Good day, everyone, and welcome to Charles River Associates Second 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 would like to turn the call over to Mr. Holmes for opening remarks. Please go ahead, sir..

Thank you, Brenda.

I'd like to remind everyone that 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, including our 10-K for the year ended December 29, 2018, filed with the SEC. 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 and related CFO remarks for reconciliations of these non-GAAP financial measures to the GAAP comparable measures and descriptions of the calculations of EBITDA and measures presented on a constant-currency basis. Let me now turn it over to Paul for his report.

Paul?.

Thanks, Chad, and good morning, everyone. Thank you for joining us today. We reported strong first-half performance and are encouraged by trends in lead flow and new project originations. Our second quarter continued the record-setting pace established in fiscal 2018 and in the first quarter of 2019.

Companywide utilization of 77% produced record Q2 revenues of $110.6 million. On a constant-currency basis, revenues would have increased by 5.9% to $111.8 million. Notably, our growth was entirely organic. We experienced strong contributions from both the legal and regulatory and management consulting sides of our business.

Q2 also continues the trend of growing profits at a faster rate than revenues. Non-GAAP EBITDA and non-GAAP earnings per diluted share increased by 8.7% and 9% respectively year-over-year.

Our strong profitability has afforded CRA the opportunity to both invest in the business and return capital to shareholders as we focus on maximizing long-term value per share.

To add further clarity to our capital allocation strategy and to address frequent inquiries from investors regarding the company's cash-generating capacity, we are introducing a non-GAAP metric, adjusted net cash provided by operating activities.

This metric begins with net cash provided by operating activities from our statement of cash flows and adds back net forgivable loan issuances, which are predominantly used for talent acquisitions and talent maintenance.

Adjusted net cash provided by operating activities represents a discretionary pool of capital used to fund items such as talent acquisitions, office expansions and redistribution to shareholders.

Given the seasonality of annual cash bonus payments, we have computed adjusted net cash provided by operating activities on both a quarterly and annual basis. For the 12 months ended in the second quarter of 2019, CRA's adjusted net cash provided by operating activities increased 16.4% year-over-year to $53.9 million.

For fiscal 2018, adjusted net cash provided by operating activities increased 14.4% year over year to $63.4 million. As many of you will recall, CRA pays its annual cash bonuses in Q1 and Q2 for performance related to the prior year.

Consequently, our adjusted net cash provided by operating activities is at a seasonally low level during Q1 and Q2 and provide and build during the second half of the year. Now turning to a few practice highlights. Our forensic services practice continues to experience strong growth as it advises clients in both civil and criminal proceedings.

For example, on behalf of a multinational company, the practice investigated allegations of fraud and misconduct related to its recently departed CEO.

On behalf of a manufacturing joint venture, the team investigated and expects to testify in the International Court of Arbitration of the International Chamber of Commerce as to whether one joint venture partner was systematically overcharged by the other.

In the cyber incident response space, the forensic services practice has helped numerous corporate clients and units of governments respond to ransomware attacks and business email compromise incidents involving both regulated data and the theft of trade secrets and confidential strategic information.

In our financial economics practice, the team assisted in fair lending regulatory reviews of mortgages and consumer-lending cases. More specifically, the practice helped with a mortgage loan servicing case in which the defendant mortgage servicer was accused of failing to comply with the requirements of the Real Estate Settlement Procedures Act.

Before I discuss Q2 activity related to our life sciences practice, I want to pause to acknowledge the tremendous performance in growth of this practice over the past several years.

At the end of 2016, CRA's life sciences practice consisted of approximately 70 consultants, principally residing and focused on a mixture of litigation and advisory matters to clients in the pharmaceutical, biotech and medical devices spaces.

Following the acquisition of C1 Consulting in the first quarter of 2017 and the subsequent hiring of senior practitioners across Europe, during 2017 and 2018, the life sciences practice now bodes more than 200 consultants.

Building on its legacy roots, the practice offers services across litigation and policy matters and helps clients address strategic challenges related to pricing and marketing access, portfolio optimization, advanced data analytics, customer insights and R&D performance management.

I expect the practice to deliver continued growth and contributions in the quarters and years ahead, but I want to express my gratitude for all of their accomplishments. Returning to the second quarter.

