FTI Consulting, Inc.
Q4 2019 Earnings Call Transcript

Published: 25 Feb 2020

[Operator:]

Good morning, and welcome to the FTI Consulting Fourth Quarter and Full Year 2019 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.

[Mollie Hawkes:]

Good morning. Welcome to the FTI Consulting conference call to discuss the company’s fourth quarter and full year 2019 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.

[Steve Gunby:]

Thank you, Mollie. Good morning and thank you all for joining us. I'd like to spend a few minutes upfront talking about the quarter, the year, guidance, and most important how our people have been building this company, have been driving it, have been seizing the opportunities in front of us and therefore seizing the future for this company, and why we therefore are confident that this terrific story can continue for some time to come. Then I’ll turn the floor over to Ajay who will guide a bit deeper into the numbers.

[Ajay Sabherwal:]

Thank you, Steve. Good morning, everybody. In my prepared remarks, I will take you through our results for the full-year and fourth quarter of 2019, segment financial results and our guidance for 2020. I will begin with some highlights. In 2019, we were able to maintain staff utilization while growing billable headcount by a record 17.8%. The resulting sharp revenue growth outpaced costs, thereby boosting margins. Lower cash interest expense and a lower tax rate, further boosted adjusted net income. For the year, every one of our business segments grew both revenues and adjusted EBITDA and at healthy levels. Revenues of $2.35 billion increased $324.8 million or 16%. GAAP EPS of $5.69 increased 44.8%. Full year adjusted EPS of $5.80 increased 45%. Full year adjusted EBITDA of $343.9 million grew 29.4%. Our 17.8% year-over-year increase in billable headcount in 2019 compares to a 5.1% increase in billable headcount. In 2018, we added 668 billable professionals in 2019 which is more than 3.5 times, the 183 billable professionals we added in 2018. Importantly, SG&A as a percentage of revenues declined 160 basis points from 23% of revenues in 2018 to 21.4% revenues in 2019. We lowered our cash interest expense by $13.5 million compared to 2018. This decline primarily reflects the lower average interest rates on our 2% convertible notes outstanding in 2019 compared to the 6% senior notes outstanding in 2018. Our 2019 effective tax rate of 24.9% compared to our effective tax rate of 27.5% in 2018. The 2.6 percentage point decline compared to 2018 was primarily due to discrete items related to the change in the estimated tax impact from the gain on the sale of Ringtail in September 2018 and share-based compensation. Overall, we are extremely pleased with these results. Now I will turn to fourth quarter results. For the quarter, revenues of $602.2 million increased $97.2 million or 19.3%. After delivering record year-to-date revenues through the first three quarters of 2019, we had anticipated a slowdown in the fourth quarter. We did see sequential slowdowns in corporate finance and restructuring and in technology. However, contrary to our expectations, we saw sequential revenue growth in economic consulting, FLC and strategic communications. Worth noting in the quarter, $10.5 million of the increase in revenues were from pass through revenues which have no impact on the earnings. GAAP EPS of $0.76 included $2.2 million of non-cash interest expense related to our convertible notes which reduced EPS by $0.04. This compared to GAAP EPS of $0.61 in the fourth quarter of 2018.

[Operator:]

And the first question will come from Tobey Sommer with SunTrust. Please go ahead.

[Tobey Sommer:]

I'd like to start out on the hiring climate in 2020 and what your expectations are? Do you anticipate hiring kind of in line with revenue growth or ahead of revenue growth in 2020?

[Steve Gunby:]

Tobey, this is Steve. Welcome. Thanks for joining us this morning. Look, I think this will be an evolving thought process as the year goes on, a lot depending on the talent we see, probably less focused on the revenue growth. I mean, I think our hiring any given year is more focused on a multiyear ambition that we have because if you don't hire good, terrific senior people, four years later you don't have a good, terrific midlevel people. If you don't hire good terrific midlevel people, four years later you don't have people up for promotions. And so, I think we have to think about hiring as less driven by the market we see today, as the talent we see and the market we perceived over several years. A little bit analogous to - I used to do a lot of work in the liquor industry. I mean, you can't inventory scotch based on what you're selling this quarter because the scotch will mature in 12 years. You have to inventory scotch based on where you think you can build your business over the next 6 and 12 years, and I think that’s what we have move towards on this. So if we see terrific talent out there, we're going to be adding talent even if we have 12 quarters. If we don't, we won't be. Does that help?

[Tobey Sommer:]

It does. When you step back and you look at your tenure at the firm, how much revenue do you think the new services that have been launched in the last five or six years are generating for the company? And then in a separate matter, maybe going - looking forward, how many new service volumes are you incubating now that we may end up hearing about from you in a year or two?

