, very often with our clients and have adjustments. Usually it's to the upside. But in this particular case, given the novel nature of this program, these volumes just have not materialized. And accordingly, it's appropriate to adjust the program in consultation, in partnership with our client, to the right level. And we are having active discussions.

From my perspective, I say all options are on the table. It could be right-sizing. So we take down the variable cost to be appropriate level to serve the current level. And it could be a wind down of the program, and it could be a termination of the program. Rick, on the financial aspects?

Sure. As a result of all of that, we are only forecasting around $5 million of revenue from this contract for fiscal year 2016, which is well below our initial expectations. At this point, built into our full guidance for fiscal year 2016, we are presently forecasting that we will lose approximately $3 million more than what we had projected when we did our original guidance.

Next question, please.

Charlie Strauzer, CJS Securities.

Just to expand a little bit more on the HAAS contract, I know you talked a little bit more about the profitability, but maybe, Rich, talk a little bit more about -- some more color there on what exactly changed there, if you can, expand on that. And then my second question as a follow-up would be the Medicaid opportunities that could be emerging from -- your prepared remarks, talking about the changes in Medicaid -- what potential positive opportunities could there be down the road? Thank you.

All right, Charlie. I will field the first question and Bruce Caswell, our President, is here with us today and Bruce, as you would imagine, has been immersed in these new Medicaid rules. Bruce is going to give us a highlight in terms of what it means -- what they are, and what it means to MAXIMUS specifically.

On the HAAS contract, I think I just mentioned the driver behind it, that we work with our client to adjust these programs accordingly. In the HAAS situation, this really emanated from a client's routine annual evaluation of programs and their budget and their programmatic needs. I do think there has been, behind the situation, a need for UK to do a spending review on all of its budget. And they came back and simply said, given -- and I think part of it is a reduction in backlog, but we think the volumes won't be quite as high in demand for the program in years two and three.

So, in partnership and negotiation with our client, the volumes were adjusted. At the end of the day, again, as we work with our clients, I think we ended up with a better risk profile. The prior volumes were very, very -- were very challenging in some regards. So, with the reduced volumes, I view it as a better risk profile. We really do have a more stable footing for both the client and MAXIMUS with these revisions. Bruce?

Great, thanks, and I might just add one other comment to the HAAS answer. And that is that we, as part of those discussions and negotiations with the client, if I might, were able to adjust some of the performance benchmarks. And you think about that program, you asked Charlie, what are the things that are different now, what are the things that have been improving? And we've made some adjustments to things like customer call waiting times that are required and call center waiting times.

Those are metrics that, while they are still challenging, we feel they are very much achievable. So, we are pleased with the improvements that we've seen in productivity as more of our employees have graduated and become accredited. And we talked probably in prior discussions with you about how, even when you're trading employees, you are pulling other employees off the line to help train and mentor them. So, consequently, you get the benefit of those folks returning to the line. So across the board productivity capability improves, quality improves, as Rich mentioned. So, to summarize, as Rich said, we feel quite good about the footing that we're on.

Turning now to your question about the Medicaid rules, (laughter) Rich is right. Many of us have been immersed, I think is the right word, in the 1,425 pages that dropped from CMS. It's still early days and a lot of folks are still really trying to dissect them and understand what the potential impacts are going to be. And quite honestly, it could be some time before the states themselves digest them and figure out how they're going to operationalize the rules.

We did hold a webinar two days ago, and I was really proud we are kind of first to market in that regard with a very comprehensive webinar held in conjunction with some consultants that we work with from Health Management Associates. And you are welcome to our website and review the transcript from that and the materials from that webinar. Our early read is that there are many things in the new rules where MAXIMUS can provide additional support for our state clients. Rich mentioned several in his prepared remarks.

I would lump them largely into four categories. One is the area of beneficiary support services, and the fact that the rule really does emphasize the importance of choice counseling for beneficiaries, assistance for enrollees, and understanding managed care, and all that be done in a conflict-free and independent fashion. The second category would be really new standards and requirements for Medicaid long-term services and supports. And Rich spoke to a number of those.

We are encouraged that the concept of beneficiary support services really extends now to the Medicaid long-term services and supports community. So there's much more of a requirement to ensure that there is a single point of entry, for example, for choice counseling; that there is independence and freedom -- or freedom from conflict in that choice counseling process. Similarly, the very -- the process that we've discussed in terms of getting beneficiaries into the appropriate level of care and the work that we now do with our new colleagues from Ascend will become more important in that domain.

