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Edited Transcript of CRAI earnings conference call or presentation 2-May-19 2:00pm GMT

Q1 2019 CRA International Inc Earnings Call

Boston May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of CRA International Inc earnings conference call or presentation Thursday, May 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad Holmes

CRA International, Inc. - Executive VP, CFO & Treasurer

* Paul A. Maleh

CRA International, Inc. - President, CEO & Director

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Conference Call Participants

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* Marc Frye Riddick

Sidoti & Company, LLC - Business and Consumer Services Analyst

* Timothy John McHugh

William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to Charles River Associates' First Quarter Fiscal 2019 Conference Call. Today's call is being recorded. Today's release and prepared remarks from CRA's Chief Financial Officer are posted on the Investor Relations section of CRA's website at crai.com.

With us today are CRA's President and Chief Executive officer, Paul Maleh; and Chief Financial Officer, Chad Holmes.

At this time, I'd like to turn the call over to Mr. Holmes for opening remarks. Please go ahead, sir.

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Chad Holmes, CRA International, Inc. - Executive VP, CFO & Treasurer [2]

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Thank you, Rob. I'd like to remind everyone that the statements made during this conference call including guidance on future revenue and non-GAAP EBITDA margin for fiscal 2019 and any other statements concerning the future business, operating results or financial condition of CRA including those 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 and actual performance and results may differ materially from those expressed or implied in these statements due to many important factors. Additional information regarding these factors is included in today's release and in CRA's periodic reports filed with the SEC including our 10-K for the year ended December 29, 2018. CRA 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 on this call and certain measures presented on a constant currency basis. Everyone is encouraged to refer to today's release for a reconciliation 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.

Let me now turn it over to Paul for his report. Paul?

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Paul A. Maleh, CRA International, Inc. - President, CEO & Director [3]

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Thanks, Chad, and good morning, everyone. Thank you for joining us today. I'm pleased to report the highest first quarter revenue in CRA's history. Not only this Q1 build on the highest annual revenue of 2018, but it is a continuation of the strength and consistency demonstrated over the past 5 years. Q1's year-over-year growth rate of 6.4% is consistent with our long-term growth targets and the continuation of our strong revenue performance.

We completed the first quarter of fiscal 2019 with strong performance across our portfolio of practices once again demonstrating the continued dedication and hard work of our entire team. We delivered 75% company-wide utilization, while headcount increased by 6.2%, translating into 7.9% year-over-year revenue growth on a constant currency basis. On the bottom line, we delivered non-GAAP net income of $4.5 million or $0.54 per diluted share. These results were negatively affected by a foreign currency loss, which reduced our non-GAAP net income and earnings per diluted share by approximately $600,000 and $0.07 respectively. Chad will discuss this in greater detail in a few minutes.

Looking more closely at the first quarter, we exhibited strength across our geographic footprint. Our North American operations grew 6% and European operations led by the Antitrust & Competition Economics practice grew 7.9% year-over-year. We continued to enjoy broad-based contributions across our service portfolio with particularly strong performance in our Auctions & Competitive Bidding, Finance, Financial Economics, Forensic Services, Intellectual Property and Life Sciences practices.

As these results demonstrate, we continue to see strong demand for our services. First quarter lead flow and new project originations were up more than 5% and 10%, respectively, year-over-year. In fact, the past 6 months represents the strongest such period of activity in CRA's history. While the timing and size of these new projects cannot be determined in advance, CRA's business fundamental and strategy position the firm for continued success.

Within legal and regulatory, our Forensic Services practice was certified under International Organization for Standardization for information security management earlier in Q1. To our knowledge, CRA is the first forensic services practice in the nation to achieve this certification and it underscores our commitment to complying with exacting information security standards.

In the health care sector, the Forensic Services practice was appointed by the U.S. Department of Health and Human Services for specific right to serve as an independent monitor for one of the nation's largest nonprofit health care provider networks, stemming from its multiple potential violations of the Health Insurance Portability and Accountability Act.

In the cyber incident response space, the practice helped numerous clients respond to malicious cyberattacks determine the sources of intrusion, provide threat intelligence, assist with the remediation efforts and prepare responses to the appropriate data protection authorities and regulators.

In our Finance practice, the team assisted the Cigna versus Anthem merger litigation in Delaware Chancery Court. CRA's Senior Consultant, Richard Ruback provided expert testimony on damages, and CRA Vice President, Monica Noether provided expert testimony on antitrust issues. In addition, the practice continued to work on matters alleging spoofing and other types of market manipulation brought by government agencies and civil plaintiffs. CRA clients in these matter include corporations, financial institutions and traders.

