Fti Consulting, Inc Q4 FY2022 Earnings Call

Good day, and welcome to the FTI Consulting Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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 fourth quarter and full year 2022 earnings results as reported this morning. Management will begin with formal remarks, after which they will take your questions. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21 of the Securities Exchange Act of 1934 that involve risks and uncertainties. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, future revenues, future results and performance, expectations, plans or intentions relating to financial performance, acquisitions, share repurchases, business trends, ESG-related matters and other information or other matters that are not historical, including statements regarding estimates of our future financial results and other matters. For a discussion of risks and other factors that may cause actual results or events to differ from those contemplated by forward-looking statements, investors should review the Safe Harbor statement in the earnings press release issued this morning, a copy of which is available on our website. As well, other disclosures under the headings of Risk Factors and Forward-Looking Information in our Annual Report on Form 10-K for the year ended December 31, 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 of these and other non-GAAP financial measures as well as our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures, investors should review the press release and the accompanying financial tables that we issued this morning, which include the reconciliation. Lastly, there are two items that have been posted to the Investor Relations section of our website for your reference. These include a quarterly earnings presentation and an Excel and PDF of our historical financial and operating data, which have been updated to include our fourth quarter and full year 2022 results. Of note, during today’s prepared remarks, management will not speak directly to the quarterly earnings presentation posted to the Investor Relations section of our website. To ensure our disclosures are consistent, these slides provide the same details as they have historically, and as I’ve said are available on the Investor Relations section of our website. With these formalities out of the way, I’m joined today by Steven Gunby, our President and Chief Executive Officer; and Ajay Sabherwal, our Chief Financial Officer. At this time, I will turn the call over to our President and Chief Executive Officer, Steve Gunby.

