Welcome to the FTI Consulting Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mollie Hawkes, Vice President of Investor Relations. Please go ahead.

Good morning. Welcome to the FTI Consulting conference call to discuss the company's second 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 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 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 second quarter ended June 30, 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 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 these 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 an Excel and PDF of our historical financial and operating data, which have been updated to include our second 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 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 Steven Gunby, our President and Chief Executive Officer; and Ajay Sabherwal, our Chief Financial Officer. At this time, I will turn the call over to our President and Chief Executive Officer, Steve Gunby.

And Mollie, for once I've got the mute off before you turned it over to me. So thank you, Mollie, and thank you, everyone, for joining us today. I obviously hope all continues to be well with each of you and all of your loved ones in these complicated times. Ajay, in a moment, will take you through the details of the quarter. What I'd like to do upfront is, first underscore just how pleased I am and we are with our second quarter results, and thank our teams for incredible efforts that drove those results. Extraordinary efforts over the past few months to support our clients and each other from home and the major efforts over the last few years that have put us in a position such that even in these difficult times, we are seen as highly relevant resources for our clients. So I'd like to start with that, and then with your permission, also share a couple of perspectives on the future, both the inherent near-term uncertainty these days for a number of our businesses, but also the enormous confidence that we have in the medium- and long-term prospects for all of our businesses. So let me start with the results. One way to look at them, a pessimistic way to look at them, is to note that our adjusted EPS of $1.32 is down significantly from a year ago. Another way to look at it, however, is to note first that we happen to be cycling an all-time record quarter for adjusted EPS, so the comparison is a difficult one. But second and more important, if you step back and think about it, in the face of COVID, in the face of some parts of our businesses being at record low levels of utilization due…

Thank you, Steve. Good morning, everybody. In my prepared remarks this morning, I will provide an overview of our companywide and segment results, and discuss guidance for the full year. Beginning with the second quarter results. As Steve said, we reported record quarterly revenues and our results were better than we anticipated at the time of our last earnings call. Considering the impact of the COVID-19 pandemic on us, our clients, and our employees, we are very grateful for these results. Revenues of $607.9 million were up $1.7 million or 0.3%, compared to revenues of $606.1 million in the prior year quarter. As expected, our revenue growth year over year was driven by record quarterly performance in our corporate finance and restructuring segment because of the surge in demand for our restructuring services. GAAP EPS of $1.27 in 2Q '20, compared to earnings per share of $1.69 in 2Q '19. Adjusted EPS for the quarter were $1.32, which compared to $1.73 in the prior year quarter. The difference between our GAAP and adjusted EPS in 2Q '20 reflects $2.3 million of non-cash interest expense related to our convertible notes, which decreased GAAP EPS by $0.05. Our convertible notes had a potential dilutive impact on EPS of approximately 507,000 shares and weighted average shares outstanding for the quarter as our average share price of $121.03 this past quarter was above the $101.38 conversion threshold price at maturity. Worth noting, the trigger for conversion of our convertible notes prior to maturity was not met during the quarter. Second quarter 2020 net income was $48.2 million, compared to net income of $64.6 million in the prior year quarter. The year-over-year decrease was largely due to higher compensation, which was primarily related to an 18.2% increase in billable headcount and higher variable compensation, which…

[Operator Instructions] The first question comes from Andrew Nicholas with William Blair. Please go ahead.

Hi, good morning. Thanks for taking my questions. First, I just wanted to touch on CFR and the bankruptcy environment. I realize market and economic conditions are evolving pretty rapidly, but I'm just hoping to get your take on the runway for this level of demand in CFR. How do you see the bankruptcy market kind of evolving over the rest of this year and into next? And then relatedly, if you could speak to the length of the typical engagement in the current environment, obviously, recognizing that each case is unique, that would be helpful.

