Good morning everyone and welcome to the FTI Consulting Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Mollie Hawkes, Head of Investor Relations. Ma’am, please go ahead.

Good morning. Welcome to the FTI Consulting conference call to discuss the company's fourth quarter and full year 2023 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, 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 plan, initiatives, projected prospects, policies, processes and practices, objectives, goals, commitments, strategies, future events, future revenues, future results and performance, future capital allocations and expenditures, expectations, plans or intentions relating to acquisitions, share repurchases, and other matters, business trends, ESG related matters, new or changes to laws and regulations, scientific or technological developments and other information or other matters that are not historical, including statements regarding estimates of our future financial results and other matters. For discussion of risks and other factors that may cause actual results or events to differ from those contemplated by forward-looking statements. Investors should review the safe harbor statement in the earnings press release issued this morning, a copy of which is available on our website at www.fticonsulting.com as well as other disclosures under the headings of risk factors and forward looking information in our quarterly report on our annual report on Form 10-K for the year ended December 31, 2023, and in our other filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this earnings call and will not be updated. During the call, we will discuss certain non-GAAP financial measures such as total segment operating income, adjusted EBITDA, total adjusted segment EBITDA,…

Thank you, Mollie. Welcome, everyone. And thank you all for joining us this morning. I'm sure many of you saw in this morning's press release, we delivered fabulous results in the fourth quarter, and fabulous results more generally, in the second half of the year. Those results in turn -- turn the year, the whole year into one that was terrific overall. The results at the end of this year exceeded our expectations and I suspect many of yours as well. So what I'd like to do before turning this over to Ajay, who will go through the quarter in more detail just take a moment to reflect on the entire year. In particular, to reflect on the variation we saw in some of the performance metrics across the quarters. And talk about how we thought about what actions we should take and what actions we shouldn't take as the year went on. I'm hoping those reflections support the more general conversations that we've had from time-to-time, about how do we think about the twin objectives of being responsible stewards of this company for your shareholders being seen as responsible stewards. Also not losing sight of the core ultimate objective, which of course is not quarterly earnings, which can be very transient, but rather is building something more powerful, ever more capable organization, a more welcoming organization, one that can make evermore difference for our clients, one that's ever more able to attract great people and support them so they can develop themselves and the people around them through that creates something real, something durable for our clients and for our people and for you, our shareholders. Looking back ashore, as many of you will recall, our first quarters' earnings were well below our internal expectations below Street's expectations and…

Thank you, Steve. Good morning, everybody. In my prepared remarks, I will take you through our company wide and segment results and guidance for 2024. Beginning with our full year 2023 results. We reported record revenues of $3.49 billion, up $468.3 million, or 15.2% compared to revenues of $3.03 billion in 2022. We also reported record earnings per share of $7.71, up $1.13 or 17.2% compared to EPS of $6.58 in 2022. As a reminder, in the fourth quarter of 2022, there was a $8.3 million special charge related to severance and other employee related costs, which reduced earnings per share last year by $0.19. Adjusted earnings per share of $7.71 in 2023 increased $0.94, or 13.9% from $6.77 in 2022. Net income of $274.9 million compared to $235.5 million in 2022. Adjusted EBITDA of $424.8 million was also a record that was up $67.2 million, or 18.8% from $357.6 million in 2022. The sharp increase in adjusted EBITDA is primarily a result of our superb revenue growth of 15%. Noteworthy, in the first half of the year, revenues grew 13% year-over-year, and in the second half of the year, revenue growth accelerated to 17.3% compared to the prior year period. This revenue growth occurred in a year where total headcount grew 4.6%, which is lower than we have seen or targeted in recent years. Revenue Growth exceeded the growth and direct costs and SG&A excluding depreciation and amortization, resulting in record adjusted EBITDA. All segments delivered record revenues and our corporate finance and restructuring segment also delivered record and adjusted segment EBITDA. Overall, growth was particularly strong for restructuring, investigations, litigation, non-merger and acquisition related antitrust, and corporate reputation services. Now I will turn to fourth quarter results. For the quarter, record revenues of $924.7 million increase 19.4% or…

Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions]. Our first question today comes from James Yaro from Goldman Sachs. Please go ahead with your question.

