FTI Consulting Inc (FCN) 2003 Q1 法說會逐字稿

Good morning, my name is [Michasta], and I will be your conference facilitator today. At this time I would like to welcome everyone to the FTI Consulting first quarterly conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press "" then the number "1" on your telephone keypad. If you would like to withdraw your question, press the "#" key. Thank you.

And at this time I would like to turn the call over to Lisa Fortuna. You may begin.

Good morning, and thank you for joining us. On behalf of FTI Consulting, I would like to welcome everyone to the first quarter conference call.

Before we begin I want to remind everyone that the conference call may include forward-looking statements that involve uncertainties and risk. There can be no assurance that actual results will not differ from the company's expectations. The company has experienced fluctuating revenues, operating income and cash flow in some prior periods, and I suspect this may occur from time to time in the future.

As a result of these possible fluctuations, the company's actual results may differ from our projections. Other factors that could cause such differences include pace and timing of additional acquisitions, the company's ability to realize cost savings and efficiencies, competitive and general economic conditions, and other risks described in the company's filings with the SEC.

I'll now turn the call over to Jack Dunn, chairman and chief executive officer of FTI Consulting.

Thank you very much, Lisa. It is my pleasure to report that there's a lot of excitement at FTI these days. In addition to our excellent financial performance, this quarter also witnessed a remarkable period of learning and growth for our company. This growth was not just in the sense of the year-over-year or quarter-over-quarter results that all of us on this call are always so interested in, but also in the sense of putting two great organizations together and seeing the competition to share, own and institute best practices. In terms of learning, it is somewhat the same exhilaration of harnessing a new methodology, knowledge or technology, beginning to understand its capabilities, appreciating what it can do, and testing the edge of its envelope.

We learned that there are tremendous resources in the PriceWaterhouseCoopers folks who joined us, even beyond their signature restructuring and solvency practice. These include expertise in industries such as telecom, energy and retailing; excellence in marketing, and experience in cross-selling. Together with the not inconsiderable preexisting capabilities in these areas from our Legacy businesses, these should stand up in excellent stead if, as and when the economy goes from bad to worse, or recovery to well.

We learned that our small initial exploratory steps towards building FTI into a recognizable brand name are not only important to our clients to help better serve them, but to our own people as well. As we work to retain and attract the best and brightest professionals, it is not only dollars but the psychic income of being part of a world-class organization that can help carry the day.

We learned from our research that we have only scratched the surface in terms of that brand. This can actually be good news. While our forensic accounting network industries, trial consulting and electronic evidence practices and disciplines are progressing nicely; they are somewhat the best-kept secret in town. This represents opportunity for market share and penetration. Shame on us if they are still a kept secret next year.

Finally, we learned that there is an opportunity to expand our restructuring and insolvency practices beyond our borders. Changes in the laws abroad, combined with the interest in global distress [tests] by a whole new group of investing players, is providing an incubator for change in the way distress situations are handled overseas. They are moving more to what is more commonly experienced in the U.S. model.

In addition, the first evidence of impact of conflicts, which have so dramatically been felt in the U.S. as a result of Sarbanes-Oxley, and corporate governance concerns, are only just subtly but definitely beginning to be felt abroad. As economic unrest in France and Germany continues to unfold, perhaps we can expect the phenomenon to accelerate. We are now anxious to explore how we can best serve our clients and participate in this arena.

The big question coming out of this quarter of course is, as a result of this growth and learning, have we reached a new level in expected activity. As we said in our press release, our internal answer is; not yet. While we don't rule it out, for the present time we are not changing our models and budgets for future periods, and will not, until additional time passes to better assess the earnings power and capacity of our organization, barely seven months after the recent acquisition.

With that, I would like to turn it over to Stew and to Ted to discuss the quarter in more detail. Stew?

Okay, thank you, Jack, and good morning, everybody. Welcome.

We mentioned in our press release that we get strong demand in our basic practice areas. As you can see from reading the papers and the current events, restructuring continues at a high level, lots of troubled companies, unfortunately, for them, but good for us.

In the forensic accounting area, we have been involved in a number of restatements and investigations, fraud investigations. Electronic evidence, a practice area that we invested in in 2002, has now matured into a full-fledged practice where we are selling our service into our other practice lines. The network industries business continues to be strong. The new telecom act has created yet more demand for work in that area. Trial consulting, a number of large states, major trials involving a number of Fortune 50 companies, have been underway and continue to be underway on a go-forward basis. Also, one of the investments that we made two to three years ago in hosting data across the Internet is paying off in a number of cases, and that stimulated the high demand in the first quarter.

As far as the PWC integration is concerned, we are into what I call the second stage of that. We have taken a number of major steps and we are continuing to work on aligning personnel policies, intent of comp plans and marketing activities. We're even looking back now on some earlier decisions and deciding what went right, what didn't, and we're revisiting some of those.

