Good day, and welcome to the FTI Consulting Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ms. Mollie Hawkes, Head of 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 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 headings of Risk Factors and Forward-Looking Information in our Annual Report on Form 10-K for the year ended December 31, 2022, 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 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 fourth quarter and full year 2022 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 same 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 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, and welcome, everyone, and thank each of you for joining us this morning. I’m sure most of you have seen this morning’s press release, and if you have, you’ve noted that 2022 was a year in which we once again reported record revenue, record adjusted EBITDA and record adjusted EPS, so a terrific 2022. With your permission, however, I’d like to not talk too much about 2022 and rather leave it to Ajay to go through the year in detail, and instead, allow me to focus on something that I find even more important than the 2022 results, which is the multi-year trajectory this company has been on and which I believe is positioned to stay on. The critical point to me is that though 2022 is a good year. It’s not a one-off good year. If you look at the last five years, we have averaged double-digit revenue growth organically. We have also done a couple of terrific tuck-in acquisitions during that period, but even apart from those acquisitions, we’ve averaged double-digit revenue growth. And in terms of adjusted EPS growth, we have had adjusted EPS growth not for a year or two, but now for eight consecutive years. I think some of you have heard me talk a lot about the stair step nature of this business that we never grow in straight lines, never in our individual businesses, certainly not in sub businesses or individual geographies, but actually also for the company as a whole. And some years in that eight had a lot of revenue or EPS growth, and some years had just a little bit. But when you’ve had eight consecutive years of a mixture of a lot and a little, it adds up. It adds up to considerably more than a…

Thank you, Steve. Good morning, everybody. In my prepared remarks, I will take you through our company-wide and segment results and guidance for 2023. I will begin with highlights from 2022. Revenues of $3.03 billion increased 9.1% or $252.7 million. Excluding the estimated negative impact of FX, revenues increased 12.2%. GAAP EPS of $6.58 decreased $0.07 from $6.65 in 2021. Adjusted EPS of $6.77 increased $0.01 from $6.76 in 2021. The difference between our GAAP and adjusted EPS for the year reflects an $8.3 million fourth quarter special charge related to severance and other employee-related cost, which reduced GAAP EPS by $0.19. Net income of $235.5 million compared to $235 million in 2021. Adjusted EBITDA of $357.6 million was up $3.5 million from $354 million in 2021. Last February, we talked about our ambition to grow headcount boldly in 2022. Reflecting those intentions, our headcount increased by 855 or 12.6% in 2022, which compares to an increase of 459 or 7.3% in 2021. Hiring, promotions and compensation increases resulted in a $150.5 million increase in direct cost in 2022. Revenue growth more than offset the increase in such direct costs with gross profit increasing $102.2 million year-over-year, and gross profit margin expanding from 31% to 31.8%. When we provided 2022 guidance, we also said we expected a sharp increase in SG&A. For the full year 2022, approximately half of the year-over-year increase in SG&A was related to higher travel and entertainment, marketing and business development and employee-related training costs as we opened up from pandemic restrictions in many places and experienced pent-up demand for meetings. SG&A expenses increased $103.2 million year-over-year, moving from 19.4% of revenues in 2021 to 21.2% of revenues in 2022. This increase in SG&A expenses offset the increase in gross profit, resulting in our net income…

[Operator Instructions] And the first question will come from Tobey Sommer with the Truist Securities. Please go ahead.

Thank you. A question about guidance, in the simplest terms for your revenue guidance for 2023, what are the basic building blocks in terms of utilization, headcount and bill rates?

So Tobey, we don’t give that level of detail. But essentially we expect – we’ve told you – the number of heads by segment at the end of the year. We’ve told you, we have similar ambitions. We – utilization is a derivative of how we hire, and what matters we bring in, et cetera. We are always looking for higher utilization. And we’re always also looking to compensate people so that, ours is the place they want to join and to have rates in the marketplace that our compensatory to the talents that we bring to the field. That’s as much as I’ll give you.

Okay. Curious if you would comment on SG&A expense growth as we exited last year on prior calls, I think we had indicated, or you had indicated that while SG&A investments are of course likely to continue, that the disproportionate drag on the bottom line was going to dissipate over time. Is that still an expectation here in 2023?

Absolutely.

Okay. And then one more financial questions, and then I’ll go to something a little bit more strategic. What are your expectations for free cash flow conversion from EBITDA, and are there any initiatives to improve that after last year?