Good morning. Thank you for taking my questions. Perhaps starting with a bigger picture one. I think at the midpoint, your guidance for 2024 implies 7% revenue growth year-on-year. This would be the lowest year-on-year revenue growth since 2020, a year in which you faced significant headwinds, especially from courts being shut. Is there anything we should take away from this lower growth rate guidance in terms of the demand equation for your business next, in 2024 beyond lapping the strong 2023 restructuring results that Ajay touched upon, or is there something else?

I'll give you a high-level answer that Ajay disagree with me or add to it however he chooses. Look, there is nothing that has me concerned about the long-term demand structure of our company. Actually, one of the concerns I have is to be under higher in the second half of the year, which you can't see aggregate utilization things because we have so many little sub businesses that even if the aggregate is x, a subpart of that business can be at 30 points above x. And so when you under-hire, you sometimes end up in different places around having to turn down work. So that worries me. And there's always variation. As Ajay says, we don't know the revenue in July at this point in time. I mean, there's always variation, but there is no underlying concern about the overall growth potential of our company. I will say that. I think the two-year growth in here is pretty consistent with where we've been over the multiple years. I think '19 was extraordinary in '20, as you pointed out, was less and so forth. So this is in line with our two-year numbers, but I think that's more coincidence than anything else. But I hope I answered. I am not worried about long-term growth if we do the right things, continue to do the right things about getting the talent and supporting them, James. Did I answer your question?

Yes, that was excellent. Thank you. Maybe just one on restructuring. I appreciate your comments, Ajay, on the guide for 2024. But I just wanted to take a step back and get your perspective on two different scenarios, which is one is a soft landing. And then the second one is higher rates for longer. Presumably, of course, higher rates for longer would be stronger, but just how you're thinking about the two of those and what that means for the restructuring longer-term outlook?

James, that it correctly, those would shape a whole variety of scenarios around our midpoint and though -- transcend into next year as well. Clearly, higher rates for longer would extend the restructuring cycle. But we are beginning to see the yields, the yield spread has really tightened. And so the most challenged companies are beginning to get financing. We have seen that in the marketplace today. So the general theme for us at this juncture is we are proceeding carefully in our -- in the way we think and the way we are presenting to you, we are proceeding carefully.

Okay. That's very clear. Just one on Compass Lexecon. I know there have been some senior leadership changes there. I just wanted to get your thoughts on the senior leadership changes there. And if that represents a different direction for the firm and whether it changes the growth for compact specifically and whether that changes the growth profile for that business?

Yes. Look, let me be clear. I'm very excited about the people who are running Compass Lexecon. I mean I spent -- it was over in Europe at the beginning part of this year with Jorge and three people who are running Europe underneath them, Lorenzo, Neil and Kirsten, I mean I got to tell you, there's nobody at person on this call who wouldn't love having time with those people. Jorge, the guys who founded Compass Europe for us. I mean it's been an amazing growth engine, but he's built a team underneath him. And as great as Lorenzo, Neil and Kirsten are -- I went spent time in Spain, and you see -- and Brussels and Paris and London, I mean there is an amazing, amazing place with multiplicity of talent. The US, as you know, Ampere, I'm not sure that a more distinguished powerful, incredibly respected and impressive person and professional services, and he's sees these leading -- I guess, the title as his Chairman, but he's a father of Compass Lexecon in some ways. And I mean there's multiple fathers, but he's an incredible asset. I think probably people know Mark Israel less well. Mark is very different than them, but they're very different personalities, but -- and these are cap generation, younger, maybe a little more than half generation, younger and is equally as impressive. So we have an amazing leadership team, and they're all focused on building it. Just to put the point on the table, we had a senior person leave. It's always unfortunate when one senior person leaves. And I would say that the circumstances around the departure were particularly unfortunate, but it doesn't give me any lack of confidence in where this business is the position it has and the ability of that leadership team to take it forward, not only that leadership team, but the people below them. Does that answer your question or speak to your question, James?