In terms of utilization, overall 93% is slightly higher than our targets, but we could conceivably sustain that kind of thing except for things like holidays, spring break, vacations, and also periods where our people are transitioning between cases. The first quarter has been very high utilization; and, as Jack indicated, we are not changing our models at this point.

Turnover has run about 14.5% on an annual basis through the first quarter. Some senior people have left, but we are also replacing them with industry experts, such as a former partner in a Big Four accounting firm, Mike Hamilton, who is an industry expert in the utility industry, and will be enhancing our capability there.

So with that as opening points, of course we will be glad to answer questions, but before that let me turn it over to Ted.

Actually we were very explicit this time in our press releases with all the metrics that you'd like to know, our average rate of $336 an hour is there as Stew talked about on utilization. Our turnover, as we had told you in our last conference call, we expect that during this year to keep our headcounts itself reasonably stable. And that of course you know our organic growth was coming to come from includes utilization, and that's exactly what we have done, kept our net headcount almost identical to what it was three months ago, upgrading some of the people, and have clearly improved the utilization.

Everything worked in the financial in the first quarter. We exceeded $100 million for a quarter obviously for the first time. Gross margins, primarily because of the utilization, were 54%, clearly above the targets that we articulated to you for the rest of the year. And I'm sort of back to Jack and Stew's comments with what we are doing with our model, which is still keeping it the same.

That came right down to the bottom of our EBITDA margins, more than 34.5%, exactly the same comment on that.

Our G&A seems to have stabilized at about 21% of revenues, a comfortable place for us.

In terms of whether we simply are just continuing operations, we are moving along in the potential sale of the remaining business in our former applied sciences practice, with one of the smaller practices within that having been sold as of the beginning of the year, and the other activity is moving along quite nicely.

On our balance sheet, in terms of our net BSOs, again for everybody's information I will repeat that you need to deal with a net of three numbers on our balance sheet accounts; accounts receivable, unbilled receivables, net over billing and excessive services provided. And when you do that you will find that it was almost exactly the same as it was at December 31st, less than 50 days outstanding, also a very comfortable place for us to be. Stockholder equity has dropped $400 million, and obviously a combination of our cash flows and our recent offering have given us a net working capital position of well more than two-to-one.

And our cash flows. Interesting, our cash flows provided by operations in the first quarter was almost identical with our net income. Admittedly a portion of that comes from the income tax benefits from exercise of stock options. But notwithstanding that it was, and including the payment of a very substantial amount of bonuses that were accrued during 2002 and paid during the first quarter, our cash flows from operations was significantly positive and an excellent trend for us.

Otherwise, let me turn it back and open it to questions.

Okay, we'll now take the questions.

Hello operator?

Hello?

At this time I would like to remind everyone in order to ask a question please press "*" then the number "1" on your telephone keypad. We'll pause for just a moment to compile the q-and-a roster.

Your first question comes from Arnold Ursaner with CJS Securities.

Good morning, Arnie. We can't hear the question at this end.

Hold a moment. Your next question comes from Adam Waldo with Lehman Brothers.

Operator, we are not hearing the questions.

If you would hold for a minute, we are experiencing technical difficulties. Okay, your question comes from Arnold Ursaner with CJS Securities. Arnold, your line is open.

This is John Reilly from CJS Securities.

Hello, John.

You can hear me now.

Sorry about the confusion.

Absolutely. Focusing on free cash flow for a moment, you mentioned some one-time items. Could you tell us where you are on a monthly basis for free cash flow?

We have two things. Number one, we have never disclosed monthly performance, John. It's really not something that we are interested in doing. And also free cash flow unfortunately is not a generally accepted accounting principle defined term. So we would have to, under the new rules that we all live under, you would have to define that term for me in order to answer that. I apologize for that.

I understand.

But that seems to be the way the world works today.

Great. Focusing on headcount, you mentioned that you are not targeting increasing your headcount for the near term. At what point would you focus on exploring new areas and adding new headcounts?

Well, we are, John, this is Stew Kahn. We are exploring new areas constantly, number one. But keep in mind instead of our usual pattern of hiring, ramping up to the budgeted headcount in the beginning of the year, we hired 400 people towards the end of last year. And at least on a quarter-to-quarter comparison basis for the next two quarters, we are going to be ahead on an average headcount basis from where we were last year significantly.

I would expect, while we have a budgeted headcount at the end of the year, that pretty much we expect to be at the same level we are at now, that that excludes any possible acquisitions and probably will reflect some changes in mix as we go through the year.

Okay. You mentioned, speaking about some of the new areas also that you have already entered into, could you tell us what portion of revenue you think that restructuring currently accounts for?