Let me take a crack at it, Ajay, and then, chime in if you'd like to add anything. Look, I think the world is a very complicated and fluid place at this point, Andrew, as you know. I think our sense is -- our guys' sense in Corp Fin is that this is likely to be a long cycle, but with some potential uncertainties along the way, right? I mean, you just don't know how would government actions get taken. In some places around the world, governments have suspended bankruptcies for a period of time. You don't think that will happen forever. And that sort of thing can happen at any point in time and it can have a material impact on your business. But I think if you think about the more fundamental macro factors, there's just been loose -- lose money for an extended period of time, which means that a lot of companies that would have been restructured in the past are somehow surviving to live another day and that eventually cures itself. So, I think our guys are feeling quite bullish about the need for -- the need of our restructuring services for an extended period of time. But that makes -- that doesn't necessarily mean each quarter looks like this quarter, certainly not. There's going to be a lot of idiosyncratic factors that can affect it. So on the medium term, I think we're quite bullish on that business quarter to quarter. It's almost anybody's guess exactly how that plays out. Ajay, do you want to add anything on the length? I don't know whether we describe the length as conservative. So many assignments are different in lengths. I don't know how you'd answer that, but maybe you can help.

Yes. No, no. No, I'll try. So Andrew, to be precise, and we used our words incredibly carefully in my script, we expect the strength in corporate finance to continue at least for the balance of this year. We'll talk about guidance for next year in Feb -- in February next year, but at least for the balance of this year, number one. Number two, you know, there's -- if there -- if you want me to hazard an average, it's about six months for an assignment.

Got it. That's helpful. And then, the next question I had is looking at some of the mandates that you won throughout the quarter, we saw a handful of examples where you were also tasked with helping in another area kind of alongside a restructuring win. Have you seen an uptick in your ability to cross-sell services in the current environment, specifically? I know that's been a trend over the past several years more broadly. But just curious on the cross-sell opportunity in that environment and progress there.

I don't know if this is the environment. I think you're right, Andrew, that what's happened is our firm has gotten to know each other a lot better over the last few years and our leadership team has gotten to know each other a lot better. And uh, and uh, where it's made sense for teams to collaborate, we're just doing it a lot more. That's been a general trend over the last few years, whether this environment creates new opportunities. I mean, look, what does happen in this environment, challenging economic conditions, as I've been educated, tends to reveal big frauds for example, and big frauds tend to be associated with big bankruptcies. And so, those sorts of macro forces tend to tee up big joint efforts between our FLC business and our bankruptcy business. But I think what I've been seeing more is the general increase of collaboration across our firm rather than anything I can point to for COVID. Do you see something different, Ajay? Or would you agree with that?

The -- no questions. I completely agree with you. The culture of the company is engendering this. The one thing that I might add is our strategic communications practice, especially this quarter, benefited significantly from allying itself with the corporate restructuring practice.

That's good. Yes. Does that answer your question, Andrew? Or at least give you…

Yes. No, that's helpful. And then just last one, if I could squeeze it in. On FLC, I think you mentioned on several occasions that both travel restrictions and the court systems being closed had an impact. I'm just curious because I want to understand, as we move through the rest of the year, how -- how this could all play out? Is the travel restrictions a bigger impact or the court systems? Or is there any way for us to kind of rank those? Just because I would imagine as things hopefully improve on the travel front over the course throughout the year, I just want to have a sense of what that could mean for this business.

The -- again, Andrew, I'm hazarding, I guess, here. The travel feels like the bigger factor right about now. Because on the court, we are getting virtual depositions. Although on the court, what we are seeing there is logjams. You know, there's only so many judges, so things are getting pushed into next year. But that's -- I mean, that's fine. I mean as long as the business isn't lost, I mean, that's OK if it gets pushed into -- it's the travel restrictions that are hurting because they also hurt, to some extent, in business development.

Makes sense. Thanks a lot.

Thank you, Andrew.

[Operator Instructions] The next question comes from Tobey Sommer with SunTrust. Please go ahead.