That's very clear, Steve. Thank you so much. Just one last one. Just on the longer-term ramifications of AI on your business. Maybe you could talk about the puts and takes there. What -- how do they benefit your business? What are the potential risks? And then an investor question I've gotten is just are there any risks that certain parts of your business could be replaced by AI tools? On the other hand, of course, that could make you more efficient and increase margins. So just the puts and takes there over the longer term?

Yes. Look, so I think there are for every company, right -- well, first of all, let's be clear, right, everybody has definitive opinions on new technology, which means some of it is right, some of it is wrong and you figure it out over time, right? But it's obviously an area we're focused on. And I suspect, and I think the team that's looking at this within the segments and across all believe that this will change some of our businesses. I mean this has already happened. I mean our tech business, our e-discovery business has been using machine learning for review for years now and they're cutting edge. And they know that if they fall behind on the changes, it doesn't matter what success we've had. We won't have it going forward. To the contrary, actually, their ability to innovate has been one of the reasons they've been outperforming the industry in the last few years in terms of emerging data and so forth. And so that mental mindset is the way we are looking at this. And we're looking at this within segments. Each segment is looking at both of those questions. What's the threat? Which way is can it lower value-added? Presumably, I wasn't around. I don't think you were around when people did handwritten spreadsheets. But you can't build for handwritten spreadsheets and then a recalculation of handwritten spreadsheet these days anymore, right? Excel made a difference on that. And the same thing happens all the time. So yes, of course, 13-week cash flows. Are we going to need as much time to do it? Or is it going to take less. These are all the questions we're asking across the business. I will say two things. Right now, I would say none of us feel like there's more threat than there is opportunity, but we're monitoring both. The other thing I would say is universals in the face of new technology are always a little scary. But our firm is not a commodity firm. Our firm is -- we're talking about Speciale in Israel. I mean you're in the middle of a huge litigation, you want one of those persons with their capabilities testifying for you. And I think it's -- will their AI help streamline some of the preparation that makes our people more efficient. I think it's going to be a long time before you have a computer testifying in court. And the same thing is true for any sort of crisis situation, which is crisis communication, M&A crisis. And I think that's our firm position there. So as long as we do the right things and challenge ourselves, I suspect we will be fine. If we get lazy, we won't be. But my job is to help us not get lazy. Does that at least talk to the question?

That's really helpful, Steve. Thank you so much for answering my questions.

Our next question comes from Tobey Sommer from Truist Securities. Please go ahead with your question.

Thank you. Could you expand a little detail that peaked my interest at the end of your prepared remarks talking about the guidance, about the deferred revenue and competitive pressures in the guidance commentary?

Let me talk about the competitive pressures and I'll let him talk about deferred revenues. Look, I think you've noticed, Tobey, and we appreciate the comments you write about the success we've had. Unfortunately, competitors also noticed that, too. And so we are routinely attack. Now the reality is, so far, we are hiring many more people than we lose. But it remains we have to be on our toes on competitive comp, and that's across the board in our company. And so that's a reality of life. And I mean that's at a high level, the answer to that. I'll let Ajay talk to the other point.

Thanks, Steve. Tobey, you might recollect in the last two years in Economic Consulting, we've been saying in the first quarter and also in the second quarter, I think, in 2020, 2021 and 2022, sorry, in 2022, even in the second quarter, we said that look, there's a whole bunch of utilization, which didn't translate into revenue because the conditions for revenue recognition were not met. And we've had that happen in '22 and '23. And now I'm saying we're going to have that happen in 2024 as well. And that's what we just communicated.

Okay. That makes sense. What's the right way to think about headcount growth in '24 given sort of the lower starting point in the fourth quarter? And I was hoping you could also speak to the -- whatever metrics you care to reveal about what drove the sequential headcount decline in the fourth quarter, maybe commenting on employee attrition trends or the inputs into that? Thank you.

