FTI Consulting, Inc. (FCN) Earnings Call Transcript & Summary

Good afternoon, everybody. I'm Greg Mendelson, Managing Director of the Technology Investment Banking Group of JPMorgan. Thrilled to have with me here today Ajay Sabherwal, CFO of FTI Consulting. For the session here, we've got 35 minutes. We'll spend about 20 or 25 minutes having a fireside chat conversation, and then we'll open it up to questions from investors. So folks, as you have questions, please fill them in on the Q&A screen in front of you. So with that, Ajay, welcome to our virtual TMT conference. Thanks for joining us here.

Thank you, Greg. Thank you for having us. Thank you for doing this. So I will spend a few minutes just talking about our company, and then you can pepper me with questions and so can the audience. I thought I would share with you 4 things. I would start with what do we do? This is a TMT conference, not typical to have a consulting firm there. So what do we do? I can only imagine there's a wide array of clients of yours on this call, so I'm not so sure what their knowledge of FTI is. So what do we do? For whom do we do? Who are our customers? So that'd be second topic. Third topic is how do we make money? I have the CFO on the line. I think I need to talk about how do we make money? And then I'll throw in some stats on size, scale, scope. So what do we do? We are a consulting company. Think of us as the company corporation's call when they're having the most impactful events in their lives -- in their company's lives. So we are the -- we have organized in 5 segments. We are the company you call when you're in the unfortunate position that you have to restructure your balance sheet or restructure your corporation in the U.S., known as Chapter 11. So that's your restructuring. That's the one we are most famous for. That's a restructuring group or restructuring segment. We are a lot more than that, too. Over the years, we have gone into many, many adjacencies. So for example, we also -- we are #1 in the world, by the way. We believe in restructuring in the world, not just in the United States. And we -- but we also pride ourselves in being the company that you can call, whether you're successful or unsuccessful, in improving your profits or transforming your business. We -- our brand is one where we roll up our sleeves and get dirty and help our clients or their owners in fixing their companies as it were. So that's our Corporate Finance segment. We're also the company you call in our Forensic and Litigation Consulting when there's been a fraud, when there needs to be an investigation or a major dispute. So our claim to fame is we helped attorneys find the Madoff money, for example. So major disputes, investigations is also what we are very good at resolving. And that extends to cybersecurity-related issues or construction disputes as well. So that's our Forensic and Litigation Consulting segment. We also have a very prominent Economic Consulting segment. That's the one I think that is probably the least known given its stature. Our wholly owned subsidiary, Compass Lexecon, is probably #1 in the world in resolving antitrust issues. If you're doing a $50 billion merger, you better call Compass Lexecon. If there is an antitrust issue, I'd strongly recommend it. So that's our economic. We also get involved in financial arbitration, and we have a practice outside of Compass Lexecon and economics as well that is very good and -- around the world. So those are our 3 large segments, which make up roughly 25% each of our revenue in the pie as it were. They're slightly more than that. But if you take the remaining 10% to 15% each, there are 2 segments. One is our -- what we call our Technology segment. It's not technology in the literal sense. We don't do hardware or software. What we do is consulting, where we consult on e-discovery. It was pretty closely linked with our FLC area because a lot of investigations require e-discovery, but we also get involved in second requests for major M&A and stand-alone investigations as well. That's our e-discovery area. And then finally, there is a Strategic Communications practice. Again, if you're facing really impactful events in the corporation's life, you might need communications. So fraud, bankruptcy, M&A, disputes, litigation begets FTI. So that's what we do. Who we do it for? Large corporations, banks, law firms are one of our most prominent distribution channels, where law firms bring us into investigations to provide them with the arms and legs to do the investigation as it were, which -- to help them argue their case as it were. And most major law firms around the world, Fortune 500 corporations, large banks, very, very proud to say that your bank is a key client of ours. So that's -- and we're grateful for that. So that's who we do work for. How we make money? Very near and dear to my heart. So essentially, it's an arbitrage play. You're not going to -- we hire experts, right, the best of the best in the world; people who've been there, done that and CFOs, heads of investigatory agencies and people like that. And we leverage them up with junior staff as it were. These are people you wouldn't typically have on your payroll because not only are they very expensive, but ideally, you don't need their expertise 24/7. So the -- what we take on is the utilization risk. What we provide the clients is expertise when it's most needed. And how we make money is, of course, what we pay people, especially the senior practitioner plus the junior staff and what we charge them out for at a certain level of utilization. I mean that's how we make money. So the raison d'etre is you cannot -- you should not have those -- if you're running your own finance organization, well, you shouldn't have those people on your payroll 24/7. And you can lean on us and pay up for it, and we make money by taking on that utilization risk. It's a very low capital intensity business unlike the other companies that you probably had at your conference. There's a very high EBITDA, 60% to 70% on a good year EBITDA to free cash flow throughput. We are -- our balance sheet is very strong. We have hardly any net debt, and we manage it that way. And so that's how we make money because the risk in our business is the utilization risk, and we are not a subscription business. So therefore, balance sheet needs to be strong. And finally, some statistics. Well, we are $2.5-odd billion, just shy last year in revenue, almost $6 a share last year in earnings. We've been growing double digits for a couple of years, a couple of 3 years. We've been around since 1982. We're in 28 countries, almost 5,500 employees. We think we really add value. I'll stop with that.