Thank you for that question, Tobey. So, it’s – I’ll get a little bit more granular. It’s roughly 65% free cash flow to EBITDA. And that’s defined as, and we have obviously taxes. We have certain amount of CapEx, small amount of in cash interest expense. I mean, those are the – and there’s of course working capital. Those are the main variables. If you go back and plotted for several years, that’s the kind of conversion. Obviously, 2022 was nowhere there. But then 2021 and 2020, we are far higher than the 65%. And that’s what – the pandemic from a cash flow perspective was very good because people completely stopped traveling and all of that – and all of not just travel, but meetings, et cetera, all of that prepaid expenditure just stopped. Meanwhile, you got all the normal collections, which in our case we’re not impacted adversely at all. The flip side took place in 2022 when there was a massive revving up of such SG&A, but once you’ve built that up that, even if you keep it at the same level, you don’t see the adverse cash impact. So average out those three years, and you’ll get this percentage I mentioned, which is what we should expect going forward.

Okay. Thank you. And maybe this is for Steve. I was wondering if you could describe the portfolio of businesses that the company operates in sort of grouping the most procyclical and the most countercyclical in describing demand in those two sort of ends of the spectrum. It’s difficult to interpret what are mixed economic signals and anticipate with accuracy how that’s playing out in your portfolio? Thanks.

That’s a great question. And I’m not sure we debate this internally. I’m not sure we have any great exact numbers. But let me and then you can chime in here too, Ajay, if you say something you disagree with. I mean, these are judgment things. But I think there’s three parts of our business, not just two. There’s procyclical parts, there are a cyclical part. There’s countercyclical parts and there’s a cyclical parts. And so you just, we have to think about all three. The procyclical stuff tends to tie to M&A, right? And we do M&A, we do M&A in our stratcom business. It’s not half of our business, but we do it. Sometimes IPOs are procyclical too. But we do M&A-related work in our corp fin business as well. And so that’s procyclical. Some of our Econ business on merger clearance is procyclical. Countercyclical, obviously our restructuring business is countercyclical, and sometimes some parts of the non-restructuring business is countercyclical because the impetus to cut costs, private equity impetus to cut cost for healthy companies grows during troubled times. So we have some substantial countercyclical. I think the thing that people miss is we also have a whole lot of our businesses that are not particularly driven by the cycle. I mean, if the governments are investigating tech companies. As far as I know, they don’t turn the throttle on or off based on the global economy. And so, a lot of our investigations work is affected by things that are independent of the cycle. And so I think we have all three. I actually, I think we’re sufficiently balanced that I pay zero attention – it’s not that I pay zero attention, of course, I monitor the news all the time. But I don’t act based on those determinations because I believe as a company, we – if we aren’t prospering, it has more to do with us. Put it another way. Over any multi-year period, no matter what the general economic is. If we do the right things, I believe we can grow. Now, I’ll withdraw that if Putin sends nuclear wars around the world, that’s a different issue. But if – but in terms of the general economy of the world, I think what we have to focus on is doing the right things for our business. And I think we’ve proven over the last years, if we do, we grow. And so that’s where we keep our focus as much as we can. Does that make sense?

It does. Yes. And last question from me. And I’ll get back in the queue. We’ve seen some layoff announcements among some of the big four firms and even some white shoe strategy consulting businesses at least reported. Does – could you describe how this climate, maybe in the context of the restructuring business, picking up other competitors, both close and distant, changing their behaviors, what does this do to the context of FTI adding talent?

No. No. It’s a great question. So let me respond two ways. Look, first of all, I don’t – if we were on the verge of going bankrupt, of course we would consider layoffs, but that is not our instinct here. We have performance conversations, particularly with the senior people to make sure that they’re aligning their business with the markets going ahead and all that. But I’m not sure that it ever makes sense to optimize a quarter by laying off junior people who you just hired, and we try to withhold off as much as we can, and I think we have. I mean, obviously, our economics are great. And so I just – I would – I kind of personally – we didn’t do that during COVID, and I’m not sure why we would do it if an individual business happens to have a slow quarter, which is different than if a business has no future, but we don’t have any of those. To the contrary, though, I do think it creates opportunity because – and we found this in different places around the world. We picked up, for example, in Australia, some incredible talent who are frustrated by the actions of the companies that they came from. They’re in COVID where they thought they were being short-termism. They weren’t addressing those people, but they were addressing those people’s people, and that frustrates people. And so then they said, well, maybe FTI is a place that is more committed to the same values as me, and we picked up fabulous talent, which has changed our marketplace. So that’s why I believe we get talent when it’s available. And I think your point is – I think you’ve pointed to something really important that difficult times often cause others to feel like they have to do things that are not good and that frees up talent. And if it is, we’re going to jump on it. Did I at least respond to your question, Tobey?

Yes, you did. Thank you.

Thank you.

The next question will come from James Yaro with Goldman Sachs. Please go ahead.

