Welcome to the FTI Consulting Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note that this event is being recorded today. 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 third 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 related 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 September 30th, 2023, our annual report on Form 10-K for the year ended December 31st, 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…

Thank you, Mollie. Welcome everyone and thank you once again for joining us this morning. I have one main message that I'd like to convey this morning about this quarter, which is this is a quarter where we got our earnings back on track. And I'm focusing on the word earnings because as I hope everyone on this call will remember, our revenue has been terrifically on track all year. In the first half of this year, our revenues were up 13%. This quarter, we delivered 15% topline growth. Those are numbers that I would be proud of most years, but particularly so given this year has been an environment where it's been particularly challenging for many professional services firm. I like focusing on revenues. To me, that sort of revenue growth is one of the best predictors of long-term success. It is a validator of whether your teams are doing something right. When you have that sort of growth that shows the power of your teams and relevance in the market for their competitive position, perhaps most important impact they are delivering for and with your clients. I believe, in this case, it also reflects our team's dedication to and continuing success in attracting supporting sort of talent that aspires to make that sort of difference for clients. So, we have been extraordinarily gratified this year that it has been yet another year where we have delivered terrific revenue growth. What was not so great in the first half of the year was translating the terrific revenue growth into earnings growth. In general, in most companies and in professional services, over time, earnings end up roughly tracking with revenues. And that's what we, of course, have seen for much in the last five years. But for periods of time,…

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 third quarter results. We reported record revenues this quarter with all business segments growing year-over-year. 15.1% revenue growth outpaced the 14.4% increase in direct costs and SG&A expenses, and earnings per share grew by 8.8%, setting a new record at $2.34. Growth in revenues resulted from higher demand and higher realized bill rates. Utilization remains steady as we welcomed our new class of graduates while moderating other hiring. Overall, we are pleased with the strong results, especially after a weaker-than-expected first half of the year. Year-to-date, our performance is more modest. While 3Q 2023 adjusted EBITDA of $118.7 million is up 20% from $99 million in 3Q 2022 year-to-date adjusted EBITDA of $297.4 million is only -- is up only 12% compared to $265.6 million in the prior year period. And earnings per share have increased only 3.4%, primarily because of a higher tax rate this year and FX remeasurement losses compared to the prior year period. Now, turning to our third quarter results in more detail. Record revenues of $893.3 million increased $117.4 million or 15.1% compared to revenues of $775.9 million in the prior year quarter. The increase in revenues was primarily due to higher demand in Corporate Finance and Restructuring, Forensic and Litigation Consulting, or FLC, Strategic Communications and Technology segments. Net income of $83.3 million compared to $77.3 million in the prior year quarter. The increase in net income was due to higher revenues, which was partially offset by an increase in direct compensation, which includes the impact of a 7.8% increase in billable headcount. Higher SG&A expenses, a higher effective tax rate and a decline…

We will now begin the question and answer session. [Operator Instructions] At this time, we will take our first question, which will come from James Yaro with Goldman Sachs. Please go ahead.

Good morning, and thanks for taking my questions. Maybe I could just start with the corporate stance and restructuring. I think restructuring was up, on my map, nine million quarter on quarter. So post the dramatic increase in long rates over the past one to two months, maybe you could just speak to the outlook for restructuring and whether this has improved versus a few quarters ago. And then I'm going make this into a multi-parter, so I apologize in advance, but maybe if you could just give us a little bit more color on the district discreet outlooks across business transformations and strategy versus transactions and then finally you did touch on the success fees in the segment which are usually I think it's fairly small portion of your fees so any chance you could just type that?

