Good day, and welcome to Exponent's Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. All participants will be in listen only mode [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Joni Konstantelos. Please go ahead.

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate Web site at www.exponent.com/investors. This conference call is the property of Exponent and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer; and Rich Schlenker, Executive Vice President and Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, Exponent's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent's periodic SEC filings, including those factors discussed under the caption Risk Factor in Exponent's most recent Form 10-K or 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise. And now I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Catherine?

Thank you, Joni, and thank you, everyone, for joining us today. I will start off by reviewing our fourth quarter and fiscal year 2022 business performance, Rich will then provide a more detailed review of our financial results and outlook for 2023, and we will then open the call for questions. We delivered solid results in fiscal year 2022, growing net revenues by 7% year-over-year and expanding earnings per diluted share. In a year marked with evolving macroeconomic challenges and uncertainty, we continued to showcase the strength and resiliency of our business model. We saw strong demand across the business for Exponent's diversified portfolio of services through 2022. On the proactive side, our work in the consumer products, electronics, automotive and life sciences sectors were key contributors for the year. On the reactive side, we saw robust litigation related activity and a diversified portfolio of product safety and recall related work spanning multiple industries. As innovation and technology become increasingly complex, the critical nature of our insights uniquely positions Exponent to address our clients' needs throughout the product life cycle. Turning to our engagements in more detail. Within our proactive services, we saw strong demand for our working user experience research and machine learning data studies across multiple industries. Clients look to Exponent for our expertise in understanding the human machine interface from the cognitive impact of virtual and augmented reality to the interactions between vehicle operators and advanced driver assistance systems. They come to us when they need to acquire the most sophisticated, high quality and curated training data sets to drive machine learning algorithms because getting it right matters when it comes to product performance and safety. We saw increased activity in the life sciences sector related to regulatory issues as well as the safety and efficacy of…

Thank you, Catherine, and good afternoon, everyone. Let me start by saying all comparisons will be on a year-over-year basis unless otherwise noted. For the fourth quarter of 2022, total revenues increased 12.2% to $127.4 million and revenues before reimbursements or net revenues, as I will refer to them from here on, increased 7.9% to $112.6 million as compared to the same period of 2021. The quarter's net revenue growth was negatively impacted by 0.7% from foreign exchange. Net income for the fourth quarter increased 10.5% to $22.5 million or $0.44 per diluted share as compared to $20.4 million or $0.38 per diluted share in the prior year period. EBITDA for the fourth quarter increased 3.1% to $31.1 million, producing a margin of 27.6% of net revenues, which exceeded our guidance. We expected the margins as we return to decline as people return to in-person engagement, both our employees and clients. Billable hours in the fourth quarter were approximately 354,000, an increase of 5.7% year-over-year. The average technical full time equivalent employees in the fourth quarter were 989, which is an increase of 7.3% as compared to one year ago. Highlighting our focused recruiting, utilization in the fourth quarter was 69%, down from 70% in the same quarter of 2021 as we continue to balance headcount growth and utilization. The realized rate increase was approximately 2.5% for the fourth quarter as compared to the same period a year ago. In the fourth quarter, compensation expense after adjusting for gains and losses in deferred compensation increased 7.7%. Included in total compensation expense is a gain in deferred compensation of $6.7 million as compared to a gain of $4.7 million in the same period of 2021. As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have…

Thank you, Rich. For decades, Exponent has stood firmly at the forefront of engineering and scientific excellence. Our fiscal 2022 results demonstrate Exponent's resilient business model and financial strength in a challenging and uncertain macro environment. Our exceptional talent, coupled with our diversified and growing portfolio of services positions us as a vital partner to help address the evolving needs of our clients. As we look to the year ahead, we remain keenly focused on positioning the company for continued success and creating long term value for our shareholders. Operator, we are now ready for questions.

[Operator Instructions] The first question this evening comes from Tobey Sommer with Truist.

This is Jasper Bibb on for Tobey. So I just want to ask about the margin guidance. Like how would you frame your assumptions for '23 with respect to office occupancy, business travel and recruiting versus your pre-COVID rates? On a per employee basis, other operating expenses for '23 looks pretty similar to 2019. So would you say you're effectively assuming things returning to normal there?

Yes, we are. The guidance that we’ve provided around other operating and G&A costs here as well as the structure is what we think will return us to a normalized level in 2023.

And then following up on that, could you comment on what you're seeing with respect to consultant compensation rates and the ability to pass those along in your realized rate gains?

So we are entering our period of time of doing our recognition and reward process that we do each year during the first quarter of the year. We expect, just as we've seen that we're going to have stronger pricing increases than we did a year ago, so that our realized rate will go up. We are expecting to deliver equal or thereabouts growth in the compensation or raises in salaries for our consulting staff.

Last one for me. Are you seeing any impact from economic conditions on the proactive business at this point where clients might be pulling back spend or maybe postponing some projects that have been in the pipeline?

