Maximus, Inc. (NYSE:MMS) Q4 2023 Earnings Call Transcript

Maximus, Inc. (NYSE:MMS) Q4 2023 Earnings Call Transcript November 16, 2023

Operator: Greetings. Welcome to Maximus Fiscal Year 2023 Fourth Quarter and Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Batt, Vice President of Investor Relations for Maximus. Thank you, Ms. Batt. You may begin.

Jessica Batt: Good morning, and thanks for joining us. With me today is Bruce Caswell, President and CEO; David Mutryn, CFO; and James Francis, Vice President of Investor Relations. I’d like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions. Actual events and results may differ materially as a result of risks we face, including those discussed in Item 1A of our most recent Forms 10-Q and 10-K. We encourage you to review the information contained in our recent filings with the SEC and our earnings press release. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances, except as required by law.

Today’s presentation also contains non-GAAP financial information. Management uses this information internally to analyze results and believe it may be informative to investors, engaging the quality of our financial performance, identifying trends and providing meaningful period-to-period comparisons. For a reconciliation of the non-GAAP measures presented, please see the company’s most recent Forms 10-Q and 10-K. And with that, I’ll hand the call over to David.

David Mutryn: Thanks, Jessica, and good morning. We are pleased to report a solid finish to fiscal year 2023 with 7.4% organic revenue growth and a 10% adjusted operating margin in the fourth quarter, reflecting healthy earnings tailwinds that we expect to carry on through fiscal year 2024. Last week, we announced that we divested several international employment services businesses in our ongoing effort to strategically shape the Outside the US segment and improve profitability and stability. We had robust signed contract awards in the fiscal year of $6.1 billion, which includes successfully defending key recompetes. Our contract backlog that we report annually stepped up again from last year to $20.7 billion, over four times our trailing revenue.

We are executing on our stated capital allocation priorities with debt paydown yielding 2.2 times net debt-to-EBITDA at September 30, while also increasing our quarterly cash dividend to $0.30, in line with our commitment to grow the dividend with earnings over time. Our fiscal 2024 revenue guidance reflects mid-single-digit organic growth and our earnings guidance implies at or above 30% bottom line growth over fiscal 2023. Finally, the essential nature of our work means that we have excellent insulating properties during periods of uncertainty around government budget. Let me orient you to our revised definition of adjusted EPS. In addition to adding back intangible amortization expense, now and going forward, we are adjusting for gains, losses or other charges relating to divestitures.

While these types of costs have not been large in fiscal year 2023, we are underway with reshaping the Outside the US segment and it’s a process that could last for several more quarters. We have not added the costs related to the cybersecurity incident disclosed last quarter to our list of adjustments, but have provided a pro forma view excluding these costs for improved visibility. There is a slide in the presentation for today’s call, which demonstrates the methodology change and identifies the cybersecurity incident cost in fiscal year 2023. For the full fiscal year, total company revenue increased 5.9% to $4.90 billion. On an organic basis, revenue growth was 7.1% over the prior year and consistent with the mid-single digit rate that we expect for the business.

The growth drivers were a combination of new work as well as growth on existing programs in the US segment, which I’ll add more color on in the segment discussion. On the bottom line, the full fiscal year 2023 adjusted operating income margin was 8.0% and adjusted EPS was $3.83. Three things to note on our full year earnings, which are highlighted on a stand-alone slide in the presentation today. Number one, the total impact of the cybersecurity incident in fiscal 2023 was $29.3 million or $0.35. We believe our analysis of affected individuals is complete, and the largest component of costs we’ve incurred has been related to the required notification. This means adjusted EPS for the full year, excluding the incident was $4.18 and at the high end of our guidance range of $4 to $4.20, excluding the incident costs.

Number two, the second half of the year looked quite different from the first half as there were several sizable step-ups in earnings power of the core business as Medicaid redeterminations commenced in the third quarter in US services and volumes ramped on both the Veterans Affairs Medical Disability Exam contracts, which comprise the VES business and the student loan servicing contract in US Federal services. Number three, on a related note, it’s worth highlighting the fourth quarter of this year in which we delivered strong sequential earnings growth as we had expected. US Federal Services benefited from ongoing higher program volumes that I just highlighted and US Services had a full period of Medicaid redetermination. Adjusted EPS for the fourth quarter was $1.29, and adjusted operating income margin was 10.0%.

