FTI Consulting, Inc.

Welcome to the FTI Consulting Fourth Quarter and Full Year 2025 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 FTI Consulting Conference Call to discuss the company's fourth quarter and full year 2025 earnings results as reported this morning. Management will begin with formal remarks, after which we 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 the private, Securities Litigation Reform Act, including the company's outlook and expectations for full year 2026, based on management's current beliefs and expectations. These forward-looking statements involve many risks and uncertainties, assumptions and estimates, and other factors that could cause actual results to differ materially from such statements. For a discussion of risk factors 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 Investor Relations website at www.FPIConsulting.com, as well as other disclosures under the headings of Risk Factors and Forward-Looking Information in our annual report on Form 10-K for the year ended December 31, 2025, our quarterly reports on Form 10-Q, 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 of the date of this earnings call and will not be updated. FTI assumes no obligation to update these forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. During the call, we will discuss certain non-GAAP financial measures. A discussion of any non-GAAP financial measures addressed on this call and reconciliations to the most directly comparable GAAP measures are issued in the press release and the accompanying financial tables that we issued this morning. Lastly, there are two items that have been posted to the investor relations section of our website for 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 2025 results. With these formalities out of the way, I'm joined today by Steve Gumby, our CEO and Chairman, and Paul Linton, our Interim Chief Financial Officer and Chief Strategy and Transformation Officer. At this time, I would like to turn the call over to our CEO and Chairman, Steve.

Thank you, Molly. Welcome, everyone. Thank you all for joining us today. As I guess some of you have seen already this morning, we reported, once again, record fourth quarter revenues and record results for this year. I'm hoping that many people on this call know by now that those sorts of record results are not unusual for us. But in this case, given the challenges we faced when we started the year, I'd like to pause on those results a bit more than I typically do and reflect a bit on just how we got here. If you remember, at the beginning of 2025, we talked about the fact that in 2025, we were probably facing more headwinds than I think perhaps we've ever faced during my time here. We talked about the fact in the second half of the year, most of our businesses were slow. In fact, we thought some of the markets we were in were slow and we were bringing that slowness into 2025. We talked about the fact that though we have a terrifically competitive tech business, it was facing dramatic declines in second request activity. We talked about the fact that FLC, which was showing the strength we always thought that business could command, was now facing uncertainty regarding demand due to the potential regulatory enforcement changes in the United States. And perhaps most important, on top of all that, we talked about the major challenges we were facing within our Compass Lexicon business, Econ. It's a great business with the world's leading professionals, but a business that was facing truly substantial disruption heading into 2025. If you remember that discussion, those discussions of the headwinds from the beginning of the year, the fact that in the face of all those challenges, our teams delivered the 11th year in a row of adjusted EPS growth and another record year of revenue, to me at least, and I hope some of you, is incredibly powerful. maybe more powerful and more noteworthy than just simply another record year, and maybe even more powerful than our results in the years where everything seemed to go right. The ability to deliver those sorts of results in the face of those challenges, to me, is about as convincing an argument for the resilience of this company as I could imagine. And to me, it underscores something that I will come back to. which is not just the powerful trajectory of this company over the last while, because powerful trajectories imply looking backwards, but the incredibly bright future that that sort of performance portends for this company. So let me take a moment to go back through that year in a little bit more detail. In terms of the negative headwinds we talked about at the beginning of the year, unfortunately, most of them turned out to be real. In tech, the slowdown in second activity requests, the second activity levels actually did happen. And in fact, it worsened in the first half of the year. And CorpFin had an even slower first quarter than we expected. And Compass Lexicon, though we were able during the course of the year to attract some terrific talent, the adjusted EBITDA impact we faced in 2025 was actually substantially worse than we anticipated at the beginning of the year. So how in the face of all that did we end up with this record year? As Paul will talk about, we did have some one-time things that helped us this year, but those are not the primary story. The primary reason we delivered those sorts of powerful results is because we have such a set of multifaceted powerful businesses. Not one great business, but multiple great businesses with people in those businesses who take responsibility. who take responsibility for making