Good afternoon, ladies and gentlemen, and welcome to Huron Consulting Group’s webcast to discuss Financial Results for the Fourth Quarter and Full Year 2019. [Operator Instructions] As a reminder, this conference call is being recorded.

Before we begin, I would like to point all of you to the disclosures at the end of the company’s news release for information about any forward-looking statements that may be made or discussed on this call. The news release is posted on Huron’s website.

Please review that information along with the filings with the SEC for disclosure of factors that may impact subjects discussed in this afternoon’s webcast. The company will be discussing one or more non-GAAP financial measures.

Please look at the earnings release and on Huron’s website for all of the disclosures required by the SEC, including reconciliation to the most comparable GAAP numbers. And now, I’d like to turn the call over to Jim Roth, Chief Executive Officer of Huron Consulting Group. Mr. Roth, please go ahead..

Good afternoon and welcome to Huron Consulting Group’s fourth quarter and full year 2019 earnings call. With me today are John Kelly, our Chief Financial Officer; and Mark Hussey, our President and Chief Operating Officer. Led by strong growth across all three operating segments, revenues grew 13% organically over the prior year quarter.

Two years ago we developed a strategic plan that focused primarily on organic growth. To achieve this, we first focused on new ways to grow our core businesses, which had been the principle driver of our growth in recent years.

Second, we invested in new offerings aimed at addressing the evolving needs of our clients and strengthening our competitive advantage. As we approached the midpoint of our five year strategic plan, I am incredibly proud of the progress we have made.

We believe that collectively our progress has positioned Huron for long-term growth and improved profitability. I will now share some additional insights into our fourth quarter and full year 2019 performance along with our expectations for 2020. On a full year basis, Healthcare segment revenues grew 9% over 2018.

In the fourth quarter of 2019, the Healthcare segment grew 11% over the prior year quarter. The year-over-year and quarter-over-quarter increases were primarily driven by solid demand in our performance improvement solution. The recent J.P.

Morgan Healthcare Conference highlighted some of the key factors that continue to disrupt the healthcare industry, including concerns over quality and affordability, value- based care and population health strategies, issues related to revenue growth and diversification, and digital enablement among many others.

Needless to say, our ability to address these needs for our clients is at the heart of the growth strategy for our Healthcare business.

We believe that the combination of our traditional core offerings with new and innovative products, services and partnerships positions us to respond to future market changes as the healthcare landscape continues to evolve. Turning to the Business Advisory segment. On a full year basis this segment grew revenues 7% year-over-year.

In the fourth quarter of 2019, Business Advisory segment revenues grew 5% over the prior year quarter. The year-over-year and quarter-over-quarter increases were primarily driven by growth in our ES&A and business advisory practices.

Although the Business Advisory segment continues to serve our healthcare and education clients, the strategic story behind the growth of this part of our business is our continued expansion into commercial industries.

In this segment we have made significant inroads into the financial services, life sciences, energy and utilities and industrial and manufacturing sectors, while continuing to expand our global presence.

We believe our combination of capabilities and organic investments in these industries positions us well to take advantage of the significant market opportunities across those verticals. For the full year 2019 the Business Advisory segment generated approximately 32% of its total revenues in the healthcare and education industries.

Our ability to go-to-market collaboratively across multiple parts of our business has yielded positive results for Huron. We continue to believe that we are most successful against our competition when we are nimble and anticipatory and go-to-market with a well orchestrated set of competencies that are most reflective of our client’s needs.

Turning now to the Education segment. The Education segment achieved organic growth of 16% in 2019 over 2018 driven by strong growth in our research, technology and strategy and operations solutions. In the fourth quarter of 2019, Education segment revenues increased 27% over the prior year quarter, driven by our research and technology solutions.

Higher education institutions continue to face significant pressures on cost and quality and are also facing stiff competition from nontraditional sources. Many boards and senior leaders are having strategic discussions about the sustainability of their business models.

We believe our market presence and deep industry expertise has positioned us as one of the leading professional services firms focused on higher education. The issues and challenges in this industry are growing in criticality and we are well positioned to help our clients navigate what will surely be significant challenges in the coming years.

Let me now turn to our expectations and guidance for 2020. Our guidance for the year is $900 million to $940 million. We also expect adjusted EBITDA in a range of 12% to 12.8% of revenues and an increase in adjusted diluted earnings per share in a range of 1% to 12% over 2019.