[Steve Gunby:]

Yes. It’s a very good question. I haven't quantified that. Maybe Ajay has a more direct quantification. But, look, let me say two things on that. One, it's extraordinarily - it's terrific, the adjacent services we've launched. Cyber has been a great boost and all the extensions of - Corp Fin has been a great boost, and you can look at that across every segment. But I wouldn't want everybody to believe that it's - that's the driving all the growth here. I think the thing that we've also done which for a while we weren't doing is double down in our great core businesses. We've had a great data analytics business. That has so much room to grow. We've had a great investigations business. That has so much room to go. We’ve - for a while, we thought, geez, we are so good at Corp Fin in the United States, we have no room to grow in the restructuring side, and we've proven that wrong. We've gained share in the restructuring side in the United States, even in creditor rights where we were always the strongest by attracting some people in some industries we didn't have, and certainly on the company side we've grown. And then the restructuring business, of course, even though we were strong in the U.S., we've now strengthened it in London to the number one player in London and now we've extended it into Germany. And so, I think we had no more - no additional adjacencies. We could continue to grow this firm robustly. Now, I think that would not be a healthy thing because most of the adjacencies support our core business. I mean, the cyber is not a totally separate thing. It ties to our investigations business and so forth. So, I think we will continue to develop adjacencies, but I would think that I just don't want the impression to be that all the growth has come from the adjacencies. We have people in our core business who have driven the growth tremendously and adjacencies have supported and now create other avenues for growth. That’s not a quantitative answer but does that help, Tobey?

[Tobey Sommer:]

Sure. And, yes, two questions for me, one for Ajay and then Steve afterwards I wonder if you can comment about the acquisition pipeline and what you're seeing. But with respect to success fees, Ajay, you gave us an average for prior years and then kind of high-water mark last year. But the company is substantially bigger than those average year cited. And my sense is that the expansion in Europe may be giving you a kind of an opportunity to source large engagements and success - in associated success fees there that weren't previously perhaps available to the firm. Could you comment on that?

[Ajay Sabherwal:]

You're right, Tobey. Where goes revenue so goes success fee. There is a correlation. So we should see growth beyond the average.

[Tobey Sommer:]

Steve, if you could comment on acquisition?

[Steve Gunby:]

Look, I think acquisitions are tricky. We've done two acquisitions that I just think are terrific. And that are homeruns, the CDG acquisition we did a couple of years ago in New York has worked out incredibly well. Andersch is a great acquisition tying into our core but extending us into a market where we're under penetrated. And I don't think we gave the details of each of those but we managed to do those at reasonable prices because we offered the professionals in those organizations something that they could use. I mean, if you meet Bob Del Genio, he was fabulous. But on a small platform there are certain size cases he can get on our platform. He and his team can get much bigger cases. And it has worked out extremely well and Andersch has a real opportunity to grow with us. So we would do those sorts of acquisitions every day of the week. If the Sarbanes-Oxley equivalent came along in someplace in Europe and big chunks of businesses came along, we would do those every day of the week. What we haven't been willing to do is outbid people in auctions at very high prices for people who are unclear that they want to really be with us. That gives a short-term pop you can always make the accounting look good so that you get a short-term pop for earnings. It is not in my opinion a sustainable way to grow a professional services firms. And so we haven't done that. And I have no belief that we should start doing that. And so we look actively and we do - we have the balance sheet to do tons and tons of Anderschs and CDGs if and as we find them. But you have to be incredibly selective. The only thing I see a good news is we now have an ex-code and I think really clearly understands what good is and so our conversations out there are broader than they used to be. But it's a tough market as you know. I think people are overpaying for acquisitions right left out there with the loose money out there and that's not what our strategy is. Our strategy is organic growth first and foremost every day that we can do it, wherever we find the talent. And then when we can add Andersch and CDG as well, we'll do them on top. Did that help, Tobey?

[Tobey Sommer:]

Thank you.

[Operator:]

Our next question will come from Marc Riddick with Sidoti & Company. Please go ahead.

[Marc Riddick:]

I was wondering a couple of things that we could sort of go over the - just to clarify a couple of things on 2020. I wasn’t sure if you would mention as of yet CapEx expectations for the years. Is that something that we could provide?

[Ajay Sabherwal:]

Zip code, $40 million.

[Marc Riddick:]

Okay, great. And then, I was wondering if you could sort of talk a bit about what the hiring increases that you have and that's offensive in nature. I was wondering if there was generally any particular key focus areas that you're looking at for the beginning of 2020 that you anticipate there or sort of key areas that you're sort of have as participations to shore up based on the expectations and some of the opportunities that you see before you.