Jasper, we're very attentive to looking for signs of impact to our client base. And so far, what we found essentially is that the critical nature of our work to our clients’ operations has really continued to support the demand across the business. And what I mean by that, if you think about the elements that drive our proactive work, innovation, it's the urgency of that next feature set in the electronics industry or in the life sciences industry that they've got to get there for their next product launch if they want to be able to compete, right? So it's not so much about how many units they're selling, but it's about being able to get that new product out there, performing reliably and safely. We are driven by transformation in industries in terms of product complexity. The regulatory frameworks continue to raise the bar on safety and on health. And so what we're seeing, even if the clients are downsizing themselves, they still need to get their products through that regulatory framework, and that bar is going up. And so same is true of our risk related work on the proactive side. This is driven by climate change and extreme weather and increased demand on a stressed power grid. These are things that have to be managed even whether we're in a recessionary environment or not. So do we see clients potentially tightening their belts, looking more closely at scopes? Of course, we're not completely immune to that. But as we've seen historically, it really is the critical nature of our work that allows us to see that continued demand and that strengthen in the demand.

The next question comes from Andrew Nicholas at William Blair.

A really, really nice top line guide. And what seems like a -- it's all relative, but a normal year in '23, at least relative to the past several. I'm just wondering if this growth algorithm of 6% to 8% headcount growth with 3% to 4% price and kind of rolling that up in the high single digit, low double digit top line growth? Is that a good way for us to think about the business over the medium to long term now? Is that your expectation for growth, or are there unique things about 2023 specifically that would have it be higher or lower than that expectation?

So maybe I'll start off and respond to that quantitatively. And I think Catherine may want to add in qualitatively about why we're confident in this. But look, I think we are overall to believe that where we need to be is obviously, the pull in the market needs to be there that we are confident we can achieve over a long term. But we think that is going to come with growing that head count in that 6% to 8% range. And at times, hopefully, even striking above that. We do think that pricing will vary over time on the realized rate that we get out of that. The realized rate has a lot to do with turnover and hiring rates and things of that type. But we are -- will that always cover up near the 4%? No, I think it could be 2.5% to 3.5% would probably be a long term normalized realization range. But I think we can be slightly above that or at the higher end of those ranges this year, and that's why we provided that guidance around the 3% to 4%. And then in the utilization area, this year we have the utilization flat to down but I think over the long term, we view that, that utilization is actually gradually growing. You're going to have years of some fluctuation on that. But as I stated, we think that the overall utilization where it might be approximately 73% this year, give or take, over time that, that's going to move to the mid-70s and be sustained in that range. So that's going to be even to a plus over a year period of time that we can hopefully achieve there. So overall, that's why we believe that it is something that we can get up performing around that high single to low double digit mark and hopefully performing on the upper end of that.

And just to add on to that, Andrew, from the standpoint of the marketplace, right? We've got to have, of course, the work for all of those folks to do, and that comes across many different sectors of the economy in terms of opportunity, right? It's industries and transformation that can create tremendous opportunity for us. Innovation creates opportunity. I mean if you think about the macro trends like the energy transition that we are facing, this is going to drive engineering expectations to the limit. This is a place where Exponent thrives in understanding the behavior of these innovations across the product life cycle, whether that's proactive or whether that's reactive. You think about life sciences, things like digital health, the emphasis on value demonstration with medicines and therapies. It's our job -- you think about automated vehicles and electrification, the complexity associated with those innovations is going to continue to drive work to Exponent. Our job is to understand what's coming around the bend, position ourselves with the talent, with the capabilities and with the relationships to win the business. But I think the opportunity landscape absolutely supports the model that Rich is talking about over time in the sort of high single to low double digit range.

And then maybe just for my follow-up. You touched on it a couple of times, Catherine, on kind of digital health pharma space. I know it's a major growth focus for you and the organization as a whole. You've done a lot of hiring there over the past couple of years. Can you just give a little bit more of a detailed update on how that's going? I think it's only a couple of points as a percentage of revenue today, but you have ambitions for that to be much larger as a percentage of your revenue base. So I was just wondering if you could give a more detailed update on that effort?

We continue to invest, as you mentioned, on the talent side, but also in the building of the client relationships, getting those relationships established so that we can be able to get those engagements started when the issues arise, and we are absolutely getting increased traction around that area. We have some public work that we're doing for the Center for Disease Control around data and COVID vaccine efficacy and safety. And so there are some very tangible and very forward-looking kinds of projects that we have won in that space. So you're right. It is still a relatively small percentage of the portfolio, but I'm pleased with the progress. Look, this is a long term opportunity and we are in the investment phase but we are seeing some of those early returns in terms of those performance indicators. So very pleased to see that and we'll continue to report back on that.

Ladies and gentlemen, this concludes the question-and-answer session as well as today's presentation. Thank you all for your participation. You may now disconnect your lines.