FTI Consulting, Inc.
Q4 2020 Earnings Call Transcript

Published: 26 Feb 2021

[Operator:]

Welcome to the FTI Consulting Fourth Quarter and Full Year 2020 Earnings Conference Call. All participants will be in 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 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 fourth quarter and full year 2020 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 H. Gunby:]

Always have to remember to take off from mute, Mollie. Thank you for the introduction and good morning, and thank you all for joining us. My guess is many of you, like me, are extraordinarily happy to see 2020 behind us. I think also many of us realized that some elements of 2020 are not yet fully behind us. The COVID cases are coming down from the extraordinary levels that we saw over the holidays. But of course, they're not down to zero by any chance, and there's still a lot of it around. We have vaccines, but they're not yet in each of our arms. And I guess most important, the disruption that COVID-19 has caused to our businesses, our personal lives, and society more broadly obviously remain. Having said that, I think we all see some light at the end of this tunnel and I, for one, am so, so grateful to see that. So look, in addition to thanking you, as I normally would do for your continued attention to our company, I mean once again wish you and each of your families good health over the next while and rapid access to things like vaccines.

[Ajay Sabherwal:]

Thank you, Steve. Good morning, everybody. In my prepared remarks, I will take you through our companywide and segment results for 2020 and the fourth quarter and guidance for 2021. I'll begin with some highlights for the year. Revenues of $2.461 billion increased $108.6 million or 4.6%. GAAP EPS of $5.67 compared to GAAP EPS of $5.69 in 2019. Adjusted EPS of $5.99 compared to adjusted EPS of $5.80 in 2019. As Steve mentioned, our GAAP and adjusted EPS included a significant tax benefit that boosted full-year 2020 EPS by $0.30. And adjusted EBITDA of $332.3 million was down from $343.9 million in 2019.

[Operator:]

. And the first question comes from Tobey Sommer with Truist Securities. Please go ahead.

[Tobey Sommer:]

Thank you. With respect to your outlook for corporate finance and restructuring, you cited subdued defaults in the first half. Do you assume that segment is down year-over-year, and if so, how much and do you think the moratoria will be lifted this year?

[Ajay Sabherwal:]

So Tobey, let me try and answer that. So, we -- and I won't give you a glib answer, I'll answer it fully. There's a range of outcomes, that's why there's a range of guidance. And certainly, at the higher end of the range, all other things being equal, we expect growth and conversely at the lower end, right. So, there's a range of outcomes there. In terms of where it's headed, the restructuring is weak, and we do expect moratoriums to be lifted as the pandemic eases, but I actually don't have a crystal ball on when the pandemic will absolutely go away and governments tend to push out the ending of moratoriums. So -- and that's factored in some of our assumptions and range itself. What is most -- more important than any of this is that restructuring has higher bill rates, has higher margins, but we have very, very successful transactions and business transformation practice that's actually with secular growth. Restructuring is more volatile, these other businesses are longer growth, and there is a trade-off that we experienced between the two with staff moving back and forth, especially at the junior level. So, we factor all of this in our guidance, and there is also every possibility that our business in corporate finance and aggregate actually grows year-over-year.

[Tobey Sommer:]

Okay, thank you. And in your guidance, you don't guide formally for sort of an EBITDA or operating margin. Implied in your guidance is EBITDA margin up year over year because you have a few offsets below that line in terms of a lower share count and a higher tax rate? Thanks.

[Ajay Sabherwal:]

Again, at the lower end of the range, it would not be what you're saying. At the higher end, it would be. And this is why there is a range. And in terms of the share buybacks as well, let me just be clear, we don't mind cash piling up. Over time, we will not accept dilution, but there's no -- our Board mandate is buy back shares but with no time constraints or a share price. We don't have a defined plan in that sense. Of course, if performance is weaker, share price usually responds accordingly and then we buy back more and conversely on the other end. So those -- all of those multiple scenarios with offset are factored into the guidance.

[Tobey Sommer:]

What is the posture for hiring this year? I know the long-term rate in recent years has been strong double-digits, but is there any reason to think that you may be slightly slower in your billable headcount growth this year versus recent trend?

[Steven H. Gunby:]

Maybe I can take that, Tobey. Nice to hear your voice by the way. I hope that you and your family are all doing fine. Look, I think we disaggregate the -- there's two different answers to that, we disaggregate the topic. I mean, some of our businesses are like sold out right now and other businesses are very slow. And you have to forecast where that is over an extended period of time because sometimes you have to commit to hiring months in advance, right. And so -- but we don't set a target for the company as a whole. What we do is we look business-by-business about where we are. We've hired a bunch of senior people, and we need to build up leverage below them. We factor that in as well as the current economic conditions, and so we think that through. It's, of course, the case that if a business has been slow for a year and didn't use all the resources that we hired in anticipation of higher growth the prior year that we tend to taper the hiring there. So that's -- we just think about it, as you might expect, quite logically business, but sub-business by sub-business. The only change to that is we are pretty opportunistic, independent of the business economics on the senior hires. If we can get great senior hires, no matter how bad a business is, if we believe in the business, we'll jump on that and then we'll sort the rest of that. But otherwise, we obviously adjust hiring and focus if we're long on staff in a place versus short on staff. Does that give you the essence, Tobey.

