Good afternoon. And welcome to Huron Consulting Group's webcast to discuss the financial results for the Second Quarter of 2023. [Operator Instructions] As a reminder, this conference call is being recorded. Before we begin, I would like to point all of you to the disclosure 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 a 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 reconciliations to the most comparable GAAP numbers. And now I would like to turn the call over to Mark Hussey, Chief Executive Officer and President of Huron Consulting Group. Mr. Hussey, please go ahead.

Good afternoon, and welcome to Huron Consulting Group's Second Quarter 2023 Earnings Call. With me today are John Kelly, our Chief Financial Officer; and Ronnie Dail, our Chief Operating Officer. We continue to drive strong organic growth in each of our three operating segments while expanding our company wide operating margin, consistent with our growth strategy. Revenues in the second quarter of 2023 grew 27% over the prior year quarter and for the first half of 2023, revenues grew 25% over the same period last year, reflective of the ongoing strength and demand for both our consulting and managed services and digital capabilities. Adjusted EBITDA margin increased to 130 basis points in the first half of 2023, compared with the same period in ‘22. As we make solid progress toward a goal of expanding companywide profitability. We are pleased that our performances outpaced the financial objectives shared at a 2022 Investor Day. And we remain confident in our ability to deliver at our above these goals in the years ahead. I'll now share some additional insights into our second quarter performance. In the healthcare segment, second quarter revenues grew 35% over the prior year quarter. The increase in revenues in the quarter was driven by strong demand for our performance improvement, financial advisory and digital offerings. As the federal and state pandemic relief funding has waned, hospitals and health systems face ongoing financial and operational challenges. Many organizations have experienced workforce shortages, increased cost of labor and supplies, and increased competitive pressures in their markets, collectively leading to the margin pressures and in many cases, net operating losses. Healthcare organizations are focused on addressing these challenges and doing so in a matter the best physicians is going to stabilize near term performance and enables them to achieve their broader strategic…

Thank you, Mark. And good afternoon, everyone. Before we begin, please note that I will be discussing non-GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS and free cash flow. Our press release,10-Q in investor relations page on the Huron website have reconciliations of these non-GAAP measures to the most comparable GAAP measures, along with the discussion of why management uses these non-GAAP measures and why management believes they provide useful information to investors regarding our financial condition and operating results. Now I’ll share some of the key financial results for the quarter. Revenues for the second quarter of 2023 were $346.8 million, up 26.9% from $273.3 million in the same quarter of 2022. Achieving another record of quarterly revenues as we continue to execute on our growth strategy. The increase in revenues in the quarter was driven by organic growth across all three of our operating segments. From a capability perspective, consulting and managed services revenues grew to 33.4% and digital revenues grew 19.2% when compared to the same quarter in 2022, respectively. Net income was $24.7 million, or $1.27 per diluted share, compared to net income of $13.9 million, or $0.76 per diluted share in the second quarter of 2022. Our effective income tax rate in the second quarter of 2023 was 29.4% compared to 36% in the same prior year period. Our effective tax rate from Q2 of 2023 was less favorable than the statutory rate, inclusive of state income taxes, primarily due to certain nondeductible expense items, partially offset by the tax benefit of nontaxing gains on investments used to fund our deferred compensation liability. Adjusted EBITDA was $48.5 million or 14% of the revenues in Q2 2023 compared to $33.2 million, or 12.2% of revenues in Q2 2022. The increase in…

[Operator Instructions] Our first question comes from the line of Tobey Sommer of Truist securities.

Thank you. I wanted to ask a question about the organic runway in broad terms. Do you feel like you've got sort of all the pieces of your business continues to sort of drive organic growth and bridge it because you've been de-levering for a number of years kind of, that makes your stock kind of riskless cash deployment or at least less risky. And I'm wondering if there's a potential for you pivoting and starting to spend money on acquisitions over the near term.

Tobey, it’s Mark. And you're breaking up a little bit. I think we got the question about whether we have the organic platform today to continue growth without deploying large amounts of capital in M&A. And the answer is yes, the portfolio if you look back to what's happened to our business over the last 10 years, we have diversified our healthcare portfolio to be far more balanced between performance improvement and other solutions like digital, financial advisory and strategy. Our education business has grown to a nice level of scale from what it was over that period of time, we expanded into areas in the commercial markets in conjunction with the digital acquisition platform that to many small acquisitions got us to this very large platform we have today. So there are what I would characterize as opportunistic pieces for us to deploy. But I don't think that we see any major gaps in the platform as we see it right now.

Thanks. Do you think they'd be in to do; you have tuck-ins, do you think that would be more on the IT side and getting skills for specific emerging software that are experiencing rapid adoption, or more than they care or for education, sort of functional areas?