$0.05 were adjusted under our expanded definition and relate to a $2.9 million non-tax deductible asset impairment charge incurred in preparing the recently divested properties for sale. This charge was not contemplated in our fiscal 2023 guidance. Fourth quarter earnings also include a $0.09 detriment from incremental costs incurred related to the Q3 cybersecurity incident meaning, excluding the incident, adjusted EPS would be $1.38 in the quarter. Let’s go to the segment results, starting with US Federal Services. For the US Federal Services segment, revenue increased 6.4% to $2.40 billion. All growth was organic and driven predominantly by continued ramp of volumes on the VA medical disability exam contracts as the overall program grows to meet client expectations.

The operating income margin for US Federal Services was 10.4% in fiscal 2023 as compared to 10.4% in the prior year. It’s worth noting, the segment continued its solid execution by delivering a 12.4% margin in the fourth quarter, which remains slightly above our expected margin range for this segment. For the US Services segment, revenue increased 12.7% to $1.81 billion. All growth was organic and driven by new work wins and our successful conversion of some short-term work into longer-term contracts. Examples include eligibility support contracts in Indiana and Arkansas, long-term care assessment work across the country and a multiyear unemployment insurance contract with California. The US Services operating income margin was 10.1% as compared to 11.3% in the prior year.

Let me recap the margin trend of this segment. Last year, in fiscal 2022, the first half of the year was overweight from the last of the profitable short-term COVID response work, while the second half of the year was underweight. This year, the first half remained underweight until the paused Medicaid redetermination commenced in the third quarter, yielding margin improvement in the back half of the year as we expected. With the full period contribution of redeterminations US services realized an 11.6% margin in the fourth quarter. For the Outside the US Segment, revenue decreased 9.8% to $689 million. This is net of currency impacts, which reduced revenue by 4.6%. The other two declines were roughly equal parts organic contraction from lower volumes on employment services programs across multiple geographies and divested businesses that we announced in the second quarter of fiscal 2023.

The segment realized an operating loss of $9 million for fiscal 2023, compared to an operating loss of $15 million in the prior year. This year’s loss was attributable to the $14.4 million revenue reduction in the third quarter of this year tied to lower estimates for future outcome-based payments. Meanwhile, the segment broke even from a profit standpoint in the fourth quarter, a slightly better result than previously expected. We have acknowledged that this segment is not meeting our financial expectations and are executing focused efforts to reduce volatility. As announced last week and completed in the first quarter of fiscal 2024, we divested three more businesses. Specifically the Employment Services division in Canada, along with Singapore and Italy, which were exclusively employment services.

Let’s turn to the balance sheet and cash flow items. As of September 30, 2023, we had gross debt of $1.26 billion, and we had unrestricted cash and cash equivalents of $65 million. We paid down approximately $60 million of debt in the fourth quarter, which brought our debt ratio to 2.2 times at September 30 and near the low end of our stated target range of 2 times to 3 times. This is down from 2.5 times, 1 quarter ago at June 30. As a reminder, this ratio is our debt net of allowed cash to pro forma EBITDA for the last 12 months as calculated in accordance with our credit agreement. We had strong cash flows in the fourth quarter to finish the year. Cash flows from operating activities totaled $314 million and free cash flow was $224 million, near the high end of our previous guidance of $190 million to $230 million.

Days sales outstanding, or DSO, were 60 days at September 30, 2023, compared to 62 days for the same day last year. Looking forward, our capital allocation priorities are unchanged. First, we fund organic investments, which are typically a combination of capital expenditures and expenses. Second, we maintain a dividend that we intend to grow over time with earnings and as evidenced by the recent quarterly dividend increase announcement to $0.30 per quarter. And third, strategic acquisitions intended to accelerate organic growth. We will continue to evaluate acquisition opportunities with discipline and our strong and improving balance sheet provides capacity should good opportunities arise in fiscal year ’24 and beyond. In the near term, we will continue to feather in debt paydown as part of capital deployment.