The third area is provider credentialing and enrollment. A greater burden has really fallen on the states to address that, and MAXIMUS is well-positioned to continue to grow on the six states where we do that presently. And a fourth area probably worth considering is quality measures. As you are well familiar, quality measures are now going to be an important aspect of plan selection enrollment through that rule.

I would also maybe make one final comment on the rule and that is that it creates a new requirement for the medical loss ratio to be at 85% for Medicaid plans across the states. And from our point of view, states are already overburdened with a lot of administrative tasks, and they are going to look at ways that they can continue to offload some of that work so their staff can focus on higher level work.

There's an opportunity, as plans look at their MLRs to say, hey, look it, there may be some administrative tasks that are quite common across all plans, like the creation of member handbooks and notices and so forth, that could be shifted back on the state side, centralized, and provided as a shared service. So I hope that gives you a little bit of color. We think overall the rule creates a lot of good opportunity for MAXIMUS well into the future.

Thanks, Charlie. Next question, please.

Steven Lynch, Wells Fargo.

Maybe for Rick, I was wondering if you could walk us through some of the assumptions underpinning the new EPS guidance range. Maybe the volumes and margins for different contracts, whether it is HAAS and jobactive, that would support the low and the high-end of the range.

We don't really call out specific contracts. We did that one time with respect to HAAS because of the size of the contract, but let me try as follows. I think it's really important that we focus on the fact that we do have a portfolio of contracts, and that these contracts are really in different stages of maturity and different types of cost structures and contract structures that you have. There really are many things that drive our guidance and that we put into there when we consider that. We are making good strides on a lot of the key elements of the portfolio, particularly the startups. But they are all kinds of different headwinds and tailwinds inside that. The startups are an important component of our organic growth this year.

I think that as you go forward and you look into future years, I think you would see a better operating income margin than you see this year, because of those startups. And so, I think when people think about startups, they are really an important component of our organic growth. They are really advantageous to us, and they are critical in our development of long-term shareholder value. That is really what allows us to drive, in some years, double-digit organic growth -- those startups. But then what you have in that circumstance, you have revenue that lags the earnings, which is really a normal course kind of event.

So, you tend to see this year being the year that you have revenue -- (multiple speakers).

Earnings lag revenue.

I'm sorry, earnings lag revenue. Did I say that backwards? Sorry. Earnings lag revenue; and I think you will see that normalize itself on the back half of the year and as you go into FY17. Now, obviously the big storyline this year, I mean this quarter, is HAAS. And that does create a situation where we feel like we've stabilized that contract and we have a better feeling of confidence with respect to FY16 guidance. And that is why we were able to really manage it -- manage the bottom end of our guidance up, and effectively raise the midpoint. Does that answer your question?

Thank you.

Steven, do you have another follow-up?

No, I will hop back in the queue for now.

(multiple speakers) Great. Next question, please.

Frank Sparacino, First Analysis.

I was just hoping to get a little bit more color on the issues in Australia in terms of the volumes.

This is Bruce Caswell. Let me give you a little bit more color on that. One of the things we always look at in situations like this is what the employment rate looks like in Australia. And I want to begin by saying that our understanding is that most, if not all, vendors that are involved in this contract are experiencing similar volume related challenges. It's not unusual in a contract like this to see fluctuations from the estimates that were first provided as part of the tender process. And it is worth noting that the Australian unemployment rate is fairly low. It is at 5.7% reported this past March, and it has not been that low since 2013.

So, while there are many factors that can ultimately factor into or play into the number of referrals that you get and the volumes that you are seeing -- some can be related to public policy, others to obviously broader market trends -- it could quite be here that it is simply tied to the rates that were previously assumed at the tender time versus what we are seeing today in terms of the employment environment. But I do want to note that, as we said, this program is profitable.

It is going to continue to improve in the back half of fiscal 2016 as this contract continues to mature, and we are really focused now on really managing the margins of the contract. Because they obviously did not turn out to be as robust as we might have initially expected. But we've got a great team working on it and we expect it to continue to improve this year.

Frank, do you have a follow-up?

I do not, Lisa, thanks.

Okay, thank you then. Next question, please.

Brian Kinstlinger, Maxim Group.

I missed the prepared remarks, but I just want to be clear that the HAAS contract was profitable before the unexpected $6.6 million in true-ups? And based on the questions I heard from some of the analysts, and I just want to be clear. The $6.6 million of benefits is completely separate from the $0.08 change request that we all had expected, right?

Yes, with respect to the second question first, that $0.08 that we had talked about in the quarter one related to a domestic program that we had. And it was a change order that we had in our hands, but it was not signed yet. So it was one that had been negotiated but had not been fully executed with the customer. The accounting rule's not allowing us to record that revenue until we actually have the signed agreement. With respect to HAAS, yes, without that $6.6 million, we still had a profit this quarter two in fiscal year 2016. Did that answer your question?

