FTI Consulting - Q4 2022

Transcript

Operator (participant)

Good day, welcome to the FTI Consulting Fourth Quarter and Full-Year 2022 Earnings Conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Mollie Hawkes, Head of Investor Relations. Please go ahead, ma'am.

Mollie Hawkes (Head of Marketing, Communications, and Investor Relations)

Good morning. Welcome to the FTI Consulting conference call to discuss the company's fourth quarter and full-year 2022 earnings results as reported this morning. Management will begin with formal remarks, after which they will take your questions. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21 of the Securities Exchange Act of 1934 that involve risks and uncertainties. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, future revenues, future results and performance, expectations, plans or intentions relating to financial performance, acquisitions, share repurchases, business trends, ESG-related matters, and other information or other matters that are not historical, including statements regarding estimates of our future financial results and other matters.

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.com, as well as other disclosures under the headings of Risk Factors and Forward-Looking Information in our annual report on Form 10-K for the year ended December 31st, 2022, 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 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 the reconciliations. Lastly, there are two 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 fourth quarter and full year 2022 results.

Of note, during today's prepared remarks, management will not speak directly to the quarterly earnings presentation posted to the investor relations section of our website. To ensure our disclosures are consistent, these slides provide the same details as they have historically, and as I've said, are available on the investor relations section of our website. With these formalities out of the way, I'm joined today by Steven Gunby, our President and Chief Executive Officer, and Ajay Sabherwal, our Chief Financial Officer. At this time, I will turn the call over to our President and Chief Executive Officer, Steve Gunby.

Steven Gunby (President and CEO)

Thank you, Mollie, and welcome everyone, and thanks each of you for joining us this morning. I'm sure most of you have seen this morning's press release, and if you have, you've noted that 2022 was a year in which we once again reported record revenue, record Adjusted EBITDA, and record adjusted EPS. A terrific 2022. With your permission, however, I'd like to not talk too much about 2022 and rather leave it to Ajay to go through the year in detail. Instead, allow me to focus on something that I find even more important than the 2022 results, which is the multi-year trajectory this company has been on and which I believe is positioned to stay on. The critical point to me is that though 2022 is a good year, it's not a one-off good year.

If you look at the last five years, we have averaged double-digit revenue growth organically. We have also done a couple of terrific tuck-in acquisitions during that period, even apart from those acquisitions, we've averaged double-digit revenue growth. In terms of adjusted EPS growth, we have had adjusted EPS growth not for a year or two, but now for eight consecutive years. I think some of you have heard me talk a lot about the stair step nature of this business, that we never grow in straight lines, never in our individual businesses, certainly not in sub-businesses or individual geographies, but actually also for the company as a whole. Some years in that eight had a lot of revenue or EPS growth, and some years had just a little bit.

When you've had eight consecutive years of a mixture of a lot and a little, it adds up. It adds up to considerably more than a little. In fact, in our case, it adds up to more than a quadrupling of adjusted EPS during that period. To me, far more important than any given year's results, it's the multi-year performance that I focus on and our teams focus on. To me, that multi-year performance is a reflection of what our teams have turned this company into, an institution that is winning in both of the marketplaces that matter. The first is the one we always think about, the marketplace of clients, of winning and delivering great work.

We're also winning in the second one, which is the marketplace of talent, of attracting great talent, supporting that talent, seeing it develop into people who are committed and able to deliver that great work. By winning in both of those marketplaces and having people who are focused on winning in both of those marketplaces, we have, in my opinion, turned this company into one that has the ability and a proven ability to thrive, yes, in good times, but also through bad times. I've made some of those observations before. A couple folks said it would be great if I could talk to some of the questions that naturally follow those observations, which is dive down a little bit deeper. What is actually allowing that sort of sustained multi-year success?

Second, why am I or, and are we confident that this sort of success is durable and expendable going forward? Let me take a crack at both of those questions. Starting with the question of what has allowed success, I think all of us know that businesses are incredibly complicated. Behind any success, you can cite 1 million factors or details, and I can't address all those. Let me highlight two things that I think are incredibly fundamental, perhaps the most fundamental things that have allowed us to prosper in this way over the multi-year period. The first is that I believe over the last years, we have built a management team and now increasingly an entire organization that is committed, irrespective of market headwinds and through the zigs and zags that happen in this industry, committed through all of that to continually and confidently bet.

Bet where we have a right to win and invest and support the talent who are passionate about those positions. That sounds like an extraordinarily basic concept, and in some ways it is. When I observe real life, the sustained commitment to those values, not just in good times, but also in bad times, turns out to be perhaps less common than one might think. Making that sustained commitment turns out to be powerful. Let me give a couple of examples through our company. Corp Fin, in 2022, which Ajay will talk about, our restructuring practice grew revenues 14% year-over-year. Sounds pretty good, and based on those results, one could assume, it must have been a good year for the restructuring markets. Interestingly enough, the answer turns out to be no. It was not a great year for the market as a whole.

