FTI Consulting, Inc.

Welcome to the FTI Consulting fourth quarter and full year 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists 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. And 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 Ms. Molly Hawk Hatem Investor Relations. Please go ahead, ma'am.

Good morning. Welcome to the FTI Consulting Conference Call to discuss the company's fourth quarter and full year 2024 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 on 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, initiatives, projections, prospects, policies, processes and practices, objectives, goals, commitments, strategies, future events, future revenues, future results and performance, future capital allocations and expenditures, expectations, plans or intentions relating to acquisitions, share repurchases, and other matters, business trends, new or changes to laws and regulations, scientific or technical developments, 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 State Harbor Statement in the earnings press release issued this morning, a copy of which is available on our website at www.sticonsulting.com, as well as other disclosures under the headings of risk factors and forward-looking information in our quarterly report on our annual report on Form 10-K for the year ended December 31st, 2024, and in other agreements with the FDC. 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 EBITDAs, total adjusted segment EBITDA, adjusted earnings for 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 table that we issued this morning, which includes 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 fourth quarter and full year 2024 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 similar details as they have historically, and as I've said, are available on the Investor Relations section of our website. With these formalities out of the way, I'm joined today by Steve Gumby, our President and Chief Executive Officer, and Ajay Sabharwal, our Chief Financial Officer. At this time, I'll turn the call over to our President and Chief Executive Officer, Steve Gumby.

Thank you, Molly. Welcome, everyone, and thank you all for joining us today. I'm sure many of you have already seen some of the results we've reported this morning. What I'd like to do is to start by sharing some perspective on 2024, which was a year with some terrific elements. It's also a year, particularly towards the second half of the year, where we had some shortfalls versus our expectations. And then I'd like to spend the bulk of the time on 2025, a year where I have to say we are probably facing as serious headwinds as we have had in a while. And in that connection, I'll try to communicate both what we see the potential headwinds are, and important, try to share a sense of the potential magnitude of the headwinds. Because together, they are creating about as serious a challenge for the P&L for a year as we've seen in a while. So I will spend a fair amount of time on the potential challenges for 2025. But I will also, with your permission, take a moment to close the session by reiterating something fundamental something important, which is that the success of this company over the last 10 years has never been about optimizing a given quarter or even optimizing a year. What has driven our success has been continually focusing on building a stronger business, a business ever more able to deliver for our clients and ever more attractive for great professionals to be part of, and as a result, delivering a multi-year trajectory of growth. At the end of the talk this morning, I will reiterate, though, I am somewhat sober about the headwinds we're facing in front of us for 2025. I do remain incredibly bullish about the company, about the multi-year trajectory the company has been on, and the multi-year trajectory that I believe we will continue to be on. All right, let me start with 2024. As I think many of you know, we had a terrific, terrific first half of the year. Revenues, you may recall, were up 12%. and EPS grew 48% compared to the first half of 2023. Now, some of that strong performance in the first half was because we were cycling a slow first half of 2023, but it was also somewhat because of what we did. As I think you know, many other firms did not report anywhere near as good results during that period. Our teams were winning big jobs in the marketplace, and some of the bets we had made in prior years came to fruition at this time, And those results were notwithstanding the fact that we continued to attract during the year and invest in great talent, which always costs us some money in the first year. Let me turn to the second half of the year. We always expected that year-on-year growth would be slower, mainly because we knew we were cycling a much stronger second half of 2023. But the sales we actually got in the second half of 2024 turned out to be even a bit slower than we expected. Last quarter, we talked about the fact that we only had revenue growth of 3.7% year on year, which is among the slowest growth we have seen in a while. This quarter, we were actually down year on year and down sequentially. Now, I think most of us on this call know that our multi-year growth, the performance of this company over time has never been a straight line up, and we never expect it to be. However, I did want to point out that we did expect