Welcome to the FTI Consulting Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Mollie Hawkes, Head of Investor Relations. Please go ahead.

Good morning. Welcome to the FTI Consulting conference call to discuss the company's second quarter 2023 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 quarterly report on Form 10-Q for the quarter ended June 30, 2023, our annual report on Form 10-K for the year ended December 31, 2022, and in our 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 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 2023 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, they 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. Welcome, everyone, and thank you once again for joining us this morning. I'm sure many of us on this call saw the earnings announcement this morning. Ajay will take you through the performance in more detail. Let me try upfront to share a few perspectives on the results. The first is the terrific strength we continue to show in terms of revenue growth, in particular, in terms of organic revenue growth, as well as the terrific strength we are showing in terms of attracting and retaining top professionals. We've talked about these in the past. I'm going to underscore them again both today and the consistency we have shown in delivering on both of them in the last few years, in the face of COVID and booms and busts in the market. The consistency we have shown in terms of both organic revenue growth and in terms of attracting and retaining top talent are the two elements that I think ultimately have been the core of our success. So I'll emphasize that. But I'm also going to talk about a second point, which is the fact that we have not met our earnings expectations for the first half of the year. In fact, we missed our expectations sufficiently that we are lowering our full year guidance. The third point I'd like to share some thoughts on is how do those two points come together. Yes, in terms of how they come together for the year, but perhaps more important, what it means for the multiyear trajectory that this company has been on, and as I'll come back to, I believe we continue to be on. So let me talk to those three points, and then Ajay will take you through the details of the quarter. And then…

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. In summary, we had a solid quarter with record revenues. At the company level, we delivered 14.5% revenue growth, with all segments growing year-over-year. Our net income increased 21.3% and adjusted EBITDA increased 31.6%. We achieved those financial results while continuing to add talent globally with billable headcount growing 11.3% year-over-year. Though solid, our results for the first half were weaker than our internal expectations. As Steve mentioned, midway through the year, we are lowering the top end of our revenue guidance and lowering our EPS guidance range. I will discuss factors shaping this revised guidance towards the end of my prepared remarks. Turning to our second quarter 2023 results in more detail. Revenues of $864.6 million increased $109.6 million compared to $755 million in the prior-year quarter. Earnings per share of $1.75, compared to $1.43 in the prior-year quarter. Net income of $62.4 million, compared to $51.4 million in the prior-year quarter. This increase was due to higher revenues, which was partially offset by an increase in direct compensation costs, higher SG&A expenses, a higher effective tax rate and an unfavorable impact from FX. SG&A expenses of $186.4 million were 21.6% of revenues. This compares to SG&A of $167.9 million, or 22.2% of revenues, in the second quarter of 2022. The year-over-year increase in SG&A expenses was primarily due to compensation and outside services expenses. Second quarter 2023 adjusted EBITDA of $100.2 million, or 11.6% of revenues, compared to $76.2 million, or 10.1% of revenues, in the prior-year quarter. Our second quarter effective tax rate of 26.7%, compared to 20.6% in the prior-year quarter. The higher…

We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Andrew Nicholas with William Blair. Please go ahead.

Hi, good morning. Thanks for taking my questions. I wanted to first ask on the cost side. I think you both mentioned inflation pressuring cost as it's costing more, obviously, to hire people and keep people. I'm wondering if there's any kind of mismatch there as it relates to bill rates also going up. Is that pressuring the first half more so than you would expect it to pressure second half or even looking ahead to '24? Or are you having a harder time than expected passing through that dynamic through on the bill rate side?

Let me take a crack at that. Look, I think, obviously, we're a complicated business with a ton of subparts in different parts around the world. I would have said last year, we had trouble -- we were a little slow to raise bill rates. I don't think that's the main factor of the shortfall this year. There have been a couple of places where we're not getting the realization. I think a lot of it actually has been utilization has been lower. Like for example, our restructuring business hasn't been as strong. It's not that we didn't raise the rates and commensurate with inflation. It's not that they don't know how to get realization there. But if you're lower utilization, that shows up on the revenue line. It's obviously a mixture of all three. But last year, I would have said we were slow to raise rates and then there was a little less commitment to realization than there should have been. I'm not sure that's the primary cause of the shortfall in the first half of the year.

Understood. That's helpful. And then I wanted to ask on guidance. It sounds like you're lowering your expectation for the pace of restructuring growth, which makes sense. I'm wondering if there is kind of an offsetting increased assumption on the M&A front, if we do kind of thread the needle in terms of a soft landing here or what level of kind of conservatism is there in terms of larger deal activity? It seems like the transaction practice picked up a bit of an easier first quarter comp. Just wondering kind of how you're seeing that or if the back half not only is expecting slower restructuring growth but also still relatively modest acceleration on that front.

Andrew, that's exactly it. At the midpoint, we are expecting exactly what you said. Slower restructuring growth and moderate growth in transactions. And there's a range around that midpoint.

