FTI Consulting Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 7 speakers on the call.

Operator

Good day, and welcome to the FTI Consulting Second Quarter 20 24 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ms.

Operator

Molly Hawkes, Head of Investor Relations. Please go ahead, ma'am.

Speaker 1

Good morning. Welcome to the FTI Consulting conference call to discuss the company's Q2 2024 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 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, initiatives, projections, 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, climate change 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.

Speaker 1

For a 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. In our quarterly report on Form 10 Q for the quarter ended in our quarterly report on Form 10 Q for the quarter ended June 30, 2024, our annual report on Form 10 ks 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, adjusted earnings per diluted share, adjusted net income, adjusted EBITDA margin and free cash flow. For a discussion of these and other non GAAP financial measures as well as our reconciliations of non GAAP financial measures to the most directly comparable GAAP measures, investors should review the press release and the accompanying financial tables that we issued this morning, which include these reconciliations.

Speaker 1

Lastly, there are 2 items that have been posted to the Investor Relations section of our website for your reference. These include a quarterly earnings presentation and an Excel and PDF of our historical financial and operating data, which have been updated to include our Q2 2020 results. Of note, during today's prepared remarks, management will not speak directly to the quarterly earnings presentation posted to the website. To ensure our disclosures are consistent, these slides provide the similar details they have historically and as I have said, are available on the Investor Relations section of our website. With these formalities out of the way, I'm joined today by Stephen Gumby, our President and Chief Executive Officer and Ajay Sabharwal, our Chief Financial Officer.

Speaker 1

At this time, I will turn the call over to our President and Chief Executive Officer, Steve Dunphy.

Speaker 2

Thank you, Molly. Welcome, everyone, and thank you all for joining us this morning. As I'm sure many of you saw in our press release this morning, we once again delivered terrific results this quarter. As usual, certain sub businesses and geographies either outperformed or underperformed their specific expectations, But overall, it was a terrific quarter and combined with a strong first quarter delivered an exceptional first half of the year. As Ajay will talk about in a moment, we had some one time factors that this quarter positively affected the results, most notably a lower than expected tax rate.

Speaker 2

But even normalizing for those one times factors, it was a great first half of the year. Our revenue in aggregate grew 12%, almost all of which was organic growth and our adjusted EBITDA was up 27% compared to the first half of the year. We feel pretty good about the first half of the year and importantly the strength of our businesses. With respect to the second half of the year, let me share a couple of points. First, Ajay always points out at this time of the year that the second half of the year and particularly the Q4 includes the holidays, which is a time when many of our professionals and our clients take time off.

Speaker 2

The December effect does not actually happen every year because there's so many variations in our business. You can have transactions pick up, you can have little booms in December and so forth. For example, last year we were surprised by how strong December was and therefore our 4th quarter. But the December slowdown does happen more times than not and it can have a considerable effect on our results. So we build that into our forecast.

Speaker 2

That's a general point. More unique to this year is something about the comparisons with last year that I want to underscore. So far this year, we've been cycling a very weak prior year, the first half of the year. For the rest of this year, while we're forecasting our business will continue to be strong, we are cycling a much stronger set of comparables from last year. That does not mean we expect our business to be weak in the second half.

Speaker 2

It does mean however that as the year unfolds, we expect the growth year on year will look different than what we've delivered so far. The third point is to me the more contentful point, which is that so far this year for a variety of reasons, we have not shown the level of headcount growth that I aspire to that we typically have had over these many last few years and that is required to meet my and our multi year growth aspirations and the level of growth that we have been delivering. And so we have clear plans to correct those shortfalls in the second half of the year. As always, the bulk of our campus hires would join us as they typically do in the Q3. But as I will come back to in a moment, we also continue to find and invest behind senior talent.

Speaker 2

Before I come back to that senior talent point, let me just summarize. In aggregate, these first two quarters notwithstanding these uncertain economic terms leave us feeling terrific, not only about the performance so far this year, but about the strength of our positions around the world. So let me come back and elaborate a bit on the 3rd point I made, which is a point that I referred to briefly last quarter, which is that we have been having and continue to have what I believe maybe the most robust and broad set of discussions regarding potential senior talent that we've ever had or at least during my tenure here. After I mentioned that last time, a couple of people queried Molly about the fact that it didn't seem coterminous with a lot of announcements. So let me talk to that a bit.