Yes. Look, let me clear. I mean we didn't have a massive outpouring of people. Our attrition levels for last year were well below our expectations and below prior last -- at least the prior year and maybe the year before that. I don't remember the year before that right now. We did. The real issue was I took the action I mentioned of tapering hiring. Well, let me be clear. I got recommendations to do, and I reluctantly agreed to do that. I'm probably the more bullish guy on headcount, one of them are bullish people on headcount. Ajay, is more -- my quarterly conscience and I'm more -- look, what do we need to do to make this business where we want it to be in the next two to three years and who the hell cares what the utilization is this quarter. So we have a yin and yang within our farm. But I agreed to a substantial tapering of headcount just because of the conditions that was in the middle of the year. So I think we ended up the year, this year lower than we probably should have, well, lower than if I had known how strong the year was going to be, I would have guided us to, so we're going to have to make that up. Because our goal is not to maximize the profits in 2024. Our goal is, and it's not just work, is to sort of build a business that you and we can see the next tripling of earnings, and frankly, most of our people don't care about the next tripling of earnings, but we do care of a team that is winning, that's tracking great people, meaning the great assignments just happens to be that is consistent with a multi-year trajectory. So we are going to have to -- we're going to have to make up for some of the shortfall in hiring this year. And so I would be very surprised if it's not up over last year, and much more in line with what we've been doing over time. Ajay, I don't think we give more specifics than that, do we?

No, you're right. So we've specifically said we expect headcount growth in 2024, Tobey to be higher than what we achieved in 2023. So that we have explicitly said. We've also said on top of that, we have an appetite to make investments, and we're seeing opportunities. Now one of the reasons we don't give a specific percentage is these things are easy to accomplish. There is also, there is a certain amount of attrition that takes place in the business, and you got to offset that and then grow. So there's a lot of work that comes in all of this. But that clearly is our ambition, and that is factored into the guidance.

Okay. Perfect. What -- I heard your general comments about restructuring demand in '24 and sort of how to think about that puts and takes. From a domestic versus international perspective, are there any contours that may be different than the overall commentary? And how do you think the company's performance reflects on sort of market share trends within that business?

So I'll -- let me give a top-level answer and then Ajay wants to give more specifics. Look, the dynamics are different around the world just because, a, sometimes economic situations are different and sometimes there's -- if you remember from the COVID days, their government policies interfere. But also, it also depends on what parts of the restructuring we're in. In the in the US, we are in both company side and creditor side. In overseas many places, we are primarily creditor side and there's a timing difference. The company will often hire you months before they have decided to do a filing the creditors, don't course or not usually. And so there is those timing dynamics, which vary around the world and, frankly, meant that I think the US was busier earlier than many places around the world. And that those dynamics change over time. So that's a kind of a high level answer. I don't know, Ajay, do you want to give anything more on top of that?

Just some slicing a little bit more. Germany has been really strong recently. The UK also kind of caught up to some of the trends we were seeing in the United States. So our international pieces were part of the surprise growth or growth more than we thought has come from EMEA, Germany, in particular. So that for whatever it's worth, that's additional color there. Did that answer sufficiently, Tobey?

Yes, yes. Thank you very much. I'll get back in the queue.

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

Hi, good morning. Appreciate you taking my questions. Maybe I'll follow-up there on your last comment, Ajay, and take a step higher. Like in terms of the biggest areas of sequential improvement or areas that surprised you positively in the fourth quarter. Could you just provide a little bit more color or thoughts there? It's the first time I can remember with this type of fourth quarter step-up and obviously better than your guide from last quarter. So if you could just isolate the main areas that surprised you positively, that would be helpful?