Sure, sure, we can address all of those, James. So first on the success fees, success fees were around $12 million in the quarter. That was up from like two odd in the same quarter last year, but they were lower than about the 15 odd million that we had in the second quarter of this year. So that's those specifics. In terms of the three areas, Certainly, I mean, the math that you should do is look at the sequential growth rates in restructuring business transformation and strategy and transactions. So each quarter we give you those numbers, plot out the sequential growth rates. The sequential growth rate this quarter is higher than that last quarter. It's 6%, I think, versus about 5% or 4% it was last quarter. So it's up slightly. Does that say that we are entering into a recession? Not necessarily. The default rates are still in between the three and 4% range. In a recession, you get 10% default rates on speculative grade debt. So this is a stronger performance for restructuring, but I'm not willing to say this is a harbinger for a recession coming up. So that's on that point. And so we expect to continue to be strong and to be the leading provider of restructuring services in the world. On the second one, on business transformation and strategy, of course, we had an exceptionally strong quarter, but it came after a quarter and second quarter, which was weak. And what happens here is, we are relatively small in the grand scheme of things for business transformation, and you could have big jobs ending and new big jobs starting off, causing one quarter strong one week and one quarter strong again. We are very confident about this area. We believe we have enormous potential to grow, but don't read one quarter as a trend. Finally, transactions, down 2% from Q2, but still relatively strong. Look, in transactions, there's a lot of due diligence going on, but less closing of deals. And it's when you close that you get the success fees that results in the revenues in that area. We're optimistic about the future, but those are the trends. Does that answer your question?

Absolutely, that's super clear, so thank you for that. And then just, I think your guidance upgrade was very constructive, but it does imply, on my math, a slight revenue decline in the fourth quarter. So, maybe you could speak to the drivers of this, and maybe how we should sort of think about the jumping off point for next year. Because obviously this quarter is very strong, it seems like the fourth quarter is a little bit weaker. You did talk about how there's seasonality there. So just putting that all together.

Yes, so essentially James, what we are saying is, don't take Q3 and start multiplying. Take the first three quarters and extrapolate. That's the main message we're giving you. I'm not going to give you the guidance and trend lines for next year just yet. Give me till February to get there. But that's the main theme that we're indicating. I'm not taking anything away from the strength of this quarter. Despite hiring 316 people from university, our utilization was strong, which meant our bill rates and utilization for the first quarter, the more senior professionals were higher than we anticipated and good strong performance. We also had very strong realization, especially in corporate finance and restructuring from work that was done in prior quarters where, whether it's releasing gaps or getting LOE signed, we could, we could realize the revenues, a good strong quarter, but you must take the first three quarters and extrapolate and not take the third quarter, whether good or bad and multiply.

I guess the only other thing I'd add, Ajay, is to underscore your other point, which is we do have holidays and we're a professional services business in the fourth quarter. And that is, occasionally we have weird stuff happens at the end of the year where we close deals so that you don't see it in the numbers. But if you look back over multiple years, our Decembers are much weaker and it's not because our business fell off, it's because people took some well-deserved vacation around the holidays that we bill by the hour. So that's the other factor to have in mind, James.

Absolutely, that's very clear. And then for just my last question, I just want to turn to cash flow conversion. Despite very robust earnings, cash balances were down sequentially and the three-Q day sales outstanding are substantially above historic 3Qs. Maybe you could just speak to the drivers of the lower conversion and perhaps whether there's anything structural that is different versus prior years.

There isn't anything structural. That's the first part of that. Look, we launched a new ERP system in April, and in April, our billing was depressed. Since then, our billing has picked up substantially. Last few months, we're billing over $300 million each month, but there's still a little bit of a lag. Our revenues have surged, which I'm delighted about in the same time frame. So as billing and collection is picked up, it's lagging the revenue. And I think in the fourth quarter, we will flip that.

Okay. Thank you so much.

Our next question will come from Tobey Sommer with Truist. Please go ahead.

Thank you. I was curious, from a historical perspective, what's a reasonable revenue range for what constitutes a large project at the company in a single quarter? Is there a high degree of variance across the segments? I don't expect specific numbers, but if you could ballpark it for us, because we do know that it's a big project firm.

Did we answer that, Ajay? I'm happy to answer it. I just don't know if we give out that information or not. I don't know why I answered that.

