Good afternoon and welcome to the Exponent, Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Joni Konstantelos, Managing Director, Riveron Consulting. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent’s second quarter 2024 financial results conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company’s corporate website at investors.exponent.com. 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-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 second quarter 2024 business performance. Rich will then provide a more detailed review of our financial results and outlook, and we will then open the call for questions. We delivered net income growth of 14% and expanded EBITDA margin in the second quarter, reflecting the results of efforts to align our operating model with market demand. As expected, revenue growth moderated during the quarter due to ongoing headwinds in the consumer electronics and chemical sectors and a tough comparison against 20% growth in our reactive work last year. Despite these challenges, our reactive business delivered mid-single-digit growth fueled by demand across the transportation, utilities, and medical device sectors. Our proactive business continued to experience softness in consumer electronics, partially offset by modest year-over-year growth in the utility sector. Turning to our engagements in more detail in our reactive work, we saw strong demand within transportation related to product liability and regulatory matters. These included evaluating the performance and safety implications of advanced driver assistance technologies and battery systems, as well as railway failure investigations in life sciences. Our team continued to leverage their expertise in engineering, manufacturing, and human factors to understand the root causes of medical device safety concerns. The energy transition continued to be a driver as we advised clients facing infrastructure disputes involving wind, solar, and large-scale energy storage. During the quarter, we continued to see headwinds in the chemical sector as some clients paused near-term litigation work within our proactive services. Engagements in the quarter were driven by our asset integrity work in the utility sector, for example, evaluating ignition risks and mitigations for electrical infrastructure and in transportation, evaluating vehicle emissions technologies. While we continue to experience headwinds in the consumer electronics industry related to product lifecycle timing and broader industry impacts, we are seeing more signs of stabilization. Our product development consulting activities began to recover modestly in the quarter, and we were encouraged by an uptick in human subject research engagements. Turning to our segments, Exponent's engineering and other scientific segments represented 84% of revenues before reimbursements in the second quarter. Revenues before reimbursements in this segment increased 4%, driven by demand for Exponent services across the transportation and energy sectors. Exponent's environmental and health segment represented 16% of revenues before reimbursements in the second quarter. Revenues before reimbursements in this segment decreased 4% due to ongoing headwinds in the chemical sector. Looking ahead, accelerating transformation across industries will continue to create attractive market opportunities, from groundbreaking technology and data applications in life sciences to renewables and infrastructure resilience in the energy sector, and electrification and automation of transportation. Exponent remains well positioned to support our clients with vital insights for current challenges while preparing the path toward the future. Considering our encouraging performance in the first half of 2024 and the outlook for the remainder of the year, we are raising our full-year revenue and margin expectations. Rich will take us through the details of that. However, we still face headwinds in the chemical sector as well as tough comparisons based on unusually strong prior year growth in our reactive services. Over the last several quarters, our incredible team has demonstrated agility in adapting to ongoing dynamics in both our consulting and our talent marketplaces. Going forward, we will continue to leverage and build upon our diversified portfolio of talent and capabilities as we flex to meet market demands. I'll now turn the call over to Rich to provide more detail on our second-quarter results as well as discuss our outlook for the third quarter and the full year 2024.

