Good day, and welcome to the FTI Consulting First Quarter 2024 Earnings Conference Call. [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 first quarter 2024 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, initiatives, projections, prospects, policies, processes and practices, objectives, goals, commitments, strategies, future events, future revenues, future results and performance, future capital allocation and expenditures, expectations, plans or intentions relating to acquisitions, share repurchases and other matters, business trends, ESG-related matters, new or changing laws and regulations, scientific or technological development 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 March 31, 2024, our annual report on Form 10-K for the year ended December 31, 2023, 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…

Thank you, Mollie. Welcome, everyone. Thank you all for joining us this morning. As I'm sure many of you saw in our press release this morning, we again delivered terrific results this quarter. In fact, we delivered results which exceeded our expectations and I suspect many of yours as well. What I would like to do is to make 2 points before I turn the call over to Ajay who will, as usual, go through the details of the quarter. The first is to talk about some things we have always believed is important to talk about after bad quarters, but also after good ones, which is that individual quarters where they do tend to reflect the core strengths we work every day to create are often influenced by transient elements as well. And hence, we always urge caution about taking any given quarter, multiplying it by 4 and thinking, wow, that's a great representation of where the company is. That's the first point. The second point is on a different subject, but one that in an important way ties to the first and is, in any case, something very important going on, which is the rich set of investment opportunities that we are seeing right now across our segments and across the world. Let me start with the first point, why it is that quarterly results can deviate from what we would see as the true durable underlying economic power of the business. One reason is that certain P&L elements can sometimes have somewhat of a random feel. Sometimes they happen to have negative FX in the quarter or higher bad debt than is typical or happen to have lower success fees. And sometimes it's the opposite, where those factors in a given quarter cut more positively than we…

Thank you, Steve. Good morning, everybody. In my prepared remarks, I will take you through our company-wide and segment results for the quarter. As Steve mentioned, today, we reported yet another quarter of record revenues with all of our segments growing year-over-year. 15.1% revenue growth outpaced a 13.1% increase in direct cost and a 9.6% increase in SG&A expenses compared to the prior year quarter. As a result, earnings per share grew by 66.4% to $2.23. We are, of course, pleased with these results, which exceeded our expectations as we benefited this quarter from an increase in both utilization and average billable rates. However, I must point out that the year-over-year increase in earnings is also in part because of a number of factors that had particularly negatively impacted Q1 of last year, including higher FX remeasurement losses; investment in our public sector practice, which resides within our Corporate Finance & Restructuring segment, where we did not see significant revenues until the third quarter of '23; and losses within our health care business transformation practice, which we have since realigned within our Corporate Finance & Restructuring segment. Additionally, in the first quarter of 2024, our tax rate of 19.6% is particularly low relative to 24% in the first quarter of '23. Now turning to the details for the quarter. First quarter of 2024 revenues of $928.6 million increased $121.8 million or 15.1% year-over-year. Earnings per share of $2.23 increased $0.89 compared to $1.34 in the prior year quarter. Net income of $80 million compared to $47.5 million in the prior year quarter. SG&A of $201.9 million or 21.7% of revenues compared to SG&A of $184.2 million or 22.8% of revenues in the first quarter of '23. The increase in SG&A was primarily due to higher compensation and bad debt. First…

[Operator Instructions] And the first question will come from Andrew Nicholas with William Blair.

I wanted to start on the restructuring environment. Ajay, I think you said it was even stronger than you expected in the quarter. Obviously, first quarter, I think, is higher than fourth quarter levels. Just curious if you could kind of unpack the strength. How much of it is the environment and kind of the market staying higher than you had expected versus the company winning a higher share of mandates? It did seem like from some of the things that we were able to track down intra-quarter that you guys are doing quite well in terms of winning large deals. So any kind of color between what is and is not under your control in that restructuring business would be helpful.

Ajay may have more detailed answers. Look, there have been some quarters where we've been up when the market has been down, which clearly gives you an indication that there's share gain. I think this market is robust for people in addition to us. It's not just us that are doing well. But I don't know how to disaggregate the 2. Do you?

No, I'm sure you're absolutely right, us and others are doing better than we expected.

Yes, I think that's right. So I'd like to say it's all share gains, sometimes it has been. I can't claim that this quarter here, Andrew, is my sense. But we're feeling pretty good about our competitive position out there. Does that at least respond to your question?