I will now provide a few thoughts regarding our expectations for each segment as well as overall company profitability. Company-wide, we are guiding to mid-single-digit revenue growth in 2020.

In healthcare, while we are encouraged by the growth and strengthening in demand in 2019, we remain cautious about extrapolating recent market trends given the limited visibility we have into the pipeline as the year progresses.

At the midpoint of our guidance, we anticipate Healthcare segment revenues will grow organically in the mid-single-digit range in 2020. Our guidance also reflects mid-single-digit organic revenue growth in the Business Advisory segment. And in the Education segment, we anticipate upper-single-digit organic revenue growth for the year.

In terms of margins in 2020, our guidance reflects our commitment to expanding margins and it is inclusive of strategic and operational investments that we believe will enhance our revenue growth trajectory, drive deeper operational efficiencies and create opportunities to better leverage our G&A.

We remained focused on expanding our margins, while investing in the areas with the greatest growth potential or efficiency gains. We continue to believe that we have created a strong foundation from which we can sustainably grow revenues, while improving margins over time, consistent with our long-term financial objectives.

Finally, today we announced the hiring of our new General Counsel. Last year, Diane Ratekin approached me about her plans to retire. Diane has played a critical role in our organization since she joined Huron in 2005. She was a proven and respected leader who has demonstrated a deep commitment to our business and our people.

She has made significant contributions that have helped position the organization to achieve our strategic goals and objectives. I want to express my deepest gratitude and appreciation for all Diane has done during her 15-year tenure at Huron. We congratulate her on her retirement. Next week, we will welcome Ernie Torain to Huron.

Most recently, Ernie spent nearly 10 years at the Illinois Tool Works, most recently serving as Associate General Counsel. Ernie’s broad expertise across a range of disciplines will be an asset as we continue to execute on our strategy. I look forward to officially welcome you, Ernie to the Huron team.

In summary, 2019 was a strong year for Huron and I want to thank the entire Huron team for their hard work, dedication and commitment to our clients, our company and to each other. We do not take our recent success for granted and remain focused on executing our strategy.

In 2019, we saw the fruits of our recent investments in new offerings begin to take hold and I’m excited about how those investments will continue to shape our business in 2020. Now let me turn it over to John for a more detailed discussion of our financial results.

John?.

We planned to increase in salaries and related expenses for our revenue-generating employees, the reset of fringe rates at the beginning of the year, including FICA and our 401(k) match, which are fairly significant given our people-driven business.

The impact of three annual practice leadership meetings taking place in the quarter and an increase in stock compensation expense for restricted stock awards that will be granted in March to retirement eligible employees.

Based on these factors and similar to 2019, we anticipate approximately 15% of our full year adjusted EBITDA and full year adjusted EPS to be generated during the first quarter.

As a closer reminder, with respect to the 2019 adjusted EBITDA, adjusted net income and adjusted EPS, there are several items that you will need to consider when reconciling these non-GAAP measures to comparable GAAP measures. The reconciliation schedules that we included in our press release will help walk you through these reconciliations.

Thanks, everyone. I would now like to open the call up to questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Tobey Sommer with SunTrust. Your line is open. Pardon me, Tobey, your line is open..

Thank you. If you could comment and give us some color on the accelerated growth in the Education segment, including updates, where you perceive the opportunity for student focused ERP tools? Thanks..

Tobey, this is Jim. We had – yet again, we had a pretty good year across the board in the Education business. The student business amidst all that growth was actually quiet for the year, in part, that still is attributable to that kind of still evolving maturity of the software platform for student.

We’re – that will – I think will begin to pick up a little bit in 2020. And we’ll probably pick up in earnest in 2021. It’s not to say that there’s no work being done in the student area. There’s a lot of kind of additional things that are being done at some institutions, particularly some of the smaller ones, where it’s a little bit less complicated.

But we do expect the student in 2020 to be better than it was in 2019 and even better in 2021. But I think, the reality is this, the practice in general, had another very strong year across the board. I think just the demands in education are very significant right now for improving efficiency and just trying to make the business model sustainable.

So we feel good about the way we ended the year, and we feel very good about the way that 2020 is picking up in the Education business..

Thanks. Turning to Healthcare, the bill rates were up a decent amount year-over-year.

Could you describe the puts and takes that drove that change?.

