FTI Consulting, Inc.

Welcome to the FTI Consulting second quarter 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 that this event is being recorded. I would now like to turn the conference over to Molly Hawkes, Head of Investor Relations. Please go ahead.

Good morning. Welcome to the FCI Consulting Conference Call to discuss the company's second quarter 2023 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 a 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 10-Q for the quarter ended June 30, 2023. Our annual report on Form 10-K for the year ended December 31, 2022 is and in our filings with the SEC. Investors are cautioning 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 a 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 reconciliation. 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 second quarter 2023 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, they 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 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 Gumby.

Thank you, Molly. Welcome, everyone, and thank you once again for joining us this morning. I'm sure many of us on this call saw the earnings announcement this morning. Ajay will take you through the performance in more detail. Let me try up front to share a few perspectives on the results. The first is the terrific strength. we continue to show in terms of revenue growth, in particular in terms of organic revenue growth, as well as the terrific strength we are showing in terms of attracting and retaining top professionals. We've talked about these in the past. I'm going to underscore them again both today and the consistency we have shown in delivering on both of them in the last few years in the face of COVID and booms and busts in the market. The consistency we have shown in terms of both organic revenue growth and in terms of attracting and retaining top talent are the two elements that I think ultimately have been the core of our success. So I'll emphasize that. But I'm also going to talk about a second point, which is the fact that we have not met our earnings expectations for the first half of the year. In fact, we missed our expectations sufficiently that we are lowering our full year guidance. The third point I'd like to share some thoughts on is how do those two points come together? Yes, in terms of how they come together for the year, but perhaps more important, what it means for the multi-year trajectory that this company has been on, and as I'll come back to, I believe we continue to be on. So let me talk to those three points, and then Ajay will take you through the details of the quarter. And then as usual, we look forward to opening the floor for your questions. In terms of the first point, I want to underscore that strength of our top line results. Year over year, this quarter, our revenues grew 15% organically. And for the year to date, it's 13% growth. And that is even before you normalize for FX. And as you might expect, given that level of overall strength, the contributions to our revenue growth were multifaceted. Every segment, every segment delivered year over year revenue growth in the quarter and in the first half of the year. Ajay will talk to each of the segments, so let me just highlight two here. First, as I'm sure many of you noticed, our tech business continues to soar. That tech team has now delivered multiple years of strength, and this year, it's notwithstanding, muted M&A activity globally. We are winning major jobs in multiple places around the world with major corporations and with prominent law firms. The second business I'd like to point out is FLC. As many of you know, we have been investing in FLC for a while, and we've seen it underperform our expectations in some quarters, and importantly, in last year as a whole. To me, it is terrific to see FLC beginning to show the tremendous potential it has, particularly this quarter with strong performances, actually in the first half of the year, from our investigations, sub-business, and data analytics businesses. So those are just two examples. Ajay, in a little bit, you will talk to the others, because Across the board, every segment this quarter and this year delivered growth. So let me turn to what I guess is the key question I would have if I were listening to this. With that level of revenue growth, how can you not also show earnings growth? So let me take a few minutes on that question. And let me do that via giving you an example of one of our best businesses, CorpFin, and use that as an example not only of CorpFin but to illustrate the more broader disconnect or parent disconnect. I think for most people on this call, you know that CorpFin is an incredible business of ours. And in the first half of the year, it had a terrific performance, 13% revenue growth. But in the face of the 13% revenue growth, our adjusted EBITDA actually declined 3%. So how does that happen? There are several reasons. First, our total headcount was up 14%, higher than the 13% revenue for the same period. In general, if your revenue is up less than your headcount, you of course see pressure on margins. But that pressure these days gets accentuated because of inflation. We are no longer in an environment of 2% or less inflation in the U.S. or globally. In the U.S. over three years, I suspect there's been about 20% inflation cumulatively. This year, depending on what metric or whose forecast you use, it might be about 5%. So in CorpFin, our total cost structure, including billable and non-billable costs, was not up 14% in line at headcount, but because of inflation, it was up 17%, which of course is quite a bit higher than 13%. And as a consequence, our adjusted segment EBITDA didn't grow. If you look beyond inflation, what else has surprised us during the year? One is that we've had lower attrition. We expected attrition to be a couple points higher this quarter. If it had been, our headcount, instead of being up 14%, would have been up 12% or 13%, and that would have closed the gap somewhat. So we can point out attrition, and I think many companies are pointing out attrition. I want to also be clear. We hired people this quarter and this half year, because we found terrific talent, terrific talent to join the Corp of Bend business. And when we find terrific talent, we hire, at least as long as we believe in the business, and we certainly do here. So we continue to hire. And as you know, when you hire senior people, it typically is not profitable initially. The third point is a slightly different one, which is, As strong as the revenues were in this quarter and this first half of the year for CorpFin, we actually expected even stronger revenues. If you think back a year ago or when the budgets were being set in the fall and most of us thinking about what we were thinking about in the economy and bankruptcy forecasts, I think most people expected a faster pace of bankruptcies this year in multiple places around the world. Some folks who were outside observers expected a boom We didn't expect a boom, but we certainly did expect strengthening in multiple places around the world. Now, we are seeing strength in some places around the world, but we're certainly not seeing a boom, and we're not seeing strength every place, and we have some weaknesses in different places. And just to put in perspective how sensitive the Corpathan results are to a few points change in revenue, if instead of 13% revenue gain, we had had 17% revenue gain, CorpFin adjusted segment EBITDA instead of being down 3% would have been up 15% so I share the CorpFin example because it's of course the largest of our segments and it's important to understand what happened there but it also illustrates a general set of principles that happen various places around the firm at the company level we grew revenues 15% this quarter and 13% year-to-date but our cost structure is actually grew faster. And the weighting of the various reasons changes when you look at different subsegments and different regions. Essentially, that story reflects the three themes I just highlighted in the CorpFen example. The first is lower attrition. The second, that even in places where we were slow, when we found terrific talent, we jumped on it. And the third is some places, not every place, but some places, we did have a revenue shortfall, not versus last year, but versus our expectations. And so those three reasons are the basis for why, even though, as Ajay will say, it was a solid quarter, actually a terrific quarter in terms of revenue, the adjusted EBITDA and EPS for the first half of this year were, to us, disappointing.