Speaker 2

First of all, I hope by now you're starting to see some of those announcements. I think so far we've announced 19 S and D hires and it's across the breadth of our segments and geographies, business transformation and strategy, transactions, IG, privacy and security, forensic accounting, cyber and hires here in the U. S, in Asia, on the continent, U. K. And elsewhere.

Speaker 2

So we're starting to show up and I hope you're seeing them. And of course importantly, those are on top of a terrific set of promotions we made earlier in the year, 56 promotions at the SMB level and hundreds and hundreds of promotions below that level. But beyond the promotions and the announced hires, let me share a couple of other points. We are having a lot of conversations with very senior people. When you're at the very most senior levels, there's often more of a lag when we come to an agreement with a person and when we actually announce them publicly.

Speaker 2

Those senior people typically have important existing obligations at a company. And we typically will support them as they deliver on those expectations and obligations. But given that we will typically delay the announcement until they're clear of the obligations, we probably have at least another 15 SMBs beyond the 19 that we've announced that we've agreed to come have agreed to come join us and we simply haven't announced them while they're delivering on their prior obligations. And beyond the ones we've announced and the ones we've signed, but not yet been able to announce, we're also having an amazing set of further conversations. Now, of course, with any early stage conversation or even mid stage conversation, the obvious question is will they ultimately come to fruition?

Speaker 2

First, are you going to give them an offer? Are they going to come? We of course do not know on any individual conversation for sure. I will say however, given the number of conversations underway, some of the people I've had a chance to talk to in there and the quality of that set of people we're talking with and the richness of the dialogue we're having with them. But I suspect a lot of them in fact will come to fruition.

Speaker 2

As Ajay always points out, those investments could hurt our P and L in the second half of the year or into 2025 and of course they can. Typically senior hires because they often have non competes or non sources or even if not, you're not going to just hire them, you're going to hire the people behind them. For all those reasons, they typically do not make us money the minute they hit the ground. With that, I hope it's a conversation that you will recall from many of these calls. For me, it's that commitment, the commitment to making those sorts of investments behind great talent, talent that can address important client needs in fundamentally important ways and our willingness to do that, yes, in good quarters, but also in bad quarters.

Speaker 2

It has been that commitment that has allowed us to turn this company into the growth engine that it is. It's one that has allowed us to build our businesses across so many geographies in every segment. It has allowed us to achieve multiple years of growth and to me has transformed our company's reach, our relevance, our profitability, our reputation and our ability to attract great professionals to deliver those results for our fabulous for our fabulous results for our clients. My sense is as long as we continue that philosophy and yes, we always have to accompany it with the discipline around that philosophy, which is making sure that we are finding great hires. We're spending time on those hires to make sure that people we're truly excited about and we'd spend time integrating them into our company.

Speaker 2

As long as we have that discipline and together with it we maintain the commitment when we are excited to invest boldly and with conviction in them and the teams that we build around them, my sense is as long as we continue that discipline and that boldness, we will continue to build on this company's strong history and if anything accelerate this company's powerful growth journey. With that, let me turn this over to Ajay for the details of the quarter.

Speaker 3

Thank you, Steve. Good morning, everybody. In my prepared remarks, I will take you through our company wide and segment results and discuss guidance for the full year. Beginning with our Q2 results, we had a strong quarter with earnings per share of $2.34 which grew 33.7 percent year over year. Let me at the outset though caution that in this quarter we had significant tax benefits that resulted in an effective tax rate of 18.2% compared to 26.7% in the prior year quarter.

Speaker 3

We expect these benefits to be largely behind us now, resulting in an expected effective tax rate for full year 2024 of between 20% 22%. Even without this tax benefit, I'm pleased to report that our underlying results were strong. Overall, year over year revenue growth of 9.8% more than offset an 8.4% increase in direct costs and a 10.7% increase in selling, general and administrative or SG and A expenses, resulting in adjusted EBITDA growth of 15.7% year over year. All of our segments grew with particularly strong growth in Corporate Finance and Restructuring, Economic Consulting and Technology. These segments also had year over year adjusted segment EBITDA growth, which offset a decline in adjusted segment EBITDA in Forensic and Litigation Consulting or FLC and in Strategic Communications.