Yes. In general terms.

So let me say this. They do vary. They do vary a lot by segment. I mean, they all have big jobs, smaller jobs. But if I think back over the years, the largest job in Stratcom has been less than the largest job in Econ or the largest bankruptcy we've done in Corp Fin or the largest investigation we've done in FLC. I don't, do we respond to the range and the size of the jobs?

I mean, I would say what we will do is we will call out if any one job is more than 10% of segment revenues. So, from time to time, we'll have that size of case. And more recently, it's been around econ, larger matters there, and technology. I think last year, actually, in technology, we called out that we had one large mandate that was over 10% of segment revenues.

So that's a good threshold. Over 10% of revenue is a good threshold for what constitutes a large shop?

So just short, I mean, that would be a large job. I mean, obviously, if it's at 8% of revenues, we actually think of it as a large job too. What I'm saying? I mean, I think, what we're saying is there can be more double digit revenue in a quarter for some of these segments if you do the math on that. And that's a pretty big thing. And so you drop -- you have something that strong double-digit revenue in a quarter and it goes to zero, that is material when we have a fixed cost structure. If you do the math, I think that's would be implied in Mollie's comment. Does that make sense, Tobey?

Yes, it does. Thanks. Where is FTI and the maturation of the international business which clearly doesn't -- not every city you have abroad has every segment and capability of a firm and you're increasing that over time as you build scale. And is the margin internationally over the next few years, likely to be sort of an increasing drag, neutral or sort of expanding from a level perhaps below the firm average but accretive to corporate margin as that occurs.

So let me treat that as maybe a two-part question, even if you mention a one-part question. Okay. I think in terms of our international expansion, we are still at the early innings of this. I mean it's -- I hope somebody notices the revenue growth. I think we published revenue growth for EMEA 26%, 27%, something like that year-on-year. There's not some of that's FX, but it was north of 20% even without FX. It's -- and we're nowhere near the presence that I aspire to [indiscernible] aspires to the segment leaders aspired to country by country. But we're no longer -- say, we're a European firm when we only have -- we have 900 out of 1,000 people in London, right? We have more people in London than we did when I got here, but we have people on the continent and they're building businesses that are tracking and they're showing our ability to win in those markets. So I think we're in -- and I'm just talking about EMEA right now, but Latin America, we've had the best team ever. We've talked about the turnaround in Asia and Australia that we've had in any recent years. And so -- we are in the early innings of a multi maybe, multi-game business out there, and I feel really good about that. In terms of the earnings, it's -- it had -- this quarter has been a significant drag, but it's not always been a significant drag. I think we are succeeding in many places. The problem is that you can succeed some places and have an ability to get a whole bunch of talent in other places. And so you can mask that in the numbers a little bit because you're succeeding in the last bet you made and you make another bet. And so I think that's some of the issue. And I think that phenomenon is going to -- we are committed to, I mean, that phenomenon go on for some time to come. It's not about sitting with bad bets. It's about seeing good bets come to fruition, but then having the confidence if great talent becomes available to jump on that again, and we did that this year. And that's how we're getting, not just double-digit growth. I mean that's phenomenal levels of growth in EMEA. And I think we have the confidence to continue to bet behind it. If we stop growing, the EBITDA margin would go up for sure, but that's not our intent. And if we have got no opportunities to get people, the EBITDA margin would go up. But with the ability to continue to grow, that -- I think that's the countervailing for us. But I wouldn't underestimate how many of the bets overseas we are excited about and how well they're doing. Does that at least talk to your point, Tobey?

Sure. So I had a couple of questions on M&A. I'd like to get your autonomous sense for what the large activity in the oil patch, is that indicative of a broader resurgence or perhaps isolated? And I'd love to hear if you have any perspective on the new merger guidelines out of the FTC related to antitrust. It seem a little bit stricter, which can maybe be favorable on a specific project, but also could influence the animal spirits that sometimes drive consolidation and make some other sort of reluctant to pursue it. If you have an early perspective, I'd love to hear it.

