FTI Consulting, Inc. (FCN) on Q2 2021 Results - Earnings Call Transcript
Operator: Welcome to the FTI Consulting Second Quarter 2021 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the call over to Mollie Hawkes, Vice President of Investor Relations. Please go ahead.
Mollie Hawkes: Good morning. Welcome to the FTI Consulting conference call to discuss the company’s second quarter 2021 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 and other information or other matters that are not historical, including statements regarding estimates of our future financial results and other matters.
Steven Gunby: Thank you, Mollie. Good morning to everyone and thank you all for joining us. I hope everyone and your families continue to be well. I know we all can see light at the end of the tunnel regarding the pandemic, but I also know that in no place around the world, no place around the world are we yet fully in that light. So I am hoping everybody remains safe. I am also hoping that we are – is there a binging in the background there? Yes. Well, I am in a new place doing the call. So unfortunately, we might have a little background noise. Sorry about that. So look, I am hoping everybody stays safe. I am also hoping that we all are getting a chance to reconnect with our loved ones and our colleagues in a somewhat deeper way. Over the last several weeks, like this week, I have had the pleasure of starting to see clients in person and traveling to some of our offices to see our people. I hope you have begun to have the equivalent. For me, it has been wonderful to get the chance to see people in person again.
Ajay Sabherwal: 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 this morning we reported record quarterly revenues with growth of 17% year-over-year. Revenue growth more than offset increased costs primarily from our investments in both organic head count growth and in acquisition. Earnings per share were further boosted by lower weighted average shares outstanding, or WASO, and from a lower tax rate, resulting in a 39.4% increase in GAAP EPS and a 31.8% increase in adjusted EPS. The strength in our M&A and litigation-driven businesses more than offset the impact of lower demand for restructuring globally. Overall, we are pleased with these results, which give us even greater confidence in our increased guidance ranges for the year. Revenues of $711.5 million were up $103.6 million compared to revenues of $607.9 million in the prior year quarter. GAAP EPS of $1.77 in 2Q ‘21 compared to $1.27 in 2Q ‘20. Adjusted EPS for the quarter were $1.74, which compared to $1.32 in the prior year quarter. The difference between our GAAP and adjusted EPS in 2Q ‘21 reflects $3.1 million in a fair value re-measurement of acquisition-related contingent consideration, which increased GAAP EPS by $0.09, and a $2.4 million of non-cash interest expense related to our convertible notes, which reduced GAAP EPS by $0.06. Net income of $62.8 million compared to $48.2 million in the prior year quarter. The year-over-year increase was primarily due to higher operating profits in our Forensic and Litigation Consulting, or FLC segment, as well as our Technology and Economic Consulting segments, which was only partially offset by lower operating profits in our Corporate Finance & Restructuring segment compared to the prior year quarter. SG&A of $133.9 million were 18.8% of revenues. This compares to SG&A of $126.9 million or 20.9% of revenues in the second year – in the second quarter of 2020. The dollar increase in SG&A was primarily due to an unfavorable impact related to foreign currency translation, or FX; increased compensation primarily related to non-billable head count growth; and higher rent, which was partially offset by lower bad debt and the previously mentioned fair value re-measurement.
Operator: Our first question comes from Sam England with Berenberg. Please go ahead.
Sam England: Questions, on the first one, I was just wondering with the different vaccine rollout across your market, can you talk a bit about the differences you are seeing in performance across the different geographies in the business?
Steven Gunby: Could you repeat that, Sam? We got – I got at least from my side, it was a little garbled. I heard the different – the end of it. I didn’t hear the beginning. And by the way, nice to hear your voice.
Sam England: Yes, you do. No, it was just to understand a bit more about performance across the different geographies that you operate in given the sort of differing vaccine rollouts that we have seen in all of the markets you are in.
Steven Gunby: Ajay, you want to take that?
Ajay Sabherwal: Sure, sure, sure. So listen, all our regions are growing and you can see that in our – we publish results by region in terms of revenues. So, you can see there is year-over-year growth in all our regions. The vaccine rollout is different though. I mean, there are markets for example, where folks haven’t been able to get back into the offices as yet, because there is limited vaccine rollout and they are typically in the less wealthy countries, if I may say so. But that hasn’t affected us too much, because year-over-year every single region is growing and the themes in terms of M&A-driven businesses and litigation and the corporate reputation and public affairs services are actually relatively consistent. And we have been able to add head count everywhere as well.