Speaker 3

Considering our record revenues and EPS in the first half of the year, we are raising our revenue and EPS guidance ranges for the year. Turning to our Q2 2024 results in more detail. Revenues of $949,200,000 compared to $864,600,000 in the prior year quarter. Earnings per share of $2.34 compared to $1.75 in the prior year quarter. Net income of $83,900,000 compared to $62,400,000 in the prior year quarter.

Speaker 3

This increase was primarily due to higher revenues and lower effective tax rate and FX remeasurement gains compared to losses in the prior year quarter, which was partially offset by an increase in compensation and SG and A expenses. SG and A expenses of $206,200,000 were 21.7 percent of revenues. This compares to SG and A expenses of $186,400,000 or 21.6 percent of revenues in the Q2 of 2023. The increase in SG and A was primarily due to higher compensation and bad debt. Q2 2024 adjusted EBITDA of $115,900,000 or 12.2 percent of revenues compared to $100,200,000 or 11.6 percent of revenues in the prior year quarter.

Speaker 3

Our 2nd quarter effective tax rate of 18.2% compared to 26.7% in the prior year quarter. The lower tax rate was primarily because of a higher discrete favorable tax adjustment related to share based compensation due to the exercise of a larger number of non qualified stock options, which is not expected to recur to the same extent and a decrease in foreign taxes compared to the prior year quarter. For the second half of the year, we now expect our effective tax rate to be between 22% 24%, resulting in an overall expected effective tax rate for full year 2024 of between 20% 22%. Weighted average shares outstanding or WESO for Q2 of 35,800,000 shares compared to 35,700,000 shares in the prior year quarter. Billable headcount increased by 103 professionals or 1.7% compared to the prior year quarter.

Speaker 3

Non billable headcount increased by 81 professionals or 5% for the same period. Sequentially, billable headcount decreased by 32 professionals as attrition slightly exceeded gross hiring. Non billable headcount increased by 14 professionals. Now I will share some insights at the segment level. In Corporate Finance and Restructuring, revenues of $348,000,000 increased 9.5% compared to the prior year quarter.

Speaker 3

The increase in revenues was primarily due to higher demand and realized bill rates for business transformation and strategy and Transactions Services, which was partially offset by lower restructuring revenues. Adjusted segment EBITDA of $66,500,000 or 19.1 percent of segment revenues compared to $45,500,000 or 14.3 percent of segment revenues in the prior year quarter. The increase in adjusted segment EBITDA was primarily due to higher revenues, which was partially offset by an increase in variable compensation. In the 2nd quarter, restructuring represented 43%, business transformation and strategy represented 32% and transactions represented 25 percent of segment revenues. This compares to a split of 47% for restructuring, 28% for Business Transformation and Strategy and 25% for transactions in the prior year quarter.

Speaker 3

Year over year Business Transformation and Strategy revenues grew 24% and transactions revenues grew 13%, while restructuring revenues declined 1%. Sequentially, corporate finance and restructuring revenues decreased $18,000,000 or 4.9 percent as 10% growth in transactions revenues was more than offset by a 13% decline in restructuring revenues and a 3% decline in business transformation and strategy revenues. The sequential decline in restructuring activity occurred as several large engagements concluded. Adjusted segment EBITDA decreased $8,800,000 sequentially, primarily due to the sequential decline in revenues, which was only partially offset by lower compensation and SG and A expenses. Turning to FLC, revenues of $169,500,000 increased 2.9% compared to the prior year quarter.

Speaker 3

The increase in revenues was primarily due to higher demand for dispute services and higher realized bill rates for construction solution services, which was partially offset by lower demand for investigation services. Adjusted segment EBITDA of $15,000,000 or 8.8 percent of segment revenues compared to $25,600,000 or 15.5 percent of segment revenues in the prior year quarter. The decrease in adjusted segment EBITDA was primarily due to an increase in compensation and SG and A expenses, which more than offset the increase in revenues. Sequentially, FLC revenues decreased $6,600,000 up 3.7 percent, primarily due to lower demand for investigations and dispute services. Adjusted segment EBITDA decreased by $18,700,000 sequentially, primarily due to lower revenues and higher compensation.