Our Intellectual Property practice continues to provide damages and valuation expertise for all types of IP assets. The practice has experienced an increase in trade secret work across a broad range of industries as more cases are being filed under the Defend Trade Secrets Act, which provides a federal cause of action for trade-secret misappropriation.

During Q1, our Auctions & Competitive Bidding practice continued to support our global dairy trade, which surpassed $24 billion in dairy products transacted on the platform since its inception. Among other services it provides, the practice also designs and manages auction and RFP processes for regulated utilities and utility commissions as well as other clients. In Q1, the practice conducted 9 auctions in RFP processes for clients such as FirstEnergy Ohio and Pennsylvania Utilities, Duke Energy Ohio, Dayton Power and Light Company and Duquesne Light Company.

Our Life Sciences practice's Q1 performance was boosted by projects across both our legal and regulatory and management consulting services offerings. In legal and regulatory, the team has been retained on a large project dealing with the reasonableness of commercialization efforts for a global product launch. The work included an assessment of the global commercialization efforts in consideration of the damage model. And in another matter, CRA litigation consultants developed theoretical and empirical models to challenge class certification in a patent settlement, antitrust dispute involving an attention deficit hyperactivity disorder drug. The models were a first step in the litigation that will include evaluation of antitrust liability, economic product market and damage estimations for a joint defense group that includes brand and generic manufacturers.

In management consulting, CRA's Life Science consultants helped the biotech client design a patent-centric advanced analytics data warehouse in 3 key therapeutic areas, which integrate data and insights across all stakeholders in the pharmaceutical industry. It will evolve our clients' capabilities to support their patient value model vision and strategy using agile approaches and collaboration tools, such as MS Teams, Miro, Flock, Trello. CRA paired the supporting analytic data warehouse design with the development of end user centered and flexible business intelligent dashboards and click sets.

Ultimately, the integration of data and advance analytics, user experience and agile platform development will enhance the clients' return on information and enable effective response to dramatic shifts in the U.S. health care market.

And now I'll turn the call over to Chad for a few additional comments.

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Chad Holmes, CRA International, Inc. - Executive VP, CFO & Treasurer [4]

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Thanks, Paul. As a reminder, more expansive commentary on our financial results is available on the Investor Relations section of our website under prepared CFO remarks. Before we get to your questions, let me provide a few additional metrics related to our performance in the first quarter of fiscal 2019.

In terms of headcount, we ended the quarter with 687 consulting staff, which consisted of 123 officers, 387 other senior staff and 177 junior staff. This is a net increase of 40 consultants or 6.2% growth compared with 647 total headcount we reported at the end of the first quarter of fiscal 2018.

Non-GAAP selling, general and administrative expenses as a percentage of revenue, excluding the 3.2% attributable to commissions to nonemployee experts was 18.3% for the first quarter of fiscal 2019 compared with 18.2% a year ago. As Paul mentioned, we incurred approximately $750,000 foreign currency loss in the first quarter resulting from the revaluation and realized gains and losses on working capital balances. These losses are included in interest and other expense on our consolidated statement of operations and arose mainly from fluctuations in the euro and pound exchange rates, which were affected by the ongoing political uncertainty surrounding Brexit.

The effective tax rate for the first quarter on a non-GAAP basis was 23.4% compared with 17.4% on a non-GAAP basis for the first quarter of 2018. The higher rate in the first quarter of 2019 was primarily attributable to a smaller benefit arising from the accounting for stock-based compensation in the current quarter relative to last year.

Turning to the balance sheet. DSO at the end of the first quarter was 111 days compared with 104 days at the end of the fourth quarter of fiscal 2018. DSO in the first quarter consisted of 72 days of billed and 39 days of unbilled compared with 74 days of billed and 30 days of unbilled in the fourth quarter of fiscal 2018.

We concluded the first quarter of fiscal 2019 with $15 million in cash and cash equivalents with the majority residing internationally. As a result, in the first quarter, we borrowed on our line of credit in the amount of $39 million. The first quarter is typically a period of lower cash levels as it coincides with the timing of a significant portion of our annual bonus outlays.

Turning to our capital allocation strategy. We remain committed to maximizing long-term value per share by reinvesting in the business and returning capital through both share repurchases and quarterly dividends. During the first quarter of 2019, we returned $6 million of capital to our shareholders, consisting of $1.7 million of dividend payments and $4.3 million for share repurchases of approximately 87,000 shares at an average price of $50.25.