In 2022, according to Debtwire, North America had the lowest number of bankruptcy filings over $50 million since 2014. A decline of 13% compared to 2021 and less than half of what we saw in 2020. We grew 14%. Zooming out, our restructuring practice revenues have grown 67% since 2017. Even though 2022, by all measures I know of, was a worse year for restructuring than 2017. It wasn't the market. What did our teams do? Let me talk to three of the moves. They had confidence in the core parts of our business, but didn't sit on them. They doubled down on them. For example, our creditor rights business in the U.S., we were already the number one player. Our teams did not stand still.

We hired people, we promoted people, we added people in new verticals like healthcare and airlines, even though we were already number one. Secondly, we looked at areas where we're historically where we underrepresented, where we had talent. For example, our company-side business. We had great talent. We were underrepresented compared to where we thought we should be. We invested behind that talent, grew it dramatically. The market began to notice. The last couple of years, you may have noticed that we've won several of the biggest company-side jobs in North and South America. Third, our teams leveraged dislocations at competitors, as well as the attractiveness of our increasingly strong global network to attract great people from the outside at rates that exceed anything we've ever done in the past and in more widespread geographies. For example, Germany, France, Australia, the Middle East, and others.

Those three moves, plus a few others, caused us to go from being a very strong player in a couple of markets to becoming the number one or two restructuring firm in more markets than anyone else in the world, which in turn positions us to become the go-to firm for the biggest global job, which in turn is incredibly attractive for the best talent in the marketplace. Corp Fin is not some fuzzy theory of, well, maybe sustained betting behind talent where we have a right to win can work. It's tangible actions that reflect those theories, tangible actions that translate into actual powerful results. The story I just told is focused on the restructuring part of the business.

Interestingly enough, as big as the increases over the last five years have been on the restructuring side, we've grown our Corp Fin non-restructuring businesses, the business transformation and transaction side, even faster during this period. We have, in those businesses, bet behind dynamic leaders who had confidence in sub-practices and teams driving those sub-practices, whether it's transaction services or our Office of the CFO services or other businesses. Those efforts collectively have caused that collection of business to more than triple over the last five years. That's a snapshot of Corp Fin, which we typically start with because it's our biggest business. To me, there are analogous stories across every one of our business. The specifics are always different because the industries are different, the competitive situation is different. The stories all reflect commitment to that same set of core principles. The second example, Tech.

For those of you know the Tech business know our team's faced an industry with a lot of challenges. There's a tremendous amount of competition, an incredible amount of margin compression. In the face of those challenges, our teams have delivered over 80% revenue growth since 2017. By the way, if you look at the amount of data processing done, given the price reductions, it turns into something absurd in terms of the amount of data processed. Either way you measure it, that growth, I believe, represents by far the strongest organic growth in this industry. Actually, before I continue on Tech, let me make a side note that applies to Corp Fin and Tech, but also all of our businesses. These successes are fabulous, none of our businesses, none of the businesses in Tech or Corp Fin or them as a whole was up every quarter.

There were zigs and zags in the Corp Fin story, and the restructuring story, and the OCFO story, and the transaction stories, and there were huge zigzags in our Tech story. You can even see that last year. For example, Tech, I think this past year, our EBITDA had a 37% decline from the first quarter of 2022 to the second quarter of 2022. Not because the business suddenly became terrible, but because of a combination of the fact that big jobs could benefit or negatively impact any quarter and the fact that our commitment to making the right investments in people independent of whether that big job happened to be there or quarter can further exacerbate a slow quarter. In Tech five years ago, our leadership and teams knew we were strong with a right to win.

We had feedback from our clients that on the most complicated cases, we were far better. The team bet. They bet first making sure that on those complicated jobs we delivered for our core clients. Confidently, they began to engage in increasingly systematic calling programs with clients who hadn't worked with us, who hadn't experienced that difference, to encourage them to give a trial so they could feel and test for themselves. In some cases, it took more than a year, sometimes closer to two years before we got the trial. I'm incredibly pleased to say, as people have tried us, our share has grown, and that gets reflected in the numbers I just talked about.

The teams in Tech are doing other things to ensure their capabilities continue to be leading edge, like focusing on emerging data like Teams, Slack, Google Workspace, chat apps, and others. They invested behind core adjacencies. The point is, the market did not give our Tech teams that 80% revenue growth. Our teams did the things that were required to create that growth. I believe you get to similar conclusions if you look at our other businesses or if you look at it by geography. We talked to our teams in Australia on how we've seized growth out of that market over the last years and how we've been able to get great talent, bet behind them, and use that to attract more great talent.

At this point in our company's history, I believe we have leadership teams across every one of our businesses that is committed to that journey, that's committed to betting on talent, on the winning positions that we believe in, regardless of the zigs and zags. There are always zags on this journey. You see it this year, for example, in a lot of zags in parts of EMEA or FLC. When you have a zag, you always have to test yourself to say, "Oh, is that zag really a blip or is it a reflection of something that we're doing wrong or something more fundamental?" You have to do that examination. Once we verify that the zag is due to short-term factors, our teams continue to bet confidently. In EMEA and FLC, we've done that aggressively over this course of this year, notwithstanding some zags.

