Exponent, Inc.

Good afternoon and welcome to the Exponent Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, Please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Joni Constantelos. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's fourth quarter and fiscal year 2023 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 www.exponent.com backslash 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. Katherine 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, exponents' 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 exponents' periodic SEC filings. including those factors discussed under the caption risk factor in Exponent's most recent Form 10Q. 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. Katherine Corrigan, Chief Executive Officer. Katherine?

Thank you, Joni, and thank you everyone for joining us today. I will start off by reviewing our fourth quarter and fiscal year 2023 business performance. Rich will then provide a more detailed review of our financial results and outlook for 2024, and we will then open the call for questions. Exponent's world-class team of experts delivered a 7% increase in net revenues in 2023, showcasing the effectiveness of our highly diversified portfolio of services. Notably, our reactive business grew in the high teens, driven by robust failure investigations and disputes-related work, primarily for the transportation and energy sectors. While proactive services for the consumer electronics sector declined year over year due to ongoing industry headwinds and product lifecycle timing, the remainder of our proactive portfolio grew in the mid-single digits for the year. Turning to our engagements in more detail, our roots in failure analysis and the leading market position that we have earned over the past 50 plus years continue to be important drivers of demand for our reactive services. Exponent is retained on some of the largest and highest profile matters around the world, spanning a wide array of issues from wildfires to advanced transportation and more. Our recent retention by General Motors Cruise Unit To investigate the cause of their driverless vehicle's collision with a pedestrian is but one recent public example. In the energy industry, our experts are advising on disputes around the world involving everything from refinery explosions and liquefied natural gas facility operations to massive offshore wind farm construction and pumped storage power plant performance. Whether it's a question of the integrity of longstanding infrastructure, or the imperatives of the energy transition pushing the limits of technology, one common thread is certain. Complexity abounds, it's not going away, and these are places where exponent thrives. Our leading market position has continued to expand as we further differentiate our experience in this portion of the business. Our world-class and highly diversified expertise combined with the vital nature of our insights in these high-stakes situations positions this part of the portfolio well to weather various economic cycles. In addition to our reactive work, our team's ability to anticipate clients' needs throughout the product life cycle continues to be a significant differentiator for Exponent. Within our proactive services, demand was strong for our regulatory consulting activities in the chemicals industry, evaluating the effects of chemicals on human health and the environment. We are pleased to be advising clients in this sector as they develop and bring to market increasingly complex technologies such as RNA-based pesticides. We also saw increased engagements in product development and safety-related consulting for the life sciences sector, including medical devices and pharmaceuticals. As expected, we continue to face headwinds in the consumer electronics sector. due in part to the timing of client product life cycles as well as broader headwinds in the industry. We saw year-over-year declines in human subject research engagements as well as product development consulting as products moved out of the development stage and into the refinement stage. Excluding consumer electronics, net revenues for the firm increased 16% year-over-year. In the fourth quarter, we noted an increased client sensitivity to budget concerns, which resulted in the slowing or pausing of some litigation activity. For example, we saw this in the chemical sector, which is currently responding to elevated levels of destocking post-pandemic. While this created a lower than expected growth rate of our reactive business in the quarter, all indications are that this activity will resume over time based on the demands of global litigation and arbitration dockets which show no signs of easing. We remain actively engaged with our clients and are well positioned to help address their critical needs. Turning to our segments, exponents engineering and other scientific segment represented 84% of revenues before reimbursements in the fourth quarter and 83% of revenues before reimbursements for the full year 2023. Revenues before reimbursements in this segment increased 2% for the fourth quarter and 8% for the full year, driven by demand for exponents services across the transportation and energy sectors. Exponents environmental and health segment represented 16% of revenues before reimbursements in the fourth quarter and 17% of revenues before reimbursements for the full year 2023. Revenues before reimbursements in this segment decreased 3% for the fourth quarter and increased 5% for the full year. Fourth quarter revenue in this segment was impacted by the aforementioned client budget constraints, which resulted in delays in litigation work. Growth in this segment for the year was primarily driven by Exponent's safety-related work evaluating the impacts of chemicals on human health and the environment. As we expected, Full-time equivalent employees in the fourth quarter decreased 3.4% compared to the third quarter, reflecting our ongoing focus on strategically aligning resources with demand across the business. At the same time, we continue to invest in growth areas of the business, developing our exceptional talent and expanding our differentiated capabilities to better meet the evolving needs of our clients. For example... We continue to position ourselves across the spectrum of challenges involving existing infrastructure, all the way to new investments and technologies to support the energy transition. While the automotive industry's aspirational goals for electric vehicle growth have been tempered in part due to customer hesitation, it is precisely this heightened expectation of safety and performance of new and complex technologies that is a fundamental business driver for Exponent. We are seeing evidence of this on the reactive side with advanced driver assistance technologies, which are increasingly at issue in automotive disputes. As we look ahead to 2024, we are mindful that we are coming out of the year with higher than usual growth in our reactive business, creating a high hurdle rate for year over year comparisons. In the current environment, which I've described, we expect reactive revenues to remain in line with 2023 levels. We also expect some continued headwinds in the consumer electronics sector, combined with constrained budgets and project delays that we are seeing with some clients in other pockets of the business. In this dynamic environment, we remain keenly focused on new business development and strategic investments and growth opportunities, as well as aligning our resources and costs with anticipated demand. We will continue to position Exponent on the forefront of innovation, supported by our exceptional team, our reputation as a leader in high-profile failure analysis, and our differentiated capabilities across the product lifecycle. Our performance in 2023, with growth in all major industries we serve, with the exception of electronics, demonstrates the power of our portfolio and value proposition in a challenging environment and gives us confidence in our ability to deliver long-term profitable growth and value for our shareholders. I'll now turn the call over to Rich to provide more detail on our fourth quarter and fiscal year 2023 results, as well as discuss our outlook for the first quarter and the full year 2024.