Q2 2022 CRA International Inc Earnings Call

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Good day everyone and welcome to Charles River associates's second quarter 2022 conference call.

Please note that today's call is being recorded.

The company's earnings release and prepared remarks from crra's Chief Financial Officer are posted on the Investor Relations sections of crra's website at crai com.

With us today our serra's President and Chief Executive Officer Paul malei, Chief Financial Officer Dan Mahoney and Chief corporate development Officer chat hommes.

At this time. I'd like to turn the call over to MR Mahoney for opening remarks. Dan Please go ahead.

Thank you Rob, and good morning everyone.

Please note that the statements made during this conference call, including guidance on future revenue and non-GAAP EBITDA margin and any other statements concerning the future business operating results or financial condition of CRA, including those statements using the terms expect, outlook or similar terms, are forward-looking statements as defined in section 21 of the exchange Act.

Information contained in these forward-looking statements is based on management's current expectations and is inherently uncertain. Actual performance and results may differ materially from those expressed or implied in these statements due to many important factors, including the level of demand for our services, as a result of changes in general and industry-specific economic conditions.

Additional information regarding these factors is included in today's release and in crra's periodic reports, including our most recently filed annual report on Form 10-K and quarterly reports on Form 10 -q, filed with the SEC.

Cira undertakes no obligation to update any forward-looking statements after the date of this call.

Additionally, we will refer to some non-GAAP financial measures in certain measures presented on a constant currency basis. On this call, everyone is encouraged to refer to today's release in related CFO remarks for reconciliations of these non-GAAP financial measures to their GAAP comparable measures and descriptions of the calculation of EBITDA and measures presented on a constant currency basis.

I will now turn it over to Paul for his report, Paul.

Thanks Dan, and good morning everyone. Thank you for joining us today. Continued momentum in the business and demand for our services supported headcount expansion of 4% year-over-year and utilization of 77% for the second quarter. The hard work of my colleagues drove crra's revenue to $149.1 million, which is the highest quarterly revenue in the company's historythis record was achieved despite currency headwinds associated with the strong U's dollar. That shaped $3 million, or 2% year-over-year growth from our reported revenue on a constant currency basis.

Our performance was broad-based, with four practices and our trust and competition economics energy, intellectual property and labor and employment, delivering double-digit revenue growth year-over-year. We also saw solid contributions from our international operations, which posted growth of 6% year-over-year.

We continue to effectively manage the business, mitigating the pressure of cost inflation and converting crra's top line performance into strong profitability. For the quarter, crra set new quarterly records for EBITDA net income and earnings per diluted share. I will now highlight some of the services we provided during the second quarter.

Despite a 21% decrease E over year. Worldwide, MA transactions total $1.1 trillion during the second quarter of 2022, marking the eight consecutive quarter of $1 trillion or more. Looking at transactions in excess of $1 billion, which tend to represent the types of transactions on which our economist are engaged, the value of MA transactions total morethe total more than $6 billion during the first half of 2022, a decline of only 5% comppaiared with the second quarter of 2020. oneagainst this backdrop, our anitrust and competition economics practice once again establish a new high water mark for performance, as a recorded its highest quarterly revenue ever during the second quarter, the practice continued to support private parties and regulators on a variety of new and continuing MA related engagements and North America and .europethe engagement span a broad range of industries, including technology transansportation tele, communications and industrial manufacturing and chemicals, and require our experts to assess the characteristics of product and geographic markets. Among other considerationsthis work involves the application of cutting edge economic theory, impirical analysis and computing infrastructure.

Turning to the legal market, serres revenue from legal and regulatory offerings during the second quarter grew 4% year-over-year. The team achieved this growth despite the fact that both total case filings and total Court judgments during the second quarter of 2022 were down 8% year-over-year.

serres, anitrust and competition economics practice continued to support clients in the context of legal disputes in addition to their merger review work. For example, during the second quarter, serrea was highred by agway energy services, the defendant, and a consumer class action matter in which the plaintiff allegge that agway engaged in deceptive pricing practices by charging low introductory rates and then switching customers to higher monthly prices that were allegedly more than the rates charged by competing electric utilities and competing energy supply companies.