the business to be a bit better in the second half. We knew it was going to be slow, and it actually turned out to be worse. That's somewhat important for explaining 2024 results, but it's also important because it presents a revenue trajectory that is carrying into 2025 as a headwind. So I'll turn to 2025 in a minute, but before I get to 2025, let me try to sum up 2024. I'm going to talk about the fact that we were a little disappointed about because of the cumulative second-and-half effect. But I think it's appropriate to point out that it was yet another year of record revenues. It was the 10th year in a row, the 10th year in a row of adjusted EPS growth. So look, there's a lot to be proud of for 2024. But it's also true that relative to our expectations, the second half of the year disappointed. And as a consequence, the year as a whole, certainly not terrible, didn't fully fully meet our expectations. With that on 24, let me turn to 2025 and some of the headwinds we are facing. Obviously, the slowed growth trajectory is an issue we bring into 2025, but in addition, there are several other important headwinds that I want to make sure we talk to. Probably the most important, which I'll talk to at some length, is that we're in the process of seeing a number of senior departures in our U.S. competition part of our Compass Lexicon subsidiary, which in turn, as you may remember, is part of our econ business. And we currently believe that a number of less tenured people may also depart, which together can create some substantial headwinds, particularly for that subset of the business, but are sufficient magnitude that it will create headwinds for us as a company as a whole this year. A second issue is much more technical issue, which is we happen to be cycling a particularly low tax rate in 2024, which is not technically a headwind, but it does create some tough comparisons year on year. So it's akin to a headwind. And then not really at all a headwind, in fact, a very good thing, but a headwind in terms of near-term financials is the fact that we continue to see great opportunities, terrific opportunities to attract and invest in people. The phone is continuing to ring off the hook from people who want to join us. And as we've always done, we're committed to take advantage of those opportunities when we see them, notwithstanding the near-term financial pressures we may feel. So let me talk about those in a little bit more depth so you can get a sense of the magnitude. In terms of revenue slowdown, as Ajay talked about in October, we did see the revenue momentum slowing in the third quarter. And we thought that the slowdown might persist. And it has. And in fact, it's worsened year on year into the fourth quarter. It is hard to pinpoint one thing that has caused that slowdown, apart from what I mentioned before, that we were cycling an incredibly strong second half of 23. As I think many of you know, we were not alone in seeing slower performance in parts of 2024. So some of it appears to be market forces. For example, we had a fourth quarter slowdown in our activity in our M&A related businesses and econ and tech and Corp Fin, where we had a number of large jobs roll off and not as many large jobs start. And we believe that that was at least in part driven by the US M&A market slowing in the fourth quarter. And there is, as you probably know, a fair amount of pressure on different economies around the world. For example, in the UK. And we believe in that case, some of those pressures on the economy as a whole has affected several of our businesses. So market forces clearly appeared to be one of the factors. But I also think that some things that drove our slowdown in sales were idiosyncratic to us. Like, for example, our strategy business in Corp Fin, which had several large jobs roll off over the last few quarters, which we haven't yet replaced. As we have talked about, the nature of our business, the core nature of our business is that we can always have substantial lumpiness quarter to quarter in individual segments and for the company as a whole. And when we've had that in the past, it has never been a permanent condition. And important, there is no belief today that it is a permanent condition. We are currently forecasting solid revenue growth every one of our business segments, except for econ, which of course is because of the headwinds I'll talk about in the U.S. competition practice. But one of the reasons for our caution is it's also the case that right now, except for FLCs, the parts of STRATCOM, a little pickup in the pause in M&A activity we saw in the fourth quarter in corporate and tech, to date, we haven't yet seen the major resurgence of our overall revenue trajectory. So I hope that one is clear. Let me talk to the second headwind, which is clearly idiosyncratic to us, which is in addition to whatever market headwinds there are in econ, we are in the process of experiencing some dislocation in our Compass Lexicon subsidiary, in particular with the part of the business that deals with U.S. competition work. In that part of the business, so far in the first quarter, we've had the departures of a number of senior professionals, and we currently believe that quite a number of less tenured people may also depart as well, which together will create a headwind for revenue and profitability as the year goes on and potentially into early 