Sure. Tobey, this is John. So the bill rates were higher in the fourth quarter. We had several projects, where the benefits that we drove for our clients’ performance improvement projects or what I’m referring to better than what we had initially anticipated beginning of the year.

We also had a few jobs, where our efficiency and executing the deliverables was a little bit better. So that had the benefit of increasing the rate during the fourth quarter. I probably quantify the impact of those items is about $20 on the bill rate.

So I think if you were – I made a comment in my prepared remarks that we expect there to be stable bill rates in the 2020, and I’d say, stable with regard to our full year, which was more than that $230 range versus the $250 that we saw in the fourth quarter..

Okay. Last question from me and then I’ll get in the queue. With respect to your guidance at the top line, you exit 2019 with a relatively rapid rate of revenue growth and headcount growth, yet the guide is for about 5% revenue growth, if I made my calculation, correct.

Could you describe the puts and takes that would maybe cause there to be a slowdown in growth or whatever other factors you may have included in arriving at that guidance?.

Yes, Tobey, it’s Jim. John will have some commentary as well. But I think, in essence, for us it’s just we feel good about the way we’ve turned the corner. But I think it’s just the continued lack of visibility we have in terms of longer term.

As we get into the out quarters of the year, I do feel like – for us, just given the kind of the uncertainties in the market, we prefer not to extrapolate the second half of the year or even the fourth quarter into 2020. So we do look at the underlying demand. It remains strong.

We look at the complexity of the issue that the demand is coming from and they also remain strong, but we’re just being cautious in terms of our guidance in response to the fact that we just don’t have great visibility into the out quarters..

And the part that I’ll add is, the internal targets for all of our teams, as we probably talked about before, are set higher than what our guidance ranges are. So clearly, our teams are pushing to be up – towards the upper end of that range.

But nonetheless, as Jim says, just given the nature of our work and the fact that by the time you get out to the third and fourth quarter of next year, we have lost visibility. We went with more cautious guidance at the outset of the year..

I understand that for the back half the year in terms of visibility.

Has visibility changed and deteriorated? Or is that just the nature of the business right now?.

No, I think we – it hasn’t changed. I think, it’s remains strong, but it’s just, again, what we’re just doing is we’re being cautious about trying to project that strength into the later quarters of the year..

Thank you very much..

Thank you. And our next question comes from Bill Sutherland with The Benchmark Company. Your line is open..

Thank you. Hey, everybody.

Wondered if we could get a little more color on Business Advisory, the three or four components and how they look individually going into the year?.

Sure.

So talking more from a guidance perspective, Bill, or how we close out 2019 or both?.

Kind of both, just to feel for how they’re tracking and kind of contributing to the outlook?.

Yes. I’ll start and then I’m sure Mark and Jim may have some color or commentary. But ES&A, they closed out 2019 with a strong growth. And when we look at our pipeline and our opportunities there, we continue to be very encouraged about their growth prospects.

Their offerings right now are very much in demand with our clients, who increasingly want better data, better analytics and need that to run their businesses. And also they’ve got a very strong industry expertise, not only in healthcare and education, but also in financial services, energy and industrial.

So we feel like they’re very well positioned in the market. The Legacy Business Advisory team had a really strong close out to 2019, very strong revenue growth there. A, continue to have a strong pipeline, strong conversion in Q1, so we feel good about that business.

From an inner side perspective, they closed out the year down relative to last year, but that was really in large part, explained to a very tough comps in 2018, if you recall, they were very hard towards the end of 2018. They actually had 40% organic revenue growth for the full year 2018 versus 2017.

So it wasn’t a surprise to see them take a little bit of a step back in 2019. With that said, their offerings are still very strong in the market. They’re still serving very prestigious clients and still partnering very well with our other businesses. So we’re encouraged there.

And then from a life sciences perspective, they had a relatively low growth rate in 2019. But they’ve been investing in the business in terms of bringing in talent and I want to encourage that with all the activities that there is going on in the life sciences industry right now, that their position to have a year of strong growth in 2020..

Thanks, John.

And I wanted to understand a little bit better the impact of the Adventist, your relationship with them in terms of how the numbers, their impact on the 2020 Healthcare numbers?.

Yes. It’s largely as we described it in the last quarterly call, Bill. So we’re adding to the growth for the year. But it’s to be very clear it’s not all incremental, it was also a large PI client of ours in 2019. So I think of it as conservatively $15 million of incremental revenue in 2020.