Sam England: Okay, great.
Steven Gunby: Does that help, Sam?
Sam England: And then the second – yes, no, that was great. And then the second one in FLC, I was just trying to understand, I suppose how much of the strong growth is being driven by a release of pent-up demand from last year and early this year versus just pure underlying demand growth? And then do you expect FLC will normalize a bit across the rest of this year given how strong you did this quarter?
Ajay Sabherwal: The answer really is yes and yes to both parts of your question. So when we reported first quarter results, we telegraphed that these were really beyond exceptional results. And there was a lot of deferred work that was getting done. I think we are now – that deferred work is now behind us. There may be still some sputtering elements of it. But this is growth in the quarter. And really, you should – may I suggest – use this opportunity to suggest? Combine the two quarters when you’re looking at margins and things like that because you could get from one quarter to the other certain expenses and deferred revenue elements. So that combined margin level is more appropriate.
Sam England: Okay, great. And then maybe just one more, could you just talk a bit about your wage inflation expectations for the rest of the year? And are you seeing a similar sort of battle for junior talent that you’re hearing from the sort of investment banks in the U.S.?
Steven Gunby: Yes. Look, let me address that. Look, I don’t think we have a backdoor. I think we’ve done a pretty – I think our teams have done a great job over the last while of just making sure that we’re connected through our – the ranks of our team. I just think it’s just been a big focus, and we’re investing in our people as the future of our firm. And I think that’s being noticed, and that has caused over a multiyear business year the stickiness, the morale, all those things to go up and the attrition rates to plummet. And that’s been great. Now last year, the attrition rate, I think, was not just because we got better looking as a firm but because people were frozen versus COVID. So we’re absolutely seeing some catch-up for that. And then look, I think COVID has caused some people to just reexamine life. People – we have people who are leaving not to go to competitors so much as people are deciding to go – not literally becomes Zen masters on the top of a mountain but really radical, different life choices. So it’s something we’re monitoring. It’s not – it’s certainly higher than it has been, and it’s not totally unexpected. I mean anybody who thought the attrition rate during COVID was the underlying reality was a little bit self-delusional. But we’re trying to work hard to make sure that people who – don’t make mistakes in their careers that they don’t leave to do something and then regret it. And I think we’re doing a pretty good job. So it’s not a huge phenomenon, but we are – so far, year-to-date, not a huge phenomenon, but we’re monitoring it, and we’re trying to help people supportively think through their choices. Does that help, Sam?
Sam England: Yes, that’s great. Thanks very much. And I will pass it over.
Operator: Our next question comes from Tobey Sommer with Truist Securities. Please go ahead.
Tobey Sommer: Thank you. You began this transformation a number of years ago towards an organic growth business, investing in the requisite talent. If I’m right that an end state for the process might be a period of time where you’re actually kind of bringing in junior talent, onboarding them and eventually promoting them to the ranks of MDs and SMDs and kind of fueling this organic growth internally versus lateral hires today, how far away may that be? Is that a generational thing that takes sort of a decade or two or are we 3, 5, 7 years away from being able to feel some of that?
Steven Gunby: Well, I think we’re already starting to feel some of that. But I think you can quantify this. I mean we have been doing that since early in my tenure. I can probably get Holly or Mollie to give you the statistics on how much entry-level hiring we’ve done. And then over the last few years, I mean, it’s not just lateral hires. We’ve done record numbers of promotions to SMD and to MD and so forth. And we’ve also – some of that lateral hiring was at the mid-levels, and some of those folks are now coming through to SMD. But I do think there is a good analogy, which is I used to do a lot of work in the liquor business in scotch. Interestingly enough, you know how long it takes to grow great 12-year-old scotch? It takes 12 years. I won’t make you answer that question, Tobey. I mean – and we like that business. If you want to have great 12-year-old scotch, you have to have confidence in the business, invest in the right raw material, put it in the right environment, not let the barrels blow up because of a bad quarter or not – or two and see that – the scotch season and develop over that period of time, and you have to have confidence in your business. And by the way, a lot of our SMDs are 12-year-old scotch. I mean they are – at least the ones that are hitting the ground running. The people who get promoted often, faster than that, but where they start to really lift the business is often around that time. And so yes, so we have been fortunate that we’ve been able to find lateral hires, A-plus lateral hires, which is not always the case, to help supplement that growth. And that’s been a key part of it. But we’ve been investing in this since my – maybe not my first day but my first year here. And we’re already starting to see some results. But yes, it takes 12 years to grow 12-year-old scotch – to get great 12-year-old scotch. And if you think you want a smattering of 18-year-old scotch, it’s a long time. So we’re working through that. But we’re seeing results already. Does that help?