Yes, absolutely. No, it's not an easy question to answer, so I appreciate that. In terms of Economic Consulting, you mentioned the revenue deferrals and that potentially pressuring first quarter margins. Just to clarify there, is the work that you did or, I guess, the expenses tied to that work that you expect to come through maybe in the second half of the year, did that all happen in the first quarter? I guess I'm asking if I can do that math to specifically allocate that $6 million of EBITDA headwind as a onetime item to the first quarter Economic Consulting margins because that is a quite a bit lower margin level than maybe what you've done historically.

You can, Andrew, and that's exactly right. That's why we provided that number. So the -- just to be clear, the work -- there was work last year as well. There's work this quarter. This quarter, the impact would be that $6 million that we mentioned, and there is work continuing into the second quarter.

All right. Great. And then maybe just one last one for me. I appreciate all the insight so far. I think if it wasn't yesterday, there was some news on non-compete legislation. I know that there's been already some pretty significant pushback from corporations on the new legislation. But if you could speak to either your thoughts on the legislation, the likelihood of it ultimately coming to pass and the impact on the business, that would be really helpful.

Yes. Look, thanks for the question. Look, we're obviously looking at that. We knew that, that -- the FTC was looking at that, and we've been monitoring it and we are monitoring. I think you've got it right, there are a lot of -- as my General Counsel, who's a very big baseball fan, says there are a lot of innings left in this game before it's over. But let me maybe talk to the more general point. There are different aspects of that legislation. I mean some of it apparently is targeting out people who have non-competes for people who earn $30,000 a year. I mean we don't do that. I mean we have non-competes for our senior people who are in important leadership roles in order to protect big investments we're making in those people. And that is important to us. We invest confidential information about us and our compliance. We invest -- put them in positions of trust with our people and so forth. So in that sense, that part of it is very important to us. Now even then, when senior people leave, we're usually able to, as long as they're willing to honor their restrictions, able to make this work. So we -- but those restrictions, the not abusing relationships and so forth is an important element. It's not clear whether those are actually going to ultimately be challenged by this legislation. So we're monitoring it. The other thing I would say is there are some competitors out there who are routine about abusing these sorts of provisions, we aren't. When we hire people from competitors, we honor them. So if this thing were actually to go through in its most broad form, I suspect we end up -- we don't think that's the right thing, but we would end up being benefited because people we hire who we protect the confidential responsibilities they have to their prior firm, they wouldn't be required to going forward. So there's a lot of puts and takes we're monitoring actively, and I think there are a lot of innings left. Does that at least talk to the question?

Definitely.

The next question will come from Tobey Sommer with Truist Securities.

I was hoping you could give us some color on the investments in the kind of calls you're getting from interested potential lateral hires across the segments, geographies, and I don't know if those investments also include external acquisition opportunities. So any color you can provide would be helpful.

Yes. Look, I'm not going to comment on acquisitions that we're thinking about or not. But I mean, I would say, just to be clear, most of -- almost all of the investments we've made historically have been in the one-off hires of individuals. And so we haven't made a dramatic change in strategy. What I think is going on here is a combination of things. As you might know, there's a lot of disruption in the various marketplaces around the world and a number of our competitors. And that's coming at a time when our reputation has grown enormously. I mean, at one point, leading professionals in many markets overseas would never have called us if they were ticked off, and that has dramatically changed. And even here in the U.S. where we always had a -- we got a long relationship with a number of people who think, "well, if I would ever going to leave, I would go to FTI," has just soared. And so disruption in marketplaces in some ways is very good for us. And so it's across the world and it's across our segments is what's going on. Now as Ajay would caution, there's a lot of conversations, and then some of those translate into things and then there's sometimes long delays. Like we've probably hired more people than you know right now because if -- order their people -- allow people to honor their commitments to their existing employees, we allow them to honor their commitments, and we don't announce them until they're finished with that. So -- but it's pretty broad and -- I mean it's very broad and it's global. And so that's why I said I think this is the largest extent of conversations we've ever had. Does that talk to your point, Tobey?

It very much does. And then a related question, what is the -- your expectation for SG&A percentage and investments to support those prospective new revenue generators? Are there consequential new economies you may need to enter in de novo or significant flesh you would need to add to the bones and muscle in existing geographies such that G&A percentage is likely to tick higher as a result of these investments?

