FTI Consulting, Inc.

Good morning, everyone, and welcome to the FTI Consulting Third Quarter 2022 Earnings Conference Call. All participants will be in a 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 questions, you may press star and two. Please also note today's event is being recorded. At this time, I would like to turn the floor over to Molly Hawks, Vice President of Investor Relations. Ma'am, please go ahead.

Good morning. Welcome to the FTI Consulting Conference Call to discuss the company's third quarter 2022 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, ESG-related matters, 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 headings of risk factors and forward-looking information in our quarterly report on Form 10Q for the quarter ended September 30, 2022, our annual report on Form 10K for the year ended December 31, 2021, and 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 the reconciliations. Lastly, there are two items that have been posted to the investor relations section of our website 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 third quarter 2022 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 am 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 President and Chief Executive Officer Stephen Gumby.

Thank you, Molly. Welcome, everyone, and thank you all for joining us this morning. As always, Ajay will go through the numbers in some detail. But first, with your permission, I'd like to share a few perspectives that hit me, some thoughts that hit me as I reviewed those numbers. The first reaction I had, which may be similar to the reaction that some of you had when you first saw those numbers this morning, was, wow, the numbers this quarter are amazing. This is another extraordinary quarter, another in a long line of extraordinary quarters. So a very bullish reaction that I'd like to share. The second reaction I had as I looked at the numbers a little more fully was less bullish. And I want to also share that. As I examined the numbers a little closer, the numbers in some real sense overstated the underlying strength of the business this quarter. So there were parts of the business that did extraordinarily well. In fact, parts that exceeded Ajay's and my expectations. In fact, more parts of the business underperformed Ajay's and my expectations than overperformed. We had, in the words I've used before, a few more zags than zigs this quarter. What I found as I looked more closely, in fact, that a big driver of the extraordinary level of results this quarter was not the underlying business performance, but some major one-time factors that happened to cut in our favor this quarter. So that's a less bullish point that I'd also like to share. And the third point is the one that I think I don't need... quarters to think about is when I think about all the time and that we've talked about many times, which is a broader perspective point, which is that there are always quarterly zigs and zags. To me, they aren't in any long-term view particularly significant. What is far more important is to check in and say, where are we as a whole, the company, in terms of the medium-term trajectory? And that's a bullish point that I'd like to close with because I'd like to close with sharing my view that right now in every segment and every geography around the globe, We are continuing to build teams and the capabilities we need to win for our clients and our firm. We're attracting and developing people who can help our clients on the most sophisticated issues. And my experience is that when we do that, those short-term factors can either buoy a quarter, as it did this quarter, or hit a quarter, as it has sometimes in the past. Over any extended period of time, when one does that, the core underlying business will continue to soar. So those are the three points I'd like to cover. And with your permission, I'd like to dive a little bit more into each of them. With respect to the first point, as I said up front, I'm guessing a few of you may have had the same initial reaction that I had to the numbers, which was, wow, these are amazing. If you haven't had a chance to look at them, once again, we reported record revenues and record EPS. In fact, on the revenues, we delivered double-digit organic revenue growth in the face of FX headwinds. If you exclude the FX headwinds, it was 15% top line growth year over year. And perhaps even more powerful and maybe most surprising, that translated to $2.15 in earnings per share. When I saw that number, I took out a calculator and just compared it to where the earnings of this company were my first full year I was here. Because I thought this was about 50% higher than where we were. And it turns out that's about right. The quarterly earnings this quarter were 50% higher than the entire year's earnings the first year I was here. So when I did that calculation, I was impressed by the number. I became less bullish, however, when I began to isolate the underlying business from what were more one-time factors. And we've talked about this before. You always have to do that isolation because even though over any longer period of time, one-time factors tend to even out, In any given quarter, one-time factors like remeasurement gains, FX remeasurement, gains or losses or tax rates or success fees can seriously affect quarterly results. If they happen to cut all negatively in a quarter, the numbers, in my opinion, end up understating the strength of the underlying business. But conversely, if they all cut positively, the reverse is true. And in this quarter, there were some major one-time factors that happened to cut in our favor. One of those we talked about last quarter, which was the major revenue deferrals in econ, deferrals that we expected to recoup this quarter and we did. Those deferrals, of course, mean that last quarter's revenues and profits in some real sense understate the underlying performance of the business that quarter. And this quarter's revenues and profits in some sense overstate, in the same sense, overstate the underlying performance this quarter. That, of course, we knew about and we talked about. Perhaps more significant were two additional benefits for this quarter. We had substantial FX remeasurement gains this quarter. Those come and go. They're very hard to predict, but this quarter they happened to cut very positively, as Ajay will talk about in some detail. And for a variety of reasons, we ended up this quarter with a very low tax rate. If you strip out the effects of all those one-time benefits, it was not a bad quarter. But neither was it the extraordinary one that $2.15 an EPS would suggest. That being said, if you dive down a level, some parts of our business did terrifically well and or better than our expectations. But at the same time, other parts did not perform as well as we expected or hoped. And there are lots, as always, lots of examples. And let me give you just a flavor of some of the to's and fro's. Within CorpFin, our U.S. business continued to outperform, but some overseas markets, particularly Europe, were weak. In FLC, health solutions and cyber continued to soar, while some other businesses lagged our expectations. In tech, we had record revenues, but the investment we have made in headcount and associated compensation together with price pressure meant that EBITDA growth did not fully follow suit. And let me spend a minute on EMEA. As we've talked about EMEA, I am, and I think the entire leadership team and the entire company is extraordinarily proud of the multi-year trajectory our teams in Europe have been able to build there. And we are very bullish on the investments we are making for the next generation of growth. However, some of the extraordinary stresses going on in Europe have meant that in this quarter, like in fact every quarter this year, that business has continued to fall short of our expectations. Ajay will give you more details on some of the various to's and fro's, but my takeaway was overall that when you normalize for the one-time factors, this feels more like a solid quarter. A solid quarter rather than an extraordinary one, with some parts of the business is doing great and other parts dealing with market realities and with work to do. So more typical than extraordinary.