[Ajay Sabherwal:]

As Steve mentioned, Marc, it’s across the board where our business is growing across the board. Every segment is growing, so therefore, hiring expectations are also across the board. I mean, we do campus hires in the fall. And those are also typically across the board. So, of course, the growth rate in EMEA geographically is higher as the revenue growth rate there is higher as well. So, beyond that we don't provide specifics as to what percentage of hiring or growth, et cetera. As Steve mentioned, our objective is to hire strength, not target percentage.

[Marc Riddick:]

And I just wanted to go over the - I guess I would be remiss if I didn’t ask this even though this may be require an anecdotal answer. But I just wanted to get your thoughts on maybe what you're hearing from clients and what have you between the combination of the concerns from China regarding the virus as well as maybe some thoughts or feedback that you've received from clients around what we're seeing in the U.K. with what's taking place with Brexit?

[Steve Gunby:]

Yes, look, I think that if I had to use one word it's uncertainty. I mean, everybody has heard of coronavirus and everybody has heard of Brexit and there's lots and lots of discussion. There's actually been a lot of discussion on Brexit for now for four years with pundits specifically making arguments this will happen, this will happen, that will happen. And I would say most of the pundits have been wrong thus far and the coronavirus, oh my God, it's even more uncertain, right? Nobody knows. I mean, it all of a sudden sprung up in Italy. As far as I know, they can't even find person zero in Italy and how person zero in Italy found it. So, look, there's a lot of discussion. It creates uncertainty. What that uncertainty does, nobody really knows, right? I mean, you can't believe it's good for the economy. You can have speculation that says if China stays close for that long, it's going to have ripple effects in Germany and elsewhere. And if the coronavirus spreads around the world, you cannot say it's going to have all sorts of ripple effects on the economy. We're not going to act based on that. I mean, obviously, first of all, in terms of us as a company, given the strong bankruptcy practice we have, if the economy had a downturn, we've got some parts of our business that would go up. But I think my experience is, again, we’re not trying to build this company for the second quarter of 2021 or the third quarter of 2020. I think all of our businesses are worth investing in, and so you can’t - particularly without a clear view of the economy, we're not going to change our plans based on that, but we're monitoring it. I mean, what we obviously are monitoring, most importantly, on the coronavirus is the effect on our people, and we’re actively - Mollie is sitting here. I don't know if you're in daily discussions with our folks in Asia and now elsewhere just about what's going on and making sure people feel comfortable working from home and all that sort of stuff. That's the most definitive stuff. The rest, there's lots and lots of discussion, huge amounts of speculation, and nobody I talk to actually knows. Do you, Marc? If you do, you could share. I'm sure everybody on the call would appreciate enlightenment on how that's all going to play out.

[Marc Riddick:]

I wouldn't even begin to subject people to that, but I would - just one last thing for me. You've mentioned quite a bit as far as the head count. I was wondering if you could spend a little time on kind of where you are with tech spend or some maybe IT upgrades or things of that nature that you're looking at that - or sort of how you're feeling about where you are overall on digital needs and the like.

[Steve Gunby:]

So two different things. We have a tech business which, as you know, we had a turnaround in a couple of years ago which has been - and that strategic redirection by that team has been fundamentally successful, and it's great to see. I think your question actually is for our own expenditures on digital upgrades, so I'll turn that over to Ajay.

[Ajay Sabherwal:]

Sure. We want to make it a pleasure to work here, our employees deserve that. And technology is moving. We want to save people time and hassle in entering their time or travel and such like. So, we’re constantly making investments. It’s incorporated in our guidance on CapEx. We've made some significant investments last year, but there's much, much more to come. I'd leave it there.

[Operator:]

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

[Andrew Nicholas:]

Can you provide a bit more detail on the performance across the various geographies in the fourth quarter? And then, looking out to 2020, should we expect EMEA to continue to lead the way there in terms of top line growth or any other color you could provide on maybe the different contributors to growth by region?

[Steve Gunby:]

Look, I'll let - if we want more specific numbers, I think Ajay can give you. But I think right now, EMEA has been incredible and I think we - incredible for a while now. Now, I think, obviously, as a high percentage growth on a small base is less noticeable than now it's a substantial business so we're noticing it more. But actually, EMEA has been growing, has been a force for growth for quite some time even during a period when the U.S. wasn't contributing to growth. I think what's different about the company today, though, I want to be clear, is not just EMEA. Every region is contributing to growth. And importantly, the U.S.'s, we - the biggest issue of kind of worry about sitting on our laurels was thinking, oh my goodness, we don't need to grow the U.S. That was a problem we had at one point in the past. We do not have a leadership team that believes that. And the surge in our performance the last couple years is not because EMEA started growing there. It started growing actually a couple of years before that. It’s that the U.S. is also contributing to growth. And so when you have both the U.S. and Europe contributing to growth, as well as Asia and Latin America contributing to profitable growth, it’s a force. And so, look, we will have bad quarters some place at different points in time and so we can have a bad quarter at some point from EMEA and we're not. We can never count on sustained growth in the sense of every quarter any place. But I have a belief that all of our regions can contribute to growth over the next while, all of them. You want to add to that or is that okay?