[Tobey Sommer:]

It does, thank you and likewise for your family, Steve. Last question for me, could you refresh us on the approximate breakdown of revenue in the various businesses within corporate finance and restructuring, I think that's something that investors struggle to perceive? Thank you.

[Ajay Sabherwal:]

There's a reason for that, the struggle because it's not static as you can imagine, right. Let me give you an example. In Q2, restructuring was almost 70% of the revenue. In Q4, closer to 55%, so it varies. And staff at the junior level can do restructuring work, transactions work, and business transformation work. There are matters or assignments, engagements, as you would like to call them, which have components of all three. So, this is the reason why you have that. But to give you a sense for it, we've been doing over the years if you want to take a slightly longer-term view, over the years, business transformation and transactions are becoming a growing percentage of the total mix. This is a concerted effort on our part. Yet, when there's a sudden boom as it were in restructuring, that revenue does become a much higher part of it. So right now, the transactions practice for example is doing exceptionally well. And so you will see that percentage grow. I hope I've answered the question.

[Tobey Sommer:]

Thank you.

[Steven H. Gunby:]

Thanks Tobey.

[Operator:]

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

[Andrew Nicholas:]

Hi, good morning.

[Steven H. Gunby:]

Good morning, thanks for joining.

[Andrew Nicholas:]

Of course. Ajay, in your prepared remarks, you mentioned your assumption that SG&A will gradually increase throughout the year as the pandemic lessens or evolves. I guess I'm wondering, it's almost a year now under your belt in the new environment, could you speak to whether you expect any kind of permanent savings in that SG&A line, whether it be from lower real estate spend with a higher reliance on remote work or less T&E spend, and then somewhat relatedly, how much of that is simply just a reduction in pass-through revenue as opposed to potentially a bottom-line benefit?

[Steven H. Gunby:]

Yes, I'll let Ajay respond to the second part of that question about the pass-through revenue. Maybe I can talk to the first part more broadly, Andrew, if I could. Look, I think the world -- nobody knows. There are lots of people forecasting in the world, nobody exactly knows what the post-COVID world would look like, and there are extremes out there, and I think we can argue against the extremes, but I have a view that we're going to be somewhere in the middle. So look, I do remember in the earlier part of my career, flying to Korea for six minutes of a pitch. The pitch we were doing was longer than six minutes, but my role in that pitch was six minutes and they made me fly to Korea. I flew to Korea, got off the plane, took a shower, drank a lot of coffee, did six minutes, went back to the airport and flew back. I'm pretty sure nobody in the history of consulting is going to go do that again, right. The world would have changed. People will Zoom or Teams into those meetings. So, the world is not going to go back to the way it was before. But although I know there are people who say, oh, we're going to get rid of offices and we're not going to have anybody get back together, I don't think that's the reality either, particularly not in our segment of the market. Our segment in the market is doing very high intensity, really high-stakes things that involve teams working closely together on nonstandard products. It's not the same thing you're doing over and over again, it's different. Each assignment is different, and the stakes are huge, and you need teams. We invest a lot of money in creating teams not only in offices and segments, but across the world because we're doing a big across the world, people have to work collaboratively together, and so I don't believe -- I know some people are saying we're going to get rid of real estate, I don't believe we're going to get rid of real estate. We will have real estate, and we will have people in offices. Now, and you then argue well, will there be a little bit less offices or a little less travel and so forth, I would guess there’s some movement on that, and I don't think -- but I don't think anybody knows exactly where in the middle that's going to end. I think the reality in terms of 2021 that Ajay can verify is we did not budget radical changes in any SG&A strategies in 2020 or 2021. The reality is, the SG&A is greater because we didn't travel, and the travel costs went down, and I think the budget is for that to gradually come back. But we don't have a definitive world, post-COVID world in our minds yet. And I think we'll sort it out as we emerge. Ajay, do you want to add to that or address the pass-through question that was part of that?

[Ajay Sabherwal:]

Yes, absolutely. Just to add to what Steve said, look billable T&E goes through revenue and direct cost doesn't go through SG&A. So that's sort of number one. My comments on -- so that's a pass-through, that's one-on-one. It doesn't make difference to margins or maybe the margins doesn't make difference to EBITDA. In terms of SG&A, non-billable T&E as it were, it would be imprudent though yes, lots of folks are realizing that even without traveling, the business does fine. I mean, look at this call that we're just having, we're not all gathered together. We're doing it from our homes, all the investor road shows, etc. Though I'm sure some of us -- some of you want to see me, but we've been doing that remotely but it'd be prudent to model accordingly. So we model that by the middle of the year we'll be back to where we were before and slowly move up to that level and then stay at that level and grow. I mean that's a modeling assumption with ranges around it.