Great. Perfect introduction of the business.

So let's spend a few minutes now talking about different elements of FTI. I guess, first off, kudos to you guys on what's been incredibly strong growth over the last couple of years. If we rewind the clock prior to this year, what has really been the -- what have the drivers been of that double-digit top line growth? How have you guys been able to drive that type of growth sustainably across your collective business lines?

So it all comes down to the practitioners and their relationships and what they bring to the table and how they are led. So that's -- I could stop right there and say, their expertise speaks for themselves, their relationships, that speaks for themselves. I'd say that. But let me -- that's a cliched answer. So let me go a little bit further than that. Our core competency, as I said, is clearly disputes, investigations, restructuring, and it's very easy to say that those things are event-driven situations. You could say, well, however good you may be, you don't create bankruptcies. You don't create investigations and so on and so forth. Those events occur. And it's -- you don't know when they will occur. And if they occur, somebody may hire you, depends on how strong the relationship is. What we have done is we've said, yes, all that is absolutely true, but you should be able to recast, you should be able to go into adjacencies as it were. So let me explain. For us right now, construction-related disputes are bigger than financial disputes. Would you believe that? So when there's large construction projects, delays create disputes. I don't know, if you've ever done a home construction, the plumber always blames the electrician for the delay. Who came in first, who delayed, who did what and so on and so forth. Now look at large construction projects, the same occurs and there are disputes, there are investigations, we get called in. So instead, what we have argued and what we have championed within our company is that don't wait for the next large Ponzi scheme or financial scheme and once every 10 years get busy. Go where the puck goes, as a famous hockey player once said. Go for your core competencies, disputes and investigations, for example, find where that dispute and investigation is going to occur next and make yourself relevant to that consultancy. For example, cybersecurity, we are very, very prominent. We -- all the major corporations there use our expertise in cybersecurity. 5 years back, that niche within our Forensic and Litigation Consulting practice didn't exist. So our relationships and talents of our people unleashed to go into these different areas. So those 2. And the third one, instead of solely being focused on acquisitions to grow, we deemphasized. We didn't say we would never do them. In fact, we've done some very successful tuck-in-type acquisitions. But we deemphasized acquisitions and built an organic growth engine to grow. And organic growth is infinitely higher return on invested capital than acquisitions. Acquisitions could be hit and miss. So I think those 3 things have propelled us forward.

Got it. That's helpful, Ajay. Let's spend a few minutes now on just the current environment, right? We're now effectively 2 months or so into this COVID-19 dynamic. As you outlined at the beginning, you've got several different business lines, some are cyclical, some are countercyclical. So they've all got different impacts from the broader economic backdrop. Maybe spend a few minutes just talking about across the different business lines, what you've seen to date over the last couple of months and where you anticipate things going within your business as we sort of navigate through this pandemic.