Our restructuring business is approximately 70% of our total business.

That's much lower than I thought. Thank you very much.

Thank you.

Thank you.

Your next question comes from Adam Waldo with Lehman Brothers.

Good morning, Jack, Stew and Ted. It sounds like there's lots of restructuring opportunities still left in telecom. (Laughter.)

Adam, I'm afraid they're a lot. (Laughter.)

Turning to your business, which performed much better in the quarter, a couple of questions. Were there any unusual bonus payments from clients, either performance incentives around clients emerging from bankruptcy, that sort of thing that would have affected your revenue line and margins in the quarter?

No

Okay. And as we turn to Stew's comments on the headcount side for the balance of the year, we're sort of thinking flat, organic headcount expansion for the year, and utilization rate of 93% in the first quarter as being, you know, somewhat unsustainable. Would we be thinking mid to high 80s utilization target for the year, pretty consistent with what you said last quarter?

Well, I think what I said last quarter was I didn't think it was impossible to top 90, and we were 87% I think in the fourth quarter. And I thought 90 was a number that we could get to, and we're still going to try to work towards that. But, you know, that's on an annual basis. And I think as you look at each of the quarters, some could be higher, some could be lower.

Okay. And the bill-rate inflation looks to run a little bit better in the quarter than we were thinking about, although I think you cautioned us last quarter that bill-rate information would be more gradual through the year this year. Is that still your thinking?

Yes.

I have a question as we turn to the additional growth opportunities area. I was wondering if Jack could update us a little bit on the progress of your business in Europe. You have been starting to parachute some case teams into London and so on. Give us a sense, if you would, in the last quarter as to roughly what percentage of your revenue is coming outside of U.S. engagements, and where you would see that going over the balance of the year.

We really haven't established any kind of a beachhead yet in that arena. We have done some exploratory work. We've talked with some clients. We have talked with some of the professionals who represent the clients in different constituencies. So we really, none of that is reflected in the results to date. There's the outlying case, we had some case in the Netherlands, we had a couple of cases that mostly had some nexus to the U.S. So this is really we are at this point looking to see whether we want a green field and send some people over there, whether we want to hook up with an alliance with some folks. This will really be a new area for us.

Jack, over what sort of timeframe are you thinking about resolving your corporate development decision making on that?

I think we are, I don't know if your people talk about real time, we I think in the last week we've had several people over there checking out the landscape. And I think our belief is that there is very little risk in putting something together, because as I said there is client demand to get our perspective on some of the things going over there. But I think we're having meetings right now deciding how to best approach it. So I would expect it to be real time.

Thanks very much.

Thank you. Congratulations on the baby.

Your next question comes from Sandra Notardonato with Adams Harkness.

I didn't have a baby. (Laughter.)

Well, congratulations for not having one.

Okay, you made the comment on US Air in your press release. How do you think more companies coming out of bankruptcy affects your business prospects? And have you seen any change in the pipeline because of that?

Well, I think that what is happening is if you've noticed recently there has been a return to record levels of high-yield financing. I think what you're seeing is a lot of the indicia coming about that makes it a good environment prior to hire from buyouts and not through liquidation, but to put the plan into place to come out and have a plan. US Air was a special one. The management there was absolutely superb, coming out in under eight months in a transaction that is being widely acclaimed as knowledge first, but to be done in a very professional and excellent manner, which will set the stage and probably provide inspiration.

We have also seen interest; as we have told people before, when you focus on restructuring, don't just focus on Chapter 11 or insolvency. We do a fair amount of work for companies who are looking at restructuring their debts before there is any legal event, so that we are hired to help do a plan, to put together a balance sheet, but then execute the plan with the full authority of the lenders, and be able to negotiate new terms. So I think you'll see a lot of that, and hopefully the economy starts to turn, and people want to take advantage of that and have projections and business plans that have real teeth to them that people can buy into and get behind and provide the financing that's necessary. So I think it's a very good environment for us.

Okay. I am not sure if this is a, I am going to be able to articulate my question. But you saw very strong utilization in this quarter. Were you at all surprised by the rate at which the BRS folks were able to ramp up their utilization? And was there where most of the upside came from?

And, secondly, I guess I'm still a little unclear as to why we wouldn't, if it was so strong, why we wouldn't continue to see it in what I think would be a seasonably strong quarter, like June, for example. I mean, I understand holidays, so September and you know the holiday season in December. But what would be the impact in June?

June, Sandra, is another vacation month, in part, number one. We have a lot of young folks who have children in schools, who have graduations and things like that. And also we do a lot of work for bankers and lawyers, and they have children in school, and vacations. So we can't absolutely predict what the impact is until we have lived it in June, July and August, because the historical performance for the group was different when they were owned by PriceWaterhouse. So they had various types of training meetings and management meetings, and also recruiting obligations in their business that we are not continuing to have in ours.