In collaboration with the intellectual property and finance practices, our life sciences practice advised on a litigation matter involving claims that Sanofi failed to properly commercialize the multiple sclerosis therapy, Lemtrada, in the U.S. and Europe.

The assessment of these claims showcase CRA's expertise in accounting and intellectual property issues and the internal breadth of our life sciences practice involving staff in the U.S. and Europe.

Our auctions and competitive bidding practice conducted a solicitation on behalf of Dayton Power and Light Company to identify a supplier to serve the energy and capacity needs of low-income customers to reduce the surcharges and costs paid by all household in the DP&L service territory.

As discussed earlier, we are encouraged by the positive trends in lead flows and new project originations across the firm, as it indicates continued strong demand for CRA's services.

For the full-year 2019, on a constant-currency basis relative to fiscal 2018, we are reaffirming our previous guidance of revenue in the range of $430 million to $445 million and non-GAAP EBITDA margin in the range of 9.2% to 10.2%.

While we are pleased with our operational performance in the first half of fiscal 2019, we remain mindful that uncertainties around global economic and political conditions can affect our business. And now I'll turn the call over to Chad for a few additional comments.

Chad?.

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 second quarter of fiscal 2019.

In terms of headcount, we ended the quarter with 664 consulting staff, which consisted of 123 officers, 378 other senior staff and 163 junior staff. This is a net increase of 5.7% year-over-year.

Non-GAAP selling, general and administrative expenses as a percentage of revenue excluding the 2.9% attributable to commissions to non-employee experts was 18.6% for the second quarter of fiscal 2019, compared with 19.2% a year-ago.

The effective tax rate for the second quarter on a non-GAAP basis was 29.6%, compared with 27.5% on a non-GAAP basis for the second quarter of 2018. Turning to the balance sheet. DSO at the end of the second quarter was 105 days, compared with 111 days at the end of the first quarter of fiscal 2019.

DSO in the second quarter consisted of 68 days of billed and 37 days of unbilled. We concluded the second quarter of fiscal 2019 with $15.6 million in cash and cash equivalents, with the majority residing internationally.

During the second quarter of fiscal 2019, we returned $8.8 million of capital to our shareholders consisting of $1.6 million of dividend payments and $7.2 million for share repurchases of approximately 177,000 shares at an average price of $40.47.

Finally, we announced earlier today that our Board of Directors declared a quarterly cash dividend of $0.20 per common share, payable on September 13, 2019, to shareholders of record as of August 27, 2019. That concludes my prepared remarks. Brenda, we would now like to open up the call for questions..

[Operator instructions] Our first question is from the line of Timothy McHugh with William Blair..

Thanks. Paul, I wonder if you could just elaborate a little bit on your kind of comments about the macro. It's hopefully in the news, various headlines debating about global growth, as well as just in the context of what you're seeing from M&A-sensitive businesses.

I guess, just maybe a little bit more color on the project lead flow and how you're viewing the broader environment at this point of the year..

Yes. Let me start by saying that to date, I've seen no direct and immediate impact from these uncertainties that I referenced about the global economic conditions or the political uncertainty. But it does create uncertainty in the marketplace.

What we try to keep on top of, Tim, is to see whether there's any manifestation of that uncertainty into our performance.

To date, I haven't seen it, both in the direct projects and billings of the firm, as you can tell from the consistent utilization marks, and I also haven't seen it in the lead flow of the new project originations which continue to be quite strong across both lines of business and across both geographies.

So we are not seeing, again, the manifestation into the business, but it is something we try to keep on top of with respect to future demand..

Okay. And then you talked about life sciences, how much it's grown during the last several years. And I think to certain extent forensics as well. If we look forward to the next three to five years, would it still be those? And we're trying to look at what businesses really structurally grew by a meaningful amount.

Would it be forensic and life sciences? Or is there something else that you're really particularly investing in that you would highlight to us to watch for the next couple of years?.

Sure. I mean I like my portfolio that I have right now. And a lot of times, our antitrust and competition economics practice almost gets a footnote in these messages because when you're 200-plus consultants and have one of the highest revenue per head in the industries, nevertheless CRA, growth is a little difficult, but they are consistently growing.

They're consistently expanding. There's scope of here in the states and in Europe, not just with the M&A work, but as you've seen in a lot of the discussions in the press talk about increased enforcement, particularly in the high-tech sector. So we're seeing growth there. I still think there's growth opportunities.