Great. Thanks so much.

Thank you.

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

Good morning. And thank you for taking my questions.

Good morning, James.

So we just received proposed antitrust guidelines in the U.S. as well as some changes to Hart-Scott-Rodino. How do you see these as a catalyst for your business broadly? And maybe if you could just help us understand in which segments you think you might benefit. And then outside of the U.S., just any update on the antitrust dialogue and how that should or should not affect your business?

Look, let me make a general statement and then I'll see if Ajay wants to go into more details. Look, I think we have -- I think it's fair to say we have, around the world, the leading group of antitrust experts of any firm, and I think by a significant margin, at least most places around the world. So any sort of dynamics in the world of antitrust, whether it's private litigation, public litigation or just investigations by regulatory authorities, stimulates demand because the stakes of these things are incredibly high. So I think many people would have thought our E-Con business would have been slower this year because of the M&A market is not as robust. I mean our E-Con business, it had a slow start to the year and it had some deferrals and all that sort of stuff, but we are -- we have a terrific E-Con business. And I think as all these regulatory changes continue, it just tends to -- in general -- the specifics are always different by the individual specific country litigation -- legislation. In general, it just stimulates more and more demand for the best professionals in the world, which is ours.

Okay. That's very clear. Thank you, Steve. You touched on E-Con consulting a little bit. There's obviously a tremendous sequential growth in the business this quarter, which is great. Is this the right normalized level to build off going forward? Or were there any sort of onetime factors in there related to deferred revenue for the first quarter? I'm just trying to figure out what we should put in our models going forward there.

Well, there clearly were onetime factors. Let me have Ajay talk to you about that, but that's an important point.

James, the better way to do it is add the first two quarters and divide by two. That's -- on the revenue side. That's the launch pad that you should have going into the third quarter.

Okay. That's extremely clear. And my last one is just around the U.S. presidential election. We're entering into an election year in the U.S. next year. And historically, you have had a step down in revenue in Forensic and Litigation Consulting around those events. Maybe you could just speak to what you think this coming election could mean for the business growth for next year?

James, look, I have no idea. What I have found -- let me say this. I used to run -- lead a big chunk of BCG. When BCG was not performing, we talked a lot about the external markets. When we started performing, we stopped talking about the external markets. And it doesn't mean markets can't affect us. But -- I don't know that the election results from 2008 actually have relevance today. When we attract great people and they monitor the markets, we can have slow periods because of dislocating events. And we worried how's Brexit going to cause a low mark in the Europe and all these sorts of things. I think my experience is, over time, we determine our future over any 12 to 18 months, and that's kind of what we focus on. Otherwise, you spend your entire time trying to look at crystal balls when -- I don't know what your crystal ball is about who's going to get elected or even who's going to get nominated, right? It's just two, third order and fourth order. We spend our time saying we feel like we have the right propositions for our clients, how could the world change on election so we're positioning ourselves against the right needs for the clients and make sure people are out in the market. And then we -- if there's short-term dislocations, we live with it. I wish I had a better answer, James, but that's our -- that's my crack at it.

Totally understood. Thanks so much, Steve and Ajay.

Thank you.

The next question comes from Tobey Sommer with Truist Securities. Please go ahead.

Thank you. Good morning. Will there be G&A leverage in '23? And if not, when?

Answer is we do expect lower G&A in the second half than the first half, which -- and we do expect higher revenue growth at the midpoint. So yes, we do expect G&A leverage in the second half.

And would that be true for 2023 versus '22? Just on an annualized basis rather than just looking at the discrete guidance period of half the year?

I'm not sure whether for '23 to '22. I'll have to think about that a little bit more. SG&A has been up. And that's where you see some of those inflationary pressures. Those flights cost -- the same flight costs a lot more and the same hotel costs a lot more. And in terms of the pay increases, which are very justified, you can't pass those on to the clients. So you do have those. But I think it's turning.

Let me just add something on that. Look, I think there are SG&A costs like flights and so forth. A lot of our SG&A costs are driven by our billable head count. You add a lot more billable head count. Open a new office, you have new real estate, you have new computers, you have travel and all that sort of stuff. Whether our SG&A gets leveraged is a lot historically -- there used to be a rule of thumb in professional services. If your revenue goes up faster than your head count, then you've gotten leverage on your SG&A, unless you're managing it stupidly, over an extended period of time and the reverse. The issue today is your revenue has to go up faster than head count plus inflation in order to actually have a big leverage point. And the issue this year is not that our SG&A went out of control. We had some expenditures on things, which we chose to do. It's that we expect -- we had head count growth, and we didn't get as much revenue growth. And once we can get the revenue growth ahead of our billable headcount and inflation, we will get a lot of leverage, but we have to get there. And I think we have uncertainty about the second half of the year revenue, which we put a guidance around. Does that help, Tobey?