In terms of being surprised, I am never surprised by high utilization, because I always think it could be higher. You know, in response to a question a couple of weeks ago, some investors asked, Well, how can you possibly expect to do 100% or more utilization? And I asked them, simply, well, how many hours do you work a week? If you work 60 hours a week, which most people seem to do, if you devote that time to serving clients, you'd have 150% utilization. So it's not so hard.

But you are not going to see that 100% plus utilization on both debtor and creditor side, correct?

I'm not sure that, I am not sure that there is a distinction between either side that would drive the utilization rate.

Okay.

Sandra, please, also, as I said a moment ago, 70% of our business is restructuring. That means 30% of our business is not. And as we said in the press release, every single one of our significant practice areas had very strong demand for their services. So it came from everywhere all at once.

Okay, great, thank you. And obviously a wonderful quarter.

Thank you.

Your next question comes from Bill Warmington with SunTrust Robinson.

Good morning.

Good morning, Bill.

I had a question for you. It's not specifically on US Airways, but it brings to mind the question of how you continue to charge or you continue to have billing with clients even after they emerge from bankruptcy, typically still monitoring and so on. But I wanted to ask, to give us a sense for the relative level of see before you emerge from bankruptcy versus after you emerge from bankruptcy, because you would expect it to in some way tail off, but I am not sure as to how much.

That's a good question, and it certainly varies on a client-by-client basis. Many clients where we continue to work for them on claims reconciliation and claims management and the ultimate claim payout, and sometimes the establishment of things like product liability trusts or litigation trusts, our activity level can continue post-bankruptcy almost at the same rate that it was at certain stages of the bankruptcy. But the activity level varies tremendously, depending upon the needs of the client. And it is true that the work, just because a company comes out of bankruptcy doesn't mean that everything is done, because it's not by a large measure. I can't really give you a percentage number. It wouldn't be meaningful, because it flops all over the place.

A question for you then on new business added during the quarter. That seems to be a question that I'm being asked frequently in terms of what is the new business that you are adding by quarter. And I know you've made a number of points about you can't tie the business to certain things as bankruptcies, because you do a lot of your work pre-bankruptcy, and a lot of the work that you do, you know if everything works out you don't even go into bankruptcy. But still the question would be in terms of your new engagements, if you could give us a sense how new engagements were in the first quarter versus maybe the fourth quarter.

I think the new assignment activity in those two quarters was about the same. Frankly, I don't think it's changed very much one way or the other. A number of new assignments, and I think the real measure of our work though is the cases that we are on that we are on for years, the ones that take years and that as we go through them sometimes require far greater resources. One case in particular involved a case that we've been in for two years now that now it looks like we need our electronic evidence guys to come in and start managing some information in connection with litigation defense, also claims management, et cetera. So all of a sudden the activities will pick up in that case.

Right. Then a final question for you on the utilization, because it was so strong. And if you get, the question it would seem to me that you have got to understand how you do achieve the increase in the utilization, and why it would not be sustainable. And so I look and I say, well, is it possible that basically you do that by understaffing projects, or you get additional projects, you don't increase the headcount, which it sounds like you are keeping the headcount pretty stable. And it would seem at some point you would, with that additional business level, you would need to add to the head count in order to sustain it. Is that I am looking at it the wrong way?

That's not the way I would look at it.

You're very kind.

The utilization numbers, the utilization is a function of the amount of available work and the number of heads you've got to do the work. As long as you can sustain the volume of work, you will sustain the utilization, if you keep the headcount flat. If the volume of work drops and the headcount drops, then the utilization will stay the same, if they drop in the same proportion. If you added a lot of people, and you only had the same amount of work, then the utilization number would go down.

The issue here, in fairness, is really kind of a simple thing. You know, as Jack indicated, we had to have as part of our company for a mere seven months at this point, and we are for them, for the folks from PWC, it's a big change to have this much higher utilization. I am comfortable with their personally committing to this on a go-forward basis, because historically their goal was to be at 70%. It went from 70% to 90% to 100%.

It sounds like it's been quite a change in life-style for them.

Well, not really. We have 450 great new employees, and we are taking some time to figure out where they settle in comfortable doing this work. They do many of the same things we used to do, as we mentioned in terms of some of the very precise industry expertise. They do some things that we didn't used to do. Or I'll say it to you a little bit differently; We are still, you know, we think we are on a very acceptable range for our investors, and we want to make sure that we do this the right way, and don't not take advantage of some of the resources we have by making a mistake early on that just drives towards utilization. We want to let them have the freedom to settle in where it would be a win-win situation for everyone.