[Andrew Nicholas:]

Got it. No, that's helpful, thank you. Another question I had was just on kind of project size dynamics in the fourth quarter, specifically interested in the economic consulting segment. Looks like you had a really strong quarter with what I believe are record margins in that business. So I'm wondering if that was partly due to some larger than usual engagements or if the strength was pretty spread out.

[Ajay Sabherwal:]

We are -- I am beyond extremely proud of the achievements of our economic consulting practice. It gives one great pride to work in a company that is working on most -- some of the most significant matters in the world. And there are many of those. But I'm not going to get into the specifics but it is not appropriate. We just simply don't talk about specific matters, their size, ranges. So that's the headline. If you have an M&A matter of any large size that you're contemplating, FTI and its Compass Lexecon economic practices are the people to hire, and our clients are. If you are on a non-M&A antitrust issue in technology space for example, we have the leading economists in the world working with FTI. So you must hire FTI. That is what is going on is the most important piece. Now in terms of the margins, primarily it's a functional revenue, but we used fewer external affiliates than we used our own staff and it's just a matter of expertise that then results in higher margins. Margins can come and go with matters ending who you use for engagement, etc. I would not read too much into it. I would read more into the revenue story and the profile.

[Andrew Nicholas:]

Great, that's helpful. And then one last one for me. One of your competitors in the UK sold off its restructuring business a couple of weeks back, I believe. And so I'm wondering, first, if there's any potential market impact to a competitor changing ownership, in your view, perhaps an opportunity to take some share or add talent? And then relatedly, I'm wondering how much private equity's interest in the consulting space more broadly is impacting asset prices right now and how that affects your approach to M&A in the current environment? Thank you.

[Steven H. Gunby:]

Maybe if I take a crack at both of those. So in terms of our restructuring business, we, as you know, have grown it extraordinarily, right. I mean, at one point 10 years ago we are mainly a U.S. business. Now we have, I think, the strongest global position of any firm and we're number one -- which doesn't mean we're every place we want to be, but we're number one or two in more places around the world than any other firm, to my knowledge. And I think when I joined, I think we had 700 billable professionals in CF, and I think we have I think, between 1,600 and 1,750. So it's a huge growth area and in this year, I think we -- with the acquisitions and the organic growth, I think we grew it some -- didn't you say 38%, Ajay, somewhere around that, right. I mean so we are committing to this business. I think we are the strongest by far. By far we have ever been and we've always been strong in this business. And we take all competitors seriously. But my experience is if you have leaders, and leaders I don't mean just the segment leaders or at my level, I mean multiple leaders around the world looking to build that business, you continue to attract great people around the world and you continue to strengthen yourself. And we've done that. We've done this with terrific people who've joined us in Australia and other places around the world. And so I feel like we're in the strongest position that we've ever been in. And we -- the phone has been ringing, continue to ring off the hook with people who want to join us, and we expect that to continue. We don't take any competitors lightly, and we monitor that very strongly, but we -- I feel very good about that, just the competitive position in that business. The second question is about private equity, yes, we've noticed that too. Look, I think it's private equity, it's also the loose money which is out there is just causing the ability to raise debt for professional services companies and others at unprecedented levels. And that just makes it, the prices or assets at historically, I think, unprecedented levels. We look very aggressively out there in the world for acquisitions. But we screen them tightly. We screen them first and foremost for -- there's a group of people who we think will want to stay with our firm and build it over an extended period of time, but secondly, then we also look at the purchase price associated with it. And so in this environment, it makes it even harder to do acquisitions that you feel real good about it. So that is a limiting factor on the acquisitions. But candidly, our growth has -- although we've had several great acquisitions that have been here, our growth has been to grow notwithstanding acquisitions and take advantage of them when they're available. And so if private equity drives the prices up and we can't do acquisitions for a little while, we won't. But I suspect also that at some point loose money in and there may be a lot of assets to pick up, in which case we'll take advantage of it. Does that talk to your question?

[Andrew Nicholas:]

Yes. That's a great answer. Thank you very much. And talk to you again soon.

[Steven H. Gunby:]

Thank you.

[Operator:]

The next question comes from Marc Riddick with Sidoti & Company. Please go ahead.

[Marc Riddick:]

Hey, good morning.

[Steven H. Gunby:]

Good morning, Marc.