Finally, we announced earlier today that our Board of Directors declared a quarterly cash dividend of $0.20 per common share payable on June 14, 2019, to shareholders of record as of May 28, 2019.

That concludes my prepared remarks. Rob, we would now like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Tim McHugh with William Blair.

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [2]

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Paul, I wonder if you could just elaborate on I think you made the comment that last 6 months are kind of the best new business period. I guess, one, is that on an absolute basis? Or I guess, I'm trying to think of a growth rate I guess because you, obviously, have been growing. So I guess the bigger you get, each new period should be the biggest. And then trying to translate you not to give us the numbers about the kind of 5% to 10% growth in the lead flow in new projects. How those growth rate of 5% to 10% compare to what you've been seeing 1 year ago or 2 years ago in terms of just the growth rate, not the absolute level?

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Paul A. Maleh, CRA International, Inc. - President, CEO & Director [3]

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Sure. Tim, I'm not trying to be nice to you in any way, Tim, but that's a good question with it. So I think the foundation of the question is that CRA has been achieving all-time highs basically on a quarterly basis. So 2018 was the best year this firm has ever experienced and Q1 has been more of the same. So from that perspective, I guess, it shouldn't be a surprise that the lead flow both in project leads and new project originations were also at all-time highs as those tend to be precursors to the actual revenue. So my comment is that these last 6 months, on an aggregate basis are higher than any other past 6 months we have achieved on both lead flow and new project originations. So I wasn't just making a year-over-year comparison, but more of an absolute statement.

With respect to what that entails for future revenue, typically, lead flow and new project originations are correlated and oftentimes strongly correlated with future revenue. The difficulty there, Tim, is it's hard for me and hard for the firm to exactly know the timing of that new revenue. But if we see lead flow continue at the rates we're observing now, you should again see a high correlation between the rates of change of those and our rate of change of revenue, all things being equal there.

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [4]

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Okay. And then I guess maybe just to ask on cash flow. I guess, I understand that this is obviously a seasonally weak period, I guess. But if I look at a trailing 12-month free cash flow number or even kind of trailing 24-month, it's a little lower than I thought. Is there anything happening? And I missed the DSO number you gave, Chad. But I guess just as we think about cash conversion, is there anything happening as we think about that going forward here that we need to be aware of I guess?

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Chad Holmes, CRA International, Inc. - Executive VP, CFO & Treasurer [5]

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Sure. When I think about the cash-generating capacity of the business although we start with EBITDA, I will look at the forgivable loan issuances and expense that occurred during a quarter. And if you actually look at these 2 measures and compare them to year ago measures, we're actually generating more cash flow in Q1 of '19 than we were in Q1 of '18. So there's nothing systemic happening within the firm to say that it is less profitable relative to the same time a year ago. Our DSOs are a little higher than we would like around at 111. We need to get busy on that. Our goal is still to try to have DSOs under 100 days. So there'll be some additional cash generation from those collections, but we really haven't seen any kind of market shift in the profit-generating capacity of this firm.

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [6]

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And then last question just, is bit of a high-level question always, but it's relevant I think in this type of economy, which is the competition for talent and I guess both junior talent, but I guess, the cost necessary to recruit senior talent out of competitors in terms of the transfer kind of market if you will.

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Chad Holmes, CRA International, Inc. - Executive VP, CFO & Treasurer [7]

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Yes. I think CRA has and continues to be an attractive destination for top talent. The one thing is with the recruitment of top talent from competitors, often times it does require a capital payment for those individuals. And it also requires a little bit of patience as they transition and ramp to more of their historical levels. So when we recruit top talent is always with that value lens on how we do it, and I think we've done a pretty good job, history shows, of generating a positive value on these recruitment efforts, and that's what we're striving to do with every hire.

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Operator [8]

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Our next question comes from Marc Riddick with Sidoti.

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Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [9]

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Wanted to touch on the new hires a little bit. It seems as though the concentration over the last few quarters has been in the senior levels. And I was wondering if you could shed a little light on that. It certainly seems as though the opportunities out in front of you and the lead flow would talk to that, but I was wondering if you could shed a little light on maybe some areas of -- if there was any particular of focus within the new senior hires and what we might be looking at as far as potential headcount changes over the next couple of quarters.

