Navigant Consulting's (NCI) CEO Julie Howard on Q1 2016 Results - Earnings Call Transcript

| About: Navigant Consulting, (NCI)

Navigant Consulting, Inc. (NYSE:NCI)

Q1 2016 Earnings Conference Call

April 26, 2016 10:00 AM ET

Executives

Aaron Miles - Director, Investor Relations

Julie Howard - Chief Executive Officer

Tom Nardi - Interim Chief Financial Officer

Lee Spirer - Executive Vice President and Global Business Leader

Analysts

Randy Reece - Avondale Partners

Tim McHugh - William Blair & Company

David Gold - Sidoti & Company

Kevin Steinke - Barrington Research

Kwan Kim - SunTrust Robinson Humphrey

Bill Dezellem - Tieton Capital Management

Operator

Good morning and welcome to Navigant’s First Quarter 2016 Earnings Conference Call. At this time I would like to inform all participants that their lines will be on listen-only until the question and answer portion of the call. This call is being recorded. If you have any objections, you may disconnect at this time. Now I would like to introduce Mr. Aaron Miles, Director of Investor Relations for Navigant. Mr. Miles, you may begin.

Aaron Miles

Good morning and welcome to Navigant’s first quarter 2016 earnings conference call. We have posted our earnings release as well as supplemental information about the quarter on the Investor Relations section of our website.

Before I turn the call over to Julie Howard, Navigant’s Chairman and Chief Executive Officer, I would like to highlight the disclosure at the end of our earnings release for information about any forward-looking statements that maybe made or discussed on this call. Please review this information, along with the Company’s SEC filings, for disclosure of information that may impact subjects that we discuss this morning. We will be discussing one or more non-GAAP financial measures on today’s call. Reconciliations to the most comparable GAAP financial measures are contained in the schedule to our earnings release.

I will now turn the call over to Julie Howard.

Julie Howard

Thank you, Aaron and good morning. I’d like to thank all of you for joining us today. Also wanted to give you heads up in advance that I’ve been down with a little bit of a cold. So I maybe somewhat rafting throughout our comments.

I’d like to begin today’s call by commenting on our strong start to 2016 and then turn the call over to Tom Nardi, our Interim Chief Financial Officer to review our business performance for the first quarter in detail.

Before I get started, I would also like to welcome Stephen Lieberman. Our new Executive Vice President and Chief Financial Officer who has joined in on today’s call as well. Stephen’s strong financial acumen and vast experience across a range of global industries aligns well with the growth trajectory of Navigant. We are very excited to have Stephen on board.

However, since we are only about seven days in Stephen’s tenure, Tom will be handling this call and any questions today.

I am really pleased to report that we are off to an outstanding start in 2916 highlighted by strong demand for our solutions, expertise and experience and reflected in our first quarter 2016, revenues before reimbursement s increased of 11% and adjusted earnings per share growth of 17% as compared to the first quarter of 2015.

The consistency of our performance and the momentum visible in this quarter is directly correlated to the execution of our long-term strategy. We are creating a more durable and resilient organization that is purposefully built to address the same risk and transformation in our client market space.

As a result, we are achieving an organic growth rate in ex path of historical trends. Simply stated, we are accomplishing what we set out to do which has been driven recently by our success and the following actions.

Aggressively recruiting to bolster our revenue generating consulting population which strengthens our organization with deeper expertise and greater business development potential, investing externally in capabilities and tools that leverage and enhance our current offering, developing new service offerings and solutions to meet the needs of our client base which also includes developments from collaborations with promising start-up companies to ensure we are bringing the leading edge to our clients. We’ve refreshed our brands and are continuing to build infrastructure necessary to support our evolving business mix of assets that drive recurring revenue.

The byproduct of all of these actions is a firm that remains well positioned in the markets we serve. Demand in our core client industries of healthcare, energy and financial services, as well as in legal channel where we have decade’s long eminence is robust. Change will continue in these sectors and we remain at the forefront as anticipated in serving client needs in this transformative environment.

As a company, we strive on solving enough the challenge with our clients. Our diverse client portfolio offers solutions that only Navigant can deliver based on the unique combinations of our people and their deep market insights along with specific tools, technology and – to further enable our consultant offerings.

