FTI Consulting, Inc.

Welcome to the FTI Consulting Third 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 and then one on your telephone keypad. To withdraw your question, please press star then two. Please note that the event is being recorded. I would now like to turn the conference over to Molly Hawks, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to the FTI Consulting Conference Call to discuss the company's third 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 results, 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 first quarter ended March 31, 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 of 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 accompanying financial tables that we issued this morning, which include the 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 and an Excel and PDF of our historical financial and operating data, which has been updated to include our third 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 our 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 Gunby, our President and Chief Executive Officer, and Ajay Sabharwal, our Chief Financial Officer. At this time, I will turn the call over to our President and Chief Executive Officer, Steve Gunby.

Thank you, Molly. Good morning to everyone. And thank you all for joining us. Well, I'm sure you've all noticed that it's the end of October and COVID is still with us. And I'm guessing that's just as troubling for you as it is for me. I think most of us knew during the summer that the evidence suggested there'd be a good chance that COVID would still be with us at this point. I don't think any of us really expected that it would be completely gone, but I guess most of us secretly hoped it would, and at least had some expectations it would be better than it is today. So in addition to hoping that you are doing well and your loved ones as well, Let me thank you during these complicated times for the continued attention you're showing our company. Let me also use this opportunity to thank some of the FTI folks who may be joining this call for the incredible efforts that have continued all year and continued into this quarter. Our company, as I'll talk about in a moment, we're in terrific shape. We're not in perfect shape. There's no company during COVID who's in perfect shape, but we are in terrific shape. And that has only been possible because of extraordinary efforts by our people, efforts to support clients, to support each other from home, efforts that collectively have put us in a strong position, not only to weather COVID, but in my view, to soar coming out of this. Today, as usual, I will let Ajay take you through the details of the quarter, but let me upfront share a couple of comments. One, on the revision to guidance, and secondly, and at least as important, why I continue, notwithstanding that revision, to be so positive about this company's future. Let me start with the adjustment to guidance. It is essentially an adjustment to our expectations about the fourth quarter. The third quarter, though different from expectations in some specifics, did not come out too different from what we expected in aggregate. But at the end of the last quarter, we had hopes that the evolution of COVID will allow for a stronger fourth quarter than we do today. Let me go into that in a little more detail. As you know, I think our fourth quarter results are typically our weakest, considerably less strong than the prior three quarters. For example, if you look at the last five years, our fourth quarter EPS is roughly two-thirds of the prior three quarters because of holidays and some end-of-year factors. This year, we thought the evolution of COVID might allow for better. Back in July, we suspected that COVID would still be here in the fourth quarter, but we, and I'm guessing most of you, did not believe it was going to be as present as it is today. And therefore, we hoped for a somewhat more rapid unfolding of the opening of courts, more rapid de-rigidification of the legal system, more of an opening of cross-border travel, all of which, of course, would allow a faster return to normal for some of the businesses that were hurt by COVID. We also thought that if that didn't happen at the speed we hoped for, on the other side, we would see a continuation of the extraordinary strength we had in our restructuring business in the second quarter. What has happened in reality is both of these, but unfortunately to a somewhat lesser extent than we had expected. First, in terms of the businesses that were negatively affected by COVID, they are in large part starting to come back. We have started to see some signs of improvement in FLC. and in other parts of our business that have been affected by travel restrictions and court closures. But that recovery is at a considerably slower pace than we had hoped. It's just not the hockey stick we expected to see begin in the third quarter and continue into the fourth quarter. Second, in terms of the restructurings and bankruptcies, last quarter, if you recall, we talked about the fact that there is uncertainty. There was uncertainty around that. We talked about how we could have a scenario where the government actions cause a temporary pause on bankruptcies and restructurings, at least in some parts of the world. We believe then and continue to believe now that the restructuring market is going to be here for a considerable amount of time. But we also understood that there could be waves because of government policies. For example, the aggressive monetary stimulus that we have seen can affect or at least seriously delay bankruptcies and restructuring activity. What has happened here recently is that market forces began to play out more in favor of loose money and against restructuring activity than we had expected. Not extraordinarily worse, but around the edges worse. You can see that in our third quarter results, but you can also see it very vividly in external data. Notably, if you look at, for example, August and September Chapter 11 filings and defaults, they fell to just over half the level that they were between May and July. And I think the reason for that is essentially the loose money. The loose money has allowed for an unprecedented issuance of speculative-grade bonds this year and at remarkably reasonable rates. If you look at the rates right now, they are not too different from where they were pre-COVID. And the spreads compared to March have halved.