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Paul A. Maleh, CRA International, Inc. - President, CEO & Director [10]

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Sure. Thanks, Marc. With respect to the new senior hires, the one thing I think this firm has done really well for the last number of years has been able to grow the top line and also grow profits at a commensurate rate. But as I commented to Tim, oftentimes, senior hires require a little bit of an upfront capital investment in which we'll take multiple periods to recoup. So you always need to keep that in mind, the activity during Q1 is no different than the activity that we've done in prior quarters and years on that. So it will be active. We try to manage the hiring of consulting staff to not get too far ahead of demand. So I think if you also have gone back through our history, and quite frankly, Q1 of 2019 is no different. You'll see revenue growth rates to be roughly commensurate with that headcount growth rates. And you see that consistency again in this quarter, so you should expect to see headcount growth at or slightly above the revenue guidance we have provided for 2019. If we see revenue materialize little more quickly, we will be more active in the secondary market.

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Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [11]

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Okay. Great. That's very helpful. And then wanted to switch gears on the growth you're seeing in -- actually instead of going in that direction, I was wondering if you could sort of give an update we talked in the past about a potential acquisition to what the pipeline and valuations look like. I was wondering if you could touch on that and maybe what you're seeing there if they happen to be any more attractive looking internationally than they are here in the States.

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Paul A. Maleh, CRA International, Inc. - President, CEO & Director [12]

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I see no real difference in the level of attractiveness of recruiting opportunities, whether they're individual group hires or acquisitions between here domestically and internationally. So a lot of the hiring that has been done particularly over the last 12 months have been focused on -- in the U.S., but that by no means says that we don't have an active pipeline internationally with that. So I'm really happy with our portfolio. The consistency of this portfolio in terms of the growth, the profit contributions as quite frankly, I know I'm biased, has been quite remarkable over the past 5 years. So I am willing to invest in each of our practices and each of our geographies. They have demonstrated the ability to create value for our shareholders and thus warrant investments as opportunities arise.

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Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [13]

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And then one other things that you -- and thanks for giving us much detail as you did as to some of the practice areas and what you're seeing there. I was wondering if you could -- are there a couple practice areas that may be -- we don't talk about as much publicly that, that you think of growing opportunities that might be bigger contributors that they're kind of on the horizon but maybe you're kind of under the radar that, that would be good to call attention to?

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Paul A. Maleh, CRA International, Inc. - President, CEO & Director [14]

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What I'm really excited about Q1 of 2019 is you've heard us highlight some practices that may be have been unable to push themselves to the top given the exemplary performance of some of our main state practices, so you heard me talk about my -- our intellectual property practice. You heard me talk about our Auctions & Competitive Bidding practice. And that's really -- you require that kind of broad-based contribution to achieve the consistency that we've done. Practices like our Life Sciences practice, our Forensic Services practice have enjoyed -- our Energy practice have enjoyed really exceptional growth over the past number of years, and we are trying to be as creative as possible to try to continue to fund of those leaders in their pursuit for providing even broader client services.

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Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [15]

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Okay. Then last one for me, I was wondering if you're see any -- are there ongoing lingering effects of the government shutdown from earlier this year and any of the practices that are still going or are we pretty much completely past that at this point?

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Paul A. Maleh, CRA International, Inc. - President, CEO & Director [16]

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I don't know whether I would say there are any ongoing lingering effects. You clearly saw a little bit of softness in the month of January of this calendar year. Now I just put an asterisk on that because January is typically a slower month in our calendar year as people like that the holidays and get ramped up again. So January was a little softer, but I'm pretty pleased with the way the company is performing exiting that month. And I don't see any lingering weaknesses there in terms of our demand profile.

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Operator [17]

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At this time, we've reached the end of the question-and-answer session. I would now like to turn the conference back over to Mr. Maleh for any closing or additional remarks.

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Paul A. Maleh, CRA International, Inc. - President, CEO & Director [18]

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Again. Thanks to everyone for joining us today. Before we conclude, I want to pause for a moment to reflect on the passage of someone very special to this organization. Earlier this week, Frank Fisher passed away at the age of 84. Frank was a towering force in the field of antitrust economics, microeconomics and industrial organization and his accomplishments are many. He received a PhD in economics from Harvard in 1960 and embarked on a teaching career at MIT, influencing generations of students. He received many accolades and awards including the 1973 John Bates Clark Medal. CRA was fortunate to have Frank as a colleague since 1967. Frank served as a Senior Consultant and member of our board for 40 years, including a 10-year as Chairman and Vice Chairman. Frank has left an indelible mark on CRA with his intellect, his collegiality and compassion, and we will miss him dearly.

We appreciate your time and interest in CRA. We'll be meeting with investors in the coming months, and we look forward to updating you on our progress on our second quarter call. This concludes today's call. Thank you, everyone.

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Operator [19]

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