Thank you, Mollie, and welcome, everyone. Thank you all for joining us this morning. I’m sure most of you have seen this morning’s press release, and if you have, you’ve noted that 2022 was a year in which we once again reported record revenue, record adjusted EBITDA, and record adjusted EPS, so a terrific 2022. With your permission, I’d like to focus not too much on 2022 but rather leave it to Ajay to go through the year in detail and instead, focus on something that I find even more important than the 2022 results, which is the multi-year trajectory this company has been on and which I believe we are positioned to stay on. The critical point to me is that though 2022 is a good year, it’s not a one-off good year. If you look at the last five years, we have averaged double-digit revenue growth organically. We have also conducted a couple of terrific tuck-in acquisitions during that period; however, apart from those acquisitions, we’ve averaged double-digit revenue growth. In terms of adjusted EPS growth, we have had adjusted EPS growth not for a year or two, but now for eight consecutive years. I think some of you have heard me talk a lot about the stair-step nature of this business that we never grow in straight lines, never in our individual businesses, certainly not in sub-businesses or individual geographies, but actually also for the company as a whole. Some years in that eight had a lot of revenue or EPS growth, and some years had just a little bit. But when you’ve had eight consecutive years of a mixture of a lot and a little, it adds up. In fact, in our case, it adds up to more than a quadrupling of adjusted EPS during that period. To me, far more important than any given year’s results is the multi-year performance that I focus on and our teams focus on. That multi-year performance reflects what our teams have turned this company into: an institution that is winning in both of the marketplaces that matter. The first is the marketplace of clients, delivering great work, but we’re also winning in the second marketplace, which is the marketplace of talent, attracting great talent, supporting that talent, and seeing it develop into people who are committed and able to deliver that great work. By winning in both of those marketplaces, we have turned this company into one that has the ability and a proven ability to thrive. Yes, in good times, but also through bad times. I’ve made some of those observations before, and a couple of folks said it would be great if I could talk to some of the questions that naturally follow those observations, which is dive down a little deeper, what is actually allowing that sort of sustained multi-year success? And second, why am I or – and are we confident that this sort of success is durable and extendable going forward? So let me take a crack at both of those questions. Starting with the question of what has allowed success, I think we all know that businesses are incredibly complicated. Behind any success, you can find a million factors or details, and I can address all those. Let me highlight two things that I think are fundamental, perhaps the most fundamental things that have allowed us to prosper in this way over the multi-year period. The first is that I believe, over the last few years, we have built a management team and now increasingly an entire organization that is committed irrespective of market headwinds and through the zigs and zags that happen in this industry, committed to continually and confidently bet on where we have a right to win and invest and support the talent who are passionate about those positions. That sounds like an extraordinarily basic concept, and in some ways it is. But when I observe real life, the sustained commitment to those values, not just in good times, but also in bad times, turns out to be less common than one might think, and making that sustained commitment turns out to be powerful. Let me illustrate with a couple of examples through our company. In 2022, our restructuring practice grew revenues 14% year-over-year. It sounds pretty good, but one could assume that it must have been a good year for the restructuring markets. Interestingly enough, the answer turns out to be no. It was not a great year for the market as a whole. In 2022, according to Debtwire, North America had the lowest number of bankruptcy filings over $50 million since 2014, a decline of 13% compared to 2021 and less than half of what we saw in 2020. Yet we grew 14%. Zooming out, our restructuring practice revenues have grown 67% since 2017. Even though 2022, by all measures I know, was the worst year for restructuring since 2017. So what is the market? What did our teams do? Let me highlight three moves they made. They maintained confidence in the core parts of our business, but didn’t sit on them. They doubled down on them. For example, our creditor rights business in the U.S. made us the number one player, yet our teams did not stand still. We hired people, promoted people, and added people in new verticals like healthcare and airlines, even though we were already number one. Secondly, we looked at areas where we were historically underrepresented in talent. For example, our company-side business. We had great talent, but were underrepresented compared to where we thought we should be. We invested behind that talent, grew it dramatically, and the market began to notice. Over the last couple of years, we have won several of the largest company-side jobs in North and South America. Lastly, our teams leveraged competitor dislocations as well as our increasingly strong global network to attract great people from the outside at rates that exceed anything we’ve ever done in the past in more widespread geographies, like Germany, France, Australia, and the Middle East. Those three moves, plus a few others, propelled us from being a very strong player in a couple of markets to becoming the number one or two restructuring firm in more markets than anyone else in the world, which in turn positions us as the go-to firm for the biggest global jobs, making us incredibly attractive to the best talent in the marketplace. Corp Fin is not some fuzzy theory about sustained investment in talent where we have a right to win. Its tangible actions that reflect those theories, tangible actions that translate into actual powerful results. The story I just told is focused on the restructuring part of the business. Interestingly enough, as big as the increases over the last five years have been on the restructuring side, we’ve grown our Corp Fin non-restructuring businesses, the business transformation and transaction side even faster during this period. We have, in those businesses, strong leaders who have confidence in their sub-practices and teams driving those sub-practices, whether it’s transaction services or our Office of the CFO services or other businesses. These efforts collectively have caused that collection of business to more than triple over the last five years. That’s a snapshot