Overall, we came into this year assuming great about our potential for a strong 2016 and our first quarter performance reaffirms those expectations. Particularly, our demonstrated ability to deliver meaningful organic growth. We remain fully confident in our ability to meet the 2016 financial objectives we have set forth for ourselves and communicated to you previously in the year.

I am now going to turn the call over to Tom to discuss first quarter results in more detail and following that I’ll come back to you with some closing remarks.

Tom Nardi

Thank you, Julie. Good morning, everyone and thank you for joining us today. As Julie recapped a moment ago, Navigant delivered very solid first quarter 2016 results reflecting consistent performance across our segments. Based on the strong start to the year along with our positive outlook, we continue to be comfortable with our previously issued guidance for Revenues Before Reimbursements or RBR and adjusted EBITDA for the full year.

In addition, we are guiding our expectations for adjusted earnings per share to the high end of our previously communicated range.

Turning to the bottom-line, adjusted earnings per share was up 17% to $0.27 for the first quarter of 2016, compared to first quarter of 2015 driven by higher RBR, higher adjusted EBITDA, as well as a lower effective tax rate. RBR increased 11% for the first quarter to $223.5 million with 8% organic growth when compared to the first quarter of 2015.

Year-over-year growth in RBR was driven by a very strong performance from our Healthcare segment, as well as solid organic growth from our disputes, forensics and legal technology, and energy segments.

Adjusted EBITDA totaled $30.6 million for the first quarter, up 8% from the same period of 2105 with year-over-year margins roughly equivalent at 14% of RBR. Net income for first quarter of 2016 on a GAAP basis was $12.6 million or $0.26 per share, compared to $25.1 million or $0.51 per share in the prior year.

As you may recall, first quarter 2015 GAAP results benefited from a non-taxable earn out adjustment of $0.31 per share, primarily related to the Cymetrix acquisition. Non-GAAP financial measures are reconciled to GAAP measures in the financial schedules attached to the earnings release.

Moving on, let me highlight some details for each of our four segments. First quarter Healthcare segment RBR totaled $81.7 million, and increased an impressive 28% year-over-year, with over half of that increase organic. Strength in this segment remains broad and was driven by increased contributions from both our consulting as well as our business process management services.

We continue to realize growth in key consulting areas including performance improvement solutions, revenue cycle consulting and life sciences, commercialization solutions. In addition, RBR growth reflected the full three month benefit from the February 2015 acquisition of RevenueMed and the December of 2015 acquisition of McKinnis Consulting Services.

First quarter Healthcare segment operating profit margin was up slightly to 29% compared to the same period of 2015 due primarily to higher RBR. We are very encouraged that our Healthcare segment is able to grow RBR year-over-year at a very healthy 28% cliff while at the same time maintaining their margins.

Energy segment RBR increased 5% for the first quarter compared to the same period of the prior year all of which reflected organic growth. RBR growth for the quarter resulted from additional demand for strategy and operational improvement services. In addition demand side management and work with public sector clients also increased in the quarter.

However, our first quarter year-over-year growth rate was a bit more subdue than expected as we experienced some softness in certain markets and pipeline conversion lagged a bit. We anticipate that this conversion rate will pick up during the second quarter and our full year outlook for this segment remains positive.

First quarter segment operating profit was down 15% compared to the same period last year due to higher compensation benefits expenses associated with recent investments. Actions drive resources with demand were taken late in the first quarter resulting in some modest severance costs.

Turning to our disputes, forensics and legal technology segment, previously known as disputes, investigations and economics. RBR increased 6% over last year’s first quarter, all of which represented organic growth. This growth was driven by increased demand for our premier dispute resolution offerings with strong performance in global construction and infrastructure claims matters in addition to continued demand aligned with our core industry sectors. That was our Healthcare, life sciences, energy and financial services.

The segment also recognized approximately $2 million of performance-based revenue during the quarter associated with mass toward claims work. These increases were partially offset by lower revenues from our domestic, legal technology solutions business.

Segment operating profit increased to $28.7 million, up a very strong 18% in first quarter, compared to the respective period of 2015 driven by higher RBR, higher margin projects, and cost management actions taken in 2015 to improve profitability. It is gratifying to see this segment continue the positive momentum begun in the latter part of 2015.

