FTI Consulting, Inc.
Q1 2020 Earnings Call Transcript

Published: 3 May 2020

[Operator:]

Welcome to the FTI Consulting First Quarter 2020 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Mollie Hawkes, Vice President of Investor Relations. Please go ahead, ma'am.

[Mollie Hawkes:]

Good morning. Welcome to the FTI Consulting conference call to discuss the company's first quarter of 2020 earnings result 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.

[Steve Gunby:]

Thank you, Mollie. Mollie, can you hear me? Good. Thanks.

[Mollie Hawkes:]

Yes.

[Steve Gunby:]

Good morning, and thanks to all of you for joining us. Let me say I hope everything is well with each of you and that you and your families are healthy and safe. Obviously, we all know this is an incredibly difficult time for many of us individually, the economy and in fact, for the world as a whole. And it's an emotional time for many people, too.

[Ajay Sabherwal:]

Thank you, Steve. Good morning, everybody. In my prepared remarks this morning, I will provide an overview of our quarterly results, segment financial results and discuss guidance. As part of the guidance discussion, I will share our current expectations on how the global COVID-19 pandemic may impact our business.

[Operator:]

And today's first question comes from Tobey Sommer with SunTrust. Please go ahead.

[Tobey Sommer:]

Could you start out by maybe giving us a framework for the proportion of revenue across the segments that is propelled by mergers and acquisitions?

[Ajay Sabherwal:]

Tobey, we don't provide that detail, and I'm not going to at this juncture. But what I will tell you are key drivers, as you know, for our business are - the traditional key drivers for our business are restructuring, M&A, disputes, including fraud. I mean those have been the traditional. We've done a ton of diversification into the non-M&A antitrust, for example, in economics. I mean there have been - what I will tell you is there have been quarters where non-M&A antitrust is catching right up to M&A-related antitrust services. So that diversification is sizable. In our Technology area, for example, yes, second request activities drive technology, but we have done a fabulous job in getting into investigations, core investigations as opposed to just second request activities. In Strat Com, we do all kinds of communication as opposed to simply related to M&A. So M&A is a very significant part as a key driver, but boy, have we diversified.

[Tobey Sommer:]

Sure. I guess investors just struggle with understanding the relative size of bankruptcy versus those kind of more classic procyclical elements such as M&A. So trying to understand that is essential to understanding how the business is going to perform.

[Ajay Sabherwal:]

I respect that sentiment.

[Tobey Sommer:]

Okay. Moving on. How much of the business relies on court throughput in sort of timely hearings or rulings to sustain high utilization rates?

[Ajay Sabherwal:]

So if - I'll take a crack at that. In FLC and in Economics, very much so, Tobey. You can do a fair bit of work but you do have to give testimony in court. I mean that's what you're preparing for. So if the testimony is delayed, the preparation for the testimony is also delayed. So you can see that in our FLC segment, even though it was in the second half of March in North America and Europe and in Asia throughout the quarter. There is a decrease in utilization in FLC, some of it is because we've increased a lot of headcount in the second half of last year. But I would say 2, 3 percentage points in utilization comes from COVID-related impacts, related primarily to litigation stops.

[Steve Gunby:]

Yes. Let me - maybe I can add to that. Can I answer that, Ajay? Look, I think if courts were permanently shut down, it could have a major, major impact on Econ - I mean a lot of our businesses are dependent. We don't believe that the world - the world is - the world needs courts. The world that we don't believe the courts are going to be shut down for multiple years, but we're seeing our significant shutdowns and consequent delays in litigation, Tobey. And yes, we think that those gears will get unstuck at some point even if they get stuck in a bit slower way for a while. I think that's the right way to say it. But no, no, if there were no litigation in the world, I mean, it would be a huge effect on FLC and Econ because we support crisis stuff that often has courts involved. But I don't think anybody in the world believes that. It's an issue of temporary phenomenon here, Tobey. Does that make sense?

[Tobey Sommer:]

It does. It does. I'll ask 2 more questions and I'll get back in the queue. Could you describe the arc of bankruptcy activity that you expect and compare that arc to the prior recession? And also if you could address what your hiring plans are this year?

