Good morning and welcome to the FTI Consulting Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. Please note, today's 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 third 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 allocations and expenditures, expectations, plans or intentions relating to acquisitions, share repurchases and other matters business trends, ESG related matters, climate change-related matters, new or changes to laws and regulations, including scientific or technical developments, 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 30, 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…

Thank you, Mollie. Welcome, everyone, and thank you all for joining us once again this morning. I'm sure, as usual, many of you saw the earnings announcement this morning. So what I'd like to do is to maybe briefly comment on how I view those results and then with your permission, let Ajay take you through the performance in more detail. If you did in fact, have time to look at the third quarter results, you saw that they were weaker than we've been reporting in most quarters recently. They were also weaker than we expected. Year-on-year revenue growth was only 3.7% this quarter, which is of course, is nothing like what we've been averaging over the last several years and nothing like what we aspire to. And for the first time in a while, we actually delivered less revenue this quarter than in the prior quarter. As usual, when there are not terrific quarters or even when they're terrific quarters, there are multiple causes. In this quarter, some of the revenue pressure was due to market causes. I'm sure many of you monitor the markets for consulting firms. And you know that right now, in many places around the world, they are not particularly robust. For example, we have some challenges in our Asia businesses. But of course, in that we are not alone. It's happening to a number of players in the region. So some of these challenges are due to market forces. But some of the causes, as usual, are also internal cause, either delays in assignments, which, for example, we had this quarter in our very capable North American FLC business, where some slowness in our strategy business where it happened that some large client engagements all concluded at roughly the same time. Anticipating a question…

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. As Steve said, our results this quarter primarily revenue growth were below our expectations. Revenue growth of 3.7%, was not sufficient to offset the 4.9% increase in direct costs and a 10.7% increase in selling, general and administrative or SG&A expenses, which resulted in a 13.3% decline in adjusted EBITDA. FX remeasurement losses versus gains in the prior year quarter and a higher tax rate further dampened earnings. Year-over-year, our quarterly earnings per share declined $0.49 or 20.9%. In our Economic Consulting and Technology segments, we continue to report year-over-year revenue growth. But revenues in our Corporate Finance and Restructuring and Strategic Communications segments declined year-over-year. Forensic and Litigation Consulting, or FLC, revenues were up slightly year-over-year. Turning to our results in more detail. Revenues of $996 million increased $32.8 million compared to revenues of $893.3 million in the prior year quarter. Earnings per share of $1.85 in third quarter 24 compared to $2.34 in the prior year quarter. Net income of $66.5 million compared to $83.3 million in the prior year quarter. SG&A expenses of $206 million, were 22.2% of revenues. This compares to SG&A expenses of $186.1 million or 20.8% of revenues in the third quarter of 2023. The increase in SG&A was primarily due to higher non-billable headcount and related compensation and increase in investments, including in AI capabilities, travel and entertainment and legal expenses. Third quarter 2024 adjusted EBITDA of $102.9 million or 11.1% of revenues compared to $118.7 million or 13.3% of revenues in the prior year quarter. Our third quarter effective tax rate of 25.1% compares to 22.6% in third quarter of '23. The higher tax rate…

Thank you. [Operator Instructions] Our first question comes from Andrew Nicholas with William Blair. Please go ahead.

Hi, good morning. I was hoping you could start by talking a little bit more about restructuring, I guess, after a decent sequential step down last quarter, looks like it bounced back a little bit. Can you talk a little bit about that business, that environment? How much of maybe credit pressures are getting to you in the form of bankruptcy or restructuring and just overall outlook on that part of the business?

So, Andrew restructuring remains strong. The restaurant chain that has customers not going there because after COVID, people's patterns have changed, those businesses have to do -- have to file if they get to that situation. Or the airline that is facing inflationary cost pressures and then competitive pressures may have no choice. Even with last quarter, I talked about liability management. We have a couple of instances where those liability management companies have now filed. So restructuring remains strong. Now obviously, if interest rates fall by 200 basis points and credit becomes free, that does have a dampening effect. But for now, it's robust.

