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

Morning, everybody. I'm Greg Mendelson, the Managing Director in the Investment Banking Group at JPMorgan. Thanks for joining us today. We're excited to have Ajay Sabherwal, CFO of FTI Consulting as our guest today. We're going to start out having Ajay give a brief overview of FTI Consulting, and then we'll get right into Q&A. So Ajay, good morning, and thanks for joining us today.

Good morning, Greg. I am delighted to be here, 2 years in a row. And I'm sincerely praying that next year, we are not using the same format. Although, certainly, the reach is fantastic from this format, but it would be nice to actually see the whites of people's eyes as to who's interested in our story. By way of introduction, I'm -- for those of you who obviously don't know me, I'm the Chief Financial Officer of FTI Consulting. I have been in that role for 5, 5.5 years, 5-odd years now. In terms of what I'm going to present today for the few minutes before we turn it to Q&A, I thought I'd break it down into a few categories. We'll talk about who are we, who's FTI? Many of you may not even know who we are. What do we do? What do we do for a living? How are we organized? And then finally, how do we make money, which then helps you think of our story as an investment. So who are we? We are a what I would term as a high-end consulting firm. Why do I say high-end, because our average revenue per billable employee is about $0.5 million a year. So if you think about it, most people don't earn $0.5 million a year. So if our billing is $0.5 million per billable employee, the difference between what we bill and what we pay is income for the most part. So that's who we are. We are listed on the New York Stock Exchange. Our stock symbol is FCN. Our headquarters are in Washington, D.C., but we have 80-odd offices in 29 countries. Almost over 1/3 of our revenue is from outside of the United States. And we have about 5000-plus billable employees and 6,000-plus total employees. So that's who we are. What do we do? So at the end of the day, what we do is we help our clients. We help them navigate through what I would term as the most interesting/difficult or impactful periods in our clients' lives. So what does that mean? The key drivers are, if unfortunately, a client has to restructure their affairs in a bankruptcy or a out-of-court restructuring, we are the #1 firm in that area in the world. It's a mystery if FTI is not involved somewhere in a restructuring anywhere in the world. We are also less well known to Wall Street. We are also the #1 firm in economic consulting in the world. And what does that mean? That means if 2 large firms are merging, the $50 billion mergers, and you're worried about what antitrust issues that are going to be, it would be advisable to hire our consultants before you launch the deal. Similarly, if there's a major financial arbitration or dispute where damages have to be assessed or testimony from experts is required and economic impact has to be assessed, our consultants would be the people to go. And these are the top economists in the world, whether it be in the European Commission or in the United States or Brazil, we have Nobel Laureates on our staff, that kind of thing. We also helped our attorney friends find the matter of billions. So we are a leading forensic and litigation consulting firm in the world. So those are the 3 major areas. We have a large technology consulting practice and a strategic communications practice. So think about restructuring, fraud, disputes, investigations, M&A, IPOs, major impactful events in corporation's history, you engage FTI typically through attorneys. We work besides attorneys, but bill our end clients. So that's who we are and what we do. How are we organized? I hinted at that already. We are in 5 segments, corporate finance and restructuring, there's the restructuring and the business transformation transactions businesses, there's economic consulting, there's forensic and litigation consulting, our technology consulting practice is more the eDiscovery space and then finally, we have a strategic communications practice. 5 segments around the world. How do we make money? Essentially, we take on what I call utilization risks. So we hire lots of folks, and we put them on engagements. What we build per hour, on average, is a lot more than what we pay per hour on average, especially when you get to the junior ranks. So if you have lots and lots of junior folks supporting a top-end expert and the junior folks are very busy or utilized in our language, we make lots of money for our shareholders. Our key expenditures are employee-related, real estate, IT. We have a very low capital intensity. It's not a capital-intensive business, and therefore, a very high free-cash-flow-to-EBITDA conversion ratio. And we have a pristine balance sheet and deploy our free cash flow to grow the company. So that's in a nutshell who we are. Greg, I'm ready to take any questions you may have.

Perfect. Thanks, Ajay. That's helpful for everybody. So let's jump into it. So maybe just first off, at a high level, Ajay, you guys have had a tremendous amount of success in the last several years and have grown meaningfully over the last 3 or 4 years, in particular. What would you attribute that to? What have been the main drivers you've seen of that performance and outsized growth over the last few years?