[Steve Gunby:]

Look, I'll take a crack at this. Let me just make one thing - I just want to make sure one thing, I think, Tobey, you get this, but I want to make sure for everybody on the call. Our CF business is not synonymous with restructuring. And Ajay, I don't know if we've separated that out and disclosed, but a major portion - because of the diversification we've done, a major portion of our CF business is more procyclical activities. And that's been one of the reasons we've been able to grow CF over the last years, even while the Restructuring business has not been booming. So people back in the last crisis, I think 90% of our CF business may have been restructuring. Today, it's much more balanced with non restructuring activities. And that's why even though we started to see restructuring pick up a significant way in the first quarter, I don't think if you look at the year-on-year utilization rates for CF globally they're not different this year versus a year earlier. Mollie or Ajay, you could double check that, but I think that - okay. So that's sort of context. And remind me of your question, Tobey.

[Tobey Sommer:]

Describe the arc of bankruptcy that you expect compared to prior recession.

[Steve Gunby:]

Yes, so I think - what Mike would say - Mike and Carlyn run that practice, so Mike spends more time on the restructuring and Carlyn on all the other services. I think you could say that the phone has been ringing off the hook faster than it did in the last crisis. But with a little bit of a caveat, even though it's ringing off the hook and we're winning a lot of jobs, some of them can't get started right away because of court issues and issues of - related to requiring some in-person meetings and so forth. But I would say that the - this is a huge, at least initial read on this, this is a - there's a huge amount of demand right out there. It's going to take a while before it fully translates into utilization. But even so, it really started to show up in the first quarter. Does that make sense? Ajay, you have something you disagree with that or is that your sense as well?

[Ajay Sabherwal:]

No, that - I agree, sir.

[Steve Gunby:]

Tobey, does that help?

[Tobey Sommer:]

It does. And if you could comment on your hiring plans for the year, that would be great.

[Steve Gunby:]

Well, look, I think - look, our hiring plans are - we drive our hiring plans off of need, yes, but also really long-term need. And obviously, we have some businesses that are slow. You say, so would you ever hire into those things? Actually, we would if - like I talked about, our international arbitration business, if this causes dislocations and competitors and a lot of terrific talent wants to come over to us, we'll hire even in the face of slowdown because great people well over any extended period of time build your business and be profitable and shareholder-friendly over an extended period of time But so we are - we had a hiring plan at the beginning of the year. We're not obviously driving that up in businesses that are very slow, but we're not abandoning hiring, and we're certainly not abandoning any offers we've given in the past. We'll be prudent in the areas that are slow. But if great talent becomes available, we're going to jump on it. And that's frankly, Tobey, as you know, we did that in a lot of our businesses when they were slow a few years ago. We did that - some of the best adds to our CF business were during after four really slow quarters in CF a few years ago. And same thing for FLC, our cyber business was added when FLC's profits weren't very good. So we're going to continue to monitor the world, and I think we're in better shape than many players out there. And if that causes a lot of talent to want to defect to us, we'll take advantage of that even if even if it hurts a quarter. But behind that, we'll obviously be prudent. Does that help?

[Tobey Sommer:]

Absolutely.

[Operator:]

And our next question today comes from Andrew Nicholas with William Blair. Please go ahead.

[Andrew Nicholas:]

If we look back to '08, '09, and you mentioned that obviously, restructuring was a much bigger piece or the vast majority of the business mix in CFR in '08, '09 versus today. But if I look back at that, it looks like margins were in the 30s and as high as 34% in 2009. And so with that as context, I'm just trying to figure out, is there any reason from a structural perspective that the Restructuring business on a stand-alone basis couldn't get back up to those levels in today's environment? So that's the first question. And kind of as a corollary to that, if you could provide any color on the profitability trade-off between restructuring and business transformation, that would be helpful.

[Steve Gunby:]

Look, let me take a crack at this and then Ajay either add to it or correct if anything I say that's wrong. Look, I don't - I saw those numbers in 2008 and '09. I'm not sure I wouldn't want people to be thinking that we're going to get to those levels. Obviously, a lot falls to the bottom line as utilization goes up. But you know, '08 and '09 were still affected by the original deals that were done in '03 and '04 with earn-outs and so forth, which I think always make it complicated to do comparisons. It's always complicated to do comparisons depending how deals are structured for four years after a deal is done versus on a steady state going forward. So I - clearly, it is - Restructuring is one of our most profitable businesses, if not the most profitable. And the busier it gets, like on all our businesses, profitability goes up. But I'm not sure people should be thinking in terms of the numbers that we're seeing in 2008 and '09. Do you disagree with that, Ajay?