of Corp Fin, which we typically start with because it’s our biggest business, but to me, there are analogous stories across every one of our businesses. The specifics are always different because the industries are different, the competitive situations are different, but the stories all reflect a commitment to that same set of core principles. The second example is tech. For those of you who know, the tech business is laden with challenges. There’s tremendous competition and incredible margin compression. In the face of those challenges, our teams have delivered over 80% revenue growth since 2017. And if you look at the data processing done, given the price reductions, it translates into observed growth in terms of the data processed. Either way you measure it. That growth, I believe, represents by far the strongest organic growth in this industry. Just to clarify, while the successes are fantastic, none of our businesses, whether in tech, Corp Fin, or as a whole, were up every quarter. There were ups and downs in both the Corp Fin and tech stories. You can even see that last year. For example, tech saw a 37% decline in EBITDA from the first to the second quarter of 2022, not because the business suddenly became terrible, but due to a combination of big jobs' impact and our commitment to making the right investments in people regardless of whether a big job was underway during that quarter. Five years ago, our leadership and teams recognized we were strong in certain areas with the right to win. We received feedback from our clients that, in the most complicated cases, we were far better, so the team acted. They ensured that on those complicated jobs we delivered for core clients. Then they began to engage in systematic outreach to clients who hadn’t worked with us, encouraging them to give us a trial, to feel and test for themselves. In some cases, it took more than a year, sometimes closer to two years before we secured the trial. I’m incredibly pleased to share that, as clients have trialed us, our market share has grown, as reflected in the numbers previously mentioned. Our tech teams are also ensuring their capabilities remain leading edge, focusing on emerging data sources like Teams, Slack, Google Workspace, chat apps, and others. We’ve invested in core adjacencies. The market didn’t grant our tech teams that 80% revenue growth; our teams implemented actions that created that growth. I believe you get to similar conclusions if you look at our other businesses or by geography. We’ve spoken with our teams in Australia on how we’ve harnessed growth in that market over the last several years and how we’ve been able to attract great talent to enhance our capabilities. At this point in our company’s history, I firmly believe we have leadership teams across all of our businesses that are committed to this journey, committed to investing in talent and pursuing successful practices regardless of market fluctuations. There will always be challenges along this journey. For example, we’ve experienced several difficulties in parts of EMEA and FLC this year. When faced with a decline, you always have to assess whether it’s a temporary setback or indicative of deeper issues. Once we verify that the decline is due to short-term factors, our teams continue to invest confidently. In EMEA and FLC, we’ve actively pursued this approach this year, despite some difficulties. The second closely related aspect I’d like to address is how we view this through the lens of talent. Any success we’ve experienced in professional services cannot occur without great people. You can’t achieve what we’ve discussed our teams have done without focusing not just on clients but on attracting and retaining talent. We must ensure every day that our great people feel supported in their personal and professional development, and that the external world increasingly recognizes how appealing our firm is for ambitious individuals looking to grow their careers. The second key to our multi-year success has been clear achievements on these fronts over the last five years. We’ve grown headcount by over 65%, the number of applications received at our firm has more than doubled each year. We’ve nearly doubled the number of lateral hires for Senior Managing Directors (SMD) and Managing Directors (MD). We promoted 224 individuals to SMD and 537 individuals to MD, an increase of over 50% from five years prior. Perhaps most fundamentally, we now aspire to be the firm that the best people want to join—a firm where those with ambitions can trust that their aspirations can be realized here. Over the last five years, I’m proud to say, this ambition and commitment have been acknowledged by external recognition entities. We’ve been named by one group as the best firm to work for, another as a top firm for graduates and women, and yet another named us among the Americas' most just companies. I appreciate those external awards, but I also believe that even more powerful is the word-of-mouth validation of our commitment to people. Individuals who join us are not only saying to their friends, 'FTI is a perfect organization,' we, of course, are not. But they are stating, 'Wow, it’s a terrific place, where I feel incredibly well supported.' In my experience, that kind of validation is hard to beat. As I initially mentioned, to foster multi-year success, we must excel in numerous areas. I recall my time in retail, where countless details are critical to success, from ensuring boxes don’t fall on customers to keeping the backroom organized and ensuring computers are functioning. More generally, I believe the essence of winning versus losing often lies in the two main principles I mentioned earlier: challenging ourselves to discover where we possess exceptional value propositions and have an excellent team and being willing to invest in them regardless of current market conditions. Second, we need to communicate this to great talent. From my experience, talented individuals are drawn to organizations that foster brand development and cultivate personnel committed to building excellent businesses. While each of these components may be separate, they create a virtuous loop intertwined with one another. What does all that add up to? While it does not lead to a straight growth path for any specific business or even our company overall, we have had and will experience ups and downs. In fact, I believe part of our success is due to these fluctuations. If everything rose uniformly, anyone could easily replicate it. The discipline required and the management team’s commitment during downturns is the more challenging aspect, but I believe we have both a management team and an entire organization currently devoted to these two principles. To me, that represents a strong foundation for sustainable growth, as well as being a rewarding and exciting journey, one that makes this company enjoyable to lead. With that, let me turn this over to Ajay for a deeper dive into the specifics of 2022. Ajay?