The sera expert analyzed the market and the relevant regulatory structure and concluded that in the significant majority of market quarters, agy prices were in fact, below the media.n counsel for agway relied upon series expert's opinion and analysis in a series of motion that ultimately resulted in the exclusion of the plaintiff expert and led to summary judgment dismissals.

Our intellectual property practice advised on multiple high stak litigation matters covering a broad range of industries. For example, a crra expert testified at trial and a patent friendship matter between two major suppliers of offshore wind turbines. The jury returned to verdict, awarding our client a $3 thousand per megawatt royalty based on the crra experts testimony.

The case presented unique economic issues, given the early stage nature of the wind farm projects at issue in this case, requiring CRA to carefully craft damage theory that allowed the jury to determine the appropriate reasonable royalty rate for turbines that the defendant plans to install in the future. The IP practice also continued its work in international trade commission investigations and testified that trial on the issues of commercial success and domestic industry in an itc investigation involving health monitoring technology used in smart watches.

Within our labor emploment practice. Cra continues to assist clients and responding to charges filed by federal agencies, including the eoc, and state agencies such as the California Department of fair employment and housing. Our work over this period was fundamental to the initial phase of data collection, early assessment and data production, as well as later phases of expert testimony and court ordered monitoring. In additionction, the practice continues to provide proactive employment audits that benchmark workforce compposition and hiring decisions, along with compensation analysis to support clients diversity, equity and inclusion efforts. These audits are primarily focus on the? U's operations of our clients, who span industri'es ranging from automotive, food and pharmaceutical manufacturing to legal and financial services.

The practice continues to benefit from the contributions of our new colleagues who join CRA by way of our acquisition of welsh consulting. Integration efforts are ongoing and tracking to planthe labour employment practice has seen an increase in cross office staff utilization and is expanding joint marketing efforts corresponding with the return to in person conference participations, such as the national industry lia's on group conference that took place in Boston last week and an upcoming American bar Association event and Washington D C. we expect to see continued benefits from these efforts in the quarters ahead. Within our management consulting offering, the energy practice remained engaged with a number of major civil litigation cases and regulatory proceedings. This including providing written testimony to the Federal energy regulatory commission on behalf of a North Dakota cooperative utility that was seeking to block the cost of a large unrelated coal gasification plan from being included in the rates charged to it under a FERC regulated wholesale contract.

In addition, serra' energy practice increasingly has been asked by its gas and electric utility clients to develop decarbonization plans for numerous utilities. serras energy practice as evaluated alternative pathways to reaching net zero goals, such as through energy efficiency, the retirement of fossil plants, electrification and the usage of renewable natural gasthe team also often helps with the stakeholder communication process and in regulatory proceedings. Finally, the practice continueed to work with the energy investment community and expanded services into water as we assisted a European investor with the transformation of our recently acquired water system. I'm grateful to all of my colleagues for their hard work in helping our clients address their most important challenges.

As our second quarter results demonstrate, our portfolio service- a portfolio services- remains highly valued by our clients. Moreover, we are well positioned to maintain the momentum in the business as we continue to replenish our sales pipeline. In the second quarter, project leadflow grew by 3% year-over-year.

Through the first two quarters of fiscal 2020 2, on a constant currency basis relative to fiscal 2021 , we generated total revenue of $301.5 million and non-GAAP EBITDA of 39.1 million, achieving a margin of 13%. Reflecting the continued strength of our business, we are reaffirming our revenue guidance and raising our EBITDA guidancefor full year of fiscal 2020 two on a constant currency basis relative to fiscal 2021 . We expect revenue in the range of 585 to $605 million and non-GAAP EBITDA margin in the range of 11.3 to 12%.

