Welcome to the FTI Consulting Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. And 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 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 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 quarterly report on Form 10-Q for the quarter ended June 30, 2022, our annual report on Form 10-K 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 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 other 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 second quarter 2022 results. Of note, during today’s presentation, 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 they have historically. 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.

Thank you, Mollie. Welcome, everyone and thank you all for joining us this morning. This quarter, like all quarters, there are a lot of puts and takes in our results at the disaggregated levels, the segments, the regions, the subregions. So I will, as usual, let Ajay talk to those in some detail. And let me talk to the macro levels. At the macro level, the results were for the first time in a while a bit below my expectations. Important, however, I want to underscore that, that shortfall was primarily due to the sort of quarterly noise that our business is often subject to, whether it's revenue deferrals, FX remeasurement gains or losses, taxes, the timing of success fees, et cetera. So I've looked into this extensively. And the bottom line for me about this quarter is nothing about this quarter changes my sense or our sense of the prospects for the medium term and the long term or for this year. So as Ajay will talk about, we are reaffirming our guidance for this year. So I'll leave the rest of the details in the quarter then to Ajay. And for the rest of my time, perhaps instead of talking to the quarter, we turned to some of the general themes that we've talked about before which is the commitment we are making to continue to invest in the strong positions we have and the numerous strong opportunities that we see. The investments this quarter are, for the most part, in the same areas that our investments have typically been which is, as you know, senior headcount and junior headcount and I'll talk to that. But in this quarter, you'll notice in addition, we have invested heavily in SG&A in a way that we haven't over the last…

Thank you, Steve. Good morning, everybody. In my prepared remarks, I will take you through our company-wide and segment results and discuss guidance for the full year beginning with our second quarter results. Today, we reported yet another quarter of record revenues with 6.1% year-over-year growth. Without the negative FX impact from strengthening of the U.S. dollar, revenues grew 9.2% compared to the prior year quarter. We also continued to invest in capacity globally. Our billable headcount grew 9.4% year-over-year and total head count grew 9.9%. As we expected, earnings per share declined year-over-year because revenue growth was more than offset by an increase in SG&A and direct compensation costs. I want to acknowledge at the outset that this year-over-year decline was larger than our expectation for three key reasons. First, in our Economic Consulting segment, we had a significant deferral in revenue as all client approvals required for revenue recognition for certain matters had not yet been received. This factor is merely timing of revenue recognition. We expect this revenue to be recognized in the third quarter. Second, we anticipated an increase in SG&A expenses because we are investing in infrastructure to support a larger business. And SG&A was depressed in prior quarters because of the global COVID-19 pandemic. However, travel and entertainment expenses were even higher than we expected, not only due to inflationary impacts on costs such as airfare and hotels but also, as Steve mentioned, because of a pent-up desire to meet in person. Third, large M&A activity is down year-over-year which impacts our Economic Consulting and Technology segments. As a reminder, last year, we benefited from large M&A-related engagements that have since concluded. There are also pockets within our Forensic and Litigation Consulting business where work involving our litigation-related services has been slower to get…

[Operator Instructions] And our first question today will come from Andrew Nicholas of William Blair.

Maybe to start following up on the last thing you said, Ajay, about kind of not having seen a pickup in restructuring outside of North America. What's your sense for kind of what's driving that? Is it -- and what kind of visibility do you have, if any, to that eventually sighing outside the U.S.? Just kind of curious about the different dynamics impacting that end market?

Andrew, the U.S. is more marked. We can see it in the number of matters coming in and the number of pitches and so on and so forth. I think it's a matter of time but I can't predict that time. And we certainly have all the visibility in the world. We are the leading practice. So I just didn't want us to get ahead of ourselves.