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 second quarter of 2024, total revenues were approximately flat at $140.5 million, and revenues before reimbursements or net revenues, as I will refer to them from here on, increased 2% to $132.4 million as compared to the same period in 2023. Net income for the second quarter increased to $29.2 million or $0.57 per diluted share as compared to $25.7 million or $0.50 per diluted share in the prior year period. The realized tax benefit associated with accounting for share-based awards in the second quarter of 2024 was $700,000 or $0.01 per diluted share, as compared to an immaterial impact in the second quarter of 2023. Inclusive of the tax benefit for share-based awards, Exponent's consolidated tax rate was 26.3% in the second quarter of '24 as compared to 29% for the same period in 2023. EBITDA for the quarter increased 8% to $39.9 million, producing a margin of 30.2% of net revenues as compared to $36.8 million or 28.4% of net revenues in the same period of 2023. This year-over-year increase in margins was driven by an increase in utilization during the second quarter of 2024. Billable hours in the second quarter were approximately 381,000, a decrease of 2% year-over-year. This decrease was primarily related to the year-over-year decline in machine learning data studies for consumer electronics clients. The average technical full-time equivalent employees in the second quarter were 975, which is a decrease of 9% as compared to one year ago. As we have strategically aligned our resources with demand over the past year, utilization in the second quarter was 75%, up from 69% in the same period of 2023. As Catherine mentioned, our efforts to align our operating model to the market demand while also selectively expanding our capabilities drove utilization back to historical norms. The realized rate increase was approximately 4% for the second quarter as compared to the same period a year ago. In the second quarter, after adjusting for gains and losses in deferred compensation expense, compensation was approximately flat. Included in total compensation expense is a deferred compensation gain of $875,000 as compared to a gain of $4.1 million in the same period of 2023. As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line. Stock-based compensation expense in the second quarter was $5.6 million as compared to $5.2 million in the prior year period. Other operating expenses in the second quarter were up 9% to $11.2 million, driven primarily by increased engagement at our offices and investment in our corporate infrastructure. Included in other operating expenses is depreciation and amortization expenses of $2.5 million for the second quarter. G&A expenses declined 9% to $6 million for the second quarter. This decrease was primarily due to a decrease in travel and meals and bad debt expense. Interest income increased to $2.2 million for the second quarter, driven by an increase in interest rates. Miscellaneous income, excluding the deferred compensation gain, was approximately $800,000 in the second quarter. During the quarter, capital expenditures were $1.1 million, and we distributed $14.2 million to shareholders through dividend payments. Turning to our outlook for the third quarter of 2024, as compared to one year prior, we expect revenues before reimbursements to be approximately flat and EBITDA to be 26.75% to 27.5% of revenues before reimbursements. As Catherine mentioned, we are raising our revenue and margin expectations for the full year 2024. For fiscal year 2024, we expect revenues before reimbursement to grow in the low to mid-single digits and EBITDA to be 27.5% to 28% of revenues before reimbursements as compared to 27.7% for fiscal 2023. Both our current and previous guidance are inclusive of the extra week in the fourth quarter, which occurs approximately every sixth year, estimated to contribute an additional 5% to net revenues in the fourth quarter or 1.25% for the year. We expect sequential revenue growth in headcount by the end of the third quarter. The average technical full-time equivalent employees in the third quarter of 2024 will be approximately 1% less than in the second quarter. As a result, average FTEs for the third quarter will be down approximately 8% year-over-year. We expect headcount to grow sequentially in the fourth quarter, and year-over-year average FTEs in the fourth quarter to be down 4% to 5% on a year-over-year basis. We expect utilization in the third quarter to be 71% to 73% as compared to 70% in the same quarter last year. We expect the full-year utilization to be 70.5% to 72.5% as compared to 69% in '23. We still believe our long-term target of sustained mid-70s utilization is achievable as we continue to strategically manage headcount and balance utilization based on market demands. We expect the 2024 year-over-year realized rate increase to be 4% to 4.5% for the third quarter and full year. For the third quarter, we expect stock-based compensation to be $5.2 million to $5.5 million. For the full year, we expect stock-based compensation to be $23 million to $23.5 million. For the third quarter, we expect other operating expenses to be $12.5 million to $13 million. For the full year, we expect other operating expenses to be $46.75 million to $47.75 million. It should be noted that on June 19, 2024, we exercised an option to early extend the lease for our testing and engineering center in Phoenix, Arizona. Although our current lease doesn't expire until 2028, we wanted to lock in the pricing at this time. Although we will not pay any higher rent until 2028, the lease accounting rules require us to recalculate the rent expense for the length of the new lease period. This resulted in an immediate increase in our noncash rent expense of $150,000 during the second quarter and an increase of $1.1 million during each of the third and fourth quarters. We are very excited to secure this facility as we believe it will continue to be an integral part of our growth. For the third quarter, we expect G&A expenses to be $5.5 million to $6 million. For the full year 2024, we expect G&A expenses to be $23.5 million to $24.5 million. We expect interest income to be $2 million to $2.5 million per quarter for the remainder of 2024. In addition, we anticipate miscellaneous income to be approximately $500,000 to $600,000 for the third quarter of 2024 and $100,000 to $200,000 in the fourth quarter. This includes an expected sequential decrease in rental income in the third and fourth quarters due to the loss of a tenant in our Menlo Park building, which we own. For the remainder of 2024, we do not anticipate any additional tax benefit associated with share-based awards. For the third quarter of 2024, we expect our tax rate to be approximately 28% as against 27.9% in the same quarter one year ago. For the full year 2024, the tax rate is expected to be 26.7% to 26.9% as compared to 25.1% in 2023. The increase in the tax rate is due to less tax benefit from share-based awards in the first quarter. In closing, we are pleased with the expanded profitability this quarter and remain focused on growing and maintaining the balance between our operating model and market demand. I will now turn the call back to Catherine for closing remarks.

Thank you, Rich. Excellent variety that abounds in products, technologies, and regulations. In this environment of relentless innovation and safety-critical applications, we are focused on fueling the growth engines of the future through expanded capabilities, recruitment of top talent, and development of our exceptional team. Looking forward, we will maintain our strategic position in the cutting edge of innovation, and remain steadfast in our ability to deliver sustained profitability and long-term shareholder value. Operator, we are now ready for questions.

The first question comes from Andrew Nicholas with William Blair. Please go ahead.