Lastly the Financial Services Advisory Compliance segment, previously known as financial risk and compliance, first quarter 2016 RBR declined year-over-year as was anticipated. As you may recall, 2015’s first quarter benefited from a few large engagements that wound down over the course of 2015.

Although RBR was down 4% for the quarter year-over-year, this segment outperformed our expectations and has continued to grow sequentially as first quarter RBR was up 6% compared to fourth quarter 2015. We anticipate that year-over-year RBR and profitability comparisons will improve for this segment beginning with the second quarter.

Regarding the lower effective tax rate I mentioned earlier, recent growth and improved profitability of our global business driven by demand for our global construction and legal technology solutions capabilities has resulted in higher income from lower tax rate jurisdictions.

This performance allows us to reverse any deferred tax asset valuation reserve in the first quarter of 2016, which added approximately $0.02 a share to adjusted EPS. Consequently, we now estimate that our full year 2016 effective tax rate will be lower than prior estimates at around 38%, 39%.

Turning to other drivers of first quarter 2016 financial performance. First quarter 2016 G&A expenses of $39.8 million increased 12% over the prior year, while remaining essentially flat at just under 18% of RBR. Approximately half of the increase was due to higher compensation of benefit expense with the remainder due to higher bad debt expense.

As we anticipated for the year, depreciation and amortization expenses increased significantly in the first quarter over the same period in 2015, primarily due to increased capital spending as well as higher levels of intangible assets resulting from recent acquisitions.

We repurchased approximately 408,000 shares of common stock during the first quarter at an aggregate cost of $6.3 million and an average cost of $15.36 per share. As of March 31, 2016, approximately $82 million remained available under the company’s share repurchase authorization.

Since the fourth quarter of 2011, we have repurchased over $105 million of our common stock and we continue to believe this is an effective use of our free cash flow returning capital to shareholders.

Capital expenditures totaled approximately $5 million in the first quarter, compared to $13 million in the same period a year ago. Free cash flow increased to $21 million for the first quarter, compared to $11.8 million for the same period in 2015, primarily driven by our higher operating results and lower capital expenditures.

Lastly, let me turn to our outlook for full year 2016. We believe that our solid first quarter results keep us on track to deliver on the RBR adjusted EBITDA financial targets we set forth for the company on the year end 2016 earnings call. We also anticipate adjusted earnings per share for the full year of 2016 to be at the high end of the previously communicated range due to our positive business outlook combined with a lower estimated effective income tax rate that I discussed earlier.

Let me reinforce that our updated 2016 growth estimate for earnings per share is despite substantially higher non-cash depreciation and amortization expense. To reiterate our current financial estimates for full year 2016, we are targeting RBR in the range of $900 million to $940 million. The midpoint reflects growth of approximately 10% over last year, mostly organic.

We estimate a range of $960 million to $1.01 billion for total revenue. Our estimate for adjusted EBITDA is in the range of $132 million to $145 million. Adjusted earnings per share is now estimated to be at the upper end of the previously communicated range of $1.05 to $1.15 per share.

We continue to estimate healthy free cash flow in a range of $75 million to $90 million and capital expenditures are anticipated to be $30 million to $35 million.

In conclusion, Navigant is off to a good start with our strong first quarter results combined with a positive outlook for the remainder of the year. We see continued strong demand for our broad suite of services and solutions, serving clients in fast-growing and changing industries that require our specialized expertise and consulting solutions.

In closing, like Julie, I am very excited about the broad deep experience and background that Stephen Lieberman brings to Navigant. I wish him great success. And on a personal note, it has been a pleasure coming back to Navigant as Interim CFO, working with a great team and seeing all the progress the firm has made.

I enjoyed reconnecting with many of you on the call today and I look forward to following Navigant’s continued success going forward.

Julie, over to you to wrap it up.

Julie Howard

Thanks, Tom. The Navigant team is well into executing on our 2015 finance. We have a lot to look forward to you this year and our team is advancing many initiatives that will continue to illustrate that our leadership in growth, innovation and customer service.

Lastly, but very importantly, I would like to thank Tom for his service to the company and for his strong contributions as our Interim Chief Financial Officer. I wish him nothing but the best as he gets back to enjoying retirement. And thank you to all of you for taking the time to join us today and with that, operator, we can open up the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question would come from Randy Reece from Avondale Partners. Sir, your line is open.