The second closely related point is to come at the same question, not from the client side or the business side, but from the people side. Because of any of the success that I just talked about in professional services can't happen without great people. You can't do what we just said our teams are doing without focusing not just on the clients, but also on winning the war for talent. We have to focus every day to make sure our great people feel supported in developing themselves and developing their businesses, and make sure the external world is increasingly understanding how attractive our firm is if they have that ambition as a place to grow their careers. The second key to our multi-year success has been real success on those dimensions over the last five years. We've grown headcount by over 65%.

The number of applications we've received each year across this company has more than doubled. We've nearly doubled the number of lateral hire SMD and MD hires. We promoted 224 people to SMD and 537 people to MD, an increase of over 50% from what those numbers were five years prior. I think perhaps most fundamentally, we now have a collective aspiration to be the firm that the best people wanna be part of, a firm where people can have confidence that if they're ambitious, that they can meet those ambitions here. Over the last five years, I'm pleased to say some of that ambition and commitment has been seen by some external recognition groups. We've been named by one group a best firm to work for, another a top firm for graduates and women.

Another said we're among America's most just companies. I like those external awards. I actually think more powerfully, That sense of our commitment to people is getting spread by word of mouth. People who come to us are not saying to their friends, "Wow, FTI is a perfect organization." We, of course, are not. They are saying in their own words, "Wow, it's a terrific organization where I actually feel incredibly well supported." I'm not sure you can do better than that sort of validation. You know, as I said up front, in order to drive multiyear success, it's not two things. You have to do 1 million things right. I used to do work in retail.

In a retail store, in addition to all the things you have to do, you have to make sure the boxes don't fall on the heads of your customers, make sure the back room isn't getting clogged, your computers aren't getting unplugged. Sometimes there's an essence to why a retailer wins or loses versus his competitors. To me, the essence is those twin drivers, the two drivers that I mentioned. First, ongoing challenging of ourselves to find out where we have really great client propositions, where we have great people, and being willing to bet behind them independent of current market conditions. Second, making that known to great people. Because in my experience, great people want to be at institutions like that, where they're building brands, where they're attracting and developing people who are equally committed to building great businesses.

Each of those pieces are separate, but there's a virtuous loop between them. What does that all add up to? It still, of course, doesn't add up to a straight line for any one of our businesses or even for the company as a whole in any given year. We have had and we will have zigs and zags. In some ways, I think that's why we're having success, because if everything went up in a straight line, then it would be easy for everybody to copy. The discipline around it, the commitment of the management team to do it during the zags is the harder point. I believe we have today both a management team and an entire organization that is committed to those twin drivers. That is, to me, a powerful foundation for growth and a durable one.

On a personal level, it's a fun and exciting one that makes this company a joy to lead. With that, let me turn this over to Ajay for the more granular basics of 2022. Ajay?

Ajay Sabherwal (CFO)

Thank you, Steve. Good morning, everybody. In my prepared remarks, I will take you through our company-wide and segment results and guidance for 2023. I will begin with highlights from 2022. Revenues of $3.03 billion increased 9.1% or $252.7 million. Excluding the estimated negative impact of FX, revenues increased 12.2%. GAAP EPS of $6.58 decreased $0.07 from $6.65 in 2021. Adjusted EPS of $6.77 increased $0.01 from $6.76 in 2021. The difference between our GAAP and adjusted EPS for the year reflects an $8.3 million fourth quarter special charge related to severance and other employee-related costs, which reduced GAAP EPS by $0.19.

Net income of $235.5 million compared to $235 million in 2021. Adjusted EBITDA of $357.6 million was up $3.5 million from $354 million in 2021. Last February, we talked about our ambition to grow headcount boldly in 2022. Reflecting those intentions, our headcount increased by 855 or 12.6% in 2022, which compares to an increase of 459 or 7.3% in 2021. Hiring, promotions, and compensation increases resulted in a $150.5 million increase in direct costs in 2022.

Revenue growth more than offset the increase in such direct costs, with gross profit increasing $102.2 million year-over-year and gross profit margin expanding from 31% to 31.8%. When we provided 2022 guidance, we also said we expected a sharp increase in SG&A. For the full-year 2022, approximately half of the year-over-year increase in SG&A was related to higher travel and entertainment, marketing and business development, and employee-related training costs as we opened up from pandemic restrictions in many places and experienced pent-up demand for meetings. SG&A expenses increased $103.2 million year-over-year, moving from 19.4% of revenues in 2021 to 21.2% of revenues in 2022.

This increase in SG&A expenses offset the increase in gross profit, resulting in our net income and Adjusted EBITDA being up only slightly year-over-year. Overall, we are pleased with these results. Now I will turn to fourth quarter results. We ended the year strong with a fourth quarter that exceeded our expectations, driven in part by higher than expected revenue, boosted by a pickup in restructuring. For the quarter, revenues of $774.4 million increased 14.5%, with revenues up across our Corporate Finance & Restructuring, Forensic & Litigation Consulting, or FLC, Technology and Strategic Communications segments. Excluding the negative impact of FX, revenues increased 18.4%.