Thank you, Steve. Good morning, everybody. In my prepared remarks, I will take you through our company-wide and segment results and guidance for 2023. I will begin with highlights from 2022. Revenues of $3.03 billion increased 9.1% or $252.7 million. Excluding the estimated negative impact of foreign exchange, revenues increased by 12.2%. GAAP EPS of $6.58 decreased by $0.07 from $6.65 in 2021. Adjusted EPS of $6.77 increased by $0.01 from $6.76 in 2021. The difference between our GAAP and adjusted EPS for the year reflects an $8.3 million fourth-quarter special charge related to severance and other employee-related costs, which reduced GAAP EPS by $0.19. Net income of $235.5 million compared to $235 million in 2021. Adjusted EBITDA of $357.6 million was up $3.5 million from $354 million in 2021. Last February, we discussed our ambition to grow headcount boldly in 2022. Reflecting those intentions, our headcount increased by 855 or 12.6% in 2022, compared to an increase of 459 or 7.3% in 2021. Hiring, promotions, and compensation increases resulted in a $150.5 million increase in direct costs in 2022. Revenue growth more than offset the increase in such direct costs, with gross profit increased by $102.2 million year-over-year, and gross profit margin expanding from 31% to 31.8%. When we provided the 2022 guidance, we also indicated that we expected a sharp increase in SG&A. For the full year 2022, approximately half of the year-over-year increase in SG&A was related to higher travel, entertainment, marketing, and business development, as well as employee-related training costs as we opened up from pandemic restrictions in many places and experienced pent-up demand for meetings. SG&A expenses increased by $103.2 million year-over-year, moving from 19.4% of revenues in 2021 to 21.2% of revenues in 2022. This increase in SG&A expenses offset the increase in gross profit, resulting in our net income and adjusted EBITDA being up only slightly year-over-year. Overall, we are pleased with these results. Now I will turn to fourth-quarter results. We ended the year strong with a fourth quarter that exceeded our expectations, driven in part by higher-than-expected revenue, boosted by a pickup in restructuring. For the quarter, revenues of $774.4 million increased 14.5%, with revenues up across our Corporate Finance and Restructuring, Forensic and Litigation Consulting, Technology, and Strategic Communications segments. Excluding the negative impact of foreign exchange, revenues increased 18.4%. GAAP EPS of $1.33 included the $8.3 million special charge, which reduced EPS by $0.19 compared to $1.07 in the prior year quarter, which included $2.4 million of non-cash interest expense related to our 2023 convertible notes, which reduced EPS by $0.06. Adjusted EPS of $1.52, which excluded the special charge, compared to adjusted EPS of $1.13 in the prior year quarter, which excluded the non-cash interest expense. Net income of $47.5 million compared to $38.2 million in the fourth quarter of 2021. Adjusted EBITDA of $92 million, which excluded the special charge, compared to $62 million in the prior year quarter. Now turning to our performance at the segment level for the fourth quarter. In Corporate Finance and Restructuring, revenues of $292.8 million increased 26.5% or 29.5% excluding foreign exchange. The increase was primarily due to higher demand for restructuring and business transformation services. Business transformation and transactions represented 54% of segment revenues in Q4 2022 compared to 62% in Q4 2021. Restructuring represented 46% of segment revenues in Q4 2022 compared to 38% in Q4 2021. Adjusted segment EBITDA of $52.4 million or 17.9% of segment revenues compared to $22.2 million or 9.6% of segment revenues in the prior year quarter. This increase was primarily due to higher revenues, which were partially offset by an increase in compensation, including the impact of a 14.3% increase in billable headcount and higher SG&A expenses. Sequentially, revenues increased 10.3%, largely due to an 18.7% increase in restructuring revenues and higher success fees. Among the industries where we have been helping clients with restructuring matters include airlines, specialized finance, which includes cryptocurrency-related matters, and telecommunications. In Forensic and Litigation Consulting, fourth-quarter revenues of $160.4 million increased 16.2% or 18.8% excluding foreign exchange. The increase was primarily due to higher demand for investigations, data analytics, and health solutions services. Adjusted segment EBITDA of $13.8 million or 8.6% of segment revenues compared to $8.5 million or 6.2% of segment revenues in the prior year quarter. This increase was primarily due to higher revenues, which was partially offset by higher compensation, including the impact of a 5.9% increase in billable headcount and higher SG&A expenses. Economic Consulting’s revenues of $172 million decreased 0.2%. Excluding the estimated negative impact from foreign exchange, revenues increased by 4.9% compared to the prior year quarter. The increase in revenues was primarily due to higher realization for M&A-related antitrust and international arbitration services, which was partially offset by lower demand for financial economic services compared to the prior year quarter. Adjusted segment EBITDA of $27.3 million or 15.9% of segment revenues compared to $30 million or 17.4% of segment revenues in the prior year quarter. This decrease was primarily due to higher SG&A expenses. Sequentially, Economic Consulting’s revenues decreased 11% as our record Q3 2022 revenues were boosted by the recognition of previously