And that’s from a margin perspective, the nature of that arrangement is slightly below. I think we said this in the last quarter, call our typical PI margins within that business. So it factors into the mix, moderating our EBITDA margin there. But it’s not a huge factor..

Okay. And then last one. Capital allocation, are you still as focused on debt reduction this year? Or do you have other? I know you’ve got the some share repurchase you have to do plus some CapEx? But just wanted to get a sense of any change in the philosophy on that? Thanks..

I think we expect to have a pretty balanced approach in 2020, Bill. So as you said, we intend to offset that dilution from our share-based compensation programs with buybacks during the year. And in fact, we did that towards – some of that towards the end of fourth quarter and continued some of that into the first quarter.

From a M&A perspective, while our focus is clearly on organic growth, as we explore our strategic opportunity areas, there may be situations where tuck-in type acquisitions could make sense to accelerate our growth or give us an advantage in the market. So that’s certainly a potential deployment of capital. You referenced CapEx.

We continue to develop some of our analytics on the software solutions. So there’ll be some continued deployment there. But then yes, we expect it to fall, absent those things to be pay down of debt.

And we do expect absent anything unexpected that our leverage ratio would continue to decline, over the course of the year though, as you know, we’ll increase at the end of the first quarter due to our annual bonus payouts..

Right. Okay. Thanks John..

Thank you. Our next question comes from Kevin Steinke with Barrington Research. Your line is open..

Hey, good afternoon. So you talked about in reference to the adjusted EBITDA margin guidance for 2020 some investments included in there, you specifically called out 60 basis points from ERP and EPM system upgrades.

Are there investments beyond that that we should think about being incorporate in their guidance? Or is that kind of the bulk that we should think about that 60 basis points?.

I would describe that Kevin as the incremental part for this year. That’s an item that we expect to be an outlier for the 2020 year as we upgrade those systems and that we don’t really expect to repeat at the same level on 2021.

As far as our client facing investments, we continue to invest in that area, particularly as we see those areas increasingly contribute to our revenue growth in our pipeline. So last year, I think we described, those client facing investments about 100 basis points of margin.

I’d say that the similar metric to think about this year as far as us hiring and how the demand in building out solutions internally that we think are going to resonate really well with our clients..

Okay. And just following-up on the ERP and EPM system upgrades. I mean, have you thought about any potential disruption to the business? Just sometimes there could be change management, things cropping up as people switch to different systems.

Do you see any potential variability coming out of that or maybe any comment on that and maybe the implementation timeline for those projects?.

Kevin, so we started towards the end of the fourth quarter and expect to be implementing throughout 2020 with a go-live at the beginning in the first quarter of 2021.

So we certainly are planning for all those potential risks that you talked about change management is a very big part of our implementation approach and something that we’re very focused on. The good news from our perspective is, we have our internal consulting teams helping us with the deployment.

And from our perspective, we feel very good hands in that nature that we’ve got very best helping us out with that implementation. So I’m more confident that we’re going to hit our timelines, but certainly that confidence comes from a lot of advanced planning to manage those risks that you mentioned..

Okay. And maybe give us a sense of what gets you to the top or the bottom of that margin guidance? It’s a fairly wide range to start the year, obviously, less visibility at the beginning of the year.

But what are the factors you’ve considered as you think about that margin range from a top to bottom?.

So Kevin, this is John. I would describe it as, at the upper end of the range it was certainly mix that factors in there to the extent that our revenue is coming from some of our offerings that have higher margin contributions that would push us off towards the end of the range.

Whereas some of our other offerings that have a lower contribution margin, if that’s where the growth comes from, more than expected that could push us towards the lower end of the range. To the extent that we’re able to drive really high utilization across the business, that would be something that would push us off towards the top of the range.

Whereas obviously conversely, if we have lower utilization that would get us towards – more towards the bottom of the range. But I’d say, the biggest driver from my perspective is really that mix of business as well as our ability to have very effective utilization..

Okay. And then maybe just talk a little bit more about – in the Business Advisory segment you mentioned the significant inroads into the commercial sectors.

Maybe just talk more about that effort? How much more you’d like to accomplish there going forward?.

Kevin, this is Mark. Let me weigh in on this one. If you look back four years ago, we were substantially a health and education company at the time. And really what you’ve seen, perhaps not advertised in our efforts has been an underlying growth in the business advisory capabilities that we’ve had.