I think the other point, I don't think it's a major lifestyle change for them, because we are not asking them to work more hours. You go back to my 60-hour-a-week example, everybody basically works 60 hours a week. It's just what you do with those hours. When they were in their prior life, they were obligated to spend 10% of their time recruiting, 10% or 20% of their time in administrative meetings. And you know when you start chopping that out of a 2,000-hour year or a 3,000-hour, the billable utilization falls off pretty quickly. So all we are doing is asking them to work, to stop spending time in those areas, because we don't need them to do that, and spend time serving clients.

Well, thank you very much, and congratulations on a very, very strong quarter.

Thank you.

Thank you.

Your next question comes from Jordan Press, J.M. Hartwell.

Could you talk about the bill rates from the PWC acquisition, what's been happening there?

Is your question what's the bill rate for the PWC folks versus the rest of the company?

And how it's been changing over the last seven months.

Well, just in general there have been for the company as a whole we have experienced some rate per hour increases over the last seven months, but we don't break out for, we don't even keep track separately, of what the PWC bill rates are, and we certainly don't disclose it.

I mean, if your question was there's some sort of major differential person to person, that has to be caught up?

The answer to that is no.

The answer is no.

No, that was just it. Thanks.

Your next question comes from Peter Sidoti with Sidoti & Company.

Hi. Good morning, gentlemen.

Hi, Peter, how are you?

We've got the boss today.

David unfortunately isn't in today. Listen, I have a very simple question, and because David isn't here, and so I apologize for it, but it seems to me you seem to have hit on all cylinders here in the first quarter that seem to exceed your expectations.

Yeah?

So by sticking to your guidance for the year you seem to be implying that the next three quarters may be weaker than what you originally thought?

No.

No.

No?

No. What we are actually trying to say, what I was trying to say as clearly as I could in the press release, was that we think the next three quarters will be pretty much like what our original expectations were, but that our first quarter was additive.

Right. So wouldn't you by nature just raise your expectations for the year if the first quarter came in better than expected, and you think the next three quarters would be in line?

Yes.

Sure, sure. That's what it says.

Okay, I don't, the stock is off today, which kind of surprises me. And I think the Street is implying by that that you expect weakness in the next three quarters.

Expect results for the balance of the year to be more in line with our original ...

With the original expectations?

Right.

Okay, I'm sorry to ...

Enough said. It's quite all right. You know, we'd like to get that clarified. I think the stock is off because there must be somebody selling a lot of it.

More sellers than buyers. Thank you, gentlemen.

Your next question comes from Marta Nichols with Banc of America.

Good morning, guys. Congratulations from me as well.

Good morning.

Good morning. Thanks, Marta.

I think in past conference calls we've talked a little bit about the potential benefit, if any, from Sarbanes-Oxley business, and I am wondering if you could just talk to whether or not you have seen any boost from companies focusing more on Sarbanes-Oxley right now, and whether there are any other things like increased focus on pension funds and so forth that you are seeing more interest in this quarter than you might have previously.

Okay. There's actually, it's a double-barrel boost for us in terms of Sarbanes-Oxley. And the boost is as follows; first off, the accounting firms are being conflicted out of some of their traditional work in the past by virtue of the new conflicts of interests rules, so their clients are coming to us. Secondly, there have been a number of cases where we have been hired to help people in advance of their certifications, and we expect that there will be more of those on a go-forward basis. So to us, as well for those of us signing certifications as part of a public company, it's not necessarily a boon. It is from a business standpoint.

Okay, great. And then there were a couple of items that I'm just sort of curious whether you could talk to generally in terms of their ongoing impact for revenues. One is I think in your introductory comments you mentioned that some senior people have left. It sounds like not the partners that have these relatively strict employment agreements, but maybe people just below them; that combined with the rolling off, say, of a large client, like US Airways. Can we infer from things like that happening that the growth rate of revenue could slow, or is the impact of those people leaving, or one or two clients going, leaving early, going to be relatively minimal to your top line?

Well, in my estimation they will be relatively minimal changes that we can more than make up. And I expect that we will.

Okay. And then, finally, can you talk to us a little bit about what you are seeing in the acquisition pipeline right now? You are obviously very, very cautious historically about what you wanted to buy and when, and given that this is a very large integration for you, but seems to be proceeding quite well, can you give us some sense of what you are seeing in the pipeline, and whether or not you feel like there's the potential for taking any near-term action there?

I would say that we don't have anything that comes close to being called near-term at the moment. We are exploring a number of different possibilities, and we are an attractive place for professional services individuals to come join, because we have had good success in integration acquisitions or acquiring companies and having them fit within our operating envelope. But we don't have anything that looks like it will come down in the near term.

Okay, thank you.

You're welcome.

Your next question comes from [Art Gray] of SunTrust Capital.