[Ajay Sabherwal:]

No. No, I don't disagree. I would just add it, just a little 1 or 2 more points of texture. There's no structural - there's no mathematical reason for margins as an outcome. So there's no mathematical reason that if revenue is absolutely surge that margins won't expand. So I mean there's no - we have a cap on margins, that's not the case. You see it this quarter. You see the Corporate Finance Restructuring margins. We have a record quarter in terms of revenues in that area, and you see the margins associated with that. Where goes revenue over time, there goes margin. But look, in 2008, 2009, 65% of revenues roughly were in North America or 95%, now it's 65%. We have a large EMEA practice. We have a large Australia practice. I mentioned on my call, in Australia, there are certain moratoriums that are delaying restructurings there. There are core processes around the world that are gummed up. But clearly, that is an area where there is a surge, absolute surge, in demand. We are borrowing from the business transformation area for people to accommodate that extremely high utilization. We're borrowing even from other segments within the company. We are going to do all the things that any business person is going to do to increase utilization and therefore, margins. But there are also differences. So one can't just say that will equate to what it is now.

[Andrew Nicholas:]

Makes sense. That's helpful. And then just one follow-up. Obviously, the first quarter was weak in APAC as you kind of outlined on the previous call. But I was hoping, one, you could just refresh us on the mix of the businesses in that region. And then if there's any commentary you could provide on how that business more specifically has looked in April to see if that could be an indication of some sort of rebound in North American EMEA as we get through some of these coronavirus specific delays.

[Ajay Sabherwal:]

Green shoots, some encouragement there. In fact, when we used to talk to them in January, we used to express sympathy, et cetera. But I don't think it really hit home until it came here. And now they call and reassure me, they say, don't worry, it will all get better. Don't panic, et cetera, et cetera, on a personal level, that is not on the business side. China is certainly open for business. But in Hong Kong, in Singapore, Indonesia, Cayman Island, Richard Virgin Islands, some of those places are related in terms of the courts, things are still closed. So there are green shoots there. I'd also say that you asked about the mix. That area, we have a significant Corporate Finance business, but it's more in the liquidation side of things as opposed to the traditional Chapter 11. And we have a significant FLC business that is cross-border in nature, and that is what got impacted.

[Operator:]

And our next question today comes from Marc Riddick with Sidoti & Company. Please go ahead.

[Marc Riddick:]

I wanted to touch on something you had mentioned as far as the potential for new - maybe some needs that clients may have following what's taking place now, whether it's different types of expertise that's related to pandemics or what have you. I was wondering if you could expand on that a little bit and maybe touch on whether or not that you have the current expertise in those areas. Or is that something that you think might be added or if that could lead to new practice areas and the like?

[Steve Gunby:]

Yes. Look, I'll take a crack at this. Look, there are a lot of different needs. And look, they're evolving. I mean we're spending a lot of time, our people are spending a lot of time both talking to clients and also talking collaboratively with law firms that we work with a lot to sort of explore this. But a lot of the stuff that is going to come out of this is areas where we have real expertise. I mean there's stuff, I think - I don't know if you - I think you know the words, what material adverse change clauses are, force majeure claims related to M&A, some Chinese contracts where people tear it up and saying, this is qualified and what's the damages associated with that. I mean that's for Compass Lexecon people, our FLC people, our international arbitration people all have tremendous expertise in those areas. There's a lot of insurance-related stuff that come out of this business interruption insurance. The coverage is the legal question, but then the damages, there's a set of issues. There's a lot of - typically, in this environment, there are a lot of fraud allegations that come out, which is and that requires either investigations or monitorships or a set of things, which is what we - our FLC business does. I mean I think one of the - out of the last crisis made off was identified as a big fraud thing, and we spent a number of years actually helping get back. I don't know, if you don't remember the number, Ajay, but I think it's something over $10 billion working for the judge who was overseeing us to help do the sleuthing to figure out where all the money went and see if we could help him get it back. So I think this is - look, there's always something new in an environment that creates new legal twists and so forth and the lawyers that we are talking about. But this is - the expertise that we have is very much aligned with what is likely, unfortunately, to come out of an event like this. We're not - that's not a concern of ours at this point, Marc. Does that help?

[Marc Riddick:]

No, it does. It does. And then the last one for me is, I was curious as far as with the court closures and the like. I was wondering if you're getting a sense of the level of communication that you get to receive and maybe lead time for when these things might open, what that communication level is like. And I'm not sure, but if there's ever really been a similar situation where courts were closed for a length of time, either maybe in one particular jurisdiction, whether related or something like that, that might give you a little bit of an insight as to how these things might reemerge.