Thank you. I wanted to get your perspective on the hiring environment. And here, how you're thinking about kind of utilizing the throttle that you control with respect to that? And if you could also comment on the opportunity to hire people, particularly, in EMEA, in the U.K. Given some of the scrutiny and perhaps, disruption among traditional consulting and auditing competitors there.

Yes. Thanks. Thanks, Tobey. Hope you're doing well and hope your family's doing well. Thanks for the question. Look, I think you touched on the yin and yang of the hiring conversation. I mean, you know, your instinct, of course, is not to hire lots of people into a slow business until the business starts to perform. So that's one instinct. On the other side, the instinct is you jump on talent whenever it's available and great talent isn't just automatically on the market. What causes great talent to be on the market is disrupt -- either disruption in markets or disruption in competitors. And during these times, you have a fair amount of disruption in different parts around the world. As you say, some of it because of regulatory scrutiny of some of our competitors in certain places around the world, sometimes potentially because of financial pressures created by COVID. And so, look, we actively talk about that. You don't hire -- you don't overhire at junior levels into businesses that are slow, but you also don't reneg on offers you've made nine months ago to people coming from college because you're in the business for a long term. And eventually, those people will be needed and you have to honor your commitments. And so, you honor your commitments, you focus on developing people, you try to get them busy so they can develop and so forth. You try not to overhire into business that is slow. But you really -- mostly what we focus on is, first, making sure that any business that's slow is a good business and that we believe in it for the long term. And if we do, then, we tend to follow a conservative business-as-usual scenario because you're hiring sometimes nine months in advance. And then, we're also out there very much looking to take advantage of dislocations in our competitors, and that's one of the reasons I keep underscoring that. Because if we have a chance even in a slow business to pick up a terrific amount of talent, we'll do it even if it hurts earnings for a quarter because that's how you build the business over a medium term. So those are the yin and yang of what we think about. I don't know that I can comment specifically on specific competitors in a given market on a call like this. But does that give you a sense?

It does. With respect to the opportunity in the U.K. rather than talk about a specific competitor, would you say it's improving, staying the same, or worsened?

It's been -- look, as you know, Europe has been a very fertile ground for us to be attracting senior talent now for several years. And I would say, nothing in the environment there has made it less fertile. To the contrary, all the scrutiny that you're talking about is just -- keeps reinforcing the number of resumes from very attractive folks that we are getting in -- particularly in the U.K., but also on the continent. Does that help?

It does. With respect to the balance sheet and the convert, could you give us a little bit kind of color of how you're thinking about that? Whether you've kind of liked having an equity-linked instrument or may eventually look to replace that with an alternative source of finance?

Ajay?

A wise man once said, hindsight is 20/20. So clearly, you know, we -- at this juncture, we're very bullish on our stock, very bullish on our company's prospects beyond where we were at when we issued the convert. But it's a low interest-bearing instrument and we've been buying back stock very aggressively to offset the potential dilution. We -- we do not need to raise additional debt at this juncture under any circumstance that I can foresee.

And then, could you delve into the -- in the econ segment, the exposures on your M&A related work between -- excuse me, antitrust related work between M&A related and non-M&A related? Investors on the outside often struggle to understand the relative importance of those two components of the segment. Thank you.

So both -- both are very key drivers for us. We were typically an M&A antitrust shop, but we are now in a preeminent position, Tobey, on non-M&A antitrust as well. I mean, this quarter, if you step back and think about it, M&A is down. Large M&A is down, yet our economic consulting practice, you may have noticed, did quite well. And that is part of the reason the earnings have exceeded where our internal expectations were at the beginning of the quarter. And we've got both M&A related work and non-M&A related work. Large cases on M&A side continuing. We're also seeing a lot of mergers being contemplated that could never have been contemplated before with vertical horizontal integration that requires antitrust scrutiny, and therefore, very relevant for hiring our firm. And on the non-M&A side, you -- you just have to open the newspaper every morning to see major, major technology and other firms facing antitrust scrutiny. So, it's this -- it's this scenario where both sides are doing quite well. Did I answer your question?