GAAP EPS of $1.33 included the $8.3 million special charge, which reduced EPS by $0.19 compared to $1.07 in the prior-year quarter, which included $2.4 million of non-cash interest expense related to our 2023 convertible notes, which reduced EPS by $0.06. Adjusted EPS of $1.52, which excluded the special charge compared to adjusted EPS of $1.13 in the prior-year quarter, which excluded the non-cash interest expense. Net income of $47.5 million compared to $38.2 million in the fourth quarter of 2021. Adjusted EBITDA of $92 million, which excluded the special charge compared to $62 million in the prior-year quarter. Now turning to our performance at the segment level for the fourth quarter.

In Corporate Finance & Restructuring, revenues of $292.8 million increased 26.5% or 29.5% excluding FX. The increase was primarily due to higher demand for restructuring and business transformation services. Business transformation and transactions represented 54% of segment revenues in Q4 2022 compared to 62% in Q4 2021. Restructuring represented 46% of segment revenues in Q4 2022 compared to 38% in Q4 2021. Adjusted Segment EBITDA of $52.4 million or 17.9% of segment revenues compared to $22.2 million or 9.6% of segment revenues in the prior-year quarter. This increase was primarily due to higher revenues, which was partially offset by an increase in compensation, including the impact of a 14.3% increase in billable headcount and higher SG&A expenses.

Sequentially, revenues increased 10.3%, largely due to a 18.7% increase in restructuring revenues and higher success fees. Among industries where we have been helping clients with restructuring matters include airlines, specialized and consumer finance, including cryptocurrency-related matters and telecommunications. In FLC, fourth quarter revenues of $160.4 million increased 16.2% or 18.8% excluding FX. The increase was primarily due to higher demand for investigations, data and analytics and health solution services. Adjusted Segment EBITDA of $13.8 million or 8.6% of segment revenues compared to $8.5 million or 6.2% of segment revenues in the prior-year quarter.

This increase was primarily due to higher revenues, which was partially offset by higher compensation, including the impact of a 5.9% increase in billable headcount and higher SG&A expenses. Economic Consulting's revenues of $172 million decreased 0.2%. Excluding the estimated negative impact from FX, revenues increased 4.9% compared to the prior-year quarter. The increase in revenues was primarily due to higher realization for M&A-related antitrust and international arbitration services, which was partially offset by lower demand for financial economic services compared to the prior-year quarter. Adjusted Segment EBITDA of $27.3 million or 15.9% of segment revenues compared to $30 million or 17.4% of segment revenues in the prior-year quarter. This decrease was primarily due to higher SG&A expenses.

Sequentially, Economic Consulting's revenues decreased 11% as our record Q3 2022 revenues were boosted by the recognition of previously deferred revenue. In technology, revenues of $76.8 million increased 18.9% or 22.2% excluding FX compared to Q4 2021. The increase in revenues was primarily due to higher demand for investigations and M&A-related Second Request services. Adjusted Segment EBITDA of $11.8 million or 15.3% of segment revenues compared to $7.8 million or 12.1% of segment revenues in the prior-year quarter. This increase was primarily due to higher revenues, which was partially offset by an increase in compensation, including the impact of an 18.8% increase in billable headcount and higher SG&A expenses.

Sequentially, technology revenues decreased 9.6%, largely due to lower demand for M&A-related Second Request services. Lastly, in Strategic Communications, revenues of $72.4 million increased 3.7% or 10.4% excluding FX, compared to Q4 of 2021. The increase in revenues was primarily due to higher demand for public affairs and financial communications services. Adjusted Segment EBITDA of $10.5 million or 14.5% of segment revenues compared to $14.9 million or 21.4% of segment revenues in the prior-year quarter. This decrease was primarily due to higher compensation, including the impact of a 19.2% increase in billable headcount and an increase in SG&A expenses. I will now discuss certain cash flow and balance sheet items.

Net cash provided by operating activities of $188.8 million compared to $355.5 million for the year ended December 31st, 2021. The decrease in net cash provided by operating activities was primarily due to higher compensation, operating expenses, and income taxes paid, which was partially offset by an increase in cash collected. Notably, operating expenses this year included more items that were prepaid, such as travel and entertainment expenses, with a resulting negative impact on cash flow. Total debt net of cash was a negative debt position of negative $175.5 million at December 31st, 2022, which compares to a negative debt position of $10.8 million at September 30th, 2022.

The sequential decrease in total debt net of cash was due to strong cash collections in the fourth quarter, which is historically our strongest quarter for cash collections and was partially offset by share repurchases. Cash and cash equivalents of $491.7 million at December 31st, 2022, compared to $494.5 million at December 31st, 2021. On December 1st, 2022, our board of directors authorized an additional amount of $400 million to our stock repurchase program. During the quarter, we repurchased 425,016 shares at an average price per share of $153.09 for a total cost of $65.1 million.