While we still believe 2 times to 3 times is an appropriate target leverage range, supported by our long-term contracts and high cash conversion. In the current interest rate environment, we have a bias toward the low end of 2 times. Looking forward, our guidance for a step up in earnings and free cash flow, absent M&A, would enable a debt ratio of 1.5 times by the end of fiscal year 2024. About 50% of our debt is fixed through interest rate swaps, so further de-levering efforts will reduce the higher-priced floating rate component. Let’s go to fiscal year 2024 guidance. Revenue is projected to be between $5.05 billion and $5.2 billion. Adjusted operating income is estimated to be between $488 million and $513 million. The midpoints of those ranges imply an adjusted OI margin of 9.8% and within our target range of 9% to 12%.

Adjusted EPS is projected to be between $5.05 and $5.35 per share. Based on the revenue guide, the $5.125 billion midpoint represents about 5% organic growth over fiscal 2023. The major drivers are first in US federal, higher volumes in the VA medical disability exam contracts and, to a lesser extent, new work across multiple categories. Second, in US Services, there is a full period of redeterminations, which as we’ve reminded before, have a disproportionate benefit to the bottom line. There are also expanded clinical assessment programs contributing to organic growth in the segment. The adjusted EPS guidance includes approximately $70 million of interest expense which equates to about $14 million less than in fiscal year 2023. I’ll briefly share our forecast on segment margin.

We expect the US Federal Services margin to be in the 11% to 12% range, which represents moving up a notch from last year in the pre-existing target range of 10% to 12% for this segment. We expect our US Services segment margin to be about 11%. Finally, we expect Outside the US to be slightly above breakeven for the year. We expect a more straightforward quarterly profile in fiscal 2024, reflecting the improved stability of the business compared to prior years. Our current view is that operating margin should improve across the year and therefore be modestly higher in the second half than in the first half. While redeterminations in US Services are helping more in the first half, we expect margin growth across the rest of the portfolio to contribute to the profile of more steady growth over the year.

Lastly, we expect a small loss on sale in the first quarter tied to the completed divestitures, which will be excluded from adjusted EPS. From a cash flow standpoint, we expect free cash flow between $290 million and $340 million for fiscal 2024. We currently expect a slightly negative free cash flow in Q1 and as a result of seasonality and timing of certain payments, as has been the pattern in recent years. Some other assumptions around fiscal year 2024 include an estimated $88 million of intangibles amortization expense. The full year effective income tax rate should be between 24.5% and 25.5%, and weighted average shares should be between $62.2 million and $62.3 million. Before handing off to Bruce, I want to highlight our resiliency during periods of budget uncertainty with our government customers, particularly those comprising the US federal government.

Anytime there is a focus on a potential shutdown, it can be a difficult environment to navigate from an outside perspective. For Maximus, our primary focus is assessing any impact that might be expected in our US Federal segment, which is about half the business. Having recently coordinated with our federal customers, we anticipate a significant majority of our contracts would be deemed essential. In fact, our current estimate is that less than 5% of our US Federal segment revenue could be disrupted during a shutdown, representing less than 3% of total company revenue. Therefore, we believe our guidance range can accommodate a temporary shutdown which remains the positive scenario in fiscal year 2024. And though we are cautious about potential collection delays during such an event, we have significant liquidity, including our $600 million line of credit, which was undrawn at the end of fiscal year 2023.

With that, I will turn the call over to Bruce.

Bruce Caswell: Thanks, David, and good morning. Our FY ’23 results demonstrate the resilience of our business through unstable times and solid progress delivering on our strategy. We entered FY ’23 in an unprecedented environment. Both the ongoing public health emergency and the deferral of student loan payments impacted revenue. Inflation rates were growing and hiring of critical health care workers was challenging due to the recent COVID-19 pandemic. The stable core of our business driven by strong rebid year and our essential role in government program delivery enabled us to end the fiscal year with solid financial results and a clear line of sight for FY ’24. In May 2022, we presented our three to five-year strategy with specific areas in which we would focus and grow and supported by an addressable market of $150 billion in annual government spending.