Randy Reece

Good morning.

Julie Howard

Hi, good morning, Randy.

Randy Reece

Just following over your details, there was a significant increase in the non-billable employees in the first quarter over the fourth. Is all of that related to the acquisition or was there something out? I thought that the acquisition headcount would have been in the year end 2015 numbers.

Tom Nardi

Yes, Randy, it was not related to the acquisition, although there were a few non-billables added as part of that, but, about half of that was due to transfers from RevenueMed into the G&A group out of the practice headcount and combined with the transfer of IT resources back into the IT group from Cymetrix. The other half is really a smattering of adds throughout both the practice areas, especially in the business development area as well as in corporate IT, corporate finance and corporate HR. So, a fair amount of that is due to some timing of the change but that accounts for most of it. Overall, our G&A came in better than we expected for the quarter. So, it’s not indicative of any cost out of control or anything.

Randy Reece

Yes, I figured it, it was something like that. I was wondering if we can talk a little more about the market environment in the revenue cycle outsourcing business. We’ve just heard a lot of different things from the marketplace about customer behavior and I was wondering if someone could shed a little more light on how RFPs are flowing and what customer – just say activity level, same customer business looks like.

Julie Howard

Well, Randy, I would answer that in two ways. I think when we talk about revenue cycle consulting, we feel that the market activity is strong in that area and customer behaviors are positive with respect to the work that we can do to provide and serve them. On the revenue cycle outsourcing, as we have talked in prior calls, we are still in pursuit of large CRCM type matters and that continues for us. We are disappointed at how long the sales cycle can be, will we understand it’s a significant decision with a lot of financial and cultural impacts. So that isn’t as robust as the consulting environment.

Randy Reece

Very good. Thank you very much.

Julie Howard

You are welcome.

Operator

Thank you. Our next question would come from Tim McHugh from William Blair & Company. Sir, your line is open.

Tim McHugh

Yes, thanks. Just on energy, I guess, you remarked that there is some parts didn’t started off the year as well as you thought and you addressed it headcount in a few areas. I guess, can you elaborate on what parts, I guess, weren’t working as well and you talked about, I guess, the view that you think that will change going across there?

Julie Howard

We do, Tim, when we did significant hiring in that business last year, as you know we made a decent investment of probably about 18 months in oil and gas resources. So, some of the headcount adjustment was related to that. Some of those – the softness is the right word, we just didn’t get out of the gate, I think as fast as we would have liked to with energy and part of that was just due to a slower ramp on the contributions from our hires from last year. And then, a good portion of it was just related to pipeline conversion. We have a very, very healthy pipeline, but we weren’t able to convert those into billable engagement as quickly as we would have liked in Q1. Nonetheless, we remain very positive about the outlook for the full year.

Tim McHugh

Okay. And then, can you add any more color on financial risk and compliance? I guess, I know it’s a tough comp on the year-over-year, but kind of the sequential strength lately, I mean, is that traditional kind of AML FCPA type of work or Dodd–Frank, what’s driving the opportunities for you in that business, I mean, I guess the outlook there?

Julie Howard

It’s primarily related to that both domestically and globally if you will. We’ve had a lot of opportunity in that regard and then, we still have – we still see a lot of market demand in kind of the consumer finance area and most of that would be related to Dodd–Frank’s related regulatory matters. So both of those have been driving opportunity and as a result, we weren’t down as much as we had expected that we would be from a comparable.

Tim McHugh

Okay. Thanks.

Julie Howard

You are welcome.

Operator

Thank you. Our next question would come from David Gold from Sidoti. Sir, your line is open.

David Gold

Hi, good morning.

Julie Howard

Hi, good morning, David.

David Gold

Just a tiny bit of follow-up there on Tim’s energy question. As we think about that and particularly think about the profitability there, what does it take to get it to basically to level where you’d be happy or more comfortable? Is it just as simple that revenue flow through or are there other changes that you might expect to make?

Julie Howard

It is as simple as that, Dave. It’s pipeline conversion and that we have, as I said, a very robust pipeline, number of matters that we expect to convert or have already started to convert in the second quarter.

David Gold

Perfect. Great. Okay, and then, on the healthcare side with the very impressive organic growth, can you give just a little bit more color there as to what specific spots were driving it and was it across the board or were there areas where you are seeing particular success there?