Okay. Thank you. And then on the M&A front, it sounds like at least year-over-year, things have improved. You see that in M&A-related antitrust. You see it in transactions, although sequentially a little bit weaker. Can you just speak to that environment as well? Maybe if there is any distinctions in terms of M&A appetite by firm size, all that color would be helpful.

Again, there, the availability of credit is spurring transactions. And now listen, sequentially, you got it just right. I mean, roughly speaking, we were used to get M&A was about 15% of our revenues, M&A driven, if you add from technology, economic consulting and corporate finance. This year, it's been 15% and 20%, and there is a 1% slippage this quarter versus the sequential quarter, not much. So it is a robust environment and doing quite well. And we have distinctly strong positions in a variety of our segments to assist our clients.

All right. Thank you. And then if I could just squeeze one more in. You mentioned part of the increase in SG&A was an increase in investments and you noted AI capabilities within that. Can you flush out some of those investments or what you can say on how you're planning to leverage that technology within your various businesses going forward.

You take that, or do you want to take that --.

Why don't you [just answer it?] (ph)

Okay. Look, we are like everybody in AI. I mean I think Bill Gates famously said at one point about all fundamental new technologies is the pundits who confidently predict the first two years, always get it wrong and they always overestimate the speed of things. But then for fundamental new technologies, the other corollary is people underestimate the dramatic effect that it has on the world and on businesses and ensuing 10. And so we're doing a lot of things to make sure we are at the forefront and not caught unaware. And that has to do with stuff that we've done for a while. Our tech and data analytics business have been on the forefront of machine learning and extending that. We've been working on internal tools to help our company navigate, but also been out there with clients trying to figure out what early stage things they're doing, how we can help with them what risks there are because there's a lot of risk associated with hallucinations and bias and sensitive areas. How we can help them guard against that, and so we've invested a lot of internal times, some dollars to build tools and so forth, but also a lot of internal time to do it as well as to train our broader at some deep cohort because what you need over time is 750 SMDs and a bunch of MDs, we can engage conversations with their clients on what's going on and the risks. And I consider that an investment because yes, we've gotten some revenue from it. But clearly, a lot of the work that we've done has been without a P&L in mind, but really around building the capability of our organization. Does that start to address your question, Andrew?

It does. Thank you. I will get back in the queue.

And our next question today comes from Tobey Sommer at Truist. Please go ahead.

Hi, it's [Tyler Barish] (ph) on for Toby. Just excluding the outcome of the election. Could you talk about some of the headwinds and tailwinds that the business is going to face in 2025? Thank you.

[Sean] (ph) I have steadfastly refused to ever predict an election or the effects of an election on our business. We have lots of people in our company can do that, particularly in our Stratcom business and got bless them. I think most pundits out there don't even they can predict the outcome of this election, let alone the second and third are consequences. I will say that, obviously things like elections, geopolitical events these things can affect our business. But I would say, that we followed a pattern since I've been here of stop doing what is me because Brexit is coming and instead focused on the fact that if Brexit comes, clients are going to have needs and let's focus on what those needs are and make sure we're positioned against it. And I think, to me, you can't predict, say that there's no effect of any of these forces that can have an effect. But our company is better served by sort of saying, we'll see where it comes, but let's make sure we're positioned against the needs because there are needs that are going to be out there and what we need to be positioned against it. So that's the rhetoric I have, and I steadfastly refused to do the prediction that you asked for. So I apologize for that, Sean, but at least that hopefully helps somewhat.

Got it. And then just looking forward, how should we think about uses of cash going forward? Can you maybe just talk about willingness to buy back stock even with the stock at a higher than historical multiple going forward?