Hi. Good afternoon. Thank you for taking my questions. I wanted to first ask about kind of the second half outlook. It looks like you're expecting maybe a bit better growth than we had thought previously in the third and fourth quarter. And I'm just wondering what's driving that. Is it specific momentum and any specific is some increased optimism on the consumer product side? Is it increased visibility in conditions? Just any more color on what gives you more conviction in growth in the back half of the year, that would be great.

Thank you, Andrew. I'll begin and Rich can add as needed. Regarding the electronics sector, it's an important aspect for us. We're happy to report sequential improvements in Q1 and Q2 related to our user research and machine learning studies in electronics. We remain in close discussions with our clients, focusing on what we anticipate for the latter half of the year. We are gaining more clarity for Q3 and noticing trends of continued sequential improvement. On the hardware side, particularly in product development consulting, we have observed some modest progress as well. Overall, there are positive indicators from that sector, which is encouraging. Additionally, we are optimistic about the market drivers in our reactive business, especially with our advancements in driver assistance technologies, automation, electrification in transportation, and our wearable tech projects. This gives us confidence as we approach the latter part of the year.

Yes, I would just add that we were aware of certain areas we needed to address, particularly in consumer electronics and ongoing challenges in chemicals. However, our main concern was forecasting how well we would perform compared to the exceptional growth we experienced last year in the reactive business, which we've been developing for nearly 58 years. Last year, we achieved a 20% growth rate in the second quarter for our reactive business, with the third quarter even reaching the low 20s and maintaining high teens in the fourth quarter. We had several significant projects during that period, and it was uncertain how they would impact our future performance. We were pleased to see year-over-year growth in that area during the second quarter, which was encouraging, although we aspire for even better results. We recognize that the overall guidance of 2% net revenue growth in Q2 and flat performance in Q3 may not seem impressive at first glance. However, considering the market we’re in and our growth trajectory over the last few years, it’s important to note that last year’s growth wasn't achieved under negative circumstances either; it had strong growth as well. We understand there are always timing factors at play and, as a public company, we are accountable to quarterly performance. Nevertheless, the underlying demand we are seeing is promising for the long term.

Very helpful. And then maybe as a follow-up to that commentary, if you could just talk to us a little bit about headcount and ambitions on the hiring front. It certainly seems like things are turning around and improving enough to want to lean back into headcount growth. If you could just talk about whether or not that aligns with how you're thinking about it or if you're hesitant to do that, absent maybe a multi-quarter, I would appreciate it.

Yes. Thanks, Andrew. So we are absolutely in recruiting mode. But it is strategic based on the areas of the market where we see the key growth opportunities. This has always been our philosophy, as you know, that we target our recruiting in those areas because it's those individuals as they develop, two true engines of growth for the future. And so we're getting through some of the ripples in headcount, and we've been able to balance that to get our utilization back where we would like it to be, and we are hiring. We are coming into the fall recruiting season at the universities. That is a really important time of year for us, not the only time of year that we hire new PhDs, but it's a really important one. And so we are already those engines are running and we are interviewing in those key areas, vehicle automation and batteries and sensor technology. And over on the health side, toxicologists and epidemiologists, these are all areas of disciplines where we need those growth engines. So for sure, we are in that mode.

Yes, it's important to remember that we are focused on recruiting PhDs, which is a long-term effort. We maintained our market presence and recognition during this time. Over the past year, specifically in the second quarter of 2023, we saw a 15% year-over-year growth in headcount, driven by low turnover and high acceptance rates. While we needed to make some adjustments gradually, which we approached carefully as Catherine mentioned, this has led us to a healthier state, with a 9% reduction from our previous headcount. We are currently achieving 75% utilization in the second quarter, which is slightly improved from the first quarter after accounting for holidays and vacations. We anticipate another slight decrease in the third quarter and again in the fourth due to the holiday schedule, but the utilization in Q2 indicates a small increase. This change has been influenced by a slight decline in headcount, allowing us to find a better balance and positioning our business units to feel more comfortable with the recruiting and hiring process as we enter the fall recruiting season at universities. This period is crucial for us, and we are actively interviewing for key roles in vehicle automation, batteries, sensor technology, as well as toxicologists and epidemiologists in the health sector.

The next question is from Josh Chan with UBS. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. Maybe on the headcount topic, how do you feel like your Q4 projected exit rate will position you for any growth that you expect in 2025? I guess you're exiting the year possibly in low 70s utilization already. So just kind of curious how you're thinking about headcount versus growth going into next year again.