So from an absolute dollar contribution, they're going to be very high up on the list, although it may not come through with growth rates. Our life sciences practice, I think, is just really learning to run right now with mass they have.

I still think there's a lot of opportunity for expansion within their existing geographic footprint and client outreach, but we're expecting big things from that. Other practices, forensic services has grown dramatically over a very short period of time. We are committed to investing in there. We're committed to investing in the investigation space.

So I can see them making some real substantive expansion over the next few years there. We've talked quite a bit about our energy practice. Our energy practice has grown entirely organically over the last number of years.

I would love to find an opportunity for a step change in that space, but it has to fit, and I'm not going to do anything disrupt all the good advances that practice has made. And then we have a lot of other. Finance is still one of our mainstays in this firm. I think they have a lot of opportunity for expansion.

But those are the practices, I think, that can move the needle. You saw us highlight a number of other smaller practices. They will definitely grow, but given our size may not substantively change the trajectory of the firm..

Okay. Thanks. And then on turnover, I know it's seasonal quarter where you have people go back to school.

So sequentially, headcounts almost always down here in the second quarter, but it does prompt the question anyways just to maybe get an update on kind of consultant retention and the turnover rates you're seeing in this sort of tight labor market?.

Yes. Just to make sure to add clarity, we're down sequentially on the headcount from Q1 to Q2, which is pretty much an annual basis as a lot of our analysts and associates go back to grad school, but we are up year over year, almost 6% growth.

As we talked about at the beginning of the year, we think our headcount expansion for 2019 is going to be right in that 5% to 7% range, absent any kind of step change execution that we're not discussing right now. So I wouldn't read into the decline sequentially from Q1 2019 to Q2 2019.

Our attrition rate that we're seeing is really pretty close to, I won't say historic lows at CRA, but the trend continues to be that our colleagues are staying longer, even on the junior staff rank, and we have very low attrition on the senior staff rank and really nonexistent on the revenue-generating portion of our portfolio..

Okay. And then last question, just the tax rate bounce.

I know you always get – any updated thoughts on where you expect the rest of the year to fall in terms of the tax rate?.

Tim, this is Chad. Really no change in what we've said in the past. Tax rate in the kind of 28% to 30% before discrete items as we've had in prior quarters. The most notable discrete item is the effect of stock-based comp on our tax rate. This quarter was pretty minimal. So we are right in that expected zone..

Okay. Thank you..

Our next question is from the line of Kevin Steinke with Barrington Research. Please go ahead..

Good morning. So you talked about antitrust and competition having a nice quarter, and the fact that that business has been growing consistently, despite the perception that it might not have that opportunity.

Aside from increased regulatory enforcement that you mentioned and just overall fluctuations in M&A, volume and just bigger picture, can you kind of talk about why that practices continue to grow so nicely? Are you taking market share? And what's the opportunity for continued growth and share gains in that practice?.

I wish I could say it had to do with the CEO, but my colleagues within the antitrust and competition economics practice are really awesome. They have just a strong foundation. They've been able to retain that incredible talent. They've been able to recruit when talent becomes available in the marketplace.

We are one of the preferred destinations of that. So it really begins and ends with the people. And we are one of the premier providers, I think, the premier provider, but one of the premier providers for services in that space in the world.

So even when you have some fluctuations in the M&A marketplace, we are still a preferred destination for clients as they seek assistance there. So I just think it's a long legacy of stability and excellence, and that has really fueled that performance of that firm.

And quite frankly, a lot of the other litigation-related practices that we have at CRA were given birth because of that, the antitrust practices position in that marketplace. So it serves as a launching pad for many of the things we do at CRA. So I'm really thankful that they're sort of on our team..

Great. That's helpful color. As I look at the geographic growth numbers that you disclose, the Europe kind of stood out there.

Can you maybe talk about what's going on in your European business? Is regulatory uncertainty around Brexit helping you at all? Or what's the driver there despite some headlines around maybe some economic uncertainty in Europe?.

Sure. I could try to – I mean the two largest practices in Europe are antitrust and competition economics practice, and they just have been going flat out now for a number of years. I think the uncertainty has not hindered their performance at all. We're actually seeing continued strong demand there.