Good morning, Steven, Ajay, and thanks for taking my questions. Maybe if we could just start with some of the drivers in Corporate Finance & Restructuring this quarter. Maybe you could just speak to where you’re seeing the stronger restructuring results in the fourth quarter? And when and whether you expect this to accelerate further? And then in addition, maybe you could just speak to the discrete outlooks for business transformation versus transactions in this somewhat, let’s call it, uncertain economic backdrop?

There’s a lot of questions in there. If I forget any, just tell me, just repeat it. So in terms of the – we mentioned the industries that where we – we don’t talk about specific matters that could also be ongoing till well after the fact. So we talked about the specific industries like specialized finance, including cryptocurrency. We mentioned airlines. We mentioned telecommunications. So I think we mentioned the areas. I won’t go further than that. There’s a lot of publications that sometimes mention the names. Sometimes it’s in the press, but we are not in the habit of – our most treasured thing is client confidentiality. So we don’t go back there and start corroborating or otherwise as a practice. So that’s one. Two, do we expect this to pick up? In our guidance, at the mid-point of the range, we – as I said, we expect it to remain – restructuring to remain elevated at these levels. That means I’m not projecting it to get even more nor I’m projecting it to come down. That’s at the mid-point. There’s a range in there because there’s a lot of folks who feel interest rates are going to fall by the second half of the year, and there are others that feel it will – they will remain elevated for longer. There’s a mid-point, and there’s a range around that mid-point. So – and I will also tell you that some of these matters that can become large matters are not necessarily driven only by interest rates. They could be fraud. They could be investigations. They could be – for example, for the longest time in retail, we saw the impact of more transactions being done on the net versus brick-and-mortar sort of premises. So it’s more than the economic cycle that can drive restructuring. So that’s on the restructuring side. Transactions and transformation are – we are minos in that area. I think getting stronger, but we are small relative to the rest of the world. So for us, it’s more a market share versus cyclical at this point for the most spot. I will say there can be ups and downs. For example, in Q4, I must point out – and I think I said that in my words in the trans – you can see that in transcript too, we had terrific success fees in the fourth quarter, order of magnitude about $14 million. It ranges from $3 million at the low end per quarter to $15 million at the high end. This was towards the high end, and the significant portion was that – of that came in our transactions business where at the outcome of an event, typically, you get a success fee. That is lumpy. That can move around from one quarter to the next that one must understand and appreciate. Did I answer your question?

That’s very clear. Thank you. If we think about the weak backdrop that at least we’re expecting for large cap M&A globally in the near-term, to what extent do you expect the slowdown in large cap M&A to affect each of your businesses or some of your businesses?

So look, some of our M&A work is at large cap levels and some of it is – tends to be more middle market. And those markets, as you know, have not always moved together. We are the leading – I believe, the leading. I’m pretty sure we’re the leading anti-trust clearance firm in both the U.S. and Europe, and that is large cap stuff because it’s around big companies merging and second request from the government and so forth. So there’s always a chance that, that is negatively affected. We should recognize our – that business is not just that business, it also has private anti-trust, which is usually multi-year. It’s regulatory, it’s financial economics and so forth. So I mean, I think that business has shown itself the ability to grow over a multi-year period independent of the cycles, but it gets affected by the cycles. And I suspect the M&A – downturn in large scale M&A will affect one portion of our business. Same thing for Strat Com. They tend to be more involved in the large scale M&A comps because tiny deals don’t involve as much comps. But our – and then actually also our tech business is also involved in the second request market because when the government asked for you to second request, they ask for immense amounts of data in a very short period of time, and I believe we’re the leading provider of second requests through our tech business. Also, they do other things beyond that. They do investigations. They do a whole lot of things. So I think all of those businesses could be affected by a downturn in large scale M&A. Our – I’ve been impressed by the resilience of our transaction business in Corp Fin, not that it’s unaffected…

Yes. That’s extremely helpful color. Just a couple more here. If we just think about Forensic and Litigation Consulting, utilization remains somewhat lower than what you’ve seen in historic fourth quarters. I know you’ve obviously spoken to this in the past, but what do you think could catalyze an improvement in utilization? And then if it doesn’t improve, is there some sort of point where you’d consider other approaches to improving the business?