Yes, this is [Art Gray] actually on the buy side. Just kind of a macro futuristic type question. If you look at your stock prices in 2000, you are at about six bucks. And just as you look forward, you know, you obviously have got a lot of restructuring and work-outs due to telecom technology, things of that nature. What happens when this era is over, if you will, of these work-outs and restructurings and things of that nature? Where do you see your company three years down the road?

Well, three years down the road I hope that era is over, and that the economy is back on track. But there will still be plenty of companies that will fail. When I first started in this business over 20 years ago, the first cases I worked on had nothing to do with a bad economy or over-investment in telecom or over-investment in industry. It had to do with bad management decisions or it had to do with fraud. And so there still will be plenty of restructuring business three years from now. Though there will be plenty of other types of business. We expect that the M&A market will increase dramatically, because M&A activity has certainly declined during this period of retrenchment, and minimal capital availability. And our restructuring folks are very well versed in the due diligence area in terms of evaluating the worth of a company.

The third area that I think we'll find that we will wind up utilizing a lot of their skills is in the forensic accounting and expert testimony area. The skills base is transferable between those two practices, and as such we expect that we will be using lots of those folks in the forensic accounting and damages work, if they have availability.

Let me ask it this way, if I can. If you look back to again at 2000, how much of your revenues came out of restructuring?

The beginning of 2000 we acquired Policano and Manzo. On a continuing basis I would say probably 50% of our revenues were out of restructuring. That grew in 2001 probably to 60% or so. And then as a result of this acquisition and the continued growth in the other areas, it's probably moved to 70%.

So, to summarize, you don't feel like you're a counter-cyclical company to the economy; when the economy gets better, your services, you'll just transfer the skill set to, like you say, back to M&A and some other more different areas, but you don't think it's kind of like the economy gets better your business doesn't do as well? Is that your summary?

Yes, that's our management plan and our expectations.

Thank you.

At this time I would like to remind everyone in order to ask a question, please press "*" then the number "1" on your telephone keypad.

Your next question comes from Adam Waldo with Lehman Brothers.

Just a follow-up question. If we go back to 1998-99, early part of 2000, before the bear cycle hit, you were still basically a high single-digit to mid-teens internal grower, depending on the year. Clearly the restructuring business pick-up over the last couple of years has accelerated the organic growth rate. But I think is it fair to say that given the variability of your internal growth rates as between '98 and the present that certainly your ability, as demonstrated over the last cycle to achieve 15% or better organic growth rate should be a reasonable leading indication of what you would do over the next cycle?

Well, I would agree with you.

Okay, having beaten that to a dead horse, one other just quick question, if I could. Could you give us a little bit more sense as to what the margin structures, capital requirements and scalability look like in the electronic evidence practice? You were kind enough to share some more insights with us on that recently. And it sounds like that business ought to have, you know, sort of steady state margin structures well above the corporate average. Give us a sense of where that's running in terms of revenue run rates today, and where margins are and could go.

Well, I hate to lead in with we don't give any metrics for particular practices.

Well, I thought I would take a shot, Ted.

Clean it up a little bit here. It's a strong business. We started off simply with zero. We built that business not through an acquisition but by hiring the small team of people, and we continue to add people to it.

Now, that said, we have said a long time ago that our goal in terms of EBITDA margins for any of our businesses were 25 to 30%. And I repeat that goes for any of our businesses. So you would have to assume that any practice area that we have been interested in investing in is certainly capable of that kind of margins.

The growth rates, again, all of our businesses have the potential to grow in good times and in bad times. The smaller business unit it is, clearly just the sheer numbers alone will give you higher percentages of growth in the early stages of its growth, Adam.

In terms of its run rate, that's a number we really don't disclose, but obviously it's part of that other 30% of our business. That 30% is clearly more than a $100 million number. And so electronic evidence is, you know, a small but nice piece. The vast majority of that other 30% is of course for general forensic businesses. We've said that many times.

Right, thanks.

Your next question comes from Mayank Tandon with Janney Montgomery.

Thank you. Hi, Jack, Ted, Stew. Congratulations on another fine quarter. Most of my questions have been answered, but I did have one sort of high-level question. This is sort of extending off of another question in terms of the increase in pre-packaged bankruptcies and out-of-court work-outs. Does that affect your business in any way, good or bad? And how much of your business is Chapter 11 related, if you had to divvy it up between these areas?

Well, let's do the first question first, and Ted and Jack can try to think of an answer for the second one, because it's really a hard one. But pre-packs are, pre-packs are good business. There's a lot of intensive activity that occurs in advance of it, and but I don't think that there's, I wouldn't say that there's an actual significant trend for more pre-packs now than there was two years ago. I doubt that, number one.