Tobey Sommer: It does. Thanks. How long do you expect EMEA to be an especially fruitful source of, again, I guess, seasoned lateral sort of talent as a result of regulatory or other pressures that you see on competitors in that geography?
Steven Gunby: Well, look, I have – one of my principles of life is to always worry and never take anything for granted. So I think hard about that question every day. But I want to say I think there are a lot of people who have joined us who have realized that we are a better platform. Many of the people who joined us have joined us from firms that have conflicts that – with audit functions, for example, that we don’t have. The history of our firm was, in many markets over – abroad, we weren’t known. You cannot attract A-plus people, even if you have no conflicts, to a firm that’s not growing, that’s not known. We’ve changed that over the last year. And then as a result, some early brave souls from leading firms in markets where we weren’t known came over. And when others checked in with them, they say, wow, this has been a great platform. It’s more accessible. It’s more collaborative. I actually have a global business. So if I need to do global work, I can actually coordinate around the globe with authority, and we don’t have conflicts – we have conflicts sometimes, but we don’t have conflicts from an audit function, which is a big, serious issue. So I think this is a trend that has – if we do the right things, has lots of legs behind it still. But we better, as always, keep doing the right thing. Does that help?
Tobey Sommer: It does. If I could bring Ajay in, could you help us understand the mix in two segments? Specifically in CFR, what sort of split may you have between bankruptcy and non-bankruptcy work? And then I don’t know if you’re willing to give specific numbers, but in E-con, could you give us a sense for the relative size of M&A-related antitrust versus non-M&A-related antitrust? Thank you.
Ajay Sabherwal: Sure. Sure, Tobey. We can. So first things first, we don’t like to say non-bankruptcy. We like to say business transformation and transactions versus those – and restructuring. It’s fairly sensitive that folks are not bankruptcy and everything else. So that number, it’s fairly dramatic. Last year in Q2, we were like 72% restructuring and less than 30% in business transformation and transactions. It’s almost flipped entirely, very close to flipped entirely in Q2 this year. It’s around 30% in restructuring. And so it’s almost an absolute flip. And in terms of – I’ll go further. Between business transformation and transactions, transactions is the one where we’ve seen greater growth. So I hope that helps there for that piece. In terms of the economic consulting piece, it varies by a few percentage points from one quarter to the other. But typically, our antitrust business is half of our total revenues. And that’s usually split evenly between M&A and non-M&A. M&A has more often than not been bigger, but non-M&A can also – we’ve seen tremendous growth in that area.
Tobey Sommer: Thank you very much. Continuing on the hiring front, how large is your incoming class of sort of junior summer hires, undergrad, grad school graduates and how does that compare to a year ago?
Ajay Sabherwal: Similarly sized, over 200 people.
Tobey Sommer: Okay. And then last question for me. Has the Biden administration’s regulatory posture, or at least seeming regulatory posture, impacted activity to date or is that sort of a future driver as these Senate-approved nominees take their roles?
Steven Gunby: I think it’s very hard to tell, Tobey. There are endless discussions in our firm on this. There was also endless discussions in our firm about – on Brexit. What effect did Brexit have on this quarter? And I think it’s very hard to say, which comes back to, I think, the main theme of my part of the discussion today, which is if market forces can affect us, including regulatory changes – but sometimes you can’t even see them in the data, which is what we have now. It’s so noisy, the data. It’s too hard that we may as well focus on strengthening our businesses because that’s what we can control. So I would say, at this point, I don’t think anybody has a definitive answer for that. Obviously, we would think that the increased regulatory scrutiny is a plus for our business. How much of that is already being seen in the data, I would guess not that much. But it’s a guess.
Tobey Sommer: Okay. Thank you for your help.
Operator: Our next question comes from Marc Riddick with Sidoti & Company. Please go ahead.
Marc Riddick: Hey, good morning.
Steven Gunby: Good morning, Marc.