This new profit guidance compares with the prior non-GAAP EBITDA margin range of 10.8 to 12%. With that I'll turn the call over to Chad and then Dan for additional comments Chad.

Thanks Paul. Hello everyone. I want to update you on our capital deployment initiatives during the quarter.

crea continues to generate strong cash flows. For the trailing 12 months through the second quarter of fiscal 2022, crea's adjusted net cash flows from operations were $65.4 million.

As Dan will describe in greater detail. We concluded the quarter with $15.6 million of cash and cash equivalents and $7 million of borrowings under or revolving credit facility, resulting in a net debt position of $54.4 million. The outstanding borrowings were primarily to fund bonus payments and other working capital needs.

Consistent with our experience in prior years, we expect to spend in the remainder of the year reducing our outstanding borrowings and aim to finish the year with zero outstanding borumes.

In addition to the normal bonus cycle, the second quarter of 2022 also saw cash outlays for talent investments of $13.3 million net of forgivable loan repayments.

We also spent $7 thousand on capital expenditures, bring the year-to-date total to $2.1 million. For fiscal 2022, we expect to spend approximately $5 million on capital expenditures.

We returned $2 million of capital to our shareholders during the second quarter, consisting of $2.3 million of dividend payments and $17.7 million for share repurchases of approximately 211 thousand shares at an average price of $84 per share. We have approximately $27.9 million available under our share repurchase program.

With that, I will turn the call over to Dan for a few final comments Dan.

Thanks Chad. As a reminder, more expansive commentary on our financial results is available in the Investor Relations section of our website under prepared CFO remarks.

Before we get to questions, let me provide a few additional metrics related to our performance in the second quarter of fiscal 2020 -two.

In terms of consultant headcount, we ended the quarter at 863, which consisted of 145 officers, 475 other senior staff in 243 junior staff.

This represents a 4% increase compared with the 833 consultant headcount reported at the end of Q2. Fiscal 2021 .

The second quarter has historically been a seasonal low point for crra's headcount as some junior staff todepart before our new college recruits arrive.

By the end of the year we expect consultant headcount to be up 7% to 8% year-over-year.

non-GAAP selling general and administrative expenses, excluding the 4% attributable to commissions to nonemployee experts, was 15% of revenue for the second quarter of fiscal 2022, compared with 13% a year ago. This quarter's ratio was impacted by an increase in travel and entertainment expenses, higher labor costs and higher other operating expenses, including professional services fees.

The effective tax rate for the second quarter of fiscal 2022 on a non-GAAP basis was 28%, compared with two y-five 1% on a non-GAAP basis for the second quarter of fiscal 2021 . The higher rate in the second quarter of two thousand andtwenty-two was largely attributable to a lower benefit arising from the accounting for stock-based compensation.

Turning to the balance sheet, DSO at the end of the second quarter was 117 days, compared with 99 days at the end of the first quarter of fiscal 2022. DSO in the second quarter consisted of 76 days of build and 41 days of unbbuild. Dso typically follows a seasonal pattern, with increases in the second and third fiscal quarters.

The quality of our receivables remain strong, as we have not seen an increase in write-offs associated with those receivables.

We concluded the second quarter of fiscal 2022 with $15.6 million in cash and cash equivalents and a further $100.6 million.

Of available capacity on our line of credit for total liquidity of $116.2 million.

That concludes our prepared remarks. We will now open the call for questions. Rob, Please go ahead. Thank you, at this time we'll be conducting a question-and-answer session. If you like to ask a question, please press star one on your telephone key pad.

A confirmation tell indicate your line is in the question queue. You may press start two if you like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before press the stotor.

one moment. Please let we pull for questions.

Our first question comes from Andrew Nicholas with William Blair. Please proceed with your question.