Yes, thank you. And then (technical difficulty) question I've got is, if I understand it correctly, the new change order, which places some focus on face-to-face meetings, is going to make it easier for MAXIMUS to achieve your productivity goals and essentially your target profitability for that contract. Is that right?

Yes.

Yes, and I don't think it's a fact that it is a shift to face -- more emphasis on face-to-face, Brian, but really the reduced volumes.

Thanks, Brian. Next question, please.

Allen Klee, Sidoti and Company.

Question one is, what was your previous revenue expectation for the HAAS contract for fiscal 2017? And then secondly, a bigger picture question, since you mentioned that one of the factors for why the contract is reduced on volumes is the budget. Just in general, thinking about operating in the UK, do you think that, given some of the budget issues there, that -- how that could impact you in some other programs?

Rick, why don't you take the first one? I think the question was what's our previous expectation for revenue on the HAAS contract. Was it -- Allen, was that 2017 or 2016?

You said 2017, Allen, I will answer 2016. It was $230 million to $280 million, was what our expectation was for revenue for HAAS for fiscal year 2016.

So, hence, the revised expectation is really at the lower end, being at $225 million.

And we have not provided specific guidance relative to the HAAS contract in fiscal 2017.

The second part of Allen's question I think was, given the decreased volume, really the amendments on this contract and UK situations in general, what is our expectation? My view is I don't differentiate between the UK and other governments that we serve. They are, and we've said this to folks, it's really the intersection of these two drivers that sparks our growth, our long-term growth.

And governments are dealing with the fact that they have to serve more people, and more people are looking to their governments for some form of welfare. And at the same time, they have budgetary pressures that they need to deal with. In the UK, and I think it's a responsible thing, does go through and analyze each program and toggles or adjusts each program accordingly. So, in some cases, we see downward adjustments. In other situations, we see upward adjustments.

I will say from a macro market perspective, we are seeing, in general -- and this is in general -- but better employment rates, lower employment rates in many of the markets where we serve. Which, as you can appreciate, that means there is fewer people looking for jobs, and that has an impact on our programs. On the other hand, what we are seeing is governments shift their emphasis from the classic just long-term unemployed to those with disabilities and other challenging situations.

So, we are seeing the market shift in terms of what they are looking for. In aggregate, I think it's still a growth situation. I don't think it's a net reduction in the demand for what we do in that area.

Thanks, Allen. Next question, please.

(Operator Instructions). Shane Svenpladsen, Avondale Partners.

With the new federal regulations mandating competitive bidding for one-stop operators of workforce development centers in the US, are you seeing more RFP activity as a result of that? And have there been any changes to the competitive landscape?

Bruce, why don't you field that?

I would say we are beginning to see some changes in the competitive field there, and some additional RFPs coming to market that we haven't historically seen from clients that maybe haven't even historically outsourced this function. And you would expect the competitive landscape to include a broad composition of not just for-profit vendors, but historically you've seen a lot of the smaller nonprofits and community-based type organizations locally providing services to workforce investment boards, or WIBs, that have been active in those types of programs. So yes, I would say it is a bit of a shift in the market. I would not call it a seismic shift at this point.

Okay, that's helpful. And then (multiple speakers) related to the new work and health program RFP that is out, other than a change in funding, are there any other contract-specific changes that are worth calling out?

I might just provide a context, if that's okay, Shane, on work and health. First of all, as we've been talking about here, the UK's experiencing really historically low unemployment. So as a result, as Rich mentioned, governments are shifting their focus to reducing the employment gap for people with disabilities. And also focusing on improving productivity and in-work salary progression.

So the work program historically was focused on long-term unemployed individuals. But that group, interestingly, has decreased by almost 75% since 2011. So, while there was significantly more money allocated to the work program, none of the participants or vendors in the work program really ever achieved the funding levels that had been previously envisioned due to those decreased caseloads.

So, the government has now shifted and they've created a new, smaller program called Work and Health. That is expected to absorb both the Work Programme and Work Choice. And that new program is going to be focused on people with health conditions and disabilities. And as you probably well know and others, serving individuals with disabilities is a core competency of Remploy, the organization with whom we combined last year. So we feel like we are very well-positioned for that change.

To give you just a sense of the economics, because I know that would be top of mind for you, combined, the work performed by MAXIMUS and Remploy presently for both programs, Work Programme and Work Choice program, runs at about $80 million to $85 million a year. But our profitability expectations for both of those programs are pretty low. In fact, comprising less than $0.05 per share in fiscal 2016. So any proposed reduction under this new Work and Health contract that we might see in overall funding would likely be a bigger hit to the top line and relatively immaterial to the bottom line.