Only two quarters into the post PHE period, we are pleased with the performance of our segments in meeting their strategic objectives. Full year results for the US Federal Services segment are well within the target range of 10% to 12%, as are the fourth quarter results for US Services, which has a target margin range post PHE of 11% to 14%. Together, these segments drove our ability to meet our total company margin target. As David shared, the fourth quarter resulted in an adjusted margin of 10%, successfully delivering on our target of 9% to 12%. Over the longer term, our expectation for further improvement to an adjusted operating income margin of 10% to 14% remains. At Investor Day, we also communicated a commitment to increased growth in our US Federal Services Segment, success of which is evident in both our backlog and pipeline.

Just two years ago, our US Federal Services Segment accounted for less than half of our backlog. Today, the Segment makes up two-thirds of our backlog. Finally, we committed to mid-single-digit organic growth. As David shared, organic revenue growth for FY ’23 was 7.1%, and guidance for FY ’24 shows promise for a continuation of this progress. During the quarter, we announced a 7% increase in our quarterly dividend, raising it to $0.30 a share. As we stated in the press release, this dividend increase demonstrates our confidence in the earnings growth reflected in our guidance. We remain committed to periodically assessing our dividend and raising it further in line with earnings growth. Now let’s turn to fiscal year 2024, which is already off to an impactful start with recent changes made to the Outside the US portfolio.

Earlier this month, we announced the divestiture of our employment services businesses in Italy, Singapore and Canada. Throughout fiscal year 2023, we shared our commitment to restructuring and optimizing this segment under appropriate terms and in a manner that aligns with our overall strategy. We have now reduced our OUS footprint by three countries in support of that goal. As I mentioned on our Q3 call, our portfolio shaping will focus on reducing volatility, concentrating our footprint, adding diversity to the customers we serve in country and broadening the capabilities we deliver in line with our strategy. We will operate in markets with well-established contracting processes and significant and growing addressable spending. As an example, now a decade into our partnership with the government of the United Kingdom, we have a more diversified portfolio and are delivering broader capabilities than ever before.

Let me take a step back and talk with you about our strategy as we head into the new fiscal year. The three pillars of our three to five year strategy are supported by significant and growing addressable markets. The capabilities we bring to our mission of moving people and technology forward and our ability to deliver on customer priority, with differentiation and sustainable competitive advantage. With the relentless pace of technology, what was considered cutting edge two years ago is becoming table stakes. As the market moves, we are investing in anticipation of evolving customer needs. While the obvious example is AI in its many forms, there are others such as provisioning and managing secure hybrid cloud environments. Cloud-native development and digital modernization, more generally leveraging DevSecOps capabilities.

With this evolution in mind, our teams are operating with agility, mapping our capabilities to the priorities of our customers right now and with an eye toward what is to come. Let me share a few examples. Within our technology modernization pillar, the strong pipeline of federal agency IT systems procurements like the IRS EDOS contract, reflects legacy environments requiring modernization, citizen demand for a more digital government and today’s cybersecurity challenges. We’ve refined the priorities of our strategy to include greater emphasis on cybersecurity where we’re focused on cyber automation, Zero Trust, engineering and operations and digital forensics. We have also deepened our capabilities in cloud-enabled services, data management and hyperautomation.

As trusted advisers, we will empower our customers to make data-driven decisions that advance their mission and enhance their customers’ experiences. Within the future of Health pillar, we’re supporting our government customers as they respond to trends such as an equitable access to care and increasing levels of chronic disease against the backdrop of rising costs. Within our suite of services, we have long helped governments ensure equitable access to our independent and conflict preassessments delivered at unmatched scale in our markets. Looking forward, we’re focused on a balanced approach to using technology to further improve access and the customer experience while supporting our thousands of clinical staff in their work with some of our most vulnerable citizens.

Already, we are investing in solutions that improve areas such as care navigation, tele-assessments and independent quality assurance. I’m also encouraged by recent progress we’ve made in addressing population health challenges through our integrated lifestyle and well-being services in the United Kingdom. Finally, within our customer services digitally enabled pillar, our success developing and delivering award-winning mobile applications and program-specific portals has improved equitable access to critical benefits. This has been especially important for example, with the resumption of Medicaid eligibility determinations for tens of millions of Americans. Eliminating barriers like printed documents, faxing and wet signatures in partnership with our customers incrementally improves access and health equity.