As of December 31st, 2022, approximately $478.5 million remained available under our stock repurchase authorization. Turning to our 2023 guidance, we are, as usual, providing guidance for revenues, EPS, and adjusted EPS. After a year of double-digit revenue growth but only a slight increase in adjusted EPS, we are guiding to renewed EPS growth in 2023. We estimate that revenues for 2023 will be between $3.33 billion and $3.47 billion. We expect our EPS to range between $6.80 and $7.70. We currently do not expect our adjusted EPS to differ from EPS. Our 2023 guidance range incorporates several assumptions, including, first, revenue guidance reflects our expectation for growth in all business segments with the additional capacity that we added in 2022.

Second, we assume headcount growth in 2023 at similar levels as in 2022, with the caution that short-term profits could be significantly adversely affected if market disruptions afford us the opportunity to bring in a substantial number of lateral hires. Third, we expect restructuring activity to remain elevated through 2023, though there can be no certainty of the strength and length of this restructuring cycle. Conversely, we expect M&A activity to be slower in 2023. Fourth, we expect improved performance in FLC and to begin to realize the benefits of the investments we have made in EMEA across all segments. Fifth, we expect SG&A in 2023 to neither revert to the lower levels we saw during the pandemic nor to grow at the rate we saw post-pandemic in 2022.

Finally, tax planning strategies executed over the last few years reduced our effective tax rates. Though we continue to look for additional opportunities, we currently expect a considerably higher tax rate for 2023 compared to 2022. For 2023, we expect our tax rate to range between 24% and 26%, in part, because in many countries where we operate, tax rates are going up. I must point out that our assumptions define a midpoint, and we provide a range of guidance around such midpoint, which I characterize as our current best judgment. Often, we find actual results are beyond such range because ours is largely a fixed cost business in the short term, and small variations in revenue may have an outsized impact on income. Now I will close my remarks today by emphasizing a few key themes.

First, as Steve said, we are increasingly seen as a place where the best people in professional services want to build their businesses. We will continue to find opportunities to invest and grow because the best professionals are attracted by the complex work we do that ranges from the regulation of social media to being at the forefront of cryptocurrency matters all over the world. Second, our management team is focused on both growth and utilization. Third, while we cannot predict what will happen in the world in 2023, we do know, and have shown over the past several years, that our collection of businesses is both resilient and can grow regardless of business cycles.

Finally, our balance sheet remains strong and continues to provide us the ability to boost shareholder value through organic growth, share buybacks and acquisitions when we see the right ones. With that, let's open the call up for your questions.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Tobey Sommer with Truist Securities. Please go ahead.

Tobey Sommer (Managing Director)

Thank you. A question about guidance. In the simplest terms for your revenue guidance for 2023, what are the basic building blocks in terms of utilization, headcount, and bill rates?

Ajay Sabherwal (CFO)

Tobey, you know we don't give that level of detail, but, essentially, we expect, you know, we've told you the number of heads by segment at the end of the year, we've told you we have similar ambitions. You know, utilization is a derivative of how we hire, you know, and what matters we bring in, et cetera. We're always looking for higher utilization. And we're always also looking to compensate people so that, you know, ours is the place they want to join and to have rates in the marketplace that, you know, are compensatory to the talents that we bring to the field. That's as much as I'll give you.

Tobey Sommer (Managing Director)

Okay. Curious if you would comment on SG&A expense growth. As we exited last year on prior calls, I think we had indicated or you had indicated that while SGA investments are of course likely to continue, that the disproportionate drag on the bottom line was going to dissipate over time. Is that still an expectation here in 2023?

Ajay Sabherwal (CFO)

Absolutely.

Tobey Sommer (Managing Director)

Okay. One more financial questions, then I'll go to something a little bit more strategic. What are your expectations for free cash flow conversion from EBITDA? Are there any initiatives to improve that after last year?

Ajay Sabherwal (CFO)

Thank you for that question, Tobey. You know, it's I'll get a little bit more granular. It's roughly 65%, you know, free cash flow to EBITDA. That's defined as and we have, obviously, taxes, we have certain amount of CapEx, small amount of cash interest expense. I mean, those are and there's, of course, working capital. Those are the, you know, main variables. If you go back and plot it for several years, that's the kind of conversion. Obviously, 2022 was nowhere there. 2021 and 2020 were far higher than the 65%.

That's what the pandemic from a cash flow perspective was very good because, you know, people completely stopped traveling and all of that, all of not just travel, but meetings, et cetera, all of that prepaid expenditure just stopped. Meanwhile, you got all the normal collections, which in our case, were not impacted adversely at all. The flip side took place in 2022, when there was a massive revving up of such SG&A. You know, but once you've built that up, you know, even if you keep it at the same level, you don't see the adverse cash impact. Average out those three years and you'll get this percentage I mentioned, which is what we should expect going forward.