Marc Riddick: So I really appreciate the commentary on human capital at the firm and the willingness to invest there in good times and bad and what have you. I was wondering if you could talk a little bit about maybe some of the other areas of investment, particularly what you’re looking at as far as your views on other technology spending and support as well as maybe some office space, headquarters, things like that; maybe how we should be thinking about some of the potential investment spending in support of your capital that you’re looking at going forward there?
Steven Gunby: Well, I’ll take a crack at part of it, and then if Ajay has something else he wants to add, please do, Ajay. I mean, look, we have a very good team across now almost every one of our businesses in Asia. We are not in every geography, but we have a very good team across Asia. And so we have growth ambitions for Asia as well. And we’ve been adding talent, and I can’t think if there is any segment we haven’t been adding talent. We’ve been adding talent in CF, we’ve been adding talent in FLC, we’ve been adding talent in Econ, we’ve been adding talent in strat com, we’ve been adding talent in tech. I think in every business, we’ve been adding talent. We’re stronger in some markets than others. That’s true in Europe, too, by the way. It’s true in Latin America, by the way. I think there is plenty of growth in the markets that we’re in, Singapore, Hong Kong, China, before we have to go to Myanmar. But we continue to look at where we can get the right talent, ongoing expansion in the region. It’s always – it’s the same issue. Like, we’re expanding a lot in Germany now because we now have a critical mass of people who you can build behind. You can’t – it’s hard to go to a new country without that critical mass of talent. And so day in, day out, our focus is on further reinforcing and supporting terrific teams to grow in the markets that we’re in because, my goodness, there is a lot of business in the markets we’re in and a lot of growth. But eventually, I suspect we will penetrate some of the other major markets in the region as well. Does that – part of an answer? Is there a different lens you wanted on that question?
Marc Riddick: A little bit maybe on sort of where you feel you are as far as technology and the – whether there needs to be additional spending there or if there are any particular things that you would like to enhance to move things forward for the company?
Steven Gunby: So let me be – I mean, Ajay – in terms of physical infrastructure and technology infrastructure, I mean we have equivalent infrastructure every place around the world. So we have good – but it’s not like we have – we haven’t shipped our old computers to the folks in Asia and make them use it. And so I think we are equivalent state. In terms of real estate, we’ve been remodeling offices in every geography of some offices that are – people are desperate for the remodel. Like, for example, New York, people are – I just was in our New York office last week, and I think people are just – can’t wait for when we move into our new office. And Asia has some of the older offices but also has – we – when did we move into Hong Kong? Probably – the new Hong Kong office? Probably 18 months ago or something like that. So I don’t think we are behind in our commitment of capital or in any other way in one particular region or another. Ajay, you in the same place? Do you have a different view?
Ajay Sabherwal: No, no, absolutely. If – Marc, if you’re looking at the CapEx numbers, and maybe that’s where you’re coming from, this year is elevated levels of CapEx for two reasons: One – the primary reason, one is we have a new New York office where the improvements to that, our capital is substantial. And it’s all disclosed in our Qs and Ks. And second, we are redoing our ERP systems, which I promise you, we will not do every year. So those are the heavy lift. But ours is a low-capital-intensity business. It’s a high EBITDA to free cash flow, too.
Steven Gunby: That help, Marc?
Marc Riddick: It’s interesting to hear. I promise not to do an ERP system every year. That’s actually an interesting comment. But – and one thing, I did want to circle back...
Steven Gunby: By the way, if I ask him to – Marc, if I ask him to do, he will quit. So, there is lots of reasons why we won’t do one every year.
Marc Riddick: The last thing for me, Steve, I want to circle back with you because one of the comments that you made in your prepared remarks are sort of around having the opportunity to reach out to and have initial contact with some folks that you haven’t been able to in a while during the pandemic. I was wondering if there were any particular read-throughs that you were getting in those initial contacts and sort of maybe some of the feedback that you’re getting even if it’s anecdotal, kind of some of the things that – some of the takeaways that you’ve gotten from those initial commentaries as to how folks are feeling about moving forward and some of the activities that might be prioritized. Thanks.