It's a great question. Let me, again, try and break it down on the demand side and the supply side. Supply side means practitioners, where do we get people from to address the opportunity, and demand side is where does the opportunity come from. So on the demand side, this has been written about extensively, there's globalization, there is IT change, the digitization of all kinds of information, social media and what have you. All this stuff creates enormous economic activity and growth, but also creates enormous dislocation. So for example, dislocation in terms of their social media, but today, the main agenda item is what regulation should there be on social media. And the regulations, can you imagine, every country in the world has their own views about -- on this. And several commissions, et cetera, European Commission, others, European Union and others are sort of struggling with this, and they need economic consultants to help them out. So this sort of stuff causes dislocation. Globalization and the internet, you know the Amazon effect and what it did to retail and is doing to retail. It creates enormous number of bankruptcies and restructuring and what have you. Capital flows. If everybody is going to transact in Bitcoins or even a small percentages, the potential for fraud is enormous. We have wonderful things like Sarbanes-Oxley and the Securities and Exchange Commission, et cetera, but then we also have new ways of raising monies and creativity unleash through, for example, SPACs. And I'm not saying that is a bad thing, I'm just saying it requires a lot of work in getting those SPACs, for example, ready to go public in a proper way. So this sort of stuff creates enormous dislocation, and dislocation begets FTI. So that's on the demand side. On the supply side, you have to find people to address the opportunity. And our key place where we get -- we also hire from universities, grow our own, promote, train, et cetera, but we also hire experts laterally. And the big 4 accounting firms, for example, they have a variety of conflicts that they are struggling with in various countries. Their bread and butter is their audit business. So some of those folks find it better to work at a firm like FTI with fewer contracts than there. Although, we partner with them in many ways as well. So there's both a demand-side drive and a supply-side drive, and we have used our free cash flow towards organic growth. And because the organic global opportunity has been there, we've also invested in adjacencies rather than resting on our laurels. So we've gone from restructuring to business transformation and transactions. We have gone from finding the matter of billions to going into cybersecurity and construction solutions disputes. So it's a combination of these things that have led to this enormous growth and potential.

Got it. That's helpful, Ajay. A topical area, COVID. Coming out of COVID. Love to hear your views on how you guys successfully navigated the pandemic over the last year, 1.5 years, some of the challenges you saw, given you're on a people business, both on the supply side and the demand side. And maybe today, what opportunities you're seeing, where you're seeing tailwinds as we're emerging from the pandemic now.

Okay. So COVID impacted us in many, many, many different ways. My initial fear coming into COVID was, we are a consulting firm. We go visit our clients to help them. If we can't step out of our homes, so how the heck are we going to help our clients? If you can't go to client premises, how is this going to work? If there is enormous economic dislocation, what does it do to receivables? If you look at our balance sheet, it's not property, plant and equipment, it's mostly on the asset side, receivables, goodwill and shareholder equity. I mean -- and so what will it do to cash? And we have a fixed liability in terms of paying people and receivables on the other end. So there were -- how are we going to close our books? How are we going to do internal audit? I mean there were enormous number of concerns in just running the business. And there was also, which areas, if companies are in trouble in seeking loans, are they going to be hiring this consultants for discretionary work? I mean there was a genuine concern there. As it transpired, it create -- we had a huge tailwind. The dislocation, unfortunately, created a huge tailwind for us in our restructuring business for a couple of quarters at least. And there's still some of that. So that was a big -- and our professionals were able to, in the courts, in the United States, at least, were turned on a -- that's great that we've had all had internet access and Zoom and Teams and whatnot, so we were able to virtually engage with our clients and do those restructurings, in fact, faster than they occurred in the core processes before pre-pandemic. So that was that. In other businesses, especially a forensic and litigation consulting practice, things were gummed up massively. Trial dates were not being scheduled. And if there isn't a trial, then what do you need experts to -- prepare testimony on? And we'll bill in time and materials, and clients correctly shut those clocks. So it has a significant impact on us. Our CEO, Steve Gunby, took the right decision in hindsight, of course, saying, "No, no, this will come back. We don't need to take knee-jerk actions. We need to stand by our employees because there will be a demand surge afterwards when all these dates have to be rescheduled, et cetera, and we want to have the surge capacity available to address the opportunity at that point." So we stood by our clients and our employees, and we're reaping those benefits now. Our -- everybody has -- I mean we're not alone here. Digital ERP systems and digital information on accounts, et cetera, we in the back office through a lot of hard work and people working from home and adjusting to it, didn't miss a beat literally. So very, very proud of what we have achieved. So that's really, in summary, I mean there's many, many, many more war stories, but that's, in summary, the first part of your question. In terms of opportunity set, going forward. It's in the selling, general and administrative expenses, the first place people look at they say, "those are significantly lower. Folks haven't traveled. Non-billable expenses are low. There's not much entertaining." Certainly, calls like this are, in some ways, cheaper than hosting in a big hotel and what have you. I suspect there will be a new equilibrium reach where the human condition is to engage socially. And I think those expenditures will increase from the levels that we have had during the pandemic. All professional services firms should expect an increase in those expenditures. A big part of our SG&A, the single biggest is real estate. And so there's a lot of questions on, "boy, could we do without all the real estate? We have some of it, et cetera." It's not an immediate decision because real estate is long-term leases, and leases are not all due next month. But when -- one thing is certain, we can grow more folks, our -- when I say certain, at the moment, like certain, one should never -- pandemic has certainly taught me something, don't count on certainty. So -- but we can grow into our real estate more than expanding it. We were doing fine even before the pandemic. From 2018 to 2020, just in the 3-year period, we reduced our square footage per billable employee by, I think, 20% or thereabouts. So we were doing the more the open plan and other concepts even before the pandemic. So that's a response to your question. We could go on for a long time again.