Look, I don't have a definitive perspective on this. I think you're hitting on the 2 points that do matter a lot. I mean one is how many deals get done. And then the second one is how contested are those deals. I mean if you look at this year, the deal market is down a lot. Our E-Con business is doing pretty well. Why is that? Because there's been a lot of regulatory scrutiny -- enhanced regulatory scrutiny and where does enhance regulatory scrutiny having a leading group of economists is -- your group is in demand. I think you're pointing out the right forces that people we scrutinize every day, which is higher interest rate, does that mean deals down, animal spirits, positive-negative, but also enhanced regulatory script. I don't know how that all shakes out, but certainly enhanced regulatory scrutiny has historically meant more demand for our services rather than less. The market, how many M&A deals next year, I don't know any better than you, Tobey, happy to compare notes, but I think we're both guessing. Does that lead to a little?

Absolutely. Last question for me, Ajay, you retired the convert. Is the current balance sheet structure, what we should think of over the medium term? Or do you have something in mind to alter the complexion?

No. No, Tobey. We have a $900 million revolver and that's what we are using and paying down.

Thank you.

Thank you, Tobey.

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

Hi. Good morning. I appreciate you taking my questions. A lot of things that I was going to ask have been covered. So apologies for a little bit more granular questions here. I guess, first on CFR, the higher bill rate, really good growth. I think you mentioned some differences in terms of the staffing period and who's doing work. But is there any way to kind of frame the impact from mix between the different business lines and practices versus underlying rate increases or price increases on a rate card? Just trying to get a better sense for the different levers there.

So -- I wouldn't, at the outset, go to either of those two places, the rate card or the mix. I would go to the factors that we mentioned, which is that we hired a lot of junior people in the universities and yet our utilization, if you look at by segment, remain fairly steady, which meant that more senior people were more busy and they build at a higher rate. That plus the realization on past deferred revenues where somebody hit a cap or we started work without an LOE. Those were the larger factors there. On our last call, Steve mentioned something very important, where he said, look, it's the headcount growth plus inflation, our revenue should exceed both of those combined together. This quarter, we achieved that. That's our goal. Now over – those can come through rate increases, mix, utilization, realization, two of those four were in play this quarter.

Understood. That's helpful. Thanks, Ajay. And then for my follow-up, on the Restructuring environment, I appreciate all the commentary to this point, including the details on the sector level momentum. But just wondering if you could speak to differences between the restructuring environment here in the United States versus abroad? I think there's been a dichotomy in the way that you described that historically or at least a few quarters ago, wondering if there's been any kind of narrowing of the experience between those two regions? Or any color you could give on regional differences. Thank you.

I think there's a lot of variation around the world. And it's just different by geography. I mean, even earlier in the year when we said some overseas markets were slow. Our Australia business happened to be very busy, even though the Australian market wasn't. It's just that new team down there seem to be winning every job. I'm sure it wasn't every job, but it was a lot of the jobs. And then those jobs rolled off in Australia, so they're not so busy right now. So there's a lot of variations. Our German business was slow in the beginning of the year. Our German business has gotten busier. I would say that if we were – if we talked sweepingly that was probably over sweeping. But that's for sure, U.S. was busier than on average overseas earlier in the year. So that's still the case, Ajay, certainly, it's a lesser deviation, but with lots of variations, our Spanish business is really busy on the continent. I mean, it just -- I think you feel more momentum overseas than we did earlier in the year, but still with lots of geographical variation. Ajay, do you have a different view on that? Or is that sound right?

No, it's exactly it.

Thank you very much.

Thank you. And thank you all for the time today and over the year and over the multiple years. We so enjoy building this institution, and appreciate your continued attention and support. So thank you very much.

This concludes today's conference call. Thank you very much for attending today's presentation. You may now disconnect your lines.