Tobey Sommer (Managing Director)

Thank you. Maybe this is for Steve. I was wondering if you could describe the portfolio of businesses that the company operates in, sort of grouping the most pro-cyclical and the most counter-cyclical in describing demand in those two sort of ends of the spectrum. It's difficult to interpret what are mixed economic signals and anticipate with accuracy how that's playing out in your portfolio. Thanks.

Steven Gunby (President and CEO)

That's a great question, and I'm not sure we debate this internally. I'm not sure we have any great exact numbers. Let me-- Then you can chime in here too, Ajay, if I say something you disagree with. I mean, these are judgment things. I think there's three parts of our business, not just two. There's pro-cyclical parts, there are a-cyclical part. There's counter-cyclical parts, and there's a-cyclical parts. We have to think about all three. You know, the pro-cyclical stuff tends to tie to M&A, right? We do M&A in our Strat Comm business. It's not half of our business, but we do it. Sometimes IPOs are pro-cyclical too. We do M&A-related work in our Corp Fin business as well.

That's pro-cyclical. Some of our Econ business on merger clearance is pro-cyclical. You know, counter-cyclical, obviously, our restructuring business is counter-cyclical. Sometimes some parts of the non-restructuring business is counter-cyclical because the impetus to cut costs, private equity impetus to cut costs for healthy companies grows during troubled times. We have some substantial counter-cyclical. I think the thing that people miss is we also have a whole lot of our businesses that are not particularly driven by the cycle. I mean, if the governments are investigating tech companies, as far as I know, they don't turn the throttle on or off based on the global economy. You know, a lot of our investigations work is affected by things that are independent of the cycle. I think we have all three.

I actually think we're sufficiently balanced that I pay zero attention. It's not that I pay zero attention. Of course, I monitor the news all the time, but I don't act based on those determinations because I believe as a company, we if we aren't prospering, it has more to do with us. Let's put it another way. Over any multi-year period, no matter what the general economic is, if we do the right things, I believe we can grow. I'll withdraw that if Putin sends nuclear wars around the world. That's a different issue. In terms of the general economy of the world, I think what we have to focus on is doing the right things for our business. I think we've proven over the last years, if we do, we grow. That's where we keep our focus, as much as we can. Does that make sense, Tobey?

Tobey Sommer (Managing Director)

It does, yeah. Last question from me, and I'll get back in the queue. We've seen some layoff announcements among some of the Big Four firms and even some, you know, white shoe strategy consulting businesses, at least reported. Could you describe how this climate, maybe in the context of the restructuring business picking up other competitors, both close and distant, changing their behaviors, what does this do to the context of FTI adding talent?

Steven Gunby (President and CEO)

No, it's a great question. Let me respond two ways. Look, first of all, you know, if we were on the verge of going bankrupt, of course, we would consider layoffs, that is not our instinct here. You know, we have performance conversations, particularly with the senior people, to make sure that they're aligning their business with the markets going ahead and all that. You know, I'm not sure that it ever makes sense to optimize a quarter by laying off junior people who you just hired. We try to hold off as much as we can. I think we have. I mean, obviously, our economics are great.

You know, I just, I would— We didn't do that during COVID, and I'm not sure why we would do it if an individual business happens to have a slow quarter. Which is different than if a business has no future, but we don't have any of those. To the contrary, though, I do think it creates opportunity because, and we found this in different places around the world. You know, we picked up, for example, in Australia, some incredible talent who were frustrated by the actions of the companies that they came from during COVID, where they thought they were being short-termism. They weren't addressing those people, but they were addressing those people's people. That frustrates people.

They said, "Well, maybe FTI is a place that is more committed to the same values as me." We picked up fabulous talent, which has changed our marketplace. That's why I believe we get talent when it's available. I think your point is, I think you're pointing to something really important that, you know, difficult times often cause others to feel like they have to do things that are not good and that frees up talent. If it is, we're gonna jump on it. Did I at least respond to your question, Tobey?

Tobey Sommer (Managing Director)

Yes, you did. Thank you very much.

Steven Gunby (President and CEO)

Thank you.

Operator (participant)

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

James Yaro (Managing Director of Equity Research)

Good morning, Steve and Ajay, thanks for taking my questions. Maybe we could just start with some of the drivers in Corporate Finance & Restructuring this quarter. Maybe you could just speak to where you're seeing the stronger restructuring results in the fourth quarter and when and whether you expect this to accelerate further. In addition, maybe you could just speak to the discrete outlooks for business transformation versus transactions in this somewhat, let's call it uncertain economic backdrop.

Ajay Sabherwal (CFO)

There's a lot of questions in there. If I forget any, just tell me, just repeat it. In terms of the. You know, we mentioned the industries where we were. We don't talk about specific matters that could also be ongoing till well after the fact. We talked about the specific industries like specialized finance, including cryptocurrency. We mentioned airlines, we mentioned telecommunications. I think we mentioned the areas. I won't go further than that. You know, there's a lot of publications that sometimes mention the names, sometimes it's in the press. We are not in the habit of. Our most treasured thing is client confidentiality, so we don't go back there and start corroborating or otherwise as a practice. That's one.