Got it. Thanks, Ajay. Again, around broader market backdrop dynamics. FTI in the past, I would say, has always been thought about by a lot of folks as a strong countercyclical play. You've got a phenomenal restructuring business and brand there. How true is that overall of the entire business today? Do you still view the company and the business as a countercyclical bit? Or given the different business mix you have today, would you subscribe it differently?

I think we now are a company for all seasons. With -- companies go -- our clients go through restructuring, but they also go through massive growth. They also go through acquisitions and what have you. And proof of that is the last 12-odd months. In Q2 of last year, if we did not have a restructuring business, I dare say, we would have -- our profits would have been obliterated because our restructuring business is what made us all our money. I'm exaggerating, but you can see the numbers and see the percentages. Our restructuring revenue and profitability is significantly lower in Q1 of this year even though we have some cases from last year that are not yet over than it was in Q2 of last year, right? And Q1 of this year, it's much, much, much lower than -- yet we reported, in Q1, of this year, our all-time record revenue and EBITDA and income. So -- well, certainly income, I may have got one of those, I mean you go back in history in some period. But certainly, the highest profit quarter in the company's history in Q1 of this year. Even though restructuring is, I mean, in terms of jobs, new jobs, wins is way down, not because we're losing share and certainly not we're the #1 player in the business, but because there is so much available liquidity. Companies don't have to restructure. Restructuring is not the first choice of most people. So yes, so that's proof that the company has a slew of businesses that can help our clients in the most impactful times. Private equity finds us a key resource to do due diligence on mergers, on -- to do merger integration and carve-out work. We even do some deal making. We -- in Economic Consulting, a lot of the drivers there, even in Technology Consulting is M&A-driven, where second request activity for antitrust work. Our technology practice has done incredibly well. So that's an M&A-driven boom. And the Forensic Litigation Consulting, unfortunately, fraud is the human condition. And with growth, with the economic growth, with digitization, there is, in fact, more fraud. And that is not a countercyclical or cyclical. It's just an acyclical play as it were. So we will have surge quarters, and it's like being on a ski slope with moguls. Don't misinterpret the quarterly flows of moguls to the gradient of the hill. So it's a gradient of the hill that we are focused on the longer-term growth with the puts and takes in 1 quarter towards -- from these practices. But I think we are very diversified play that can help our clients in any of our conditions. And certainly, selling our shares when restructuring was waning was a mistake because Q1 results were tremendous.

Yes. That's helpful, Ajay. Next question. Investors, when they look at consulting professional services companies, one of the key metrics is, how are you cross-selling different solutions to clients and bring more of your solutions to bear with existing clients and new clients? So I guess the question would be, today, as you think about your 5 different segments and your typical client engagements, how often are you bringing more than 1 segment to bear with those engagements? And what does that look like today versus several years ago? How has it trended over time?