Tobey, I think it'll be a combination of both of those, I think it'll probably lean more digital, because those actually work hand-in-hand, especially when we rapid model we're really working collaboratively as a team in those markets, they are enabling to the advisory side of the business. And so it could be a little bit more on the pure advisory side, but I would say largely speaking, likely to have a digital flair, and probably focused on, again, some of the edge solutions in industries that we're not in and help us gain a foothold and expansion to be relevant in those particular markets. And so I think that'll probably be a little bit leaning towards a digital solution, irrespective of the industry as a general statement, but absolutely going to have an industry focus on it as well.

Last question for me, we’ve heard from some other professional services firms, that employee retention, year-to-date improved pretty significantly. And in some cases, it seems to be dampening operating leverage, that's not evident in your case. But I wanted to see if the improved employee retention is evident, even though dampening operating leverage is still visible.

Tobey, this is John. Yes, so our retention has certainly improved over the course of the year, I think, our attrition rate at this point, it's on a trajectory to be lower than even the historical norms that we had prior to the pandemic. But in our case, given the pipeline that we have the backlog we have in the growth we're seeing in our business. This is great news for us in terms of really having the talent that we need to deploy on our project. If we were to have a higher attrition rate, that just means we have to be more aggressive in the market, bringing people in because of the demand we're seeing right now across the business.

Our next question comes from the line of Andrew Nicholas with William Blair and Co.

Hi, good afternoon. Thanks for taking my questions. I wanted to ask first on the margin guidance, obviously, really, really strong second quarter and a second quarter EBITDA margin that was well above the full year guide. Just kind of curious what in the second half makes you a bit more conservative on EBITDA margins? And maybe wrapped within that question is, it is question on headcount growth and hiring expectations in the back half of the year.

Sure, Andrew. So first, you setting the question, but we are very pleased with our progress on the margin so far this year. And I think it's a reflection of a number of initiatives that we've had within the company to improve our pricing, to increase our utilization, to increase our deployment of global resources, and really the continued scaling of our corporate SG&A. And also during the quarter the performance based fees recognized the healthcare performance improvement business also help with margins during the quarter. So with all that said, we're also really pleased with the growth rate that we've had so far this year, as well as the evolving pipeline that we see now even starting to look out into 2024. And with this in mind, we think it's likely that we'll continue to build out a resource pool in the back half of the year with an eye on 2024. And that may create some additional pressure on second half margins, because there's typically a ramp to productivity for new consultants. So we're certainly very comfortable with our guidance range and the margins. And from our perspective, we see the potential based on the initiatives I described to be able to push upside there, but we're just balancing that. And to your point probably being a little bit conservative with the guidance, just recognizing that, at the rate of our growth, we're likely going to still be in the market, adding talent, and there just tends to be a little bit of a ramp as we're building up resources.

That's helpful. Thank you. Maybe somewhat related, I wanted to ask about the India initiative, which I know is a key part of your 25 margin targets, I think last quarter, there was a little bit of pressure in the digital utilization, that's picked up nicely, sequentially. So just if you could give an update on progress and utilization within that part of your business, the global support staff.

So we are seeing some nice progress there, Andrew, as we talked about on prior calls, we did intentionally build up our resource pool in the back half of last year in India, really to diversify our global talent and to make sure that we had the right capacity to serve our clients, particularly in areas of digital growth. And with that came a little bit of utilization pressure, just as we got those resources, trained up and ready to be deployed. And so our expectation for the year was that as each sequential quarter pass, we'd start to see that ramp of utilization. And that is, in fact, what we're seeing. So we ended, when you look at the digital utilization that we've published at 74.7%, for the quarter, that's a composite there, we're looking at it from a geography perspective is near 80%, in North America, and then within India, ramping up to 65% this quarter, which has been some nice sequential improvement for us.

Andrew, it’s Mark, I'm going to add a couple things to what John said. So the utilization is one part of the story. Another part of the story is just the breadth of what we're doing across every service line within India. And I just mentioned that in the last quarter, we also hired a country leader in Singapore, which will be served predominantly out of the India capabilities that we have today. So it is a great platform for us to expand, we've done very well in that particular market and have clients and the channel pulling us into there. So we feel very confident in our ability to continue to leverage that as a not only a source of margin expansion, but also to help drive revenue growth.

Our next question comes from the line of Bill Sutherland of the Benchmark Company.

Thanks and congrats on a terrific quarter, guys. In healthcare, John, did you mention the growth that you had in digital in the healthcare side?

It was 10% for the quarter, Bill.

Okay. And is the education so strong, just because there's this insatiable need for cloud migration in the universities?