Great question. As I said in my prepared remarks, we are most prominently known for our restructuring practice. I'm sure people know us very well for some of the others, too. But I think on the Wall Street, people typically think -- from the investor public, people typically think, this is a restructuring play. And obviously, very unfortunately, nobody wishes for a pandemic. Very unfortunately, a lot of businesses have been very adversely impacted by this pandemic because utilization, for example, in airlines or hotels, et cetera, has gone from very high to 0 in some cases and -- with all the fixed costs that comes from running these organizations. So we are seeing a mass of bankruptcies, and it's well-publicized in the newspapers. And given that we are the leading restructuring advisory company in the world, I firmly believe that. Obviously, we are also very, very busy in that area, more busy than I think we have ever been. So that obviously is a tailwind, a significant tailwind for us and one that, unfortunately, looks like will continue for a while. So we will help our clients as best as we can in that area. That being said, we have prided ourselves from diversifying in so many other areas, and many of our areas are being adversely impacted. If you can't get out of your homes and get on a plane and go visit your clients, if you cannot do an -- some investigations require you to be on premise. Certain data cannot be electronically assessed. Oftentimes, you're assisting attorneys argue a case in court. And if the court room is not open and the case is delayed, then your -- the need for your services diminishes or at least is deferred. And sometimes, cases get settled as opposed to litigated. So in the short term, our Forensic Litigation Practice is adversely, significantly adversely impacted. And I can go on and on, but in various other segments, for example, our Economic Consulting practice, mergers and acquisitions, as I'm sure, Greg, you know have taken a bit of a backseat. So to the extent that we are helping companies argue major antitrust cases, those are adversely impacted. On the other hand, as mergers fall by the wayside, people litigate whether MAC clauses should or should not have been affected. And there, we do get hired. And people are contemplating vertical, horizontal integration going forward with the survival of the fittest theme. And in that light, people do engage us. And for example, in Strategic Communications, we have a very robust practice in pitching people's case with the regulators, our public affairs practice. Some of that has taken a backseat. At the same time, crisis communications takes on more of a front seat. So it's a mixed bag. Mercifully for us, we have segments which are very positively impacted but make no mistake, there are areas that are negatively impacted as well.

Got it. That's helpful, Ajay. So we covered the demand side there. What about the supply side? How have you guys navigated to a work-from-home environment over the course of the last couple of months? You've obviously got a pretty dispersed set of colleagues around different offices in the world. How have you guys navigated that? What have the biggest challenges been? Has it gone relatively smoothly to date as it relates to just on the consulting side?

I'm very, very pleased to say we haven't missed a beat. We -- I'm very proud of what our various groups within our company -- a bit of a shout out for our Information Technology group. Virtually everyone has a laptop. People have -- if this had happened 15 years back, it would have been very difficult, but nowadays, everyone has high-speed Internet access. Mostly everyone has. We're in 28 countries. So I shouldn't say virtually everyone, but mostly, everyone has access to high-speed Internet access. We have Office 365 launched to all our employees. We have invested significantly in the last several years in cybersecurity. We hire -- we handle our clients' most confidential information. That's sacred for us. And so we have not shortchanged investments in cybersecurity. So all work is continuing. Again, some culture, some areas, you'd need to meet face-to-face. If you don't know somebody, it's very difficult for the -- if we were meeting for the first time here, that may have been tougher. We have known each other for a while. So business development can get affected in virtually as it were. And certain tasks, as I just mentioned, require it. But our internal organization, I really am very proud of our HR group. We were amongst the first to exit our offices. We took a proactive -- our leaders there took a proactive decision. I think they may have saved lives.

That's great. That's very good to hear, Ajay. Turning to the competition side, I guess, let's cover 2 areas. One is, given you cut across a couple of different business lines that you outlined, who do you typically see as competitors most frequently within those business lines? And the second part would be, what have you seen over the last couple of months as it relates to the competitive dynamics? And where have you guys been able to shine versus some of your competitors in this environment?

That's an excellent question, Greg. Our competition is fragmented. And that is one of our differentiating factors. And one of the things I'm most excited about in terms -- because we haven't fully capitalized on that either in terms of the opportunity set that exists for us. For example, especially in Asia, you notice Forensic and Litigation Consulting typically requires a technology element to it there. And you could have a forensic and litigation practice in Asia, but you may not have an e-discovery capability, for example, or a technology capability. Strategic Communications can plug and play with virtually every impactful decision that companies make. So the fact that we have this array of services give -- is a significant competitive advantage for us, which even we have not fully or not nearly fully capitalized at the moment. Our competition is also fragmented geographically. So for example, in the United States, the big 4 accounting firms don't play in the restructuring space. We have mostly -- virtually all privately owned companies -- there are some public companies as well in the investment banking space that, on the side, do restructuring as well. When their investment banking doesn't get busy, they say, "We do restructuring, too." There is that element. You can't -- forgive me for taking 1 or 2 shots. And -- but in Europe, for example, the big 4 audit firms do restructuring. So the big 4 accounting firms do forensic and litigation consulting everywhere. But they are finding themselves conflicted because sometimes they're investigating each other in terms of the audits as it were. So it's a fragmented space. But if I were to do a laundry list, I would say the big 4 accounting firms, a lot of privately owned restructuring boutiques, some of the investment banks with their restructuring arms and other specialist consultants in economic consulting and e-discovery and strategic communications.