As we look forward, our values will continue to guide our balanced approach to using technology to improve, not only the citizen experience but to support our employees. To that end, our 2023 global employee engagement survey independently administered by PricewaterhouseCoopers, witnessed a robust 76% employee participation. Of those surveyed, 76% stated that they would recommend Maximus as a great place to work. While we’re proud of that result, our culture is to focus on how we can do better. With the majority of our employees delivering essential services to Citizens, supporting them with competitive pay and benefits and providing opportunities for their continued development and satisfaction, doing meaningful work remain our focus. Over the last few quarters, we’ve shared details about our journey with innovation.

Across our organization, innovation creates differentiating capabilities and bolsters our efforts to be best-in-class while remaining cost competitive. In the past, we’ve shared innovative technologies we have patented as well as use cases in pilot phases. Today, I’d like to discuss two additional ways in which our teams are innovating. First, I’m excited to announce that we have established Maximus Ventures, our corporate venture capital function. Through this CVC, which will be spearheaded by our corporate development team, we will invest in innovative start-ups that share our forward-thinking vision for government. Our objective is to partner with innovative companies to learn about and gain unique access to disruptive capabilities while creating growth opportunities for Maximus.

The Maximus Ventures team has developed a disciplined methodology that includes specific selection criteria based on identified innovation needs that are critical to our priority core markets and largest contracts and tested through pilot programs. While we’re in the very early stages, we’ve started to develop several relationships with seed to Series C partners. Through thoughtful investments, we’ll work with companies to challenge the status quo develop transformative solutions, solve complex problems and reimagine the future of health and human services programs. More information on Maximus Ventures will be available on our website in the coming weeks. Where the CVC demonstrates our efforts to generate new opportunities by way of external investments, our internally focused Maximus Spark tank elevates great teams and ideas.

Our employees have the greatest awareness of our day-to-day operations and are well positioned to identify and successfully implement opportunities for innovation. The Spark Tank provides a support structure throughout a gated process that starts with the business case and ends with investment and implementation. My personal favorite gate in the process is, of course, the Spark Tank session, during which selected teams are invited to pitch their business cases to a diverse panel of organizational leaders. I had the pleasure of attending the most recent session and witnessed the passion our teams bring for how their solutions will bring us closer to our customers and their missions. Maximus Ventures and the Spark Tank are just two examples of the many ways teams across the organization are being encouraged to collaborate and drive innovation.

With respect to FY ’24, I spent some time discussing the refinement of our strategy and our commitment to innovation. Now let me turn to our pipeline. For the fourth quarter of fiscal 2023, signed awards totaled $6.1 billion of total contract value, up from $4.3 billion last quarter. Further, at September 30, there were $878 million worth of contracts that have been awarded but not yet signed. These awards translate into a book-to-bill of approximately 1.2 times for the trailing 12-month period. Let’s turn our attention to our pipeline of opportunities. Our pipeline at September 30 was $37.1 billion, compared to $32.1 billion reported in the third quarter of fiscal 2023. This September 30 pipeline is comprised of approximately $1.2 billion in proposals pending, $967 million in proposals in preparation and $34.9 billion in opportunities tracking.

Of our total pipeline of sales opportunities, 76% represents new work. Additionally, 60% of the $37.1 billion total pipeline is attributable to our US Federal Services segment. With fiscal year 2024 largely ahead of us, many companies are commenting on global conditions creating an unprecedented environment of VUCA, or volatility, uncertainty, complexity and ambiguity. In our view, however, we see a return to a more stable macro. For the first time in many quarters our core business-long an engine of growth itself- is delivering its full scope of services to our federal and state customers. Our reshaping of the Outside of the US portfolio has progressed and while not complete, means we’re on a path to reducing volatility in performance. The essential nature of the services we provide governments provides welcome insulation from the uncertainty of a budget showdown or even government shutdown.

The complexity of challenges facing government such as modernizing legacy systems environments, benefits companies like ours that have proven capacity to deliver technology and services at scale. And finally, we are unambiguous in our focused execution of our three to five year strategy and continued progressive achievement of the 10% to 14% total company adjusted operating income margin and mid-single-digit organic growth targets we have established. In closing, as I’ve mentioned on prior calls, we recognize the importance of optimizing our organization for the future. To that end, through an effort we call Maximus Forward, we continue to evaluate, benchmark and in some cases, clean sheet the design, processes and resources that drive our delivery.