Much of that is aligned with helping with capabilities in the Health and Education segments. And really that has been overtime as we’ve talked about it, roughly 30% of the revenue coming out of that segment overtime. What we haven’t talked about is the 70% and what is going on in that side of the business.

As we look ahead for where we’re trying to build the business, we do see a very significant opportunity to lean with industry first, where we have good solid expertise and then really follow that on with capabilities.

And with the practices that we have within that segment, we think there’s more opportunities for us to really leverage additional growth out of there. So to the point that John made with respect to maybe focused M&A, I think you’ll see us just continuing to refine our thinking over the course of the year.

I think this is evolutionary in terms of its direction, but clearly based on the positioning and the success we’ve seen in market in those particular areas. We feel pretty confident in the direction of advancing the commercial side..

And this is Jim.

The only thing I would add on to what Mark said, was that from a market perspective, if we go back and look at when we go to and make competitive bids in financial services clients or an oil and gas clients or an retail clients, we’re going – we have over the last two or three years continue to increase the size of the jobs that we’re getting.

We’re increasing the size of the companies we’re serving. They’re getting – the jobs themselves are getting more and more complicated. And we’re winning against pretty formidable competitors. And when you look back, we’re certainly proud of that.

But if you go back and say, why are we doing that? I think it’s because we continue to assemble a really talented group of people that have that industry knowledge and that we have also been able to demonstrate because of the size of our company, kind of a nimbleness that I think some of our competitors struggle with at times.

So we feel like we’re in a really good sweet spot in the market as it relates to both the skills we can bring to market and our ability to be nimble. And to put it together and we certainly don’t win everything, but we win a lot against some pretty formidable competitors. If you did that once, you’d say, that was good.

If you did it a number of times as we’ve been doing it, you say, there’s something going on here. And we feel like, we’ve just got a good combination. So that’s what gives us more and more comfort that we can continue to make progress in these commercial segments.

Because we have been able to attract some really talented, experienced recruits and to help us improve our competencies and it’s paying off. And it’s paying off. The jobs are getting bigger, the clients are getting larger as well.

And you put it all together, we feel really good about our ability to continue to expand the commercial part of our business..

Okay. That’s good to hear. Thanks for taking the questions. Appreciate it..

Thank you. And we have a question from Andrew Nicholas with William Blair. Your line is open..

Hi. Good afternoon. Thanks for taking my questions.

I guess, first as we’re a bit closer now to the election in November, are you seeing any material change in your client’s willingness to move forward with bigger decisions or maybe said differently, are there any clients that have become more cautious as we approach the election in your view?.

Yes. This is Jim. I’m sure there’s some out there, but it really hasn’t become noticeable to us yet. I think there’s really nothing that we’re seeing that we could point to that say that there’s a softness due to uncertainty around the political arena. We just haven’t seen it yet. Could it emerge? Maybe.

But I think my sense is people are kind of getting used to all this uncertainty. And so I think at this stage we don’t think there’s anything that we could point to that would indicate that that’s an issue for us..

Got it. That’s helpful. And then now you’re a couple of months into the Adventist relationship. And I was wondering if you could just kind of speak to early progress or early successes in that relationship. If there had been any new conversations with new prospects that have opened up as a result of that announcement.

And then sorry for the multi-part question, but just a last item from a disclosure perspective.

Are the incremental hires tied to that augmented relationship included in the segments headcount?.

Andrew, this is John, I’ll start. Your first question, obviously we’re still in the early phases of the contract with Adventist now. But we’re extremely pleased with the efforts of our team on this project to date and the impact that we’ve been able to have working with Adventist.

The collaboration between our team and the Adventist’s team has led to a very smooth transition for our people. And we’re very excited about our ability to drive financial benefits for Adventist as we move forward. So all good on that front so far.

From a headcount perspective, no, the incremental headcount that we picked up in relation to that contract shows up in the FTE line item. The billable headcount is not impacted by that. I think one other element to your question was just pipeline and these types of projects.

I would say our focus at this point continues to remain focused on the Adventist contract and really making this a win for our people and for their people. So that’s where our focus remains right now..

Great. Thank you..

Thank you. And I’m showing no further questions in the queue. I’d like to turn the call back to Jim Roth for any closing comments..

Thank you very much for spending time with us this afternoon. We look forward to speak with you again in April when we announce our first quarter results. Have a good evening..

This concludes today’s conference call. Thank you everyone for your participation. You may now disconnect. Everyone have a great day..