It prompts a follow-up, Steve. Does that mean revenue needs to grow at rates including inflation above head count growth? So this year, for example, using your own numbers that would be 5 points. Is that right?

I think -- look, I think there are millions of specific things that the accountants will tell you can trump all this on a short-term basis, right? I mean you got exchange rates and you got blah blah blah [ph]. And so I haven't looked at that, Ajay probably has, in detail. I think over any multiyear period, in order to get a lot of leverage out of SG&A, you want your revenue to grow faster than billable head count plus inflation. And that's a truism that actually has flied through many professional services companies for very long periods of time. Does that help?

It does, but maybe you could dig into what are the things internally you are toggling that are your control, that are under your discretion differently in response to the changing conditions? So either slowing office growth. I understand you're going to hire billable headcount, particularly senior people who can generate revenue when they're available. But you could hire less junior staff to improve your utilization. So describe some of those toggles if you could.

Yeah. Let me start by describing what we're not doing, right? I mean, look, if we were in duress, really company duress, we could pull the plug on the 300-some-odd new hires that are supposed to show up in -- from September -- in September, right? I mean -- and I guess some people do, where they postpone all the things. We're not doing that. It burns your brand on campus. It hurts junior people. It has a temporary benefit to our P&L, and it's a temporary benefit to your P&L. So what we're not doing is looking for short term fixes that really help a couple of quarters and really don't help us. I mean we're hoping that all of you have enough confidence in our -- the discipline of this company that we shouldn't be doing short-term things that are -- that hurt the company in the long term in order to boost a quarter or two. And the opposite, as you say, which you're supportive of is, one of the weird things is that in complicated times often is when the best talent is available. And one of the things we've committed to is to jump on that, even sometimes where places are slow in utilization. And that doesn't mean we want to have sub-parts of our businesses at 48% utilized going -- forever going forward. But if you find the best talent available and you believe in the business, you jump on it. And so what we're not doing is doing a U-turn on the core strategy of the company. Now do we fine-tune things? Absolutely. Do we look at -- I mean my view is, yes, to your point about real estate, I think the landlords are not reflecting reality in terms of cutting rates at this point. So we're slow to expand real estate at this point in time. Are we slowing backfill hires in really slow businesses? Of course, we are, unless we find fabulous talent. So look, we understand we have a responsibility on a multiyear basis to deliver value for our shareholders. And we act accordingly to that. But the core of it is to deliver growth and have enough discipline without choking off what is the wonderful thing that has led to the success of this company. And so that's what we try to balance. Does that help, Tobey?

Sure. What was growth in Health Solutions? And what is the outlook?

We don't provide specific sub-practice numbers like that, Tobey.

Well, I understand, but you said -- when describing the segment, you said it was fueling growth. So I don't expect you to give a specific percentage, but could you speak to the question without numbers?

Yeah. As we said in our prepared remarks, we had growth in that sub-practice within the FLC segment.

Okay. In Tech, you cited a strong performance. Is that market share gains, market growth? And if market share gains, what do you think is fueling it?

Look, there's no hard data, so I'm giving you my judgment, but my sense is we are gaining share in that business, and we have now been for years. I think you know -- at one point, we weren't soaring. The team changed the strategy, put in place a new strategy, went out and marketed aggressively. It took a while before law firms that hadn't worked with us for a while got -- gave us trial. I think what they would tell you is that when the law firms give us a trial or the corporates give us a trial, they say, wow, this is not a commodity and we get rebuying. And we get rebuying and we increase market share within those individual law firms. And that's happening not just in the U.S. but in different places around the world. Now do market forces matter? Sure. But this is not a boom M&A market, and we're continuing to win lots of terrific jobs. So I would say it's a lot of market share.

Okay. And last one for me is just kind of a gut check. Is the basic risk here that company performance over the next few quarters that were kind of in the shoulder period between a handoff and a restructuring cycle that kind of didn't -- wasn't really strong in waiting for a positive M&A cycle? I think Chairman Pawle said the Fed no longer models a recession.

Look, I think that is the worry. I mean, look, if you want -- look, you can always paint incredible worries. You want to do the most significant worry, you say that the economy works out exactly as people hoped. Not only do we avoid a recession, but interest rates drop back to where they were in the past. And then everybody who has this big refinancing bubble in '25, just as they're totally able to refinance and you can -- and then the bankruptcy market goes back to the lows that were in, I guess, '21 and '22. You can run those scenarios. Under those scenarios, I think there would be M&A boom, but could there be often timing? Look, we feel like -- we have positions that allow us over any extended period of time to show growth in Corp Fin and more globally over any extended period of time. Your guess is as good as me -- as mine whether you can get caught on the wrong end of that for a couple of quarters. You just -- I don't have that good a crystal ball.

Thank you very much.

Ladies and gentlemen, the call has now concluded.

Let me say thank you to all of you for the continued attention and support, and we look forward to engaging with you all further down the road. Thank you.

Thank you for your participation. You may now disconnect your lines.