Yes. Look, it's not that we're now colonizing Mars, and so we have to put infrastructure on Mars. And I think notwithstanding somebody's request, we're not going into Myanmar anytime soon either. So look, I think the right -- the way I think about it is when you enter new geographies, you always have significant infrastructure or you enter totally new lines of business. And we -- as you saw that happened to us, right, when we made major investments in Europe, we had to -- and frankly, we under-invested for a while. And we're now doing a catch-up on some of those countries because we just have a much deeper commitment to some of those countries than we did, and it doesn't work to not have the infrastructure in place. That's not what's going on mostly here. Mostly what's going on is in markets which we have established presence, there are just people who are now calling us off the hook. What I would caution, though, is I think there's a naïveté in retail when I used to do retail consulting that said, if I add more stores, my SG&A goes down. And there's a naïveté in professional services that if I add more heads, well, we're just going to amortize the same cost. My sense is SG&A is pretty proportional most times to the number of heads you have. It doesn't -- you don't get a lot of economies of scale. In retail, if you double the volume per store, you get a lot of economies of scale, and the same thing if we drive our revenue per professional up. But if we add a lot of professionals, it's not like, oh, you had to hire people to recoup them. You have to give them laptops. You have to have real estate for them. And sometimes it's lumpy increases. But on average, it tends to be proportional. So I guess I haven't looked at your question exactly, but my guess is this is not a dramatic driver one way or another on the SG&A percentage. The only exception being sometimes what you do is you bring these people in and they don't get revenue for a while because they have non-competes, which we honor. And so it causes a little dip in your revenue per professional. That then makes the percentage a little higher, but that's a temporary factor. Does that give you at least some thoughts to think about?

It definitely does, Steve. I appreciate that. I had 2 other questions. One in -- they both relate to Economic Consulting. In non-M&A-related antitrust, do your people tell you that those -- that, that trend in the projects that you may be involved in or certainly out in the market have long legs and are sort of likely to be of a longer duration than a typical M&A-related antitrust engagement that has a more defined time line? And then secondly, what is sort of the long-term margin outlook there in the segment? I know you have very talented people who generate, in some cases, a lot of business. So how do you feel about that relative to historic normative margins?

Tobey, I'll take a crack at both of them. The first one, answer is simply yes, the non-M&A antitrust does not have the same defined duration that an M&A has because M&A is very set. Non-M&A could also -- it also extends to various jurisdictions. You might do a non-M&A antitrust in the U.S., which within different countries have their own anti-trust authorities. So there are longer legs to those sorts of assignments. So that's one. Second, we typically have not given margin guidance, and we were not going to start giving, actually, guidance today. So -- but if you look at last year, our Economic Consulting segment had about 15% margin. And we have the same in 2022, so around the 15% for that segment. And I very clearly telegraphed in my -- in the last quarter's earnings call that we do expect erosion in margin for a variety of reasons. And so don't take the first quarter -- so that still stands. Now don't take the first quarter margin and say, well, that's what it is because there's significant deferrals that have taken place in the first quarter. There are other items as well, like bad debt, et cetera, that you don't expect to repeat. So that's as much as we would say on margins at this point.

If I could sneak in one last one. Ajay, in your prepared remarks, you referenced a lot of new businesses that have been launched in adjacent markets over time. I don't expect you to tell me whatever your nascent new investments are. I'll wait for you to have them percolate and be consequential and then we can talk about them. But could you comment about whether you have sort of multiple irons in the fire to develop new things that we may talk about live on these calls in 2 or 3 years?

Look, absolutely. Let me say this, if I can. I mean, look, one of the things that we've done over the last while is we have quarterly strategy meetings. And you say, like, I have quarterly strategy meetings with every segment and with the key leaders around the world. And you say, well, how much can the strategy change in a quarter? You don't expect the entire strategy to change in a quarter. But what you're doing is you're evaluating bets and you're evaluating, a, do we think actually our core team, core businesses have more legs than we've historically done, and so we want to up the hiring or but also continually evaluating what other adjacencies we should do a lot and monitoring what's going on in the world. 3 years ago, we weren't thinking about in a serious way across the company about AI. We were in our Tech business. Our Tech business was doing machine learning before it was a common phrase in The Wall Street Journal. But we weren't looking at it more systematically. Of course, I've been looking at it more systematically and you come up with new ideas around that. But it's also around changes in geography, changes in competitor, changes in our capabilities, changes in the people who come to us. We didn't enter the strategy business because we've made a conscious decision to enter the strategy business. We mentioned strategy business because a great group of people wanted to join us. And the same thing in public sector work because of great group of people. So these conversations are ongoing, and they can be our essence of what I write to our people, which is the biggest mistake in professional services is thinking you can sit still. Whenever people sat still, they thought they were sitting still, and the world changed and they were really moving backwards. And what we are committed to is to continually challenge ourselves to say, where should we be moving, and that's an ongoing process. And if something new doesn't come out in 2 or 3 years, then somebody wasn't doing his job, and I'm looking at myself. Does that at least talk to your question?