Now good morning, thanks because my questions and appreciate all the color with the prepared remarks. Just want to H and on guidance. In my first question specifically it relates to margins: really, really good margin performance in the first half of the year, strong utilization like want one component of that. I'm just wondering if you could walk us through some of the puts and takes for margins in the back half of the year looks like the implied margin level is a decent bit below the first half. So I'm just wondering what's what's baked in is? Is a higher labor costs? Is it still additional tany and kind of post COVID-19 return of certain expenses? Is it conservatves? I'm just any additional color that you could provide on how margins are going to progress through the remainder of this year.

Sure good morning, Andrew. You know, just make your question into our directive and it's pretty close to the answer on it provide. So the pattern through the first six months of the year is pretty much according to plan. As a reminder, we were still in a work from home environment during Q1 and thus enjoyed what I would call unusually low's G N a related expenses. We return to the office and also return to visiting our clients and attending various other marketing functions during Q2, unless you saw the rise of's N a to 15%. Again, pretty much according to what we anticipated in the second half of the year. There are several factors that will influence, are even a margin, one being we hopefully expect to continue to be in the office visiting our clients and seeking marketing opportunities in the months and quarters ahead. So I would expect's N a to stay pretty consistent with what we have experience during Q2. Secondly, we are welcoming a lot of new colleagues. During Q3 and even into Q4 were pretty excited about that. But as these new colleagues get integrated there is a ramp associated with their integration that you know comes in the form of higher costs with left offsetting revenue. So that's factor number that I would ask people to taking acsideration. And last but not least, is Q2, I mean the second half of 2020 2, like other second half of the year, are usually more heavily weited by vacation time, thus again having more cost hitting our books than the offsetting revenue of those individuals time.

That's, that's all helpful, Thank you. And then you mentioned your your expectations for 7- 8% had count growth year-over year. Obviously a healthy number is that he kind of walk through the, the moving pieces within that number. Is attrition more or less in line with your expectations year to date. How comfortable are you with kind of your ability to add talent in this environment? Any any updatea on that and kind of the recruiting environment broadly would be helpful. Thank you.

Sure So when I talk about headcount additions or expectations for the year, we try to only focus on those hires that are already committed and have a scheduled start date. So I'm trying to take out as much uncertainty in that statement is possible. But one piece of uncertainty that I CAn't really control is the fact that people will aattrip as we get into Q3, into Q4, and at the further you get in to the second half of the year, the more difficult it is to place that headcount upon having attrition. So we build in an expectation for certain attrition level but if all of a sudden we see a spike in attrition, say in November December , it is typically difficult to offset that in the same periods of time. So that's those go into our expectation of headcount growth of 7- 8%. Well, we have experienced to date is slightly higher then what I would call pre pandemic levels of attrition and you know, do I expect that to continue? Usually you end up reverting back to a mean. But given all the uncertainties in our macro economy, with rising inflation, labor market still being tight, we are just trying to manage that as effectively as we can.

Great you and, if you don't mind me, weason one more end inenear on the EA environment. I think in your prepared remarks you mentioned a few statistics. I think one of them was that deals over ten billion.

Were about 5% down year-over-year in the first half. Are you expecting kind of similar type of year-over-year declines in the second half, or being a bit more conservative in that part of the market? Just wondering what's baked in your expectationss again.

Sure what's baked into today expectations is really matters that we see right now in our pipeline again. Given the uncertainty in the overall market, I Tri not to get too far ahead in terms of my expectations. What I can say is Q1 in Q2 in terms of merger related revenue for and it trust and competition economics practice are two of the best quarters of practice has ever experienced in the M a marketplace. So if we do see a slowdown it's typically not in the form of a cliff but more of a gradual decline. The other thing that bolsters my confidence is that lead slow to date has been pretty solid. We haven't seen a decline on both sides of the equation for the anit trust competition practice in terms of revenue related to and it trust litigation type matters and revenue related to M M a transaction assistance.