Speaker 3

This quarter, we instituted a change in compensation plan for senior practitioners, where we now have more performance weighted compensation. The increase in compensation in FLC this quarter is largely because of a year to date catch up accrual related to this new plan. Our Economic Consulting segment's record revenues of $230,900,000 increased 14.4% compared to the prior year quarter. The increase in revenues was primarily due to higher demand and realized bill rates for M and A related antitrust and financial economic services, which was partially offset by lower demand and realized bill rates for non M and A related antitrust services. Adjusted segment EBITDA of $44,300,000 or 19.2 percent of segment revenues, compared to $35,500,000 or 17.6 percent of segment revenues in the prior year quarter.

Speaker 3

The increase in adjusted segment EBITDA was primarily due to higher revenues, which was partially offset by higher compensation, which includes the impact of a 3.6% increase in billable headcount and an increase in variable compensation as well as higher SG and A expenses. Sequentially, economic consulting revenues increased $26,300,000 or 12.9 percent, primarily due to higher demand and realized bill rates for M and A related antitrust services. Adjusted segment EBITDA increased by $30,100,000 primarily due to higher revenues and lower bad debt. As I mentioned on our last earnings call, in the Q1, we experienced revenue deferrals that resulted in and may continue to result in variations in the timing of revenue recognized on work already performed on one large matter. This quarter, we experienced a reversal of some of that deferred revenue, which benefited adjusted segment EBITDA by approximately $8,500,000 In Technology, record revenues of $115,900,000 increased by 18.9% compared to the prior year quarter.

Speaker 3

The increase in revenues was primarily due to higher demand for M and A related second request services, which was partially offset by lower demand for investigation services. Adjusted segment EBITDA of $20,900,000 or 18.1 percent of segment revenues compared to $20,100,000 or 20.6 percent of segment revenues in the prior year quarter. The increase in adjusted segment EBITDA was primarily due to higher revenues, which was largely offset by an increase in compensation, which includes higher as needed consultant costs and the impact of a 12.4% increase in billable headcount and higher SG and A expenses. Sequentially, technology revenues increased $15,200,000 or 15.1 percent, primarily due to higher demand for M and A related second request services. Adjusted segment EBITDA increased by $6,300,000 primarily due to higher revenues, which was partially offset by an increase in compensation, which included higher as needed consultant costs and the impact of a 2.5% increase in billable headcount.

Speaker 3

In Strategic Communications, revenues of $84,900,000 increased 2.8% compared to the prior year quarter. The increase in revenues was primarily to a $1,700,000 increase in pass through revenues. Excluding pass through revenues, revenues increased 0.7%, primarily driven by higher public affairs revenues, which was partially offset by lower corporate reputation revenues. Adjusted segment EBITDA of $11,600,000 or 13.7 percent of segment revenues, compared to $12,300,000 or 14.8 percent of segment revenues in the prior year quarter. The decrease in adjusted segment EBITDA was primarily due to higher SG and A.

Speaker 3

Sequentially, strategic communications revenues increased $3,700,000 or 4.6 percent, primarily due to an increase in public affairs and corporate reputation revenues as well as an increase in pass through revenues. Adjusted segment EBITDA decreased by $800,000 primarily due to higher compensation and SG and A expenses, which more than offset the increase in revenues. Let me now discuss key cash flow and balance sheet items. Net cash provided by operating activities of $135,200,000 compared to $11,000,000 of net cash used in operating activities for the Q2 of 2023. The year over year increase in net cash provided by operating activities was primarily due to an increase in cash collections resulting from higher revenues, which was partially offset by higher operating expenses and an increase in compensation payments, primarily related to higher variable compensation, annual salary increases and headcount growth.

Speaker 3

Free cash flow was $125,200,000 in the quarter. Total debt net of cash of negative $166,400,000 on June 30, 2024, compared to $137,200,000 on June 30, 2023 and negative $39,000,000 on March 31, 2024. Turning to guidance. After a record first half of twenty twenty four, we are raising our full year 2024 guidance ranges for revenues in APS. We now estimate revenues will range between $3,700,000,000 $3,790,000,000 which compares to our previous range of between $3,650,000,000 $3,790,000,000 We now estimate EPS will range between $8.10 $8.60 which compares to our previous range of between $7.75 $8.50 Our updated guidance is shaped by several key factors.