26. So we talked a little bit about how do we dimensionalize this for you, and the problem is it's very early days, and so we cannot be certain about the exact magnitude of the effects. So one possibility for this call was simply to use the word substantial. We think it could have a substantial effect, and hence we're talking about it. I think the problem with that is, as I'm sure many of you know, the word substantial can mean so many different things. So let me try, which is hard in the context of it being early days, to at least give you some sort of dimensionalizing using a historical analogy. When I first started in my first year in that same Compass Lexicon subsidiary 11 years ago, We had a dislocation. It wasn't the exact same dislocation, but it was a substantial dislocation. The dislocation that handed me in my first year a $35 million decline in adjusted EBITDA in that segment. So I want to say, even though we don't know the exact numbers here, it could be in the order of that same magnitude as this unfolds. Now, just to be a little redundant. The issue with that sort of dimensionalizing is we are very much at the early stages. We don't know exactly how many senior departures we will have, how many junior people will end up leaving. More important, how many great people will see this as a great opportunity to join our firm. So it's hard to estimate the exact effect, but what we wanted to do is to communicate here that we do not expect the effect to be trivial. I'm going to take a risk here, which my general counsel is going to stare at me and my to my comms and maybe ad lib a couple comments. I tell you, 11 years ago when I got handed a $35 million hit, which nobody had told me about when I was interviewing, it hit. But it hit also because the business at that time was a business that had no growth engines. There wasn't a single business that had been growing the past few years. We had not extended overseas. We didn't have the leadership team that we had today We didn't have the quality, the vast quality of people and the hunger and the drive and the energy and the conviction that characterizes this company today. I think we are less than half the current size. So that really hit me. Today, this is not something I like to report. It's not like something I like to forecast. It's not something I like to talk about. We have to talk about because it's significant enough that we should disclose it to you. But we are nowhere near in that situation. This company is a vibrant growth engine And it's a pain. And some of the circumstances around it are a pain. And that has led to us having a lawsuit around some of the circumstances around it. Us leveling a lawsuit around the circumstances around it. But the company is in a fundamentally better shape. And so we will get through it. It is just something that we thought we should disclose to you. The other point I want to describe is that Yes, this hits that business. It is a fabulous business. FTI's econ practices under the Compass Lexicon brand and the FTI brand together constitute the leading group of economists around the world, the best group of economists around the world today and even after these departures. Even after these departures, I believe we will still have the single most powerful, vibrant, respected economic consulting firm with the best collective group of practitioners in the world. So our point is not that this business is going away. It's a great business. It will still be a great business. But we can't ignore the fact that it will have an effect on this business and is big enough to have an effect on the company. So we thought we would spend a little bit of time describing that. I hope that is clear. The third issue is a much simpler and more technical point, which Ajay will turn to, which is we had a particularly low tax rate in 2024, which is largely due to non-recurring factors. We will be cycling that. I mean, that's the sort of stuff that happens from year to year, but we should point it out. The fourth headwind, as mentioned before, is not really a headwind at all, but really a terrific thing that represents a headwind in terms of near-term financial results, which is that we continue to get a tremendous level of interest from top talent. And we, of course, are continuing our multi-year commitment to take advantage of those opportunities to build the businesses as those people become available. As you know, we do have a responsibility to be disciplined. In that light, we took some significant corrective action last quarter and this quarter in areas of sustained blow utilization. That discipline is essential. But we now have a management team, an aligned group of people that realize that while being disciplined is essential, that the key driver of our powerful multi-year success has been the commitment through that discipline to find great people, to invest in them, to attract them, to support them as they build businesses independent of any current potential P&L stress. So we have a team that is going to continue to do it even if it does have some initial P&L cost. So what does that all add up to? Ajay will talk about it in more depth and more quantitatively. Conceptually, it adds up to more headwinds for this year than we've typically had. more than we've seen in a while. As a consequence, our guidance for this year is not up as much as we typically have. It's more muted.