[Ajay Sabherwal:]

I think, that's fine I just want one or two points I would make, especially the comment that there was earlier on coronavirus. So, look our Asian business is impacted by the coronavirus. If you cannot go visit your clients then it affects your revenue. Now, it is not material for the company, it’s encapsulated in the guidance ranges I have given. Of course those guidance ranges don't take into account if it spreads to affecting business in North America or the U.K. for example or conversely if it creates unfortunate bankruptcies which then we participate in. So when you ask about regional in the current quarter, I think, the Asia business is impacted. Overall, I would say which is more to your question, both or all regions are growing handsomely. EMEA because it is smaller than North America partially and partially because we are hitting our stride and reaching critical mass in various areas is growing faster but so also is North America and it's a very interesting contest or derby between the regions that we are enjoying the benefits of.

[Steve Gunby:]

And one other thing in Asia. Although Asia is affected in this quarter as part of the general point of our commitment, we are not lessening our commitment to Asia. It's just a matter of we have some people who are underutilized and who are frustrated by having to work from home and not being able to get the client. So we’re trying to support them. But we are going to continue to grow Asia, and we expect at some point the coronavirus will be behind us. Just don’t know when, nor does anybody else. Does that help, Andrew?

[Andrew Nicholas:]

Yes, very much so. That’s great color. I appreciate it. Another question I had was just at a high level. I was hoping you could speak to the size of the projects you've been seeing of late. I think you alluded to it briefly in the prepared remarks, but just any high-level thoughts on size of projects, how that’s kind of trended over the past couple of quarters, and maybe the extent to which that’s driven the really strong top line growth of late.

[Steve Gunby:]

We are, at the core, a big job firm. We have capabilities around the globe to do the most sophisticated investigations. Obviously, unfortunately I can't talk and will not talk about them. But that's what we are at the core, and what is most exciting for me is that the jobs are coming from around the world in all the segments, multiple jobs without massive concentration, and jobs ending are typically replaced with new jobs in different places. Obviously, one is conservative in setting expectations, but that is intrinsically driving the strength of this company.

[Operator:]

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

[Tobey Sommer:]

Just a couple of numbers questions. What's your expectation for DSO, which is a little bit elevated at the end of the year, and as we go into 2020?

[Steve Gunby:]

I won’t give you a specific number, Tobey. But clearly, I'm disappointed. I wanted a lower DSO. It’s not - it’s a few days higher than where I’d like to see it. With large jobs begets complicated billing in across geographies, we are shipping people from Asia to Europe to Latin America to do massive projects and that creates delays. But I'd like to get that down below that 100-day threshold.

[Tobey Sommer:]

Okay. And then in terms of the balance sheet, are you anticipating doing anything with the convert?

[Steve Gunby:]

I wouldn't be announcing it on the calls if I were, but I’d leave it there.

[Tobey Sommer:]

Okay. And then last numbers question for me. What are you seeing in terms of wage and compensation changes, anything of note in the marketplace and in your own hiring which has been substantial?

[Steve Gunby:]

Look, I think the markets are tightening around the world, and we've been responding to that in not only for hiring, but in terms of looking at - internally at where we're out of line in comp and raising existing comp and that's part of the pressure on our cost structure that's reflected in some of the numbers that we put out there. I never - again, I never worry about that for an extended period of time because if you have the right professionals and, I mean, if you're not going crazy and if you're within the right balance and you’re paying within the right balance but you’re making sure you’re competitive and you have the right people, over time, billing rates will follow that. There can be lags between those things, but one thing you can never do is allow too big a gap to happen between you and the market because then you create risk for your enterprise. So we monitor that closely and for sure versus when I got here I think there's more upward pressure on that, and Holly spends a lot of time with the segment leaders, making sure we don't get behind that. Does that answer your question, Tobey?

[Tobey Sommer:]

Sure. Thank you.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Steve Gunby:]

Well, no lengthy closing remarks. I just want to reiterate my congratulations and thanks to my colleagues, but also those of you who, on this call, have been here for a long time, and I really appreciate it, and we look forward to working together going forward. Many thanks.

[Operator:]

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