the core investments that drive the business, who take responsibility for standing by those investments, working them so they can come to fruition. The sorts of actions that we have driven in those businesses in a lot of places around the world in prior years and in 25 were the actions that allowed us to overcome the headwinds we faced. Let me give a little bit more detail. And let me start with difficult story the tech story this year at least for parts of the year tech business did have a slow year overall so important what we always do when we face a business that slow is evaluate is it because of their competitive position or is it because of transient market factor if it's a our position is strong we continue to support that business continue to invest in that business and if you remember We have, over the last few years, talked about just how powerful our tech business is, how it strengthened itself competitively, and how much share it has gained as a result. When we looked at tech's performance this year, we did not find that those truths had changed. We found the market was slow. Second requests were slow. So we supported that business. The great teams we have in that business, we invested, we attracted talent. And so when the market started to turn later the year, we were the beneficiaries. So even though tech business did have a down year overall, you can see in that down year, you can see the resilience, that competitiveness, and that strength. And it began to show up once again in tech's fourth quarter results. In econ, the situation is a bit different. There the economics did not improve as the year went on. If you remember, the Compass Lexicon disruption really only started to hit us somewhere in the middle of the second quarter. And it intensified as the legacy revenue from the professionals who departed slowed down as the year went on. And though we were able to add some terrific talent, talent that we believe over the long term will be terrific assets for this business, Those investments in 2025, as usual, at the outset hurt the P&L. So unlike tech, Compass Lexicon did not do a U-turn in terms of quarterly results in 2025. Actually, the year got worse as it went on. And overall, the impact was worse than we anticipated at the beginning of the year. As I alluded to above, what happened is that those results in Compass Lexicon and tech we're overcome by truly terrific performances in the rest of our businesses. Businesses in CorpFin, in FLC, and in StratCom. I can't do possibly due justice to all the efforts by all the people to make that come to fruition. In CorpFin, for example, there are so many things that made a difference. The results there are attributable to both things we did within the year with really terrific, nimble management, but also the result of powerful multi-year investments that teams have made in different practices and different geographies. Investments that, for example, have allowed us to transform over the last few years our restructuring business from what at one point was primarily a U.S. creditor rights restructuring business to being a global leader in restructuring, playing and leading in many places on both creditor and company sides. which in turn, I believe, makes us right now the number one or two position in restructuring in more markets around the world than any other player. Those sorts of moves individually look small, but collectively, they have allowed us to move from a position 15 years ago when we were not the prime player to win, say, the bulk of the global Lehman Brothers bankruptcy to today where we are top of mind team, the top of mind team, I believe. to help with the massive global engagement, whether it's Hertz or Steinhoff a couple years ago, or this year with Senova Energy, Spirit, Airlines, Wolfspeed, or others. And that is just talking to the transformation of our restructuring position. Equally, or perhaps even more powerfully, are the results of our investments our teams have made in building multiple businesses beyond restructuring. Our set of transaction businesses, which delivered record results this year, even in slow markets. and our transformation set of services, which despite having some extraordinary low markets, delivered a terrific second half of the year. And our teams did all that while continuing to recruit record levels of senior talent and promoting our next generation of experts, which of course bodes extremely well for our future. In FLC, the progress we have seen reflects the great positions we have built now over multiple years, combined with enhanced leadership and enhanced communication of those capabilities to the market. Entering the year, however, even with that strength, we had concerns about headwinds from policy shifts like the slowdown in FCPA and other changes in regulations. In the face of those headwinds, our performance in FLC this year, I have to be honest, actually astounded me. I think there were a couple of different factors that particularly drove it. First of all, in slow markets, it is often the case that the strongest players tend to take share. And I believe the actions and investments that leadership have taken particular in the U S but not limited to the U S over the last few years have positioned us to win some of the biggest jobs in the market. If you win the biggest jobs in the market, even if there aren't that many big jobs, you can be up when the market is down. And I think that was part of the reason we were successful this year. Other reason, I think, was the nimbleness of this team in multiple places around the world. Our leaders believe in the proposition that we've