Two, do we expect this to pick up? You know, in our guidance, in the midpoint of the range, restructuring to remain elevated at these levels. That means I'm not projecting it to get even more, nor I'm projecting it to come down. That's at the midpoint. There's a range in there because there's a lot of folks who feel, you know, interest rates are going to fall by the second half of the year, and there are others that feel they will remain elevated for longer. There's a midpoint, and there's a range around that midpoint. I will also tell you that some of these matters that can become large matters are not necessarily driven only by interest rates.

They could be fraud, they could be investigations, they could be. For example, for the longest time in retail, we saw the impact of, you know, more transactions being done on the net versus brick-and-mortar sort of premises. It's more than the economic cycle that can drive restructuring. That's on the restructuring side. You know, transactions and transformation are, you know, we are minnows in that area. I think getting stronger, but we are small relative to the rest of the world. For us, it's more a market share versus, you know, cyclical at this point for the most part. I will say there can be ups and downs.

For example, in Q4, I must point out, I think I said that in my, in my words in the transcript too. We had terrific success fees, in the fourth quarter, order of magnitude about $14 million. It ranges, you know, from $3 million at the low end per quarter to $15 million at the high end. This was towards the high end, and a significant portion of that came in our transactions business, where at the outcome of an event, typically you get a success fee. That is lumpy. That can move around from one quarter to the next that one must understand and appreciate. Did I answer your question?

James Yaro (Managing Director of Equity Research)

That's very clear. Thank you. If we think about the weak backdrop that at least, you know, we're expecting for large cap M&A globally in the near term, to what extent do you expect the slowdown in large cap M&A to affect each of your businesses or, you know, some of your businesses?

Steven Gunby (President and CEO)

Look, some of our M&A work is at large cap levels, and some of it tends to be more middle market. Those markets, as you know, have not always moved together. You know, we are the leading, I believe, I'm pretty sure we're the leading antitrust clearance firm in both the U.S. and Europe. That is large cap stuff because it's around, you know, big companies merging and Second Requests from the government and so forth. There's always a chance that that is negatively affected. We should recognize that business is not just that business. It also has, you know, private antitrust, which is usually multiyear. It's regulatory, it's financial economics, and so forth.

I mean, I think that business has shown itself ability to grow, you know, over a multi-year period independent of the cycles. It gets affected by the cycles, and I suspect the M&A downturn in large scale M&A will affect one portion of that business. Same thing for, you know, the Strat Comm. They tend to be more involved in the large scale M&A comms because, you know, tiny deals don't involve as much comms. You know, our, actually also our tech business is also involved in the Second Request market, 'cause when the government asks for your Second Request, they ask for immense amounts of data in a very short period of time. I believe we're the leading provider of Second Requests through our Tech business. Also, they do other things beyond that.

They do investigations. They do a whole lot of things. I think all of those businesses could be affected by a downturn in large scale M&A. I've been impressed by the resilience of our transactions business in Corp Fin. Not that it's unaffected by the downturn, but I don't believe it's affected as much as the anecdotes I hear from the Big Four. I think that's partly because we do a lot with private equity and middle market, and also because I think they've done a good job of gaining share. I think we would expect that business also to be negatively affected by a generally down deal market. I don't think it's, you know, there's probably some effects through elsewhere.

I guess to come back to the more general point, we will have businesses that get negatively affected by different parts of the business cycle. We will have sub-businesses that will get negative and sometimes sharply negative affected. We saw that it's not a business cycle issue, but we saw during COVID, you know, our testifiers, some of them, utilization went to zero because the courts were closed.

Our company as a whole is far more resilient than that. Maybe not in a quarter, but over any extended period of time. What we do is if we believe that business is temporarily affected, we will reinvest in those quarters, and we'll worsen the P&L in those quarters because there's talent available. If we bet right, it tends to make the zigzag line around and upward sloping. But certainly there will be some zags this year, I would expect. Did I talk to your point, James?

James Yaro (Managing Director of Equity Research)

Yeah. That's extremely helpful color. Just a couple more here. If we just think about forensic and litigation consulting, utilization remains somewhat lower than what you've seen in historic fourth quarters. You've obviously spoken to this in the past, but what do you think could catalyze an improvement in utilization? Then if it doesn't improve, is there some sort of point where you'd consider other approaches to, you know, improving the business?

Steven Gunby (President and CEO)

Of course. At some point, you improve that utilization. Look, there are two ways to get that utilization. Yeah, the utilization last year was not in line with our long-term expectations for FLC. There are two reasons for it, one that will continue and one which I hope doesn't continue. One of them is investments. You know, when you're investing in new geographies, you get SMDs. They don't take a while to get traction. You know, that is just part of our job. You know, obviously, if you pull that out of the numbers, the historical business' utilization are higher. The other one is, you know, what we have to do is make sure the bets ultimately turn out.