You did. And as a follow-up, and then, I'll get back in the queue. Could you give us a sense for how far in advance of an M&A transaction being reported on and out in the public domain, the company is retained and/or utilized by customers as they think about and plan for potential M&A?

So I joke about this. Every morning, I look at all the cases we are picturing in the conflicts database around the world. It's the first thing I do in the morning and it feels like I'm reading the Financial Times, the Wall Street Journal, and the South China Morning Post three weeks before publication. Certainly, on major cases, we get hired in advance of the cases, whether it's three weeks or two months, I can't say for sure, but it's in that zip code.

Thank you very much.

The next question comes from Marc Riddick with Sidoti & Company. Please go ahead.

Hi, good morning, gentlemen.

Good morning, Marc. How are you?

Very good, very good. Thank you for all the detail that you provided on the call. One of the things I did want to touch on is regarding the court closures and activity. I was wondering if you could spend a little bit more time on maybe some of the actions that you're seeing and ways that they impact you, whether certain jurisdictions are doing maybe a little better than others as far as virtual testimony and things of that nature, and then, kind of sort of how your -- how you react to those things? And also, if you could maybe touch on if there are certain -- if certain jurisdictions are just doing maybe further ahead than others? Thanks.

So mercifully, the bankruptcy courts in North America didn't close down. Delaware courts didn't. Southern District didn't close down and -- in any way, so -- with virtual depositions and what have you. So that was terrific; so that's one bookend. At the other bookend, you know, you have in Australia, in Germany, in various places, moratoriums on director liability, on courts, on filings, in fact. So you -- you have a whole spectrum. And in FLC, in particular, of course, for -- and in economic consulting, there was clear logjams in the court systems and freezing for a while. Now, virtual depositions have kicked in; now the greater issue is there's a logjam.

Okay, that's helpful. Thank you very much.

Thank you, Marc.

Next, we have a follow-up call or a follow-up question from Tobey Sommer with SunTrust.

Thank you for taking the follow-up. With respect to the court system and the logjam or slowdown in kind of throughput broadly, how do you think of that in terms of demand deferral versus potentially, in some cases, demand destruction? Thanks.

You know, I think that it's the right question and the answer is we don't know. Because most -- what happens, Tobey, as you might imagine, initially, it all starts as demand deferral, right? The court date gets postponed. You know, they couldn't have a court in May and somebody looks at the calendar when they're back in their office. They're already booked -- they were already booked in the second half of the year. So they target it for June of next year and they put the date in June of next year because that's the first open date. The issue is -- so it shows up as a deferral, right? The problem is, does between now and June of next year people settle or the world changes such that the case goes away in some way. And so, we -- we don't have any real data on that. I mean, I think our current judgment is it's going to be a mix. A lot of it's going to actually show up next year because many of these cases have been floating around for years and they haven't settled until now. But some of it will undoubtedly go away by the advent of the deferral and we have no empirical data to give you any percentages on that as of now. But -- does that -- I assume that ties to your intuition that says some of it's going to go away, right?

Correct. And then, my last question is with respect to government investigations being a driver of your business, what -- could you give us some color on what you're seeing there? The government has certainly backstopped a lot of bankruptcy stuff and kind of stymied the natural course of the market. And maybe comment about how the government investigations have been historically as a driver under administrations from different parties as we look toward the Presidential election in November. Thank you.

So, we said -- I said in my remarks, Steve also said that this will create a new genre of disputes, investigations, etcetera. And part of it may be government, given government is becoming such a large participant and owner, part of it could be in the government area. So it doesn't necessarily have to have a precedent. I can't say for sure it will, but judgment would say it probably will. When you're making such large investments in such a wide swath of economy all around the world, there will be issues into some percentages. And our firm is -- you know, with our combination of our corporate finance practice and our FLC practice, I cannot imagine a firm better positioned than us to help in that regards. I'm not actually clear on what prior political dispensations did in prior recessions in this regard. So I don't know the answer to that question.

Okay. We'll take it up in 90 days. Thank you.

This concludes the question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.