It sure does.

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

Maybe just starting on the Corporate Finance & Restructuring segment, we've seen more challenging M&A trends in this quarter for many investment banks. How do you expect the higher rates for longer environment to impact growth of your business transformation & strategy and transactions businesses going forward?

So look, the business transformation & strategy, they're not as sort of rate-sensitive. This is a big job business. And if you look at the last 12 quarters, you'll notice we could have a run of 3 strong quarters and then a really weak quarter sequentially, and then simply a matter of -- major matters ending and new matters not starting. This is one of those quarters wherein business transformation & strategy in Q4, certain matters ended and you see that sequential decline. So I'm not willing to say that's because interest rates are elevated. So that's on that one. On M&A, M&A is actually picking up. So even though rates are elevated, what we hear is more M&A picking up. Now just within CFR, just to be clear there, in our transactions business, the bulk of the revenue isn't iBanking. iBanking is a very tiny fraction. The bulk of the business is due diligence, merger integration, carve-out work. And it's typically in the small to midsized types of transactions. So it's not -- that business is actually not that sensitive to the larger trends. The large M&A affects our Economic Consulting and certainly our Technology business with the second request area.

Okay. That's very clear. Maybe just turning back to Econ Consulting, which obviously was substantially better than I think at least I had been forecasting and with revenue only down, I think, 1% quarter-on-quarter. Previously, you have talked about Econ Consulting being back-half weighted for this year. And you noted on this call, the deferred revenue could support revenue further out in 2024. So should we think of this as being a good starting point and revenue can grow from here and they're still being the same second half weighted component to Econ Consulting?

I actually don't recollect saying Econ Consulting would be second half weighted, but we can go back and look at that.

It was EBITDA. Did we anticipate deferrals? I mean that could have been EBITDA if we talked about it. I don't think we would have said -- there's nothing there. I never thought I'd said that the revenue would be -- or maybe that's the deferral...

So on the revenue side, absolutely delighted and positively surprised at the revenue number on Economic Consulting, and non-M&A antitrust is the area which has grown. The M&A antitrust is robust, but it's relatively flat. The non-M&A is what has grown and other areas like arbitration and financial economics. We're very pleased and may it long continue.

Okay, got you. Yes, I think I guess I misunderstood. I thought you're talking about last quarter about how there could be more the pickup in the second half of the year. But that makes sense. Maybe just the Forensic and Litigation Consulting utilization, which did improve notably in the quarter. Is this related to some of the actions you took last year or because of the large quarter-on-quarter revenue step-up or perhaps both and your aspirations for utilization in that business going forward?

Yes, there's some onetime things in the EBITDA increase there, but the underlying realities of that business are due to 2 things. One is we have been on -- and we've had a lot of work going on, on a multiyear basis to strengthen that business. And that started -- has shown some progress over time, and that's continued. And that's what you see in revenue lines, and those are really good. The other thing is, yes, we tapered back hiring in the second half of the year in a number of segments because our attrition levels were so low in the first half of the year, plus we had started the year higher than we expected in a number of places and so forth. And so -- and then the revenue in the second half of last year was stronger than we thought. So we've gotten, in some places, caught short. I think the headcount increase year-on-year on that is not as -- is dramatically less than the revenue, which, of course, is not sustainable. So -- but look, when you have high revenue growth and no headcount growth or almost no headcount growth, then it all drops to the bottom line. I think what we believe in, in all of our businesses that the levels of headcount growth we've had year-on-year are not sustainable. You can't drive this sort of revenue growth we aspire to. So we're going to have to tweak that up, but in FLC and elsewhere. But I think we are seeing, with some zigs and zags, the progress of what our leadership team has done to strengthen our businesses there. I think that may be all the questions. Thank you all for your attention and continued support for our company. We're excited about where we are, and we look forward to continuing the conversation with all of you. Thank you.

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