There was actually a recent study that showed that the professional fee, and that would not only include us but investment bankers and legal fees, in a normal or regular bankruptcy would be something on the order of I think 4%, something like that. And on a pre-pack they tend to be in the neighborhood of 2.5%. But that's just interesting information, because as Stew said our mix of those has not changed, so they are less fee intensive potentially, but they are, have always been a part of our business.

That makes sense. Now, what is sort of the allocation between, say, Chapter 11 related work and pre-packs roughly?

Nothing. That's not the split that you're looking for really, Mayank. There is out-of-court restructuring work, there is pre-bankruptcy work, and where there is not necessarily even a pre-pack, but there is just a debt restructuring for a new operational plan. And I would, I guess if had a tote up of the 70% of revenues, probably something like half of it might be pursuant to a formal process, maybe a little more than half.

There's some engagements, in fact many engagements are in fact, you have before, during and after. So how would you characterize it?

Right. Okay, makes sense. And then, Jack, you touched on the international opportunity. Could you give us a few more specifics in terms of how the laws have changed that might favor professional services firms participating in the market?

Yeah, I'll be happy to. First of all, before I even get to the change in the law, what's happened now is that, as you will notice from reading the paper, is that there are a lot more investment groups interested in trying to participate in distress situations. You will see articles about the bond people coming in and buying the bonds when they are distressed and possibly using that as a vehicle to portray some ownership interest when the things gets into a Chapter 11 bankruptcy. You'll see actually now those distressed investors actually going to the banks and buying pieces of the bank loans.

Traditionally the European model as I understand it was that it was much more of an insolvency and liquidation model. What happened was banks got one of the big eight, seven, five, four firms to represent them, and the company got one of the other remaining firms, and then they went about an orderly liquidation or insolvency proceeding for the company. Because now the bondholders have entered the situation and are much more vocal in terms of negotiating a place at the table, that has caused everybody to have to hire additional advisors to handle that. Additionally, you will see that in, I believe in Germany, certainly in Japan, they are at least on the books these laws that would remove some of the traditional inhibitors to having a more U.S. type practice where you actually negotiate and keep the company alive and find new financing. What you are finding though is, as with many new laws, there's some resistance to really believing that is happening. But that will be driven by the financial process. As you see people make billion dollar investments in these global situations, you will see that they will take advantage of those laws. So right now it's very dependent on the legal process, so it's important as we plan our steps we coordinate not only with our traditional clients, who have been the financial institutions, but that we also coordinate with the legal professionals in those areas and make sure that we have our entrees into the clients if we decide to do debtor work as well.

So it's pretty interesting. It's a fun situation from the standpoint of watching a practice evolve much as it was here maybe 20 years ago.

Okay. Can you point to any markets beyond Japan and Germany that you mentioned?

I think France has some issues. You know, we have always done work in the U.K. in conjunction with other firms and things like that on things that were global situations. So Japan would be obviously even beyond literally a further stretch for us. Right now we would look to have, we would love to find an opportunity to get into business with the U.K. and use that as an opportunity again to then extend our activities into Western Europe. So that would be our game plan right now.

So what is your strategy in terms of buy or build when you go international?

Well, you know, as I just said, we are in the early exploratory stages. I think as it evolves what we are looking at right now is a small build where we think there will be some people who because of considerations, like Sarbanes-Oxley or whatever, might join us. So we start with some of our folks possibly going over there, and then hoping that they'd be joined by others, and then you know as somebody noted earlier, if you take a cautious view of acquisitions, as they say a bad one can ruin your day, we would be cautious about that, but it wouldn't be out of the realm of possibility, as long as we had that grounding over there and found in our belief that there is a vital market for us there was in fact true.

Okay, that helps. I guess one final question for Ted. Ted, the price increase in the quarter, was that a function of the upgrade in the work force that you had talked about last time around? Or was that just a pricing increase that you got from the environment?

Mayank, it's everything, the pricing, the gradual process frankly over a 16-month period. The mix is gradually shifting. I can't tell you of a $3 difference how much of the $3 net difference is due to each of those factors, but it's clearly both.

And that will continue, right, based on your strategy of upgrading your work force, upgrading the mix that is?

It can. It would depend. You would think intuitively it should continue, Mayank. But it depends upon the kind of assignments that we have in a particular quarter and the relative utilization of the higher-paid versus the lower-paid folks. You know, if our, if all of a sudden our lower billing rate folks, if all of a sudden our electronic evidence practice sets a doubles, and we need a lot more data entry people at $50 an hour, that's going to pull it down. But that doesn't necessarily mean that the overall profitability is going to go down.

Right. Thank you very much. That helps.

Your next question comes from David Kelly with Peyton & Lytle (ph).

Hey, I have one quick question, and that's about hourly rates. You talked earlier about your billing rates in the last seven months. Have you noticed that hourly rates are going up? Are they going down? Whereabouts are they, and what do you think this economy is doing to your hourly rates?