That's helpful, Thank you.

Thank you, Andrew.

Our next question is from Kevin thankanking with Barrington research. Please proceed with your question.

Any good morning. Paul chend donean.

I wantedis it to follow up on the discussion about the non-GAAP EBITDA margin guidance.

What I guess trending better than you expected at the beginning of the year. That enabled you to increase that margin guidance range.

First of all, good morning, Kevin. I guess the first is that revenue is going pretty much according to plan. Thus, farars. So you know, and when we talked about an EBIT, a margin, clearly revenues a big component of that. With respect to the costs, we've been largely able to mitigate the labor inflation costs that we talked about during the Q4 call, that we talked about during the Q1 call. So I haven't seen a compression of our margin on either the gross margin level or the operating income level. So not seeing that compression gives me a little more confidence about the quarters ahead. And lastly, during the Q1 call we talked about an expectation that's G N a relative to the Q1 Q1's G N a percentage of fourteen point 4% would be roughly 50 to one hundred basis points higher. We came in at 15%. So again, we've been able to run the operations pretty much according to plan. It's those combination of factors that give us confidence in the trajectory of our profitability in the months ahead.

Okay great and you mentioned there your ability to mitigate cost inflation. Maybe just talk about that a little bit more and.

Your ability to pass on cost inflation and.

The acceptance on the client's part or for what I assume, or some price increases.

Sure I wish the three executive officers talking with you today take all the credit, but we really CAn't. Any time you talk about passing of costs to your clients, it begins with the clients perception and value of the services being rendered. All the credit goes to my colleagues for continuing to improve the quality and the value of the services being provided to our clients, thus the receptivity of our clients of the higher rates. So those two things are just so closely tied. It has to do with the portfolio that we have compiled through the years in terms of our practice portfolio and just the continued excellence of my consultant colleagues.

Okay great, just talking about the trends in the legal and regulatory market. You mentioned both case highilings and.

Court judgment: styeight percent is there.

Anything in terms of a market trend that can be right into that, or could it just be kind of normal fluctuation? What are you seeing in terms of any meaningful trends in the litigation market and how that might tie to those, those figures you cited?

It's a good question and unfortunately I don't have as.

As strong an answer for you and the reason that I'm struggling with that is just the volatility that we've seen in the marketplace quarter-to-quarter has made it difficult to provide a real outlook as to the lab as to.

Trends in the overall litigation market. What we try to look at always is: are we getting our fair share of the new matters coming to market? I believe we are. Would continue to see growth across the portfolio at a faster rate than what we're observing in terms of just aggregate case filings. But we've just seen volatility for a number of different reasons. We saw a surge in case filings, in case decisions, as the world started to merge from the pandemic. We saw it recess again as we all went back to our homes and left offices. So to say what the trend is.

We'll wait to see in the next quarter, but I like the relative performance of our portfolio to the trends that we are observing.

ok understood.

And you mentioned again the expected headcount growth of 7% to 8%.

By the end of the year.

Typically I think about that as an indicator of the demand you're seeing in the level of hiring you're making to meet that demand and that would represent a pickup relative to the headcount growth of 4%. In 2021. So.

Can you tie that projected headcount growth to what you're seeing in the pipeline and just the overall demand environment for your services?

We do the best we can to tie both the supply of our labor and the demand for our services. one measure of our ability to provide that match is the consistency of our utilization, quarter after quarter year, year after year. So I think we've done a pretty good job at that. I was reading one article and they had a phrase that I think is really quite relevant to how you set your expectations: that whether we are in a recession or not, we clearly are seeing a slowing down of our economy. But the article continue to say is when you have a recession, you also have a rebound or emergence of the economy. So it just a reminder that you always have to play the long game. Our goal is to maximize the long term value per share, So I am not going to.

Jeopardize our long-term viability for short, short-term profitability, and thus we continue to hire according to the demand environment that we're seeing and the historical trends that we've enjoyed in the marketplace.