Yes. First, I'll discuss the utilization aspect since you're trying to maintain that model. We expect utilizations in the third quarter to be approximately in line with our guidance, adjusted for the additional vacations and holidays in the fourth quarter. While yes, it's lower, that’s solely due to that adjustment, and we are anticipating that. Secondly, regarding the exit, I expect us to continue gaining momentum in sequential growth. We need to monitor our progress, see how much we've achieved, and assess our planning for 2025, which will begin this fall. We also need to account for the effects of the step down in Q2. At this point, I'm not ready to predict where we'll stand, as it may still be slightly down year-over-year early in the year due to ongoing adjustments, or we may have stabilized or improved by then. We need a few more months to evaluate what we've planned for the end of the year and our early acceptances for 2025, which we likely won't have clarity on until the fourth quarter.

Perfect. And maybe my second question is on the Q3 growth guidance. Is there any reason why growth slows down in Q3 versus Q2? I know that you mentioned the reactive comp gets a little tougher, but I wonder if there's any other reasons behind the slightly more moderate growth in Q3 than.

Yes. It really comes down to two main factors. First, the comparison for this quarter is a bit challenging. Last year, the growth rate for the reactive business in the third quarter was in the low 20s. Overall, we experienced a 10% growth as a company, even with a 5% decline in consumer electronics. Excluding that segment, we had a growth rate of around 15%. We saw strong activity during that time, particularly related to litigation. Additionally, some promising projects we had in the second quarter are tapering off in the third quarter, which contributes to some headwinds. We've taken this into consideration in our projections.

The next question is from Tobey Sommer with Truist. Please go ahead.

Thanks. I was interested in getting your updated perspective on AI-related projects, maybe how often that is coming up in your new business and how it might compare to 2, 3, 4 quarters ago, if it's increasing or decreasing. What expectation is for the relevance of that as a topic and driver for your business?

Yes, thank you, Toby. We continue to observe the integration of AI in various ways. We've previously discussed this, including our traditional failure analysis work, now focused on systems that make decisions using artificial intelligence, particularly in advanced driver assistance technologies and transportation. This sector is expanding as we begin to address more complex questions about whether vehicle systems operate correctly with this technology. Early signs show positive trends in our testing efforts in this area. We are developing innovative testing methodologies that are attracting interest, particularly in the legal sector, which is part of our investment in our Phoenix facility that Rich mentioned. On the medical device front, we are still in the early stages regarding AI-related questions in the reactive business, but I believe that developments are on the horizon. This refers to wearables, such as glucose monitoring devices, that make health-related decisions using AI algorithms. Additionally, we are identifying more opportunities to apply machine learning to solve client problems. For example, when clients inquire about the durability of their packaging during shipping, we can leverage machine learning to analyze large datasets related to the packaging's exposure during transit and determine the necessary testing to ensure it is robust. This creates efficiencies for our clients. We are developing and utilizing tools to address these questions, and we are also considering fundamental inquiries about algorithms, software as a medical device, and similar areas. While we are still in the early stages regarding some of the more proactive topics, I am optimistic about the ongoing development of our capabilities and our growing use of machine learning to resolve issues.

I think there are a couple of additional points to mention. The primary questions we are receiving regarding our studies focus on helping to benchmark and understand how our health application algorithms compare to medical devices or established standards in their performance. We need to assist clients in collecting sufficient data for training and improving the algorithms. This involves benchmarking and then enhancing to ensure continuous improvement, whether through hardware and sensors or through the algorithms and machine learning tools we are utilizing. This is a significant area of focus for us. Additionally, we are working closely with clients in the utility sector, who are developing risk models to make decisions concerning reliability and when to shut down power during extreme weather. We are assisting them in validating their data and algorithms so they can build more robust and reliable decision-making models in these scenarios.

In your conversations with customers when you're hearing from senior consultants. What are you hearing about any impact that global elections are having? And I guess I cater the question a bit more towards proactive is my assumption, but I'll let you respond because we've already had globally some surprise snap elections with unanticipated outcomes and now we're in the middle of our own relatively new election process.

Yes, thank you, Toby. We always pay attention to these matters. Historically, the company has not experienced significant fluctuations due to changes in administrations. While global administration changes can influence regulatory frameworks, these changes do not happen overnight. Additionally, efforts to lighten regulations are often balanced by society’s growing expectations regarding safety, health, and the environment. Depending on the various sectors of our portfolio, a significant reduction in regulations could create opportunities for us in construction disputes, whereas stricter regulations may lead to increased work in our chemicals sector, focusing on human exposure and related issues. Overall, we see a balancing effect, which remains consistent. Another related question we receive, and are monitoring, is regarding the potential impact of the Chevron decision by the Supreme Court, which could enable regulated entities to contest regulations based on their scientific and engineering foundations. While we haven’t noticed any major changes so far, we are closely observing the situation and engaging with our clients. We expect that over time, there may be more inquiries about the scientific bases of these regulations. When regulations become complex, especially concerning health and safety and environmental issues, we will be well positioned to take advantage of that, but there has not been any significant change in a noticeable manner.

This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.