deferred revenue. In Technology, revenues of $76.8 million increased 18.9% or 22.2% excluding foreign exchange compared to Q4 2021. The increase in revenues was primarily due to higher demand for investigations and M&A-related second request services. Adjusted segment EBITDA of $11.8 million or 15.3% of segment revenues compared to $7.8 million or 12.1% of segment revenues in the prior year quarter. This increase was primarily due to higher revenues, which was partially offset by an increase in compensation, including the impact of an 18.8% increase in billable headcount and higher SG&A expenses. Sequentially, Technology revenues decreased 9.6% largely due to lower demand for M&A-related second-request services. Lastly, in Strategic Communications, revenues of $72.4 million increased 3.7% or 10.4% excluding foreign exchange compared to Q4 2021. The increase in revenues was primarily due to higher demand for public affairs and financial communications services. Adjusted segment EBITDA of $10.5 million or 14.5% of segment revenues compared to $14.9 million or 21.4% of segment revenues in the prior year quarter. This decrease was primarily due to higher compensation, including the impact of a 19.2% increase in billable headcount and an increase in SG&A expenses. I will now discuss certain cash flow and balance sheet items. Net cash provided by operating activities was $188.8 million compared to $355.5 million for the year ended December 31, 2021. The decrease in net cash provided by operating activities was primarily due to higher compensation, operating expenses, and income taxes paid, which was partially offset by an increase in cash collected. Notably, operating expenses this year included more prepaid items like travel and entertainment, negatively impacting cash flow. Total debt net of cash was a negative debt position of $175.5 million at December 31, 2022, compared to a negative debt position of $10.8 million at September 30, 2022. The sequential reduction in total debt net of cash was due to strong cash collections in the fourth quarter, historically our strongest quarter for cash collections, partially offset by share repurchases. Cash and cash equivalents stood at $491.7 million at December 31, 2022, compared to $494.5 million at December 31, 2021. On December 1, 2022, our Board of Directors authorized an additional $400 million to our stock repurchase program. During the quarter, we repurchased 425,016 shares at an average price of $153.09 for a total cost of $65.1 million. As of December 31, 2022, approximately $478.5 million remained under our stock repurchase authorization. Turning to our 2023 guidance, we are providing guidance for revenues, EPS, and adjusted EPS as usual. After a year of double-digit revenue growth, but only a slight increase in adjusted EPS, we are guiding to renewed EPS growth in 2023. We estimate that revenues for 2023 will be between $3.33 billion and $3.47 billion. We expect our EPS to range between $6.80 and $7.70. We currently do not expect our adjusted EPS to differ from EPS. Our 2023 guidance range incorporates several assumptions, including, first, revenue guidance reflects our expectation for growth in all business segments, facilitated by the additional capacity we added in 2022. Second, we assume headcount growth in 2023 at similar levels as in 2022, with the caveat that short-term profits could be significantly adversely impacted if market disruptions allow for a substantial number of lateral hires. Third, we expect restructuring activity to remain elevated through 2023, though there can be no certainty regarding the strength and duration of this restructuring cycle. Conversely, we expect M&A activity to decline in 2023. Fourth, we expect improved performance in FLC and to begin realizing the benefits of the investments we have made in EMEA across all segments. Fifth, we expect SG&A in 2023 to neither return to the lower levels encountered during the pandemic nor to grow at the pace seen in the post-pandemic year of 2022. Finally, our tax planning strategies executed over the last few years have reduced our effective tax rates. Although we continue to seek further opportunities, we currently anticipate a significantly higher tax rate for 2023 compared to 2022. We expect our tax rate to range between 24% and 26%, partly because in many countries where we operate, tax rates are rising. I must emphasize that our assumptions provide a midpoint and a range of guidance around this midpoint, which I characterize as our current best judgment. Frequently, actual results exceed this range because our business is largely a fixed-cost structure in the short term, and small fluctuations in revenue can substantially impact income. Now, I will close my remarks by emphasizing a few key themes. First, as Steve mentioned, we are increasingly recognized as a place where top talent in professional services wants to build their careers. We will continue to find opportunities for investment and growth because the best professionals are attracted to the complex work we perform, which spans issues from social media regulation to leading cryptocurrency matters worldwide. Second, our management team is focused on both growth and utilization. Third, while we cannot predict the world’s events in 2023, we know from past years that our collection of businesses is resilient and capable of growth, regardless of business cycles. Finally, our strong balance sheet continues to provide us the ability to enhance shareholder value through organic growth, share buybacks, and acquisitions when appropriate opportunities arise. With that, let’s open the call for your questions.