Yes, Bill, this is Mark, if there's going to be a long-term cloud conversion from decades old investments and systems, there's opportunity for them to leverage new technologies to help grow their businesses to applications like in the CRM space, Salesforce, et cetera. So data analytics, there's just a tremendous opportunity to bring digital solutions broadly across the whole higher education landscape as well as healthcare.

Okay. In growth, in terms of your guidance now for the year, and the growth in revenues that implies for the second half, should we think about hiring kind of being in line with that? Are you going to be hiring potentially a little ahead of that growth?

In the base case, Bill, I think is generally in line. But like I said in my earlier remarks, if they continue to get a good view of pipeline for the back half of the year into next year, and as projects continue to convert, there's potential for us to hire even more aggressively than that, but I would think of it, Bill, in the base case as being generally in line with revenue in the back half of the year.

And then finally, in commercial, I guess this requires some view of the economic outlook as to whether you continue to build up resources in distress. But how are you thinking about that and the other parts of that business? Thanks.

So we are continuing to build out resources in the distressed financial advisory space. It's been one of the areas of really strong pipeline for us. It's been one of the areas where we've seen some great success converting that pipeline in the backlog. And as you know, it's one of that higher margins, higher bill rate areas of our business. So we've certainly been adding talent in that area, and would expect to continue to do so.

Our next question comes from the line of Kevin Steinke of Barrington Research and Associates.

Hey. Good afternoon. I wanted to follow up on the discussion about utilization. I guess if you look at consulting and digital together, your consolidated utilization rate is between 75% and 76% on a consolidated basis, how much higher do you think that can go? And you mentioned near 80% in digital, and I think in the US and then 65% or so in India, this is the expectation that India migrates towards that 80 percentage level as well over time or is that kind of the right number to think about?

Kevin, it's John. I would say, so we are pleased to be, to your point on the map there over the 75% mark, in terms of utilization, that's really, it's high as we've been since prior to the pandemic. So we're very pleased with that. I think we believe there's still a couple 100 basis points of opportunity there in terms of utilization. And when we deconstruct that, I think there are resources and India will certainly play a part of that increased utilization. And to your question about where should India resources be? Certainly think we believe that the utilization in India can get up to that 80% mark. In reality, as we think that there's opportunity there for it to move even higher over time. So I think that remains probably one of our big utilization opportunities. And as we've said, on prior calls, that kind of per employee revenue or margin generation on our work done in India is actually quite high. So for us, to the extent that we're able to drive that utilization improvement, we think that's going to be accretive to our margins.

Okay, great. And just also wanted to ask you about commercial, more around your efforts to expand into serving additional industries, and or historically, we had some nice strength in financial services and energy, but just wondering about what industries you're looking to expand into more significantly, or are you making progress on that front?

Kevin, it's Mark. The answer there is, yes, you're right. We have strength in financial services, energy utilities. The third one, it's pretty broad, and actually is doing very well for us, two and three industrial market, which encompasses a number of different companies. And I would say collectively, the power of our model is the ability to bring these capability solutions into industries where you have that combination of the expertise on both vertical dimension as well as horizontal dimension. So as we continue to grow there, that's where back to an earlier question on M&A that you'll see us continue to use not only tuck-in but organic hiring to solidify the positioning in that particular market. Historically, if you go back, 10-12 years ago, if this was a very low single digit percentage of a business over time, as we've expanded our digital capabilities, to strengthen healthcare and education, it has naturally taken us into much broader markets in ways that are very naturally accretive in our expansion and growth. And that's exactly why we feel like we can continue to go down this path and really thoughtfully construct a commercial industry segment that really ends up complementing the rest of the overall Huron model.

We have a follow up question from the line of Tobey Sommer of Truist Securities.

Thanks for the follow up. I wanted to ask you questions about your relatively small restructuring business, what's the outlook there? The capital markets, at least up until today seem to be looking for a soft landing. And I think Chairman Powell yesterday's press conference said the Fed is no longer modeling a recession. What's your mind look like and tell you.

Tobey, right now, I'd say it's going to continue to be in strong demand for a while. While interest rate increases, a slowdown in absolute terms are pretty high. I think you have the capital markets now that in prior periods were due to the financial solution to a restructuring in this environment. Now you have to have an operating solution often to fit circumstances. And so the complexity of that plays well to the strengths that we have in that particular market. And we see that continuing on for some period of time. You got the senior lending market is not really supportive of a whole lot of these situations right now. The nonregulated market is that it's quite expensive. And so it's going to continue to have I think, a lot of pressure in at least, I would say, the next 12-18 months.

Thank you. And seeing no more questions in the queue. I'd like to turn the call back to Mr. Hussey.

Thank you for spending time with us this afternoon. We look forward to speaking with you again in November when we announce our third quarter results. Have a good evening.

That concludes today's conference call. Thank you everyone for your participation.