Julie Howard

It is across the board, robust market driver for us. Our strategy consulting performance improvement, our public sector works for the payer community, our life sciences business and the market commercialization work, it was really universal across the entire segment.

David Gold

Perfect, perfect. Okay, and then just one last, Julie, as we think about uses of the cash priorities there and it’s important own the 0.5 million shares, how should we think about priorities as – or how do you think about as between acquisitions at this point and additional share repurchases?

Julie Howard

We continue to be active from a share repurchase standpoint. We also have, as you know, we maintain an active pipeline of investments opportunities that we might want to look at. Those tend to be more bolt-on smaller in nature. So, we have a good pipeline of that and absence good significant investments there, we will continue to be very focused on our share repurchase program.

David Gold

Perfect. That’s all I have. I appreciate it.

Julie Howard

Thank you, David.

Operator

Thank you. Our next question would come from Kevin Steinke from Barrington Research. Sir, your line is open.

Kevin Steinke

Good morning, everyone.

Julie Howard

Good morning, Kevin.

Tom Nardi

Good morning, Kevin.

Kevin Steinke

I wanted to ask about some hiring you did in healthcare during the quarter that you announced in the press releases. You talked about some hires to build-out what you are calling the leadership institutes, the physician leadership group and also building out your capabilities with the Baldrige methodology and that all being a part of your healthcare performance improvements project. So I am just wondering if you could talk a little bit more about that, is that going to be a significant leading offering when you go to do performance improvement, is this a meaningful shift in how do you go to market or any color there would be helpful.

Lee Spirer

Sure, Kevin. This is Lee Spirer. The investments are really reflective of our strategy and performance improvement and the desire to really drive for strategy-led transformation with a process that’s left behind for the company to be able to execute on their own which is the investment in Baldrige. So, we added Scott Ransom. Scott is a strategist, some of the other folks that we’ve added, Kate Goonan, Rulon Stacey, have a Baldrige background. It really is part of what we’ve been doing as we grow to do strategy-led transformation with strategically how our system is changing, what are the operational changes that they need to drive through which is performance improvement in clinical operations and then we do number of framework to be able to manage that which is why you see the hires that have the skills in the Baldrige framework. We are going to adopt that for our own performance improvement methodology.

Kevin Steinke

Okay, great. I mean, does that change at all, how you bill for services or the type of margins you can get from projects or that’s just kind of a nice added thing to have another two I guess?

Lee Spirer

The strategic transformation is, they are broader projects. They tend to be larger over multi-year, but not just straight cost take outs. They tend to be focused on the shifts of value and reimbursements and – but the actual way that we would charge and bill for the methodology of performance kind of large would be the same. It’s going to be a balance of consulting revenue and now also be some success fees where appropriate.

Julie Howard

Right, I think, Kevin, it’s important to note that these kinds of projects tend to be much larger and longer lived over a longer period of time than probably prior performance improvement type works.

Kevin Steinke

Okay, that’s very helpful. And in the disputes business, you called out couple million dollars of performance-based revenue there. Just wondering as we think about the next quarter or two, are there any larger projects that you are working on now in that segment that maybe could roll-off or any anticipated volatility or is that just kind of too hard to call from quarter-to-quarter?

Julie Howard

Kevin, we’ve talked about this in our disputes business as more of an event-driven business. So, we feel good about the granularity in that business. Of course, every quarter we have client opportunities that come online and others that settle. And so, there is always that opportunity and we did call out the $2 million success fee this time something that we’ve referenced in the past. We have had a series of engagements of 15 clients with submitting claims in a large - on of disaster years ago and while we had expected those to resolve sooner. They are starting to flow. So we would anticipate that there maybe more of that coming in the future. But it’s very hard to put a finger on how the trustee will approve those claims for payment over time.

Kevin Steinke

Okay, okay. Thanks for that commentary. We – I think last quarter, you talked about kind of expecting sequential margin improvement throughout the year. Is that the way we should continue to think about the quarterly progression of results overall?

Tom Nardi

Yes, it is, Kevin. First quarter is relatively flat and you should see the year-over-year improvement going forward.