built. But they also understand there are multiple potential markets for those propositions. And so understand that the federal government isn't enforcing certain regulations, but the state governments are. We need to go talk to the people who are working with the state AGs. Our folks did that sort of pivoting activity this year. And that nimbleness allowed us to grow and extend our relevance with clients, even though certain places, which had been a big source of revenue in prior years, were slow in the face of the regulatory changes. Let me turn to Stratcom. Stratcom, as you know, after close to 10 years of growth, had a bit of slowness over the past couple of years. And so early in 2025, The leadership team did reevaluate some of the bets, and they took some corrective action. But at least as important, that team also had the confidence to continue to make investments in many parts of the world and in many parts of the business where we've been succeeding and have conviction. Those sorts of investments in areas like a corporate reputation, public affairs, M&A, activism, crisis, together with some terrific promotions and hires in prior years, drove a powerful return to growth for Stratcom this year. If you add this all up, the headwinds certainly were there in 2025. The combination of tech and econ added up to almost $100 million of adjusted EBITDA headwinds last year. Those headwinds were partially overcome by some litigation settlement. But the primary factor driving this outperformance was $135 million of adjusted EBITDA growth in the other three segments. Let me leave 2025 behind, and if I may, share a few thoughts about where I believe that leads us going. Entering 26, we still have some substantial headwinds, particularly early in the year. The most substantial one involves Compass Lexicon, which Paul will talk about, where we have the full cost impact in our P&L, but still haven't yet started to see anywhere near the full benefit of the people we've added. And critically, in the first couple of quarters, we are cycling the part of the year last year before the disruption has really started to impact us. So for the first half of 26, the year-on-year comparisons will be quite difficult for econ consulting. The second headwind relates to one-time benefits. Even though they weren't the primary reason we outperformed in 2025, there were some significant benefits in last year's first quarter, namely, again, those positive legal settlements I mentioned. So, again, early in the year, we have the issue of cycling those. The third headwind is different, more fundamental and more related to the business, and something we've seen from time to time in the past. As you've seen, we continued to add senior headcount last year. And given our low leverage expert model, we will continue to add senior headcount when the right people become available. And as you know, that investment is a negative hit to P&L initially. Although we are a senior-led model, and even with AI-created efficiencies, we do need also superb junior people to support those senior people. And because of caution coming into last year, we didn't do quite as good a job as we could have in adding the terrific junior people to support the senior people. And so we were looking to add junior talent, particularly in the second half of the year. So because of those near-term headwinds that we are targeting, are clearly targeting stronger revenue growth and targeting solid growth and adjusted EPS again next year, We are not yet back to forecasting the sort of double-digit growth in EPS that we have averaged since 2017. Not yet back to that. Let me try to put 24, 25, and our outlook for 26 into a broader perspective. If you look over the last 24 or 30 months, many competitors have faced some of the slowest markets they've seen in many years, and some, like us, have had their own idiosyncratic disruptions of significance, ours obviously being the disruption in compass lexicons. Have we been affected by those? Of course we have. All companies are, and all companies face those sorts of things over time. If in the face of that we achieve the midpoint of our guidance in 2026, notwithstanding all that, we will deliver adjusted EPS growth for the 12th year in a row. And we will do that while continuing to invest in great senior talent and junior talent. We will have the largest, most powerful group of senior and junior professionals that we've ever had. We will be working on the most powerful set of assignments, brand building assignments. supporting our clients on their most critical issues and opportunities, which in turn will further enhance our brand. To me, that shows once again, yeah, there are lots of idiosyncratic effects that can affect you. And they can affect you substantially for a bit. There are short-term transient market forces that can be headwinds. But my 40 years of professional services say that if you focus on the things you can control, the things you believe in, making sure you have great value propositions in areas of real importance for clients, and you focus relentlessly on being the best in those over any intermediate period, the factors you control trump the idiosyncratic factors and you persevere, you succeed, no matter what the markets are. I think the last two years, as well as the last five and 10, have shown that. They show the immense power of having great teams of committed leading experts, particularly in today's increasingly disrupted world. All of that leaves me, notwithstanding any headwinds we faced in 25 or faced in 26 or beyond, enormously confident about the power and future trajectory of this company.