Speaker 3

First, with half of the year's results accounted for, it is time to narrow our guidance range. And we are moving up the bottom end of both our revenue and EPS guidance. With EPS year to date above our expectations, primarily because of the lower effective tax rate, we are revising the top end of our EPS guidance upwards. 2nd, we typically expect both our clients and practitioners may take vacation in Q4, which has historically impacted our results. I want to recognize that last year was an exception in this regards, as many of our practitioners in many areas were busier than is typical during the Q4.

Speaker 3

3rd, I am sure many of you will be interested in our views on both restructuring and M and A for the balance of the year and how one may offset the other. Let me at the outset say that predicting this reliably is difficult. Our modeling that shapes our guidance assumes that restructuring activity remains at Q2 levels through year end. Though we expect that M and A related work, particularly in the Economic Consulting and Technology segments will remain strong. We do not anticipate it will continue at the record levels we saw in Q2, particularly as we see certain matters ending.

Speaker 3

4th, as Steve shared, we are making investments in our business. Although our headcount growth this year has not been significant, we continue to have lots of conversations with senior individuals. We cannot say with certainty though when such investments will be made and therefore how much impact they may have in this calendar year. Additionally, at the junior level, we are poised to welcome more than 300 campus hires in the second half of the year. Before I close, I want to emphasize a few key themes that I believe underscore the attractiveness of our company.

Speaker 3

First, as we continue to grow our presence globally, we have maintained our commitment to being an organization that deeply cares for its professionals, as demonstrated by our recent certification as a great place to work in 11 countries, Australia, Brazil, Canada, France, Germany, Hong Kong, Singapore, Spain and the UAE, the UK and the U. S. 2nd, our portfolio of businesses is uniquely diversified, which can allow us to grow regardless of business cycle. 3rd, as Steve said, we have the ambition, wherewithal and opportunity to invest in great talent. Finally, the strength of our balance sheet allows us the flexibility to continue to boost shareholder value through organic headcount growth, share buybacks and acquisitions when we see the right ones.

Speaker 3

With that, let's open the call up for your questions.

Operator

Thank you. We will now begin the question and answer session. And the first question will come from Tobey Sommer with Truist. Please go ahead.

Speaker 4

Thank you. I wanted to ask a question about hiring, Steve, since you and both Ajay spoke about it at length. What are the prospects as you see them for group hires as opposed to individual consultants coming over laterally? Thanks.

Speaker 2

Yes. A lot of that depends on the specific agreements that senior people have with their current employers. We honor people's non competes and non solicits. It's just part of being an ethical public company, ethical company period. So it is in many cases senior people are not allowed to bring the whole group with them.

Speaker 2

On occasion that is the case because there's dislocations in competitors that mean that they're released from their non competes and so forth and we'd certainly look eagerly at that. What does happen more typically is you hire a senior person and then that gets us on the radar screen. Some of the junior people reach out to us separately. And then certainly in most cases a year after people have joined us, there's no restrictions on them and then they can directly reach out to those people. But for us, it has not been often like 80 people joining at once.

Speaker 2

It's just the honoring legal restrictions prevents that. Over time, some of that gets reconstructed. Does that respond, Toby?

Speaker 4

It does. Thank you. If you could on the antitrust side, describe the demand outlook that you see in for non M and A related antitrust. If you think that has legs, it's top of mind given our elections here as well as elections globally in recent months?

Speaker 3

Tobey, it has legs. It is continuing. I'm not going to link it to the elections because who knows with that. But the matters are continuing and new matters emerge. But what stood out this quarter was more the M and A related antitrust.

Speaker 4

Thank you. And then could you comment on the seasonal December slowdown that you say is in your forecast? Which segments feel this the most?

Speaker 3

They all do, Toby. They all do because folks take vacation, clients take vacation. Last year though was an exception. And I think if you look at the commentary from Steve after our Q4, we were exceptionally pleased that people were serving our clients and the demand was there and we have that higher revenue in Q4 than Q3, which almost never occurs. So that's not what you can model.

Speaker 2

Let me just add to that. I mean, basically, people take vacation unless there's a crisis. And so the exceptions so we have the phenomenon across all our segments except for segments that get affected by a crisis. Crisis can be a bankruptcy, it can be a deal or some other crisis. And it's when that occurs in December that clients work over the holidays and we work over the holidays.

Speaker 2

But it's most people don't need for that. And on average, it doesn't happen. It happens sometimes. Does that help, Tobey?