[Marc Riddick:]

So I wanted to touch on a couple of quick things. I was thinking about the -- and I guess maybe this piggybacks a little bit on the office space, the future of office space question, but I guess maybe more broadly in the near term I was wondering where we should think about potential CAPEX levels for 2021 and maybe what some targeted areas may be, whether you need to do some more technology spend or if there's anything we should be thinking about there?

[Ajay Sabherwal:]

So Marc, a great question. CAPEX is going to be high this year. We're thinking around $70 million, in that ZIP code, which is more than the typical $35 million to $40 million that we spend because we have a major project in New York. We are consolidating our office space and building out a new space there. And that's more than half of that. So this is the CAPEX and we also have the change-out of our ERP systems that too is taking place. That's expected to take place this year. So that's the answer to your question.

[Marc Riddick:]

So do you think that's going to be contained at 2021 or do we think that's going to go into 2022 with those projects?

[Ajay Sabherwal:]

No, this is a once in a lifetime. Actually, I'm not masochistic to do ERP systems every year.

[Steven H. Gunby:]

Ajay, I thought you want to -- I thought you're asking me because you wanted to do those every year. There was so much fun, Ajay. Did I misunderstand, too.

[Ajay Sabherwal:]

And New York real estate is a once in a lifetime.

[Marc Riddick:]

Okay, and then switching gaze to -- and so there's certainly a good amount of -- getting to the end of the year with the headcount additions are up particularly and I was wondering if you could talk a little bit about maybe opportunity sets as far as headcount area and targeted areas that you might prioritize, I suppose, given what you're seeing in the marketplace currently?

[Steven H. Gunby:]

I'm sorry, I didn't hear the question. If you did, Ajay, go ahead and answer it. If not, Marc...

[Ajay Sabherwal:]

No. You're a bit muffled.

[Steven H. Gunby:]

The phone muffled a little bit, Marc. Could you just repeat it, please?

[Marc Riddick:]

Just asking about targeted areas for additional headcount for 2021?

[Steven H. Gunby:]

Look, I think -- I don't know. I think we -- the way we think about this is we basically say we have all of our leaders thinking about strategies for growth. And where we believe in those strategies for growth, we support headcount additions. Now I think every part of our business has shown itself able to grow. One of the things we had to do when I got here was fix some businesses that didn't really have a right to grow. But right now, we have businesses -- every one of our businesses and every one of our regions has the right to grow. Having said that, some businesses as you might imagine are expected to grow more last year than they grew because they didn't expect COVID. And so we had -- we hired for more growth last year than we actually achieved. So even though we believe in those businesses for long-term growth, they're tapering their hiring expectations for this year, at least in the areas, the subparts of their business that were -- had a lot of idleness last year. Every business has some subparts that were really busy and those still can be adding headcount. I think over a long period of time, every one of our businesses and every one of our regions will add headcount. But it'll differ quite sharply by sub-business this year because of just some overhang of headcount from previously more bullish forecast for growth than predated COVID. Does that make sense, Marc?

[Marc Riddick:]

Yes, it does. And the last thing from me, I was curious about -- you talked earlier about the teams and the activity of the work that you're doing. I was wondering if you could talk a little bit about the complexity of some of those big projects. Do you get a sense -- and this might be a bit of a squishy question, but I just wanted to get your general thoughts on this. Are you getting the sense that the complexity of what's being worked on is similar to what you've seen in the past or does the layers of COVID add greater complexity, and therefore expertise being delivered for a better way of thinking about it?

[Steven H. Gunby:]

Yes. This is a good question. I don't know if I know the definitive answer on that. What I will say is this that picking up on the general point is, look, as we've strengthened our firm over the last while, we get increasingly the largest jobs in the world. And those jobs tend to be the most complex. We have -- part of what's driven our growth over the last few years is just getting increasing share of the largest -- the global job, the most complex job, all these sorts of things. And I think that's -- as we've added great capability, we become more and more the default for those sorts of jobs. I don't think we -- I guess I don't know whether some of -- I don't know that we've released client names, but some of the global restructuring cases we get these days, we would not have one 10 years ago because we didn't have the global capabilities. And those are complicated jobs, but we get them because we have the global capabilities and the ability to juggle complicated things. The same thing in our tech practice. Our tech practice is a very much high-end global business that disproportionately gets brought into the highest, most complicated. So the increase of complexity of the world is a good thing for us. It may not be a good thing for the world but it's a good thing for our business. And whether if COVID adds to it, it will I think be a wind behind -- further wind behind us. Does that help a little bit, Marc?

[Marc Riddick:]

Very much so. Thank you very much.

[Steven H. Gunby:]

Well, let me just say to all -- is that it for questions, Mollie? So let me just say to all of you, thank you so much for your continued attention during this stressful year, and let me close by once again wishing each of you good health and good wishes to you and your families. Thanks.

[Operator:]

This concludes our question-and-answer session which also concludes our conference. Thank you for attending today’s presentation. You may now disconnect.