[Steve Gunby:]

Look, no, it's a good question. Look, as you know, I've only been in this business for 6 years. But I'd now talked with a lot of - not only our people who have been in this business for 20 years, but I have had a lot of conversations with managing partners of law firms. And I got to tell you, nobody thinks that there's a clear precedent on this. We're figuring it out as it goes along. I think nobody believes that this level of closure of the courts can sustain itself. I mean the Delaware courts are having massive amounts of litigation pile up, and there's a lot of stress. And courts play an important role in society. And so you may need meat-packing plants, you also need courts work. And so none of us really believe this will sustain itself for years. How quickly it loosens up, I get on calls twice a week where somebody says, we feel a sense of loosening over here or, the courts have agreed to do a non in-person hearings over here. And so we're seeing some of this loosen. I don't think we have a good trajectory to prediction. If we did, Ajay would have said, yes, we think this is going to be slow for half of the second quarter, and it'll be all the way back. We don't know that at this point, but we don't think it's going to be years. How many months, how fast it loosens up? We're not sure. Does that give you a sense, at least, Marc?

[Operator:]

And our next question is a follow-up from Tobey Sommer with SunTrust. Please go ahead.

[Tobey Sommer:]

Within your Corp Fin and bankruptcy-related work, how would you describe your performance with respect to market share on creditor side versus company side? Because I know you had made a push and had some success increasing your exposure to company side work.

[Steve Gunby:]

Do you want to answer that or you want me? I'll answer. I mean look, we've made an incredible progress. I think - look, I think this is something I think our teams should be, and I think are incredibly proud of. We have strengthened an already strong business. At one point, we were known as a great creditor side company in the United States. It understated actually the company side positions we had, but that's how we were known. We've, over the last few years, reinforced the creditor side in the United States but substantially built our company side capability in the United States. And we've strengthened our positions abroad incredibly, whether it's in London, whether it's on the continent, whether it's in Germany, whether it's an already strong position in Hong Kong, whether it was a weak position we once had in Australia that we strengthened, to our strong position in Latin America. So that business has never been as strong as it is today on a global basis or in the United States. I think I would - one of the definitive sources that you can look at - I think it's public, the Debtwire stuff, Mollie, is public? Look at who's the leading player on Debtwire in the United States over the first quarter. I think that's the first quarter report that I just saw, Mollie, is that right? And look at how strong - how many company side cases we have in addition to how strong we are on the creditor side. I think it's a real source of strength. And I think the Debtwire would be a third-party source for you to look at that backs that up. Does that help?

[Tobey Sommer:]

It does. And one more question for me, and I'll end it. When you think about the new businesses that you've launched under your tenure organically, does a period like this lend itself to being more fertile to make investments in new businesses than normal economic times? What does your experience tell you?

[Steve Gunby:]

Yes. Look, there are two reasons. The two reasons - two things that are required to enter new business in professional services. One is a clear client need, and in our case, it's not a clear client need for commodity service, it's a clear client need for a high-value service where people really want and are willing to pay for expertise. So that's the first one. The second one is a supply side issue, can you get the talent that you need in order to be a leading player in that, in its certain geography and then ultimately, in multiple geographies. I think any sort of stress situation like that, it creates both of those. On the demand side, there are stresses and strains in the world that, as we talked about a little bit earlier, some of which relate to historical practices, but others, as we're talking about with law firms are adjacent services that they are critical going forward. So there is going to be new services that we will be going into. The other thing that I think is the cases. The strength of our company over the last while has made us, as we've talked about before, a magnet in a way that - than we've ever been for talent. And I think we have - we don't have - I don't know whether - how much net debt we have, close to zero, Ajay. And we can invest in people, and we have shown our willingness to invest in people. And I think that will - has been attractive over the last few years. It's the way we've gotten so many talented lateral hires. I think our guess is that, that has a shot of accelerating. So I think on both the demand side and the supply side, this position us well. It's why I actually warned earlier in the call that if we have tremendous opportunities to acquire talent in a quarter that's slow, and we think that's going to help just the fundamental trajectory of this business, we should do that, and we will do that later in the year. And we think there's a good chance for those opportunities. We don't know for sure. Does that answer your question, Tobey?

[Tobey Sommer:]

It does.

[Operator:]

Thank you. And ladies and gentlemen, this concludes today's question-and-answer session and today's conference. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.