Steven Gunby: Yes. Look, I think you get different reactions. I think the main reaction I’ve gotten, at least in the early conversations is just – is really, I mean, a very human reaction of a delight to have a connection in person. And it’s very weird, right, because we’ve made Zoom and Teams work. I mean – and it clearly works. And it’s way better technology, and it’s going to give us a lot more flexibility going forward. It’s still the case that people like clients and teams that I’ve been in intense contact with, it’s just different when you’re in person. And yes, you ask people about their families on the phone and so forth, but you just – I don’t know. It just feels like you’re at liberty to actually explore those in more depth and hear about, whatever, the swimming thing. I mean it’s just a different human experience. And I think that’s happening with us and other people. And I think everybody is struggling, secondly, with figuring out whether we have a straight path up or there are sidesteps with the variants out there. And how fast do we open offices? And how do we deal with unvaccinated and all that? So there is a lot of that going on. I think there is a general sense that everybody is committed to like, all right, we got to get the world back closer to something – not back to where it was because the technology changes but certainly back to eventually a post-COVID world. But how we navigate that, because we’re not yet in a post-COVID world, is a subject of a lot of discussion. I would say there is a lot of energy about moving businesses ahead. I mean I think everybody weathered the storm of COVID well. But I think some ambitions and some discussions of the global ambitions that people have just didn’t happen as much. And I think there is some general desire to do that by our clients and within our firm. Does that talk to your question, Marc?
Marc Riddick: Yes, very much so. Thank you.
Operator: Our next question comes from Andrew Nicholas with William Blair. Please go ahead.
Andrew Nicholas: Thanks and good morning. First question I wanted to ask was just on pipeline. Specifically within FLC, I realize you only have so much visibility there over the medium term. But just kind of thinking about the next couple of quarters, is there any way to characterize that pipeline relative to last quarter or even in the second half of last year?
Ajay Sabherwal: So Andrew, we don’t typically talk as specific as pipeline or monthly trends. And we’ve given overarching guidance. If you compel me to, I’d just say it’s good. Our pipeline is robust. It’s good. Our people are busy. Our utilization, you can see the utilization stat. We have a very compelling proposition to offer.
Andrew Nicholas: Fair enough. And then for my follow-up question, on restructuring, obviously, you’re assuming in your guidance that restructuring activity remains subdued. That’s totally reasonable. And I’m not going to ask to guess or – yes, guess what catalyzes some sort of acceleration in defaults or growth because that’s anyone’s guess. But I was wondering, absent kind of the government support and the excess liquidity being pumped into the system, if you have any thoughts on just overall fundamental conditions in some of the conversations you’re having. Is this a situation where – or in your view, where fundamentals aren’t necessarily getting as much better as we might have otherwise expected to the point where, when support is pulled back, you will see a pretty significant ramp-up in this business? Or timing aside, how do you kind of see this playing out over a multiyear period?
Steven Gunby: No, it’s a great question, and it’s one that we talk a lot about. I think we do have a view that says – that is a positive view on that question. Look, I think the way to think about this is what the government is doing is allowing some companies that are temporarily made unhealthy to bridge. It’s essentially – like, it’s the federal government around the world’s version of me supporting FLC last year. FLC is a great business. You’re an idiot to cut people just because you have a couple of slow quarters and the same thing for restructuring. And so the federal government is offering that incredible levels of support so we have businesses that are viable not get killed by a temporary phenomenon. Having said that, the loose money is clearly allowing companies that are not particularly healthy to avoid restructuring, I mean I think the availability of capital at unbelievably low rates is, at least in my knowledge of the history of this industry, and I’m not the best historian, is unprecedented. And so there is second-order consequences that companies that probably should be going – undergoing restructuring right now are not. And in fact, they are adding more debt. And so I think that has a very long-term, bullish implication for that business, with the big question being the one you thankfully didn’t make me – pin me on, which is, and when is that? Because I think – I don’t think it’s imminent. I think that’s the issue. But it’s a reason for us to be incredibly – well, it’s one of two reasons: The market is going to be there is our belief on restructuring. And then second of all, we continue to invest to make it the best business in the world. I mean the best – and so I think the combination of those two is very bullish for our company, but there is a big question about when, a big question. Does that help, Andrew?
Andrew Nicholas: Perfect. Exactly what I was asking. Thanks a lot, Steven and thanks, Ajay.
Steven Gunby: Thank you. Thank you all for joining today. We really appreciate it. And let me come back to my opening remarks: I hope we’re all figuring out a way to get the deeper, richer connections with people that mean so much to us while staying safe. Many good wishes to all of you.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