Thanks, Shane. Next question, please.

Richard Close, Canaccord Genuity.

Yes, just wanted to follow-up on my Fit for Work questions. Rick, you didn't give the original revenue guidance in the original operating loss. You gave us an update, but what does that compare to?

Richard, we don't generally give that. We don't call out specific programs. I will tell you that $5 million is substantially less than what we had projected for this coming year. And at a $3 million loss is reasonably worse than what we had expected.

And then I guess my final follow-up is, there is some pretty strong positive commentary throughout your slide deck. Specifically, you talk about the long-term outlook being very positive and favorable trends. It seems like just reading your body language or your text here, that you guys are pretty optimistic on your business, it sounds, over the next couple of years. I was wondering if you could just provide any additional commentary on that level of confidence.

Richard, glad to do that. I think this, again -- this is -- the nature of our business is multiyear. We are dealing with governments and programs that take several years to go from concept to legislation to program to rule to operation -- and to start up, and then to real mature operations. And I do think the nature of these programs is such that, in some form, regardless of the party that is in play, these programs will continue.

So, when we think about this, we think we have long-term growth drivers. I've said several times that I think those growth drivers translate into 10% top-line and bottom-line growth potential year in, year out. There will be, within years, we will see situations where we may dip below a 10% benchmark. But I think that really will be attributable to the various programs in the various stages. So, there will be situations, like we are this year, where we have an inordinate amount of startups.

And as Rick said earlier, what startups tend to do is the revenue leads and the earnings lag. And in the following years, you'll see the flip side of the equation. So, that was really the intent. We remain very excited about the long-term drivers to the business. The pipeline remains, I think, handsome. So we remain optimistic about our future growth prospects.

Next question, please.

Dave Styblo, Jefferies.

Parlaying off of Richard's question there, I did want to ask about the pipeline, which was pretty noticeably up, about $400 million sequentially. And it seems like quite a bit more of the proposals pending. I'm wondering if you can talk a little bit more, if that's new business driving the increase or re-procurement? I know there are some comments there that over 50% is new. I'm wondering how that also compares to recent levels that have been in there.

And then finally, Rich, I know at some point when we sat down, you talked about beefing up the business development with the mandate to look for opportunities, sort of over the mountain, maybe into the next two years away. Can you talk more specifically about what you have done in there and the early take on that?

I would be glad to do that, and I know Bruce would be very proud to tag team on the latter part of your question. As it relates to the pipeline, Dave, when I think about the pipeline, I think it's -- it has been of late, several quarters running, higher. And I think we continue that trend with the quarterly statistics. And, we do [pull] so much of it as in the form of new work versus the form of rebid. And I think as I might have mentioned on my call notes, a good portion of it happens to be new work. It is interestingly spread across all of our businesses. It's not predominantly in any one area or any one segment.

As it relates to the rebid situation, I think this. I think it's important for folks to remember that 2016 is a light year versus other years from a rebid perspective. In terms of statistics, where we are today coming into this year, we had, I think as you are aware, 10 contracts with $170 million as it relates to contract value in rebids. Thus far we have won or extended, I believe, two of those. And so, basically, we have a significant amount to go. But again, we feel comfortable with the rebid situation. And on the options, they continue to come in at -- I think effectively in baseball terms, we are batting 1,000% as it relates to options. So, on the pipeline, I think it's strong and most importantly, a lot of it is new work. So I think that's good.

On the business development side, you are right that we have historically focused on our pipeline metrics on what we call tier 1 and tier 2. Those are situations where we think the RFP is going to be on the street within six months. We had a strategic direction to open our aperture and look beyond that into what we call tier 3. We have made investments in business development resources and we have honed and will continue to hone our methodology really to look for new, emerging opportunities so we can be out there ahead of the pack with solutions and/or frankly focusing our M&A programs strategically on what we think will be new growth areas for MAXIMUS, either one or two adjacencies away.

Bruce, anything to add on that one?

I think you've said it perfectly. The only thing I might say is -- and we do this on a global basis. We have a great integrated business development community that gets together quite frequently, shares an awful lot in terms of capabilities. And I think that really furthers our broad strategy of ensuring that we can take the full capabilities of MAXIMUS to our clients on a global basis, but deliver those at a local level. So, that emphasis on tier 3 is really something that cuts across all geographies and all business lines.

And I think that may be behind part of the growth in the pipeline.

Yes.

Well, thank you very much for joining us today. There are no additional questions in the queue. We look forward to future conference calls. Have a good day.

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.