Operator Instructions. And the first question will come from Tobey Sommer with Truist Securities. Please go ahead.

Thank you. A question about guidance. In the simplest terms, for your revenue guidance for 2023, what are the basic building blocks in terms of utilization, headcount, and bill rates?

So Tobey, we don’t provide that level of detail. But essentially, we expect—we’ve told you the number of heads by segment at the end of the year. We’ve told you we have similar ambitions. Utilization is a derivative of how we hire and what matters we bring in, etc. We are always looking for higher utilization and seek to compensate our people so that ours is the place they want to join and to provide rates in the marketplace that are commensurate with the talents we bring to the field. That’s as much detail as I’ll provide.

Okay. Curious if you would comment on SG&A expense growth as we exited last year. On prior calls, I think it was indicated that while SG&A investments are likely to continue, the disproportionate drag on the bottom line would dissipate over time. Is that still your expectation for 2023?

Absolutely.

Okay. And one more financial question, and then I’ll go to something more strategic. What are your expectations for free cash flow conversion from EBITDA, and are there initiatives to improve that after last year?

Thank you for that question, Tobey. I’ll get a little bit more granular. It’s roughly 65% free cash flow to EBITDA. And that’s defined as—we obviously have taxes, some amount of CapEx, small cash interest expense, and then there’s working capital. Those are the main variables. If you go back and plot for several years, that’s the kind of conversion that we should expect moving forward. Obviously, 2022 was not at that level, but 2021 and 2020 were higher than the 65%. The pandemic, from a cash flow perspective, worked well because spending on travel and other expenditures essentially halted. Meanwhile, our normal collections were not adversely impacted. In contrast, 2022 saw a significant increase in SG&A, but once built up, even maintaining that level won’t impact cash flow adversely. Therefore, if you average those years, you’ll find the percentage I mentioned is what to expect going forward.

Okay, thank you. And perhaps for Steve, could you describe the portfolio of businesses the company operates in, grouping the most procyclical and the most countercyclical in terms of demand?

