FTI Consulting, Inc.

Welcome to the FTI Consulting Second Quarter 2020 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 Molly Hawkes, Vice President of Investor Relations. Please go ahead.

Good morning. Welcome to the FTI Consulting Conference call to discuss the company's second quarter of 2020 earnings results as reported this morning. Management will begin with formal remarks after which they will take your questions. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21 of the Securities Exchange Act of 1934 that involve risks and uncertainties. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, future revenues, future results and performance, expectations, plans or intentions relating to financial performance, acquisitions, share repurchases, business trends, and other information or other matters that are not historical, including statements regarding estimates of our future financial results and other matters. For discussion of risks and other factors that may cause actual results or events to differ from those contemplated by forward-looking statements, investors should review the safe harbor statement in the earnings press release issued this morning. a copy of which is available on our website at www.fticonsulting.com, as well as other disclosures under the heading of Risk Factors and Forward-Looking Information in our annual report on Form 10-K for the year ended December 31, 2019, and updated in our quarterly report for the second quarter ended June 30, 2020, as well as in our other filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements which speak only as the date of this earnings call and will not be updated. During the call, we will discuss certain non-GAAP financial measures, such as total segment operating income, adjusted EBITDA, total adjusted segment EBITDA, adjusted earnings per diluted share, adjusted net income, adjusted EBITDA margin, and free cash flow. For discussion of these and other non-GAAP financial measures, as well as our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures, investors should review the press release and the accompanying financial tables that we issued this morning, which include these reconciliations. Lastly, there are two items that have been posted to the investor relations section of our website this morning for your reference. These include a quarterly earnings presentation, and an Excel and PDF of our historical financial and operating data, which have been updated to include our second quarter of 2020 results. Of note, during today's prepared remarks, management will not speak directly to the quarterly earnings presentation posted to the investor relations section of our website. To ensure disclosures are consistent, these slides provide the same details as they have historically, and as I have said, are available on the investor relations section of our website. With these formalities out of the way, I'm joined today by Stephen Gumby, our President and Chief Executive Officer, and Ajay Savarwal, our Chief Financial Officer. At this time, I will turn the call over to our President and Chief Executive Officer, Steve Gumby.