So Greg, I -- this is my fifth attempt at being a CFO. I've been in CFO for -- they were not in FTI the prior 4, they were in industrial America. And from a client perspective, you hate the word cross-selling. Because that sounds like the company is trying to pitch all its wares regardless of need, right? I've been on the other side of this. And so we don't do that. We try and solve our clients' problems. If the client's problems require other aspects of what we do, then we bring those other aspects to bear. So for example, a number of the restructurings -- restructuring, the good news with the restructuring is it's not related to fraud. It's not a bad word. In fact, it's one of the pillars of our capitalism that you can restructure without gun and jail as it were, right? It's not -- it could be because of economic factors, et cetera. But in many jurisdictions, there is a degree of restructuring that goes with fraud. I mean in certain cases in Asia and others that we publicly talk, in Europe publicly talked about, and the largest cases out there are typically where FTI is involved in some ways. We don't like to name client names and respect their privacy. And in those cases, it requires us to bring our forensic experts, our technology practice, others to investigate where did the money go. So sometimes it requires a strategic communications folks, very often a dozen. It's helpful that they have worked together with the restructuring people so that they know the sensitivities associated with the restructuring and how to communicate those sorts of things. Similarly, within M&A, in an M&A situation also, there typically is a strategic communications aspect to it or in an IPO, certainly there is. So we bring to bear what is required by our clients as opposed to measuring a percentage. Did you get this guy in or that guy in? That -- to answer your question, in the larger cases, typically, there is a need for these. And perhaps the percentage hasn't moved that much because we're doing more larger cases and more cases generally. But it's typically -- it's a small percentage. It's in the larger cases, and we think of it that way. And I would say one thing that has changed is our leadership team is much more attuned to working together. And there's a clear and greater understanding in the company that this is a win-win for all as opposed to a silo.

Got it. That's helpful. Moving to the supply side of your business, Ajay. Every consulting professional services company tends to struggle with identifying and finding the right talent to suit the needs of their clients across and obviously, you've got 5 different business lines, you've got to find the people with the right backgrounds and skill sets, et cetera. Can you just talk about -- and maybe putting aside COVID, but just generally, how you've seen the dynamics on the supply side, being able to find the right talent, bring the right talent and then matching that and driving the right utilization rate for the company because you guys have done a nice job of that over the last several years, and has that been a challenge? How have you guys been able to differentiate in terms of attracting talent to FTI, et cetera?

That's the secret sauce, right? Attracting the talent, keep -- leveraging them with junior staff by talent, I mean at the senior levels, the -- it's the -- it's our experts and their relationships that lead to our success. At the end of the day, it's our experts and their relationships, their track record, the firm's brand, if I may say so, over time. And so what we pitch to people -- I'm meeting some people tonight to try and attract them to our company, and what I will say to them is you can be on your own and you have -- yes, you may have fewer conflicts and you may have -- but you won't get the big cases because you don't have the surge capacity, your 4 of you. What are you going to do when a case comes with 50 countries involved? And people will not even think of you in that context. We bring surge capacity around the world. We have a collection of experts that can feed off each other and feed off each other's relationships. Sometimes, I will get an e-mail from one Senior Managing Director, which is -- what we term our partners, to other partners saying, "Do you have -- does anybody have expertise in this area, in Peru?" And there'll be 6 e-mails saying, "Yes, I do. I do. I do. I do. And I do." We have a collectivization of talent around the world that has virtually seen every impactful situation. So that then creates a virtuous cycle success, and that collection of experts attracts other people. And other people who say, "listen, selling your wares, selling your services, it's a personal services, is the most difficult part of this business."And joining this firm allows me a greater set of opportunities to then make more money personally and then for the firm and then for the shareholders. So that is the essential equation, and it's really, really working.

That's great. All it makes sense, Ajay. I'm going to turn here to see if there's questions remaining 7 or 8 minutes from the investors. So just give me 1 second here. Great. So one of the investor questions, Ajay, is about the international business, which, last I checked, is now over 1/3 of your total revenue and has moved up meaningfully. And the question is, where do you see that international business trending over time? Do you continue to see that rising? Do you think it hits 50% plus over the next couple of years? And what are the drivers around the success you've had outside the U.S.?