That’s a great question. Internally, we debate this topic frequently. I’m not sure we have any exact numbers, but we think about three parts of our business, not just two. There’s procyclical parts, countercyclical parts, and cyclical parts. We must think about all three. The procyclical aspects typically link to M&A activity, as we perform M&A services in our stratcom business. While it isn’t half of our business, we do engage with it. Sometimes IPOs are procyclical, too. Moreover, a portion of our Economic Consulting business related to merger clearance is procyclical. Contrarily, our restructuring business is clearly countercyclical, and in some cases, certain areas of the non-restructuring sector can be countercyclical too because the impetus to reduce costs grows during challenging times. We also have many businesses that are not particularly linked to economic cycles. For instance, when governments investigate tech companies, those inquiries tend to remain constant regardless of the global economy’s status. Thus, much of our investigations work is influenced by factors that stand independently of the cycle. I confidently believe we have a balanced portfolio; consequently, I pay close attention to the overall condition but don’t act based solely on cyclical trends. Over any multi-year period, I believe our capacity to grow depends more on our actions than on the economy. With the caveat that should unforeseen global events occur, we can adapt our strategies accordingly. However, regarding the general economy, our focus should remain on executing right things for our business. I think we’ve proven that focusing on this yields growth.

It does. Yes. And lastly, could you describe how the current climate, particularly in light of the layoffs among the big four firms, affects your restructuring business and may provide FTI with opportunities to attract talent?

That’s an excellent question. I’ll respond in two ways. If we were on the verge of bankruptcy, of course, we would consider layoffs; however, that instinct does not align with our current situation. We engage in performance discussions, particularly with senior staff, ensuring alignment with anticipated market trends. I doubt it makes sense to optimize short-term results by letting go of junior positions that we've just filled; we strive to avoid that. Our company’s economic standing is strong, and I would argue that in challenging times, we’ve had great success attracting individuals who may have felt discontented by their previous organizations. For instance, in Australia, we have acquired extraordinary talent that has joined us because they saw a commitment to values that resonated with their own. They’re often seeking companies that display long-term thinking, and we’ve seen an influx of exceptional talent through this perspective. So, while layoffs elsewhere create opportunities for us, we will continue to remain vigilant regarding talent acquisition.

Thank you.

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

Good morning, Steven, Ajay, and thanks for taking my questions. If we could start with the drivers in Corporate Finance & Restructuring this quarter, could you discuss where you’re observing stronger restructuring results in the fourth quarter? And do you anticipate this to accelerate further? Also, could you provide insights into the outlook for business transformation versus transactions given the current economic uncertainty?

There are lots of questions in there. If I forget any, please let me know. As we mentioned, we don’t disclose specific matters ongoing until after they occur. However, we noted industries including specialized finance, particularly concerning cryptocurrency, airlines, and telecommunications. I won’t elaborate more than that. As for expectations, we have included in our guidance at the midpoint that we expect restructuring to maintain these elevated levels, not projecting increases or decreases. It’s been predominantly a U.S. occurrence, although we’re observing signs of improvement in other regions, albeit to a lesser extent. So the guidance suggests expectations remain stable around these levels.

That's very clear. Thank you. Regarding the weakened outlook for large-cap M&A globally, how do you anticipate this slowdown affecting your various businesses?

Some of our M&A work targets large-cap entities, while a portion is middle market, and those markets don’t always align. I believe we’re the top anti-trust clearance firm in both the U.S. and Europe, targeting large-cap activities involving mergers and second requests from the government. This aspect could be negatively impacted by downturns. However, our business encompasses more than just this sector. We also have private anti-trust, which tends to span multiple years, regulatory work, and financial economics. This means I believe that sector can grow over multi-year spans independent of economic fluctuations but could experience downturns under certain conditions. Moreover, our technology business interacts with second requests; when the government requests data, they require substantial amounts quickly, and I believe we are the leading provider in that domain. The transaction business in Corporate Finance has shown resilience, potentially less impacted by downward pressures in the large-cap segment, partly due to our focus on the middle market and private equity. However, we do anticipate that sector to be somewhat negatively affected by the overall downturn in deals. I believe we can expect different business segments to experience different levels of impact stemming from the shifts in business cycles. Thus, while some will inevitably feel the downturn, others may be less affected. During COVID, we indeed faced challenges but managed to bounce back. Our company as a whole tends to be more resilient than individual sub-businesses with sharp fluctuations. If we believe a specific business is experiencing a temporary setback, we often reinvest, which may not reflect well on a quarterly basis but can yield benefits in the long run.