This quarter's nice growth in our European operations, again, we have to give a round of applause to the life sciences practice. We mentioned that we have recruited several people over the last couple of years, both in C1 – from C1 Consulting, but also the senior recruits we have in Europe.

They've had tremendous growth year-over-year are really starting to gain some of the penetration that we knew was coming. And so you have those two practices really driving that performance for this quarter..

Okay, great. And then you talked about some of the areas you see growing in the future in terms of areas you want to invest in.

I mean is it still the case, though that you feel comfortable investing across all of your practices as you've talked about in the past? I mean are you still kind of seeing that synchronized growth pattern that you have over the last couple of years?.

We are. I'm a believer that if you're not willing to invest in a practice, it shouldn't be part of your organization. I think having a practice as a cash cow is not good for the portfolio as a whole. Clearly, we have perhaps some practices growing at faster rates, and we'll embrace that.

But you'll have investments in all different forms and magnitudes occurring across that portfolio. I think you're going to continue to see that balanced contribution, which has led to this consistency. We haven't really had any fluctuations of performance for the last half dozen years. You've seen pretty consistent revenue growth.

And as we tried to highlight several times, you've seen pretty consistent profit growth, right, that every quarter I know people mention that it's impossible that CRA's revenue per head will improve, well, it has, or the profitability on a margin basis can improve, well, it has.

And that goes back to the performance of the individual practices within our portfolio. When you have a tight distribution of practice performance, you end up – are able to deliver really impressive profit numbers. And that is what's driven the expansion of profits over the last several years.

It hasn't been through cost cutting measures, it's just been the tight performance of our practices..

Okay, great. And then you talked about it quite a bit in the prepared comments. But if you could expand at all on the addition of that adjusted cash flow metric? You said it was in part response to an investor questions.

Maybe just talk a little bit more about what you hope to clear up with that metric? And maybe some of the uncertainty around that that had been – you had seen in investors' minds that led you to include that disclosure now?.

Yes, our investors and also here at CRA, I think, just strong believers in cash is king. And although our GAAP financials provide lots of use of information, if you look at our cash flows from operating activities in the GAAP financials, they have included in that acquisition proceeds that we're using to acquire talent.

Sometimes, you have a great group of people, like we had in the C1 acquisition, that we could use a traditional acquisition methodology and proceeds there. But a lot of times, we're recruiting individuals or group hires from across our industry, and I can't use the traditional acquisition accounting there. So we have the vehicle for forgivable loan.

Does it add confusion? It does, but it also adds a layer of complexity to our cash flows from operating activities. So I'm not saying that the cost of acquiring single individuals doesn't require a cash outlay.

What I'm asking people to do as opposed to beginning your cash flow analysis with our GAAP cash flows from operating activities, begin with the adjusted cash flow from operating activities and then make all the deductions you want, right, make all the deductions you want for talent acquisitions, make all the deductions we want for real estate, but at least that way, we are not double counting those outflows of the proceeds.

That's all we're trying to do by adding that new non-GAAP measure, is just make it a little easier to get to the cash is king type of bottom line for our folks. And I think if our shareholders – well, the shareholders who currently own CRA see the value.

But I think prospective shareholders will clearly see the value when they're just making that simple adjustment to their cash flow analysis..

Okay. That's helpful. And then lastly, shared capital expenditures picked up in the quarter. It looks like I think you have some larger office expansions or build-outs going on this year.

Can you just kind of talk about the trend in CapEx for the remainder of the year? And does that all – do those office build-outs also lead to additional operating expenses? Or is that just purely a capital outlay?.

Sure. So as I've mentioned earlier last couple of calls, our CapEx has been directed primarily toward office build-outs and expansions to support the growth in our consulting headcount. We are making some investments this year, principally in Boston, as we add some space here. And we're also moving into some new space in Oakland.

So those are our two primary focuses of investments. The space in Boston is incremental. So that will add some operating expense. But it again is in support of the growth we're seeing here in this local market. As it relates to the CapEx outlays, they are backend weighted. It was relatively light first quarter.

Second quarter had just a few million dollars. It will ramp as the Boston project wraps up and the Oakland project begins in this second half. I think overall though, our outlays are consistent with what we've done in the past. If you look for a reference point, I pointed you back to 2015, which was when we first built out our Boston office.

This year – and that was in 2015. This year, four years later, expenditures will be just a little bit more than that, probably on the order of about $20 million for the full-year..