Speaker 4

It does. Last question for me. Could you expand and provide some color on the change in compensation that you rolled out? How that kind of originated? How it's been received?

Speaker 4

And any contours and dimensionalize the change for us? Thank you.

Speaker 3

So let me give the answer on the dimensionalizing first and then we'll work backwards. So the way to look at the EBITDA for the segment is average the 1st two quarters. That's a better way than looking at the Q1 separately and the second separately. Our Q1 was terrific on margins and EBITDA and FOC. And we would like to get back to that, though it might take a couple of quarters to get there.

Speaker 3

So that's the first one on the EBITDA part. In terms of the compensation plan, essentially, it's a more variable based compensation plan with if you hit a certain revenue threshold, you get a certain bonus. And also if you do a certain type of work, you get a percentage of the revenue generated from that type of work. So it's a more variable piece. And this is similar to what we have in CF or in corporate finance, for example, in certain geographies.

Speaker 3

This is not a new type of a plan for us. Now, there's also some reductions in fixed compensation that comes with it that you see the impact of in subsequent quarters, but it's smaller. So that's the overall plan and its contours.

Speaker 4

Thank you.

Operator

The next question will come from James Yaro with Goldman Sachs. Please go ahead.

Speaker 5

Good morning and thanks for taking my questions. Maybe just starting with the updated EPS guidance. I think when I try to run some of the back of the envelope math, it appears to factor in relatively little EBITDA margin expansion in the second half, even after the billable headcount did come down in the second quarter. Maybe you could speak to whether we should anticipate margin pressure in the second half of this year and perhaps whether this is driven by the robust hiring of senior Managing Directors you talked about and whether this would be in SG and A or in direct costs?

Speaker 3

Thank you for the question, James.

Speaker 2

So let me get let me break

Speaker 3

it down. So it is hiring is a key part of it. We expect lots of the decline in 2nd quarter versus 1st quarter is small. We always expected the hiring to take place more in the Q3, and we're going to get that in the Q3. And we and as Steve mentioned, we have lots of folks that we are talking to, though that one I cannot say exactly when it will occur and how long and what will, but that is part of our thinking in terms of the direct cost piece of this.

Speaker 3

Plus, we certainly hope and expect a lot of folks will get to those thresholds that I was just talking about. So typically, you also see bonuses pick up as you get closer to the end of the year and that too then affects you on the direct cost side. So that's that. On SG and A, I think we probably hit the high watermark in Q2 in terms of where we think on SG and A for the quarter for this year. So you can have exceptional events occur, big gatherings that can things up sometimes.

Speaker 3

The key of course is revenue. It always is. And you know what happened last year with Q4, but that's not how you can model and that's not what you put in your projection. So yes, we do expect at the midpoint a slight margin contraction.

Speaker 5

We change in administration, how would you expect this to affect 2 businesses specifically? Firstly, the M and A and non M and A antitrust business, Econ Consulting and then the second Request business in Tech and specifically, I think the assumption that I'm embedding in my question is that there might be a more permissive antitrust backdrop under a Republican administration?

Speaker 2

So, as you might expect, these are discussed items that are heavily in discussion in our firm and my conclusion is nobody has a perfect crystal ball. So I think I'm going to disappoint you on my answer here. I think first of all, most people will have a crystal ball on actually what is going to happen in elections. And then actually what people do if reelected or after elections is not always perfectly forecast. And then the implications of that for individual businesses are not always forecast correctly.

Speaker 2

And so I have actually tended to suggest that we can have all those discussions internally and

Speaker 3

we should focus on it and make sure if

Speaker 2

we see something we act to it. But actually the safer courses is actually to focus on building our business. When we hire great, this is going to be 101. But when we focus on building great people, if the deal flow is antitrust deal flow is down, there's something else going on and the great people get involved in that and so forth. And I think that's our history.

Speaker 2

We've had lots of different administrations during the 10 years that I've been here with lots of different predictions and lots of different other global events, Brexit, and I think people were over obsessed with those. They had short sometimes had short term effects on short term businesses. When we've been doing the right thing, we've been a powerful growth engine. And so I try to focus us on that, but I must say lots of discussion internally.

Speaker 3

I just think nobody has got a

Speaker 2

perfect crystal ball to answer you. If you have one, I'll take the answer though, James. Thank you.