So the answer to the first question is yes, certainly rising 50% next couple of years, maybe a bit of a stretch. If you look at just EMEA, it's percentage in the last sort of 12-odd months, I think it's gone up almost 3% of the total. So it was, I think, 26% amounts -- goes at 29%, 30%. So if you take that every year, it's not going to be too many more years before it gets closer to 50%. Now mathematics doesn't usually work that way. I think through COVID, we have all become good in equations and geometry and all that, but seeing all the curves and whatnot. But if you're growing -- if you're adding 3% to the mix today, you're not going to add 3% more. It's asymptotically going to come down a little bit. That would be the right modeling, barring a discontinuous event like an acquisition or something of that nature. So I can't predict at what point exactly. I have my own internal models, but I'm not willing to declare at what point it becomes 50% of our business. But will it? Of course. Just math alone will tell you it will. I don't want that to then mean that North America, we don't have ambitions in the U.S., et cetera. Because U.S. is our largest market, is our U.S., Canada and some Latin America. We certainly expect those geographies to continue to grow. We're not going to -- and Europe has been seeing higher growth because also law of small numbers. They were much smaller to begin with, so the percentages are higher. We have a tremendous business in Australia. We are the leading restructuring player now in Australia, recently attracted a lot of great talent there. And so also in Hong Kong, in India, we have a substantial presence now in Dubai, Abu Dhabi. We do work in other countries in the Middle East. We have a great presence in South Africa. So we are a global player. Even on the restructuring space, it's -- not every country has this kind of liquidity to pump into the system. So we are a global -- being a global player is very, very helpful.

Great. Thank you. The next investor question, Ajay, more on the financial side. So as you said before, you guys generated a ton of free cash flow and there's a high level of predictability alongside of it. How are you thinking about capital allocation today as it relates to investing in various parts of the business? Is M&A a consideration as well? What's the overall sort of framework you have around capital allocation today?

So the goal is sustainable double-digit earnings growth over time. Sustainable double-digit earnings growth over time. And there's no reason we shouldn't achieve that. There's, as I said, there's the dislocation, there's the supply opportunity, there is no reason we should not continue to achieve that, okay? And the balance sheet is pristine, absolutely pristine. I like it that way. And there's enormous free cash flow. The -- so what will we spend the free cash flow on? We spend it, first and foremost, on organic growth because the return on invested capital on organic growth is high. Just give the person an iPhone, laptop, you don't even need office space right now and go and leverage them with junior staff below and opportunity set around the company. That's plan A. And there's huge opportunity to continue to do that responsibly. One thing I always maintain is just because there's a money piling up doesn't mean you have to spend it. It's okay. Rather it pile up than waste it. So the first is organic growth. There's enormous acquisition opportunity because there are so many boutique, other consulting firm with niche practices, et cetera. But acquisitions are tricky because, are people cashing out or cashing in? Are they there? There are very few cost synergies. There is more a revenue synergy by joining the company can you build to a greater piece. And if you're owned by a corporation, first, you pay the corporation, then you pay the employees to keep them. So it's tricky. Acquisitions are tricky, but we have done acquisitions almost, say, 1 or 2 every year in the last few years that I have been in the company's own pedigree's acquisition. So it's not as if we don't know how to do acquisitions, but do them responsibly. We also return capital to shareholders in share buybacks and what have you. And hope to keep that same mix. Certainly, I'm not sharing what proportion, but in the same mix.

Great. Thank you, Ajay. So we've got about 2 or 3 minutes left, and I'll wrap with 1 more question from an investor here, which is around cryptocurrencies. And the question is twofold. One, is FTI developing expertise in and around cryptocurrencies? And second is, what would you think about, Ajay, in terms of the opportunity set for you all going forward in and around this area?

So the answer is yes. Certainly, we are learning, and there are people creating these currencies as even country dove coins as it were -- is the next buzzword and what have of you. Again, I think about the framework, the rubric that I was talking about earlier. There is probably going to -- there already is explosive growth in coins. With that will come explosive growth in dislocation, and dislocation will require shoring up. And we are -- we do disputes and investigations. Disputes and investigations doesn't mean we have to wait for the next -- and in fact, that to -- again, credit to our leadership team led by Steve Gunby, where he's always preached that, that other leaders have as well, that you have to find where the puck is going to explore. And our core expertise of disputes and investigations can be -- can lend itself well to opportunities in all these other areas as well. So yes, we are working alongside this opportunity.

Great. Thank you, Ajay. So I think we're running short on time here. So I want to thank you, Ajay, for joining us today at the conference. And to your point, hopefully, we're all doing the same thing in person next year. And good luck with the rest of the day. Thank you.

Thank you, Greg.