And Molly, for once, I got the mute off before you turned it over to me. So thank you, Molly, and thank you, everyone, for joining us tonight. I obviously hope all continues to be well with each of you and all of your loved ones in these complicated times. Ajay, in a moment, will take you through the details of the quarter. What I'd like to do up front is first underscore just how pleased I am and we are with our second quarter results and thank our teams for incredible efforts that drove those results. Extraordinary efforts over the past few months to support our clients and each other from home and the major efforts over the last few years that have put us in a position such that even in these difficult times, we are seen as highly relevant resources for our clients. I'd like to start with that and then, with your permission, also share a couple of perspectives on the future, both the inherent near-term uncertainty these days for a number of our businesses, but also the enormous confidence that we have in the medium and long-term prospects for all of our businesses. So let me start with the results. One way to look at them, a pessimistic way to look at them, is to note that our adjusted EPS of $1.32 is down significantly from a year ago. Another way to look at it, however, is to note first that we happen to be cycling an all-time record quarter for adjusted EPS, so the comparison is a difficult one. But second and more important, if you step back and think about it, in the face of COVID, in the face of some parts of our businesses being at record low levels of utilization due to travel restrictions, court closures, and other challenges arising from COVID, and in the face of a substantial amount of extra capacity that was added pre-COVID, we still managed to deliver the fifth best adjusted DPS ever in the history of this company and the highest revenue quarter ever. So I am extraordinarily positive about the results, and I hope you are too. As we discussed during the last quarter's earnings calls, we expected this to be a slow quarter, and parts of our business, were, in fact, extraordinarily slow. Obviously, a number of parts of FLC, but in truth, parts of every segment. And yet, overall, we have been able to deliver incredibly solid results. So let me just try to describe a little bit about how that happens. In part, it happens because the markets not only take away, they give. Though discretionary spend on consulting services is, of course, down considerably, And as I think you know, deal flow is reduced and court closures meant litigation was postponed. The COVID crisis and resulting economic turmoil created need as well, need for restructuring, for crisis communication, for crisis litigation support. So some of what we are seeing is simply a major shift in client needs and spend versus simply a reduction. So some of these results are market-driven. To me, what is much more powerful and much more relevant to our long-term efforts to build this enterprise for our people and for you, our shareholders, is to talk about the part of the results that are not due to market forces, but rather due in recent times to the incredible efforts by our team to work effectively from home, together with, over the last several years, the efforts of our people to strengthen our position, to extend into new adjacencies and geographies, and to anticipate and deliver on our clients' needs. I'd like to try to illustrate that duality, first in CorpBin where you obviously see incredible second quarter results, but also into our other businesses, Econ and FLC and Stratcoms and Tech as well. Let me start with CorpBin. I suspect that anyone in restructuring today is busy. Of course, most of you remember that CorpBin 10 years ago in the midst of a market boom had record results. So it's obviously easy to simply say, wow, the markets are up, and so is FTI's corks in business as well. For me, framing this point that way misses critical, powerful points, points that suggest that obviously we are affected by markets. We are not forks on a wave. Over time, we determine our destiny, and part of what we are seeing is the markets, but part of what we are seeing is the result of actions that our teams have taken over time. not simply the markets. A couple ways to see that. One way is to recall that CorpFin, our CorpFin business, was growing and thriving even before this market boom. In fact, during 2018 and 2019, when the restructuring market was hovering around all-time lows, we delivered record revenues, up 17% and 28% respectively. That was no wave we were riding. That was us lifting us. It was a result of our team's investments and incredible efforts that drove those results. Equally as powerful is to not just look at how similar we are in Corp Fin to where we were 10 years ago, but to look at how we've changed since then, how we've enhanced our positions. Ten years ago, during the last recession, we already had a powerful, strong Corp Fin business. But we were primarily a U.S. business at that point in time. We were in London, but we were probably number four in London. We didn't have a German business. We didn't have an Asian or an Australian business. We had a smaller business in Latin America. And even in the U.S., we were primarily known as the best creditor rights business. We did, in fact, do company-side work, but we were known primarily for our middle market company-side capabilities and tended not to win the big company-side cases there. Fast forward to today. In North America, we are still the number one creditor rights business. But this year, we've already won three of the biggest company side jobs in North and South America. If you look outside of North America, we're no longer number four in London. We're now number one. We have power on the continent we didn't have 10 years ago with the addition of Anders in Germany and the addition of other terrific professionals elsewhere in Europe. We have the leading position in Hong Kong, a strengthened practice in Australia, and now a leading practice in Latin America with people on the ground in places like Mexico and Brazil. And that's all before we talk about what we've built in Corpofin that goes well beyond restructuring. Our practices in OCFO, in transactions, in carve-outs, in performance improvement, in merger integration, et cetera. There are waves in our business. But what our teams have done is to take a fundamentally strong U.S. business, and rather than sit on it, they've made it fundamentally stronger, turning us into a powerful, global company multi-dimensional player. Our success today reflects not just the markets, but the changes that our teams have driven. And that is true for CorpFin, but it's also true for our other segments as well. I won't be as long-winded on the other segments, but let me touch on them. In StratCons, for those of you who have been long-term shareholders, you may remember that 10 years ago when the recession hit, that business in large part melted down. not because we weren't good, but because we were focused on one part, an important part, but a small part of our clients' core needs. Today, some parts of this business are also extraordinarily slow, but critically, other parts are soaring, with the result that if you exclude the negative impact from FX and tab-through revenues and look at STRATCOM normalized for those, our STRATCOM revenues are actually up for the first half of 2020. I don't know of any other competitor in that industry who can say that. Similarly, if you look at econ, 10 years ago, we already had a fabulous econ business. It was primarily a fabulous North American business. Today, we still have a fabulous business in the U.S., but now we have a fabulous business in multiple locations around the world. As a result, the time when litigation, investigations, and M&A transactions are down and some have been delayed and travel is restricted and you can't get to your clients is we have a business that even with some slow parts is overall even more in demand. And even in FLC, where as you can see from our results, we have had a drastic decline in revenues in a number of places due to some large jobs rolling off and the effect of the travel restrictions and the delays in litigation and investigations. Even there, The breadth of the conversations we are having across multiple dimensions with clients remains robust. Reflecting the investments our teams have made increased the depth and the reach of our offerings, from construction to cyber to investigations to data analytics in multiple places around the world. So, yes, what you are seeing on the negative and the positive side is somewhat a function of markets. Markets fluctuate up and down, and those affect us. To me, what is much more powerful and more durable is the non-market-driven pieces, the way our teams have invested to control our destiny by growing core capabilities that allow us to serve the most important client needs in a wide range of circumstances. And that, to me, is the more powerful and the more exciting part of the results you're seeing from this company.