Speaker 4

Thanks, Steve.

Speaker 2

Did I duck your question, James?

Speaker 5

No, I really I figured as an analyst, I had to ask. I don't have crystal ball either, but I do appreciate your thoughts there. Maybe just one other one, which and I think this is a good thing. Your cash levels rose $23,000,000 quarter on quarter on my math. And obviously, you have less interest expense versus this time last year.

Speaker 5

You've obviously talked about the organic growth aspirations and hiring you planned, but maybe you could just talk about if cash continues to rise, how you might think about deploying some of that excess capital?

Speaker 3

We expect cash to continue to rise. So that's number 1. Number 2, there's no change. 1st and foremost, we'll pay down the small revolver we have. Then we will we always start in where we have more than enough capital to keep investing in the right organic growth.

Speaker 3

And we have very, very, very tough filters for acquisitions, but we look at those when the right ones come along. And we over any period of time, we have returned capital to shareholders, but we do so opportunistically.

Speaker 2

Let me maybe just add to that is the look, the cash is a powerful engine of growth in this company, but it's only a powerful engine of growth, obviously, if you use it wisely. And if you look over a long enough history, you've seen periods where we've not used it wisely and it hasn't created long term value. So we take very seriously the question of making sure we lever that for the long term interest of our shareholders in our company. And I would say that has meant sometimes the cash accumulates until we see the right opportunity and we're not afraid to do that. And then when we have a right opportunity, we're not afraid to use it.

Speaker 2

And I think that is the philosophy that I've had deep conversations with the Board about and our management team. And we take that responsibility of making sure use of cash is used powerfully to advance the company extremely seriously. And so we're monitoring it too, but we're not going to just burn it because it's in our pocket, James. Does that make sense?

Speaker 5

Absolutely. I appreciate both of your thoughts. Thanks a lot.

Operator

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

Speaker 6

Hi, good morning. Thanks for taking my questions. I'm going to ask the restructuring one, which is I think actually kind of encouraging. But in the whole, can you speak to kind of the bankruptcy market? I think it was flattish for you guys this quarter, but it sounds like sequentially down because some larger projects running off.

Speaker 6

Has there been any change relative to the last quarter or 2 in the market as a whole based on where you're sitting? And maybe a little bit more context for why you expect or baking in restructuring staying at Q2 levels through the rest of the year?

Speaker 3

So, firstly, I've often been wrong in this. So getting this done reliably is very, very difficult. Let me just say that at the outset. But you look at the trends as you see them and you make projections and you put a range around it. So for starters, nobody we've been in this time where people have lower rates, higher rates and whatnot.

Speaker 3

But at this juncture, I don't think there's a single rating agency that is saying that speculative debt default rates are going to go up. So that is a change. Nobody is saying default rates are going to go up. There is consensus on that. So that's number 1.

Speaker 3

Number 2, we are seeing a lot of what is called liability management as opposed to in quote operational restructuring. And where in the past there was a lot and there's been a lot of liquidity, there was a lot of covenant light debt issued out there. But that covenant light debt allows you to do is sometimes raise more unsecured debt with unrestricted subsidiaries and this, that and

Speaker 2

the other. So there's a

Speaker 3

lot of liability management taking place, which plays more to the investment banks than it does then to us where we do the full blown restructuring and in core processes. So that's the contour of the market. Now that means we've assumed 2nd quarter levels continue that could change. We have a bunch of matters that we're working on, all none of the really big ones. You get one of the big matters that whole projection changes upwards.

Speaker 3

But the more realistic, correct midpoint assumption is at the levels in Q2.

Speaker 6

Great. Thank you. And then on kind of the hiring commentary, Steve, I think you made mention of the fact that usually these hires, lateral hires don't hit the ground running immediately, which makes perfect sense. I'm just curious if you could remind us kind of what that productivity curve looks like? Is it a couple of quarters, like if you start hiring very aggressively or some of these announcements come through and people are alive in July August, is that 2025 meaning they're kind of at their full run rate or just any additional color there for how we should think about the lag?