Sure. And in terms of the business and transformation and transactions pipeline, it seems like that's continued to grow quite nicely. So I'm wondering what the underlying drivers of that are? Are you seeing success primarily in the mid-market? I know you mentioned large-scale M&A starting to slow in other segments. But maybe a little bit more color on the pipeline and the market backdrop there. And then somewhat relatedly and I apologize for the lengthy question here but hoping you could kind of opine on the mix shift going forward from restructuring to BTT. How long can a quarter like this, the second quarter last where you’re seeing really good growth in both? And at some point, would you expect that to flip? Or are there enough kind of share gains going on under the hood within BTT where you think there can be a period of both of those sub businesses growing?

Let me take a crack at that. It's something we talk about actively. Maybe Ajay will add to it and feel free to disagree if you have a different view, Ajay. But look, I think you've hit on a good point. Look, at a macro level, some of the forces that trigger restructuring and bankruptcy should negatively affect some of the other parts of that business, right? At the macro level, as interest rates go up, you expect deals to decline, therefore the need for merger integration to decline or for financial due diligence to decline, et cetera, right? I mean, you would expect at a macro level that those force -- the macro forces would cut in favor of one versus the -- and against the other. On the other hand, we're not just a boat floating on the sides anymore. I mean, we now have people who are actively gaining market share in the non-restructuring type of businesses. And so even if the market goes down, the question is how much -- the wave goes down but your waves slows but your engine is propelling you [indiscernible] net of those two. So that's one thing that we think about a lot. And then, the second thing is we -- to your point, we are not equally in all parts of the market. We are more middle market or upper middle market oriented than the mega deal in CF. In our antitrust business, we tend to focus on the mega deals. In our transformation services, we are more working for private equity firms on mid-market or upper mid-market deals. And as you noticed in the markets today, the middle market is more strong and continue to be more strong this year than the largest sets of deals. So, I think the question you're raising is how do all those factors balance out. We're hopeful that this quarter is not an anomaly that we can continue to see a growth in restructuring and maintain some -- I think we believe we can maintain some strength for sure, in the transformation services, whether we can be impervious to the market, I don't think any of us know. Does that at least talk to the question, Andrew?

Yes. No, that’s very helpful.

Our next question today will come from Tobey Sommer with Truist Securities.

Could you speak to the impacts that you either are seeing or anticipate associated with the Big 4 firms or at least some of them considering splitting their auditing and consulting businesses?

Yes. Look, that's the subject of some discussion. I would say as of right now, it's a modest impact. I mean, we've had a little bit of increase in -- seems like a little bit of increase in reach out from some people within a couple of the firms who -- as you know, we've been having a lot of conversations with lots of other firms of laterals who want to come and have been at least -- Mollie seems to monitor an uptick in that in the last month or so as some of the noise happens there. But we don't know how -- what that trend is. I mean, in general, I think this is going to play out over a very long period of time, right? I mean, if you look at any analogous deals, these do not happen instantaneously. Sometimes they don't happen at the end of the day, right? I mean, these are complicated things to fall off and I'm sure this one will be complicated as well. So I think this is a story that's going to unfold over quarters, not days. And I think that's what we are seeing. Look, I think if you look at historical experience, these things tend not to happen without some friction. And we've already been seen as a very good destination for the record talent on the Big 4 around the world. But we suspect this will, if anything, just adds to that momentum. But we could have a dampening effect near term with the senior most levels if people are waiting to see whether they're going to have pay days. Most typically, the outflow from companies when this happens tends to be at the level below the partner level and that's actually where we're seeing a bit of a hike up in inquiries at this point in time. So we're monitoring it. I mean, look, I think our job is to focus on building our business. If we do a great job of building our business, attracting great people and they come seeing them succeed, the word gets around on that and that causes lots of other people to come. And so although we're monitoring this, our primary focus is where it has always been which is doing the right things for our business and then monitoring and see what opportunities come along. But we will suspect that will be a process that we're going to actively be monitoring over the next many months. So it's a good question. Does that at least talk to the question, Tobey?

It does. It does. I’m curious what are your thoughts around what has been sort of a sluggish rebound in FLC as a whole? You highlighted some areas of strength but I would have thought based on what I’ve heard from other players around port throughput normalizing that the business would be operating at a higher level by now?