I am so proud of our practitioners, we just look at the statistics, put them on a piece of paper and stare at them which I do quite a bit. You three of last year utilization in corporate finance and restructuring was 61%. Q4, it dropped to 56%, 5% decline. FLC was flat at 53% and economic consulting declined from 67% to 64%, 4% decline. Expect folks to take some time off, right? Look at this year, from Q3 to Q4, 60% to 61% in corporate finance and restructuring 57% to 56%, higher than last year, and some are flat and FLC and 65% to 65% in economic consulting. This is incredible. This is our folks care for their clients are and do the most important things for them, and are there when they need them, regardless of whether it's Christmas or New Year. And that 5 percentage points in utilization makes all the difference to revenues. Then look at Bill rates. We look at Bill rates. I mean, you can see this, in economic consulting in third quarter was $5.59 rate per hour to $5.86. We do the hardest stuff. And when M&A gets really, really hard, we get hired. And this says that the top people were the ones that were working. So those rates that makes that utilization is what delivered these results. I shouldn't -- I mean, I'm not trying to short-change anybody but business transformation. Some of the largest matters out there across the globe in different geographies, in technology, we crossed $100 million in revenue this quarter in our tech segment. I mean, so this was really, really good.

Pretty broad-based point taken. In terms of utilization, you talked about the sequential trend, but maybe over the -- looking at the annual trend line in utilization in FLC, another year of improvement, but still below pre-COVID levels. Just wondering how we should think about that business getting back to those levels potentially over the next couple of years? And what gives you confidence in that business' trajectory?

Look, I've got a lot of confidence in that business trajectory. I will say that I hope I've said this in the past, but I always hate it when somebody looks at 2019 as a benchmark for our company or our business because that was a place where we got caught short on headcount, and we had to make it up on a couple of years later. And so I can't remember what the utilization was for FLC. But I know we were like sold out in Europe, and we weren't answering the phones on new leads for some places because of the business we had. So look, it's a weird thing because you say 60% or 65% utilization and you say, how can we be sold out? Well, part of it is -- I mean, I can tell you how we account for it differently than other people, but part of it is just the sub parts of our business. And so you can have people who are just 100% utilized or 90% utilized and when you have that. And so I think we're on the right trajectory in FLC. It's one of our growth engines, and it is making progress on it. I think the upside is enormous. So if you're asking me, is just as good as it gets? No, and do I have in patience for us? Of course, I do. But so do the team leading it, and I feel pretty good about it. Does that at least talk to the point, Andrew?

Absolutely. And then maybe if I could just wrap-up with one last one on M&A-related businesses. A really good quarter seemingly on that front. But if you could talk to the momentum in M&A and maybe the M&A environment broadly to start 2024. You talked, Ajay, about narrowing spreads and its impact on the restructuring environment. But are you seeing kind of an offset there in M&A to this point? Or is the potential for some sort of air pocket between those two dynamics to persist for a little bit here as everyone finds their footing? Thank you.

So the key words again, are proceeding carefully. It's -- this is not the time to be definitive. There are folks out there. I think maybe interest rates will not come down as much. There's also an election cycle this year. So to say, we are now definitively on an M&A growth curve would be premature. We are seeing, I mean transactions was up a little bit. That, as you know this on the technology side, the second request piece was up. In our economic consulting, we do the real hard stuff. So that can happen in either cycle. So this is not based on any major trend one way or the other.

Andrew, let me close. I think we're out of time. Let me just maybe add to that and say, look, let me express sympathy for all the analysts on this call, buy side, sell side anybody, you guys try to figure out where we're going to be in the next quarter. And it's hard, as Ajay said, in the next -- each of the next quarters, it's very hard to be definitive on that. What I think we can be definitive on and I think the last 10 years have shown is if you focus on getting the right people, the right attitudes, and the right capabilities, and you support them, you don't know what the damn quarter excuse me that don't know what the quarters are going to look like. But what you can put the company on is a multi-year trajectory that is up. And that is something that is predictable. And we've predicted it and we can deliver on. We've delivered on it and we can so I'm sorry, we can't be. I wish you luck on the on the quarters. It's just hard. It's hard, but I just want to make sure I underscore the definitiveness of our conviction around the multi-year trajectory.

Absolutely. Thanks Steve, thanks Ajay.

All right. And thank you all for joining the call. We really appreciate your attention and support.

Ladies and gentlemen, that will conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.