Well, let me say something about the historical -- I think, Ajay, we never comment specifically on what we're intending to do in the next quarter or two on cash. Let me say this that we're acutely aware of the fact that good use of cash or not good use of cash is a key ingredient for creating value for shareholders. And we've been focused on that during Ajay and my entire time here. And we have never felt the need to use the cash in any given quarter. What we have focused on is where is the real leverage for taking the business further and for rewarding shareholders who have a long-term perspective on us. And I think it's been a critical ingredient. Sometimes it's been -- we've used it for buying back high-priced debt. Other times, we've used it where we have seen that of critical enabling acquisition. We haven't done a lot of acquisitions, but we've used the cash where we found the right ones. Other times, we reacted to -- my sense is occasionally, the stock market has gone crazy on us negatively. And you can look at the middle of 2017 when that drove our stock price down, even though we're reaffirming guidance and we bought back I think, something like 10% of our company that and the same thing happened at the end of 2020. And it wasn't a little perturbation of the stock. It was a big drop. And when that happens, you can buy back a lot of shares. And then for the shareholders who've stayed with you, there is a tremendous return. So we think hard about that. We do not feel compelled to use the cash in any given quarter, but we are very focused on talking in management and with the Board about what's the next level of way that we can do to make it accretive for our shareholders. So Ajay, anything to add?

No.

And then just final one. Can you maybe just talk about areas you see to drive margin expansion going forward?

Look, I think a lot of it has to do with just getting the revenue in there. I mean we're such a fixed cost business in any short period of time, how that can be? Well, so there's some professional services that have extremely variable comp structures. That's not us for the most part. We have a legacy of a big four comp structure in many parts of our business where even the SMDs have a relatively fixed cost structure. And so if you believe in -- obviously, if you don't believe in the business anymore, you don't believe in the people, you can get rid of all the people. But if you believe in the business and you believe in the people you take the hit, the revenue falls dramatically to the bottom-line. And so the only solution is the revenue. Now you can also stop making investments. I mean investments in new geographies, even though if you get revenue, you tend to lose money on those initial investments initially or your investment in AI, you can stop doing. But if you stop doing that, then you're not a vibrant growth company, then you're milking off the growth of the past and that's not what we've historically meant to be. So does that mean we don't higher massively into businesses where we don't see any growth in the next 12 to 24 months. We've tightened the hiring there. But we continue to invest in the businesses where we see opportunities for growth or we can get great talent. So for those businesses, the story is getting back from revenue. You're not a growth business if you're a sustainable 3.7% revenue growth. So that's not what we aspire to. Does that help?

Yes. Thank you.

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

Good morning. And thanks for taking my questions. Steve, obviously, you have your idea credit growth strategy that I have no doubt you will continue to execute on. But as you brought it up, I'd just love to get your perspective on the drivers of the weaker industry backdrop in consulting, which does appear weaker than at least global economic growth. What do you think causes this backdrop to improve? And then as a corollary, do you think your business is more or less impacted by these industry trends?

The second one is easier. I think in general, we are a little less impacted by those industry trends for 2 reasons. First of all, some of our businesses we have some important businesses that are not correlated with the other ones, like restructuring is not necessarily correlated. And secondly, over the last few years, I think in many of our businesses, like for example, our eDiscovery business is we can gain share. And so if you're going to share your less affected than by the competitors who are losing share, right? So -- and that's our aspiration. Why the big four and some of the other firms are having such slowdowns. You can read their earnings report. I don't know I haven't found it totally satisfactory. I suspect some of it has to do with there was an over exuberance for a couple of years in terms of deals and so forth. And so that the growth rate that was seen before or wasn't actually a real sustainable growth rate. And this is a catch-up or catch down, I guess would be the case. Some of that has to do with presumably with the global economic conditions. I mean Europe is not exactly robust in terms of global growth. Some of it has to do with geopolitical conditions. Remember of -- we're not in the geopolitical realm. But in Asia, we are feeling our clients who are cutting back that has some effect on us. And I think for a number of people those things. And we have a confluence of things going on. Sometimes there is a pause in spending when there's uncertainty. I remember this now from not only FTI, but my prior employer, that bad news or good news often triggers need to help uncertainty triggers, let me pause and wait at least on anything discretionary. But I don't -- James, sometimes I really feel like I know the answer to questions and sometimes I'm feeling like I'm collating a bunch of answers that might be plausible. And I have to tell you more in that situation here. Do you have other thoughts share with me, though I appreciate yours as well.