Okay and lastly you mentioned there.

Economic slowdown. Are you seeing anything?

inyour pipeline or any of your practices in particular. That would indicate that an economic slowdown is impacting client demand in any fashion at this point.

Not prominently no, but it's one of these things that you can' avoid reading an article about: the uncertainty about the trajectory of the overall economy. So we try to maintain is much flexibility as we can. Flexibility comes from running an efficient operations, which we do, and flexibility also comes from the cash generation of the business. So right now we have that financial flexibility, operating flexibility to pursue all avenues of growth and all positive M PV projects for the firm. So we're not at the Stage yet where we see our clients retracting. That is causing us to reassess.

Our capital allocation decisions.

Okay Thank you for taking my questions and congratulations on the solid results. Thank you, Kevin.

Our next question comes from Mark ritic with sidoi. Please proceed with your question.

Good your morning morning, Mark.

So so many topics that have already been sort of covered and some, like my favorite questions have already been jumped on. So one of the things I did want to touch on is: every once in a while, we do tend to see- whether it's sort of emerging themes or emerging practice areas that maybe a little bit below the the radaror. Are there any types of examples like that that you're seeing, that that have maybe picked up during the course of year, that maybe we don't get to talk about as to much? Or whether it's something around the regulatory or crypto currency like or, or anything like that, that that, as you know, it is the kind of thing that might be more of a leading growth driver in the quarter had.

I CAn't point to one of the factors that have emerged in the last one or two quarters. A lot of the trends that we are enjoying now have been in play for the last several years. As an example, we tried to highlight some of the demand arising from diversity equity, inclusion efforts or, on ESG, efforts that both our labor and employment practice are enjoying and our energy practice is enjoying. So that's an example of some trends that our manifesting itself: the more demand, but still, relative to the aggregate revenue that we're producing in the quarter, it's still relatively small. So the performance is still driven what with what I would call base demand generators right now.

Okay greatater, then I wanted to circle back to the commentary around the legal activity and maybe some of the things that are taking place there. Are you getting any sense that maybe your, the law firms that you work with, are making sort of any changes as to sort of what they're looking for, or is it too early to sort of see any any, any meaningful differences and how they're handling what they they're seeing as far as the ultimate throughput through the courts?

Yes we haven't seen the shift in terms of demand coming out from the law firms. The Communications that we've enjoyed with them again is more of a continuation of the trends that we've seen over the last several quarters.

Okay great. And then the last thing I was I was sort of curious about with the, the hiring pickup that you have in mind already for the remainder of the year, which is certainly encouraging and certainly indicates plans to continue to invest going forward- are thinking about whether or not there are any particular practice areas that are will tougher to recruit for than than others, and I'm thinking more along lines to sort of the- the younger recruits coming in as opposed to the seasoned folks as theres, if there are any shortages out there that that we should be thinking about.

It's been really challenging recruiting at all different levels. But I guess the good news is that it's always challenging to recruited C a because if you truly want to hire the best and brightest, which is always our aspiration at C a, there's going to be a lot of competition for that labor. Whether they're from our University hires for undergraduate talent or whether they're in the secondary market for more seasoned professionals, there is lots of competition. So you always have to be economically viable to those individuals and you have to be a home that they can see themselves flourishing in. So I wouldn't say I'm seeing an increase in demand in any one sector of our recruiting. Yes, we've at seeing higher attrition rates than we have in the past, but to date we are largely able to offset that with new hires.

It is very encouraging. Thank you very much. Thank you, Mark.

We have reached the end of the question-and-answer session. I would now like to turn the call back over to Paul maley for closing comments.

Again thanks to everyone for joining us today. We appreciate your time and your interest in crea. We will be participating in virtual meetings with investors in the coming months and we look forward to updating you on our progress on our third quarter call. With that, that concludes today's call. Be well everyone. Thank you.

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