We had some bets in North America that, you know, started to pay off in the fourth quarter, and they weren't showing up in some of the earlier quarters, which is good. We have a lot of bets in Europe that we're expecting to do better this year. We monitor this pretty closely. That doesn't mean we always get it right, at least in terms of timing. We haven't had that many bets be totally terrible compared to what we expected, but there's sometimes things take longer. I would say last year was a year in which some parts of FLC were taking longer than we expected. The utilization we had in 2022 is not our expectation of the long term unless somehow, you know, 100 SMDs come on the market that we wanna hire, in which case you have a short-term blip. Does that respond, James?

James Yaro (Managing Director of Equity Research)

Yeah, absolutely. That's very helpful. For my last one, you know, you've talked about some of the pressure on margins in 2022. If you just think about your business level EBITDA margins, or just operating margins, perhaps both, where are you seeing more pressure across the various segments, and where are you seeing less?

Steven Gunby (President and CEO)

You know, I think it's very different by segment. I think the one place where I've seen a lot of it in the last 18 months or 24 months is in tech. There's just a lot of price competition. You know, we're gaining share, and we're willing to match the market's prices on that. You know, you can see over the last couple of years, our EBITDA margin, even though we're succeeding as well as anybody, I think better than, I believe, better than anybody in the market. You know, you can see our EBITDA margin has compressed even while we've been growing incredibly fast. You know, I think there's always a mix issue within Corp Fin. You know, the restructuring business when it's hot is always a big boost to margin.

You know, I don't think we have long-term structural concerns about our margin in any of the businesses I can think about. There are zigzags, and I would say, you know, the tech industry may be, you know, heading for a little bit of a shakeout, there may be a few years where the margins are a little lower. Other than that, I think I don't expect a long-term decline in margin. I'm also willing to hit the margin by hiring if time becomes right, and that's probably the bigger effect. Does that help, James?

James Yaro (Managing Director of Equity Research)

Absolutely. That makes a lot of sense. Thank you both for taking my questions.

Ajay Sabherwal (CFO)

Thanks.

Steven Gunby (President and CEO)

You're welcome.

Operator (participant)

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

Andrew Nicholas (Equity Research Analyst)

Hi. Good morning. Thanks for taking my questions. A lot has already been asked, but I just wanna ask a few follow-ups to some of the earlier questions, maybe starting with FLC. You talked about, Ajay, the plans to continue growing headcount across the entire firm at similar levels in 2023 to what you did in 2022. Should we assume that that is also applicable to FLC? Or are you gonna wait for the improved performance, which I think you said you expect in guidance to materialize before, you know, leaning into that further in 2023?

Ajay Sabherwal (CFO)

Andrew, the key is finding the right talent. If the talent is available, we have the wherewithal and we have the ambition. It's more that than an absolute number of hires.

Andrew Nicholas (Equity Research Analyst)

Understood. In terms of the restructuring environment, I know you talked about it in a variety of different ways already, but just maybe asking it a different way, is there any major change to how you're viewing kind of the ramp of restructuring today versus what you communicated on the last call? I know in guidance you're assuming similarly elevated levels. Just kind of curious as to if how things have unfolded over the past couple of months gives you a different opinion. I know last quarter, you also talked about differences from a geographic perspective. Just any additional color there on how your view has evolved over the last couple of months would be really helpful. Thank you.

Ajay Sabherwal (CFO)

Your observation is correct. When we spoke the last time-- relative to when we spoke the last time, restructuring has picked up more than I saw or anticipated at that time. Your observation is correct. It is primarily a U.S. phenomenon, but we're also seeing pickup in certain other geographies. Still smaller, but there is pickup in other geographies as well. The guidance is with it remaining at these levels with a range of outcomes around it.

Steven Gunby (President and CEO)

You know, you can look at some external statistics. 2022 as a whole was not a boom year for restructuring. In fact, it was, I think, one of the worst years since 2014. If you look by the fourth quarter, that had changed, and we have good statistics in the U.S., but you can also see that in some of our overseas markets. I think when Ajay is saying continuation, you're saying at a continuation of the what we saw, as you said, since the last quarter's report as opposed to the year 2022.

Ajay Sabherwal (CFO)

That in English means doesn't mean that the slope continues. It means it's at this level and remains at this level [audio distortion]. Does that help, Andrew?

Andrew Nicholas (Equity Research Analyst)

Yes. Yes. Then maybe one last one for me. I think earlier this year, the FTC proposed a rule on non-compete agreements. Just wondering if that would potentially impact your business or your ability to either hire away from or protect your talent, or if you've given any thought to that dynamic to this point.

Steven Gunby (President and CEO)

Yeah, we have given some thought to that. Look, I think my understanding is that this is in the early stages of rulemaking with a lot of comments still to come. I think there's a long way to go on that. Maybe we can revisit that as that gets closer, but we obviously monitor that.

Andrew Nicholas (Equity Research Analyst)

Makes sense. Thank you very much.

Steven Gunby (President and CEO)

Well, thank you, everyone. I think we went over. I'm sorry to go over, but I appreciate the good questions. Thanks to everyone on this call for your continued attention and support for our company. We look forward to taking it forward. Thanks.

Operator (participant)

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