Got it. Okay. Ajay, across the portfolio of consulting services that you have, how much do you guys do in terms of cross-selling existing clients with the different capabilities through the good times and the bad? And are there any pieces of the puzzle that are missing today in terms of capabilities that you guys really don't have within that portfolio that clients are demanding these days?

So as I said, I don't have a statistic for you. Increasingly, in our largest -- if I could maybe throw one statistic, in our largest assignments, you find more often than not, not just 1, but 2 or 3 of our segments represented. You could have FLC, technology and strategic communications together. You could certainly have restructuring and strategic communications together. Typically, economic consulting is a rarefied space. They're on their own. So -- but that's sort of the mixture, and you're increasingly seeing it, certainly, as the size of the assignment grows. That's what usually lends itself to getting multiple segments engaged because the scope, scale of the assignment is much bigger. I think that was your first question. There was a second part to your question, I think.

Yes. Just if there's any -- Ajay, any pieces of the puzzle that...

That we don't have.

Other areas that accounts...

Absolutely, absolutely, absolutely. So there are many. To be relevant, I mean, restructuring, for example, is a skill set that transcends industry verticals, right? There's a certain -- there's a playbook that goes into play when you do a restructuring. However, you -- I think you can be more effective if you also bring to the table vertical industry expertise. So there are consulting outfits that could be more prominent. I'm not going to name companies or name verticals, but there are companies that may be more prominent than us in certain verticals, for example, than we are. We -- and so that is an area. Also, there are many -- for example, we are very prominent in reorganizations. We are not as prominent in liquidation per se, especially in North America and Europe, though we are in Asia and APAC. We obviously are not as prominent, for example, in strategy consulting or what have you. So there are elements that we can, especially in certain verticals, that we can grow into organically or inorganically. So there are pockets, certainly.

Got it. Let's turn towards the growth side. Given you've got strong capabilities across different areas, how do you guys prioritize as it relates to growth opportunities? And how do you think about the growth strategy for FTI over the next 3 to 5 years? Where do you really see the most growth coming from? How are you investing in that growth?

So #1 for us is organic growth. We don't -- see, most models, and I spent many, many years attempting to be a better CFO in many different industries. And typically, models start with -- and for example, most prominently, have been in the telecommunications space. And mostly they start with what's the size of the market? Okay, let's take the United States and how big is the long distance or the landline telephony or the wireless market, and it lends itself to Excel spreadsheets. Let's -- how big is the market? And how much market share can you take? At what price point? And then you build your growth forecast from a market size perspective, right? That's a typical thing. We feel we are in an infinite space. We do not feel that the market or demand is a limiting factor for us. Very, very important point. We believe that our people and expertise have such talent, such ingenuity, such expertise that -- and disputes, investigations, fraud, restructuring, et cetera, it's almost a human condition. And there's almost an infinite space. For example, the business transformation consulting practice dwarfs restructuring. And can -- and it's not even a measured area because there's so many private companies, small boutiques and so on and so forth. So we don't -- we tend to say, the limiting factor is not demand because the moment you say the limiting factor is demand and you're in event-driven shop, that creates a mental mindset that is opposite to organic growth because that says I can't really grow. I'm going to wait for that event to occur and buy me a company and then we can build along it. And that was a very successful era in FTI's growth for a period of time. My CEO, Steve Gunby, has done that on his head and sort of said, no, we've got to go and go into adjacencies and find yourselves, find your relevance in other areas. And so organic growth is our engine. It also happens to be financially a very high return on invested capital. You get a professional. Now I'm sure you don't even need to give them office space. And you provide them with a laptop and a cell phone and off -- and their compensation, of course, and off they go and supported by a group of people. And if they are busy a certain amount of time, it can be very lucrative. Geographies we expand, adjacencies we look to -- I'm not saying we don't look. So organic growth is the first use of capital. I'm not saying we don't do acquisitions. We have done. We did a very successful one in Germany. We did one in New York a few years back, where we can get -- in this space, acquisitions aren't about cost synergies. It's about revenue synergies. So you need people who you want to buy -- you're buying people. You're buying people who shouldn't be thinking retirement. We are not interested in providing those packages. We are looking for people who feel that on our platform, their ability to sell will become easier, that they can -- because that is the most difficult part of this business is to sell yourself, sell your expertise. And so we think that in our -- if we can hire people who feel that joining us, combining with us on our platform, they could flourish, that's the kind of acquisition we want to do with those revenue synergies. And we've done some. We also are a good free cash flow, low leverage company. So we've been buying back our stock. So those are the things we've been doing.