With a balanced approach to improving efficiency and investment in the future, our Maximus Forward initiative is central as well to keeping us an employer of choice and creating greater opportunities through growth for our thousands of valued employees. And with that, we’ll open the line for Q&A. Operator?

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Charlie Strauzer with CJS Securities. Please proceed.

Charlie Strauzer: Hi, good morning.

Bruce Caswell: Good morning, Charlie. How are you?

Charlie Strauzer: Good. Thank you. Could we talk a little bit about the guidance and looking back at the August call, you mentioned kind of using Q4 as a good run rate proxy for next year. And I just want to just — the ranges feel a little conservative and hoping to get a little bit more color and commentary behind that, if you don’t mind.

David Mutryn: Sure. I’ll take it, Charlie. I’ll start by saying we believe our official guidance here looks very much like our early view of the year that we did share in August. So that was based on our Q4 adjusted EPS forecast of $1.22 to $1.42. So $1.32 being the midpoint, and that would be $5.28 on an annualized basis. So that would fall between our guided midpoint and high end, which is $5.35. So we do feel good. We also said on the last call that we saw a good line of sight to mid-single-digit organic revenue growth and 10% adjusted OI margin, which is right on the mark of our official guidance here of about 5% organic growth and 9.8% adjusted OI margin at the midpoint.

Charlie Strauzer: Great. Thanks. And then looking at US Services, obviously, you’re starting to see some good top line growth there. Obviously, it looks like there’s some room to improve the margins there, and ultimately, the bottom line, when might you have some room to improve that?

David Mutryn: Yeah. Great question. So stepping back, we guided them at 11% adjusted OI margin, which is at the lower end of the 11% to 14% range that we’ve set out for them. First, maybe I’ll cover just kind of the redetermination impact there. While, again, I always say it’s difficult to precisely estimate. We do continue to see that contribution in line with the $0.15 to $0.30 range that we’ve given before. And I think you can see that just by looking at the total US services OI, which in Q1 and Q2 of fiscal year ’23 was more in the $40 million range per quarter. And then in Q4, it was at $55 million. So kind of a $15 million OI increase really driven by the redeterminations. To your point, that we have seen a lot of growth in that segment, revenue grew 12.7% in fiscal year ’23.

And some of that growth has come in at a lower than average margin and it’s putting some pressure on the overall segment margin. And this, combined with our normal course business erosion has had a slight shift in the mix of contract profitability in the segment. But I would agree with you, and we’re optimistic that there’s room for improvement here. The segment is well suited for margin improvement with further adoption of technology, in many cases, which we control and also in natively higher mix of performance-based work. So we do see a good opportunity for improvement from here.

Charlie Strauzer: Great, thank you. I’ll join back in queue.

Operator: Our next question is from Bert Subin with Stifel. Please proceed.

Bert Subin: Hey, good morning. And thanks for the questions.

Bruce Caswell: Sure. Good morning, Bert. It’s Bruce.

Bert Subin: Hey, Bruce and hey, David. David, I think this is really just sort of a follow-up question for you on the margin front. Can you maybe give some color on how to think about that $0.15 to $0.30 range on redeterminations? Is that just sort of operating closer to $0.30 in the first half of the year baked into guidance? Or is that an opportunity? And then just sort of longer term on the margin front, given the near-term range of 9% to 12% longer term, 11% to 14% sort of sitting here at 9.8% for this year despite what would seem like very accretive tailwinds from redeterminations in the VA business. So can you just maybe give us a walk on how to think through the margins getting up to at some point, a 12.5% number from where we are today?

David Mutryn: Yeah. Great. I’ll start and hand it to Bruce for comments as well. On the redeterminations, as I said, we are in that range, and I’m hesitant to give you a precise number because it’s impossible to get too precise on it. But I think I would point out that as a result of the volume — the higher volumes during this unwind period, we do expect a slightly higher margin in the US Services segment in the first half of our fiscal year ’24 than in the second half as those volumes will moderate down somewhat. So as we previously said, the peak of those redeterminations would occur in the first half, that remains our assumption, and we’re seeing it that way. Maybe I’ll pass to Bruce for the longer-term margin.