Speaker 2

Yes. Look, I think there's no science to this exactly, but the rule of thumb I have used now for several decades in professional services is senior hires losing money in the 1st year, they break even in the 2nd year and they start to make you money in the 3rd year. Sometimes you beat that, sometimes you don't beat that. It's not a bad rule of thumb. And I use that internally to say, don't hire somebody you're not willing to invest in for a while because that's what we're doing.

Speaker 2

We're trying to build businesses. So the junior hires follow that if they're on an island with those senior hires and totally tied to those senior hires. If the junior hires are redeployable across things, the junior hires can be made accretive much quicker than that. Does that respond to your question?

Speaker 6

Definitely. Definitely. And then maybe if I could squeeze in one more. On economic consulting, obviously, really, really strong revenue growth in dollars this quarter. I understand that there's some catch up on the revenue deferral from last quarter, but margin stepped up pretty meaningfully sequentially.

Speaker 6

And I'm just trying to kind of put that next to previous commentary about your expectation that margins would be down in this segment year over year. Does the strength of that kind of end market backdrop adjust that outlook at all? Is 2Q a likely outlier? Any other kind of commentary around the economic consulting margins in the

Speaker 3

margins. So first thing, you should add the 1st and second quarters. Again, don't like in the Q1, we said that this is low, but with the deferred revenues and whatnot. So that deferred revenue, the $8,500,000 EBITDA, revenue is around $9,000,000 or $10,000,000 Most of the cost has been incurred earlier. So it's extremely high margin EBITDA.

Speaker 3

So you should add the 1st two quarters and look at the margin in that context. So that's sort of number 1. Number 2, there remain competitive pressures and we've talked about those across our business, not just in economic consulting, that's then impact margins with compensation. And 3rd, we are a large in economic consulting there, we are a large M and A antitrust shop. And there too, large matters can come and go and you can have hiatus in between.

Speaker 3

So those are all the factors that guide that judgment.

Speaker 6

Thank you very much.

Operator

Your next question is a follow-up from Tobey Sommer with Truist. Please go ahead.

Speaker 4

Thank you. If you are able to achieve your hiring objectives in a year, year and a half something that's far enough away to comment on. How rapidly would headcount be growing? And is it possible to increase EBITDA if you achieve that headcount growth?

Speaker 2

Yes. Look, let me address. I don't see the growth prospects of this company as less than what we have been achieving. I think there's huge amount of upside of this company over a lot of years to come. And so we are not we have not reduced our aspirations for growth and therefore aspirations for headcount.

Speaker 2

It just happens that this year on year, it's well below that aspiration at 2% in terms of billable headcount. And then look, we are not I am not particularly focused on growing EBITDA percentages. But when we have grown our headcount and we've maintained the EBITDA percentages because we've grown the revenue, I mean our EBITDA has soared, right? And so I would envision that is certainly our goal. I've never had a goal of getting a particular quarter to anything, but I have we have enormous goals to grow this bloody company substantially.

Speaker 2

And as a consequence, with that, we would expect over an extended period of time as we have shown that we will grow top line, headcount and bottom line in a substantial way. Does that respond?

Speaker 4

It does. It's just going from 1%, 2% headcount growth to some aspirational kind of longer term trend of mid to high single digits. If those people are productive that can weigh on EBITDA dollar growth? I'm not asking a margin question.

Speaker 2

Well, yes, no, look, I think we don't expect over any extended period of time the people we're adding to be less productive than our current people. So if they if you're going to have temporary issues because you're catching up from a low growth period to a higher growth period. But over time that should normalize and you should be able to grow revenue and not decrease on an extended period of time EBITDA percentages. So we don't see this as a long term degradation of EBITDA percent. It's just a matter of if you have a surge of hires in a couple of quarters, it can have a short term effect.

Speaker 2

Does that and so am I responding more clearly this time? Yes. All right. Good. Thank you.

Speaker 2

Any other questions? Well, look, let me say thank you very much for your continued attention and support. I mean, we're excited about the quarter. We're excited about the half year. More fundamentally, we're excited about the trajectory of this business over and we're in 2 different markets.

Speaker 2

We're in client markets. We're also in the market for talent. And notwithstanding this conversation, of course, should short term talent ads have short term effects, the fact that we are a destination for great talent that people are picking up the phone and calling us is a great sign about the future of this company. And I'm excited. I hope this was helpful for you.

Speaker 2

Thanks for your support.

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Earnings Conference Call
FTI Consulting Q2 2024
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