Got it. We've got about 5 or so minutes left, Ajay. For the investors that are on, feel free to add any questions on to the queue here. In the meantime, we'll just continue on with a couple of more questions that I had. First off is given people are the cornerstone of your business, Ajay, as a consulting firm, how have you guys thought about talent, finding the right talent within the core areas of the business where there's growth opportunities, aligning that talent with the right client base and opportunities? Have you seen challenge in finding the right talent across those business lines over the last couple of years? Or how do you guys go about finding the right people? Is it hires from other firms? Is it through recruiting firms? But just as you continue to drive double-digit top line growth, obviously, you need to continue to ramp up the supply side as well and just making sure you're aligning with the best possible people there.

Yes. It's nontrivial. It's nontrivial because there's several -- there's a financial dilemma. You hire high-priced, very good talent. And guys like me worry to say, are they going to be busy? You're extending capital as it were. But really, the bigger concern is the right talent. There is a supply constraint. Where do you find people who can go into a corporation and say, you don't have the skill set that I do and you shouldn't. And so we have hired from competition, the big 4 accounting firms, certainly. We have hired from industry. So all -- we hired, of course, junior folks from university. We are big hirers from university as well and promoting from within. So all of the above. The main proposition is we are -- you could do more at FTI than other places. You're not conflicted as much because we're not in certain areas where typically accounting firms would be conflicted, for example. You're not going to have as often -- though, we also have our conflicts, but you're not going to have as often that you're working hard on nurturing a client just to find that there's a conflict. So that is a selling proposition. We pay well competitively. And we have a global platform with surge capacity that our practitioners have a good feeling that they can do interesting work. For younger people, it's -- I'm sure it's the money, too, but it's more -- are they building their career? Are they doing interesting things? Are they working on interesting projects and so on and so forth. And the odds are higher at FTI.

Great. So let's spend a couple of minutes on some questions from the investors now, Ajay. First question that we have here is how big is the Asia Pacific practice in terms of overall revenue? And maybe spend a few minutes just talking about that business.

Overall, it's less than 10% of our aggregate revenue. It's on our website. We give statistics on, I think, 7-odd percent the last time I checked. So that sort of a percentage. And in terms of its prospects, so it depends. It depends also on lot of regulatory. For example, in bankruptcy. To do a bank -- a Chapter 11, you need a bankruptcy code out there. You need a law that says when a company goes bankrupt, it's owners, promoters, management don't go to jail. There's an orderly restructuring of the liabilities of the company. So it's a very elegant law, which says all the stores don't have to shut, business can continue. People can get employed and in a civil manner in the court of -- in a courtroom, through a lot of preparation, we can reorder the affairs of a company. That is a unique pillar of Western capitalism. Doesn't exist universally. And we come into play when that law exists. And it doesn't exist all over Asia, for example. A lot of our Asia Pac restructuring business goes straight into liquidation mode, though, in -- for example, in Australia, there is a strong restructuring bankruptcy practice. But in many, many countries of Asia, it doesn't exist. Of course, there's a lot of scope for forensic and litigation consulting. And some of the -- I've always said, if you read the Financial Post or the Wall Street Journal or the South China Morning Post, and you get a -- I get a copy of them 3 weeks before they get published because some of those investigations, we are involved with before they hit the press as it were. And there are a lot of investigations. You can take a guess at what the investigations we could be involved. The most high prominent investigations, we are typically involved with. But our slice of it is at the high end of large investigations. Our rates, our heft, et cetera, lend themselves to that. We're certainly very committed to the area. We have offices in China, India, Hong Kong, Singapore, even presence in Indonesia, Malaysia, Australia. We're prominent.

Great. So Ajay, I think we're running up upon our time here. We've got about a minute left. So is there anything else that we haven't covered that you'd like to update the investors on here? I think we've spent a lot of time on a bunch of different topics, but anything else just as we close out?

Well, maybe as a closing comment, I would say that this COVID-19 pandemic is, unfortunately, primarily a health issue, and I hope everyone is safe and healthy. Our company has a very, very strong balance sheet. Our cash flow is strong. Our collections are strong. We have at least one business that gets an enormous tailwind out of this. Doesn't mean that we are not adversely impacted. We said on our last earnings call, our second quarter results could be well below our first quarter results. But overall, this dislocation is an incredibly positive thing for us because dislocation begets FTI.

Perfect. Ajay, thank you very much for your time here today.

You're most welcome. Thank you for having me.