Kevin Steinke

Okay. Do you have a specific organic growth rate for healthcare? I know you said over half, I was just wondering if you could quantify that.

Tom Nardi

It was roughly, right about that half, 28% overall, 14% organic.

Kevin Steinke

Okay. Okay, great. Well, that’s all I had and Tom, thanks for stepping in and ensuring things continue to run smoothly and best of luck to you and enjoy yourself. Thanks.

Tom Nardi

Thanks, Kevin.

Operator

Thank you. Our next question would come from Tobey Sommer from SunTrust. Sir, your line is open.

Kwan Kim

Hi, this is Kwan Kim on for Tobey. Thanks for taking my questions.

Julie Howard

Hi, Kwan.

Kwan Kim

First, I’d like to say congratulations to Tom.

Tom Nardi

Thank you.

Kwan Kim

Following up on a previous question, you just talk about your hiring plans on senior level versus junior level and the segments where you plans maybe focused on?

Julie Howard

Yes, I mean, we did, we talked about, we did significant hiring at senior levels last year and so, this year more of our focus will be on selling out the pyramid below that since we have a very robust campus hiring expectation for the organization and we would anticipate excluding our outsourcing businesses roughly 7% to 8% increase in our consulting over the course of the year, that will vary depending upon the growth expectations in each of our businesses.

Kwan Kim

Got it. And on the large projects, how has the mix changed and are you generating similar levels of profitability than in the past and your expectations?

Tom Nardi

I would say, it’s a little bit more diverse than prior years, but no change in the way we think about profitability on those engagements. In the financial risk compliance business, we had some very profitable large engagements in prior years that that’s kind of wound down, but overall, no, no real change in client concentration of anything it’s a little less.

Kwan Kim

Got it. Thank you.

Operator

Thank you. Our last question would come from Bill Dezellem from Tieton Capital Management. Sir, your line is open.

Bill Dezellem

Thank you. First of all, relative to your healthcare revenue outsourcing prospect pipeline, would you talk about whether that is appearing to increase, decrease, or whether it’s really holding flat? I know you said that the conversion to – or sales cycle is taking longer than anticipated, but the size of the pipeline kind of directionally please?

Julie Howard

I would say that the size of the pipeline is relatively consistent though from when we last spoke. We have a number of matters that we are pursuing and those remain the same for us at this point in time.

Bill Dezellem

Great. Thank you. And then, I need a little help here with your energy segment and reconciling, I guess, I couple three different things. One, you had mentioned that you had to cut some people in that group, but then I think your most recent press release prior to the first quarter release was less than a number of additions to the energy arena and then also you have the issue of some of the prospect sales cycle again taking longer than you had anticipated to convert to work there. Can you try to put all those pieces at a puzzle together for me?

Lee Spirer

Sure, Bill. This is Lee Spirer. The – much like our other segments, we are constantly shifting our focus of our human capital to places where we see really strong market. As Julie mentioned, we had made an investment - or a modest in oil and gas, but we’ve been adjusting that over time as the demand hasn’t been as robust as we’ve expected. There are some other areas of our legacy business that haven’t been as strong, but where there is strength in the pipeline is new and renewals of energy efficiency evaluation, strategic and operational work in distributed generation and transmission, hoping our clients really be the utility of the future including how do you deal with resilience and security both sort of cyber and physical, if you look at the hires that we’ve made really over the course of last year and for this quarter, that’s where they are concentrated and that’s where the bulk of our pipeline is.

Bill Dezellem

And then the last piece is, the – I’ll call it a delay, I am not sure you would say that, but a delay in converting prospects to actual business. What do you believe is behind that?

Lee Spirer

Just want to be clear, Bill, in energy specifically?

Bill Dezellem

Yes.

Lee Spirer

I think it’s very situational. Honestly, I don’t believe that there is anything specific in the market that is causing that delay, particularly in our core utility segment. I think it is just specific to the clients and working through interest in engaging versus getting signed signature and start on engagements. I don’t think there is anything systemic to read into it.

Bill Dezellem

Great, thank you both and Julie, I hope you feel better soon.

Julie Howard

Thank you. Thanks, Bill. I believe that was our last question. So with that I think we will end the call. I look forward to speaking with all of you after our second quarter.

Operator

Thank you. That concludes today’s conference. Thank you all for participating. You may now disconnect.

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