Of course. Of course, at some point, you prove this. Look, there are two ways to get that utilization, and yes, the utilization last year was not in line with our long-term expectations for FLC, but there are two reasons for it. One that will continue and one, which I hope doesn’t continue. One of them is investments. When you’re investing in new geographies, you get SMDs. They don’t take a while to get traction. That is just part of our job. And so obviously, if you pull that out of the numbers, the historical businesses utilization are higher. But the other one is, what we have to do is make sure the bets ultimately turn out, and we had some bets in North America that started to pay off in the fourth quarter and weren’t showing up in some of the earlier quarters, which is good. We have a lot of bets in Europe that we’re expecting to do better this year. So we monitor this pretty closely, but that doesn’t mean we always get it right at least in terms of timing. We haven’t had that many bets totally terrible compared to what we expected, but sometimes things take longer. And I would say, last year was a year in which some parts of FLC were taking longer than we expected. But the utilization we had in 2022 is not our expectation of the long-term unless somehow 100 SMDs come on the market that we want to hire, in which case, you have a short-term lift. Does that respond, James?

Yes, absolutely. That’s very helpful. And then for my last one, you’ve talked about some of the pressure on margins in 2022. If you just think about your business level EBITDA margins or just operating margins, perhaps both, where are you seeing more pressure across the various segments? And where are you seeing less?

I think it’s very different by segment. I think the one place where I’ve seen a lot of it in the last 18 months or 24 months is in tech. There’s just a lot of price competition. And we’re gaining share, and we’re willing to match the market’s prices on that. So you can see over the last couple of years our EBITDA margin, even though we’re succeeding as well as anybody. I think better than – I believe better than anybody in the market. You can see our EBITDA margin has compressed even though we’ve been growing incredibly fast. I think there’s always a mix issue within Corp Fin. The restructuring business when it’s hot is always a big boost to margin. So I don’t think we have long-term structural concerns about our margin in any of the businesses I can think about. But there are zig zags, and I would say, tech may be in a – the tech industry may be heading for a little bit of a shakeout, and so there may be a few years where the margins are a little lower. Other than that, I think I don’t expect a long-term decline in margin, but I also – I’m also willing to hit the margin by hiring if time becomes right, and that’s probably the bigger effect. Does that help, James?

Yes, absolutely. That makes a lot of sense. Thank you both for taking my questions.

Thanks and welcome.

The next question will come from Andrew Nicholas with William Blair. Please go ahead.

Hi, good morning. Thanks for taking my questions. A lot has already been asked, but I just want to ask a few follow-ups to some of the earlier questions. Maybe starting with FLC. You talked about, Ajay, the plans to continue growing headcount across the entire firm at similar levels in 2023 to what you did in 2022. Is that – are we – should we assume that, that is also applicable to FLC? Or are you going to wait for the improved performance, which I think you said you expect in guidance to materialize before leaning into that further in 2023?

So Andrew, the key is finding the right talent. If the talent is available, we have the wherewithal and we have the ambition. It’s more that than an absolute number of hires.

Understood. And in terms of the restructuring environment, I know you talked about it in a variety of different ways already, but just maybe asking it a different way. Is there any major change to how you’re viewing kind of the ramp of restructuring today versus what you communicated on the last call? I know in guidance you’re assuming similarly elevated levels, but just kind of curious as to if how things have unfolded over the past couple of months gives you a different opinion. I know last quarter, you also talked about differences from a geographic perspective. So just any additional color there on how your view has evolved over the last couple of months would be really helpful. Thank you.

Your observation is correct. When we spoke the last time – relative to when we spoke the last time, restructuring has picked up more than I saw or anticipated at that time. So your observation is correct. It is primarily a U.S. phenomenon, but we’re also seeing pickup in certain other geographies. So still smaller, but there are – there is a pickup in other geographies as well. The guidance is with it remaining at these levels with a range of outcomes around it.

You can look at some external statistics. 2022 as a whole was not a boom year for restructuring. In fact, it was, I think, one of the worst years since 2014. But if you look by the fourth quarter, that has changed, and we have good statistics in the U.S., but you can also see that in some of our overseas markets. And I think when Ajay is saying continuation, you’re saying at a continuation of what we saw, as you said, since the last quarter’s report as opposed to the year 2022.

So that in English means, it’s not – doesn’t mean that the slope continues, it means that at this level and remains at this…

Does that help, Andrew?

Yes, yes. And then maybe one last one for me. I think earlier this year, the FTC proposed a rule on non-compete agreements. Just wondering if that would potentially impact your business or your ability to either hire away from or protect your talent, if you’ve given any thought to that dynamic at this point?

Yes, we have given some thought to that. Look, I think my understanding is that this is in the early stages of rulemaking with a lot of comments still to come, and so I think there’s a long way to go on that. So maybe we can revisit that as that gets closer, but we obviously monitor that.

Makes sense. Thank you very much.

Well, thank you, everyone. I think we went over. I’m sorry to go over, but I appreciate the good questions. And thanks to everyone on this call for your continued attention and support for our company. We look forward to taking it forward. Thanks.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.