Yes, that’s extremely helpful context. A few more if I may. In Forensic and Litigation Consulting, utilization remains below historical averages for fourth quarters. What do you believe could catalyze utilization improvements? And if improvements aren't realized, will you consider alternative measures to enhance the business?

Of course. Utilization was not aligned with our historical expectations for FLC last year. There are two pathways to alleviate this situation. The first, which we hope continues, is related to investments in new geographies, which take time to materialize. If you exclude this investment impact, historical utilization rates have been higher. The second influences whether the investments pay off. We observed some bets in North America beginning to shine in the fourth quarter but hadn’t shown results previously; we have numerous investments in Europe anticipated to yield better,” but timing can sometimes be tricky. We carefully monitor these aspects, yet we have not experienced a significant number of failed investments relative to expectations. However, if utilization continues to remain below expectations, we must continually assess our strategies.

Yes, of course. Finally, could you comment on business level EBITDA margins or operating margins across various segments where you see higher pressure?

The level of margin pressure varies significantly by segment. Over the past 18 to 24 months, I’ve seen considerable margin pressure in tech primarily due to intense price competition. We’ve been gaining share but have experienced EBITDA margin compression even while achieving strong growth. The mix within Corporate Finance influences, especially with restructuring, which significantly enhances margins during peak demand. Thus, I don’t anticipate any long-term structural declines across the segments I can consider at this time. However, there will inevitably be fluctuations, and I expect that tech may undergo a shakeout, possibly leading to lower margins for a while. On the whole, I don’t foresee a sustained decline in margins except where short-term hiring influences the equation, potentially impacting margins temporarily.

Yes, absolutely. Thank you for addressing all my questions.

Thank you, and welcome.

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

Hi, good morning. Thanks for taking my questions. A lot has already been asked, but I want to ask a few follow-ups. Starting with FLC, Ajay, you talked about plans to continue growing headcount across the entire firm at similar levels in 2023 to 2022; should we assume that applies to FLC as well? Or will you wait to see improved performance before increasing hiring there?

So Andrew, the key is finding the right talent. If the talent is available, we have the wherewithal and ambition to grow. It’s more about that than a specific number of hires.

Understood. In terms of the restructuring climate, has your perspective shifted regarding the current situation compared to your last call? I understand you are projecting similar elevated levels of restructuring; any updates on geographic performance would be appreciated.

Your observation is accurate. Since our last conversation, restructuring has picked up more than I anticipated. It’s primarily a U.S. trend, but we’re also noticing improvement in certain other geographies, still modest, however. Therefore, our guidance reflects stability at these levels, with some variability.

You can look at some external statistics. 2022 as a whole was not a boom year for restructuring—in fact, it was one of the worst years since 2014. However, by the fourth quarter, this has changed, supported by favorable statistics in the U.S. and other markets. Ajay’s guidance reflects this continuity based on recent trends.

Thank you. Last question for me: The FTC has proposed a rule on non-compete agreements; how might this affect your business regarding talent acquisition and retention?

Yes, we have considered that. I understand this is at an early stage of rule-making, with many comments still pending. Thus, we should revisit this topic as developments unfold, but we’re actively monitoring the situation.

That makes sense. Thank you very much.

Thank you, everyone. I apologize for going over time, but I appreciate the insightful questions, and I thank everyone on this call for your continued support. We look forward to moving ahead.

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