No. I mean I think it is really interesting, Steve, because I'm not sure I have the answer either. But that's super helpful color. Maybe just another one here, which is just I think you've had a number of -- I've had a number of invents from investors around the potential for the soft spot in revenue and earnings growth for a period, as you move past the lower hiring in the back half of last year and the first half of this year too, the stronger hiring that you started to exhibit in this quarter's results. So just putting aside the macro, is that the case? And then I think more importantly, over what time period do you think that you would be able to return to the healthier top-line growth rates that we are used to from you?

Do you want to go?

Sure. Yes. So James, we are not going to give you guidance for next year just yet. You'll have to wait until February for that. But we have never aspired for 3.6% revenue growth. So let me leave that one in terms of when you say when will you want to return to it. Let me leave it on that one. In terms of the hiring that there are two aspects for this quarter is hiring. The bulk of the hiring this quarter on billable headcount has been from university hires that we gave offers to one year back. So don't read anything that we accelerated or whatnot. These were commitments made a year back. And in terms of hiring of other professionals like the top-notch SMDs. The principles that Steve has set have been there for a long time, we will hire exceptional top talent regardless of where we are at in the business cycle or in the sub-practice is that top notch talent becomes available.

Excellent. That's very clear, Ajay. Thank you. Just one last one on the hiring. Obviously, hirings bounced around a little bit in recent quarters. The company is substantially larger than a few years as you've executed on your strategy. So maybe just taking a step back, what do you think a normalized or longer-term hiring growth rate should be? I think that might just help us think about the longer-term growth of the company.

Yes. Look, I've never given a pinpoint number on that, but I've always -- I think if you go back to the -- actually the Investor Day in 2017. What I said then when we finally thought to turn this company back into a growth engine, that my math said to combine what you're asking in a prior question [turf] (ph), if you combine mid- to high single-digit organic growth and a really good use of cash that over any extended period of time, you can turn -- that, that will turn into a top quartile S&P 500 return. And I think that's been true since. Now we've actually probably averaged close to double-digit organic growth over that period, which is certainly my aspiration over the lows the 5% or 6% level. But I think that -- if you do that, you have the opportunity to make the investments you want to make to make the investments internally on IT systems and on training and vibrant growth engine that attracts people. I think it is hard to have that vibrancy when you're 3.7% growth for any extended period of time. So it is certainly not our aspiration. Whether we can be, I don't know -- last few years has probably been closer to 10% or 12% growth, where we going to be back forever, I don't know. But we aspire to get back much closer to that on a sustained basis. Not every quarter, not every two quarters. And you can have a bad year. You can have a bad 12 months. But my experience is if you do the right thing, I've never seen a great professional services firm that did the right thing that over two years wasn't doing better than this quarter reflect. And so at least that's maybe some historical perspective but gives a little light. Does that help, James?

Absolutely. Thank you so much Steve.

Thank you. And we have no further questions at this time.

Well, let me just say thank you again for your attention. Look, 3.7%, as we've said multiple times, is not our aspiration. But I did look Mollie -- one of Mollie's team sent me recently just some data. I think in the last while, since Ajay has been CFO and I've been CEO, I think we had 17 down quarters. During that time, which is almost two a year, almost two year down quarters. And in that time, our actual results have quadrupled. So our business is not about keeping every quarter go straight line up. Our business is about building a business that has to return for you, the shareholder, but the mechanism to do it is to build a vital growth engine that has great people wanting to be here and build something. And that is our commitment to do over time. And we are committed. We focus on the shareholder value, but we are focusing on making it substantial and sizable and durable. And that's what we are in the business of trying to do. Thanks for your time.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.