Okay..

Just to expand a bit on that, there's been some enhancements of the space, but with the revenue growth we've had, we're a consultant driven firm, so our headcount in the last five or so years has grown more than 50%. We need to have places to house our new consultants and empower them to be productive.

So even though we have the cash outlays in order to gain the new space, you haven't seen any kind of reduction of our margins or increase in our SG&A over that relevant time period.

And so as Chad said, the expansion is largely in the outlays are largely because we have the demand to end up increasing that headcount and thus increasing the real estate..

Okay, and congrats on the nice results..

Thank you, Kevin..

Our next question comes from the line of Marc Riddick with Sidoti..

Hi, good morning..

Good morning, Marc..

I just wanted to piggyback, I guess on that last question. Chad, you had mentioned the Oakland.

Could you delve into that a little bit? Is that in some way connected to space that was part of the acquisition a couple of years ago? And maybe what you're doing on the West Coast there?.

So we're actually pretty excited about what we're doing on the West Coast and in Oakland. So one, through the acquisition of C1, we also gained a San Francisco office. We will continue to have a San Francisco office, and that is not being rolled up into the Oakland real estate that Chad is covering.

But one thing we're able to do with moving into some new premises is we're combining our consulting staff that currently resides in the Berkley area of Oakland and also consulting staff that we currently have in Pleasanton.

So being able to get a nice cross-section of our consultants, I think will be great for the overall morale, and it also gives us a great platform to continue to add consultants into that space..

Okay, good. Thank you. Thank you for the color on that. And then, I guess, the – where I was originally going to be coming is you've given commentary around the – some of the key practice areas and what we're seeing there. Wondering if you could touch a little bit? You've talked before about the progress being made in the auction space.

I was wondering if you could touch a little bit about that and then maybe a follow-up on maybe IP or cyber as well. Thanks..

Sure. Our auctions and competitive bidding practice has a wonderful platform. And I'm really looking forward to a step change within that practice. They're talking to a lot of commodity-based providers about using our platform and the science behind it to more effectively distribute their products and price those products, but it is a long process.

So we have it for a couple of a commodity based from milk products, dairy products and now wool and they're in discussions with a number of other providers. But in addition to that, they also use that platform, as we discussed with Dayton Power and Light to help utilities better distribute their power across their customer base.

So that's for the auction practice. So I'm still bullish on that. And hopefully, we have some much bigger news to highlight in the quarters and years ahead there. The forensic practice is where the cyber offering is housed. We just need more people in that space. The demand is very strong. Our people are working really hard, but we've seen no slowdown.

We've seen an expansion of the client base on that. So I'll remain bullish there, and the trajectory is very positive. And our IP practice, we have an intellectual property service offering that actually is provided across a number of our practices.

So yes, it is offered by our intellectual property practice, but IP services are also provided by our antitrust and competition economics practice, are also provided by our life sciences practice, where the particular expertise or functional subject matter expertise is needed, we're always trying to bring those best talent to bear.

So it continues to be a strong service line for CRA..

Okay, great. And then last one for me. You're speaking on the lead flow pacing and that certainly had looked strong earlier in the year as well. I was wondering if you're seeing any changes in sort of particular drivers of the lead flow.

Is it fairly similar to what we saw earlier in the year or at the tail end of last year?.

That's a good question. I really was trying to avoid answering that. So our lead flow – both the lead flow in new project originations, are really high on a – just a pure count percentage basis, but we're seeing a change in the mix, a change – from both the services and also some of the geographies.

So I don't want to mislead our investors by just giving a straight percent change on that, so one of the drivers is, you asked the question about cyber incident response. There, we have very deep relationships with a number of the insurance panels and the law firms, providing that services, but their cases tend to be smaller in size.

So as we see growth there right, it comes with a greater number of leads and new project originations. So as the mix is changing. We're trying to do our best to try to give you enough color to interpret that without providing a disconnect between the lead flow, project originations and the revenue growth..

Okay. That's fair. I appreciate. Thank you very much..

Thank you..

Thank you. We reached the end of the Q&A session. I would now like to turn the conference back over to Mr. Maleh for any closing comments..

Great. Thank you, Brenda. And again, thanks to everyone for joining us today. 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 during the third quarter call. With that that concludes today's call. Thank you, everyone..

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