Yes. Look, I think some parts of our business are a little bit behind where I thought it would be and we will monitor to see. I think those are temporary phenomenon. But I think some of what you're saying, I agree with and certainly this quarter, we'll meet the expectations of the leadership team in those -- that segment. But I would do want to -- let me put that a little bit of context in two ways. I mean, some of the weakness is really just the investment we're making. I mean, we're investing at a level we never have in particular in EMEA but also in some of our other practices because we have leadership now that we believe we can. So that was expected. Beyond that, there was some weakness in some businesses we think, our strong businesses and just had some historical weakness in our construction business which is a great business and is strong as it normally is. And I think that's a temporary thing. But let me zoom out for a second here. I think this is a really powerful business for us. And if you really look at it for a period of a decade, it didn't grow. And what we've done over the last few years with new leadership team is invest heavily to turn this back into a growth engine. And then you get hit by COVID and all that, there's a lot of noise. But if you look within that, we have proven our ability to grow that business. I mean, the cyber business which we had nothing, we invested in and now we have really a terrific, terrific cyber business. Our data analytics business has continued to grow around the world and it's the key to some of the biggest jobs we're winning around the world. Health Solutions was a basket case during COVID. In the midst of being a basket case, they doubled -- almost doubled the number of SMBs, that's investment and double the number -- close to double the number of headcount. And now that business is soaring. So we have proven that when you have the right teams and you invest behind them over time, that grows and we have a leadership team committed to it. But I believe the prospects for this business are terrific. But yes, for sure, this quarter wasn't our best. Does that talk to your question, Tobey?

It does. From sort of a medium-term perspective, you talked about investments a decent amount, SG&A and revenue-generating folks. How do you think about incremental margin between your U.S. operations and your international operations over – I’m not asking for guidance but over some decent stretch of quarters and years?

Ajay may have more precise answers. I've always resisted setting long-term EBITDA percent targets because I think what you have to do is make sure you're investing enough of your time with people and the growth potential and all the -- the way we're investing, of course, it all hits EBITDA, right? And if you buy a company, it doesn't hit EBITDA. You hire laterally people who have noncompetes or nonsolicits or get disruptive, that hits EBITDA. You hire junior people ahead of demand that is EBITDA. You do with SG&A, it's EBITDA. And so the way we're investing hits EPS. And if we have great investment opportunities, I want to go after that even if it temporarily depresses the EBITDA margins. And so I've resisted giving EBITDA percent. I think when you do that, you get with the zigzag but be sure with zigzag. Over time, you get significant EBITDA dollar growth. And we do it without financial shenanigans. It's not because you're doing financing things or weird things but because you're actually making the business stronger. And then because of that, your EPS grows and you create shareholder value. And so I'm very focused on creating shareholder value but I'm not -- resisted getting locked into any particular EBITDA percent target because I don't want ever have an ability to create a great group of people if it will temporarily depress our EBITDA percent. Does that at least respond, if not satisfy your question?

I was kind of – that’s a helpful perspective. But I was kind of aiming more towards incremental margin, like between your North American U.S. business and international compare and contrast. Can you talk about investing internationally but should we be able to get sort of differentiated kind of margin going forward as those businesses get scale. So I was aiming for a different angle.

Well, I'll just say this and then maybe Ajay will add. There are certain places on the continent of Europe where our investments are negative EBITDA right now and we do not anticipate them being negative EBITDA in the future. The reason I gave you that caveat [indiscernible] France, that some business in France, we've been investing them into profit margins. You may choose them to say, okay, we should go into market x or y and lose money there and so is the aggregation. But yes, absolutely, where we're investing today, EBITDA margin -- almost by definition, where we're saying we're investing heavily, the EBITDA margins there are below our long-term expectations. Does that more directly respond to what you're saying?

It does.

And ladies and gentlemen, at this time, we will conclude the question-and-answer session and we will also conclude FTI Consulting Second Quarter 2022 Earnings Conference Call.

Thank you for your support. Thank you.

Thank you all for attending today and you may now disconnect your lines.