Generally speaking they're going up. They're continuing to increase.

All right. Across the board?

Pretty much in all of our practice areas, yes, sir.

Excellent. Thank you very much.

You're welcome.

If you do have a question please press "*" and the number "1" at this time. Your next question comes from Josh Rosen with CSFB.

Hi, thanks. And let me add my name to the list of congratulators.

Josh, it's probably you, right?

Yes, indeed. I finally got myself into the queue. It took a while there. My finger is tired though, I'll tell you. Just based on the guidance that you've laid out and the consistency of the guidance, is there anything that you've seen in April in particular that has you thinking you've got to be a little more cautious as you move into the second quarter relative to the first quarter? Not relative to where you were offering at the beginning of the year, but really relative to the first quarter that you just put out?

Josh, as we get we through part of a month, and we have half a month data at the moment, but as we get through part of a month, in particular this month New Jersey, all of New Jersey was off for spring break or something like that, at one week or another this month. And we can't really, we look at quarters, we look at weeks during the month, but it's really hard to predict based upon that what the entire month or quarter is going to be like. So it's not we haven't tamped down our guidance because we see a train wreck coming down the tunnel right at us. That's not why.

Fair enough.

We haven't tamped down our guidance at all. We've made some, we though, pretty educated estimates at the beginning of the year, and we haven't seen enough data to change that. We had a very nice first quarter.

Absolutely, which is more a question in terms of as we look at the second quarter relative to the first quarter, if there was something that ...

No.

... that had you feel like you couldn't put up a similar type of quarter. It's turning to just, you know, we've done, run some back-of-the-envelope calculations trying to get at what organic growth would have been in the first quarter. Do you guys have a number that you've spoken to or can offer?

Well, I'll be very frank with you. We did our best with pro forma numbers for last year. PWC's BRS practice was on a June 30th year. Accounting firms don't have the kind of discipline on a quarterly basis as a public company does, and there just is not anything sufficiently reliable on a per quarter basis, for the quarter ended March, for example, or for the next quarter.

Well, right, because there some, what they kept track off was not necessarily what we bought. Some of what they kept track of that was merged into this practice was not included in the transaction.

However, as you look at some of other practices, I have to tell you the other ones are more than nicely meeting our expectations in terms of organic growth.

Okay, I would hope so, given the performance of the quarter. Just the last thing is last quarter you had talked about I think it was a 70 percent figure that you, in terms of the number of people that had been combined in the FTI offices from an integration standpoint. Just is there a number that you speak to along those lines again?

It's almost complete. There will be exactly one office by the time we get to the end of the second quarter that won't have been integrated, and that's because of a unique situation. They are going to physically stay in the same premises they were in, and PWC now going to turn those premises over to us at that period of time. But, short of that, every one of the physical offices will have been integrated before this quarter is over.

Actually, I lied, one more quick thing. From a branding standpoint, is there any thoughts to really to step up the investment that you are putting into the marketing front in terms of building the FTI brand?

Yes, again, we are forming that, because we think there's great advantage to be had in building that brand name, and we've never frankly had the critical mass that we have now to invest a few bucks into doing that, and we think that the dividends that it pays are potentially very significant. You know, the branding does a number of things for you. One, it gives you the client recognition, so when you make a new business call it tends to be warmer than if the brand isn't recognized.

Two, as I mentioned, we have a whole bunch of folks who have joined us from very prestigious organizations. It's time in our continual development that they continue to feel that kind of prestige, because that's where the people want to be, with organizations that they are proud of and that they recognize. And as we go try to recruit people to join us, that's very significant.

And, finally, you know, we have always been in a position, for example, where we've, starting with Stew's business and Quint (ph), Ken and Allen (ph) back in the '98 timeframe, and FDA (ph) when we were acquiring the applied science business, there was, frankly, as a small company there was probably more cachet in the names that we acquired than in FTI. Now we are having an opportunity where those practices are coming together, and we have an opportunity to invest in one name, which will allow us to focus those dollars to get more bang for the buck.

And in fact we are in the process of doing a brand marketing, brand advertising campaign in a number of major publications, and you will probably see some ads slated for publication I think starting June.

The June issues, which will go out in May.

Right.

Okay, great, thanks, guys.

All right, thank you.

You have a follow-up question from Marta Nichols with Banc of America.

Hi. This is a follow-up to Josh's question about organic revenues or revenue run rates, excluding BRS. The back-of-the-envelope calculation could be looked at a couple of different ways, I guess, one the fact that BRS I think did about $113 million in revenue for the first eight months of last year before it was included in your numbers. So if you assume it was doing something like a $14 or $15 million monthly revenue run rate, you could get it something on a run rate basis that way. I am wondering if you can speak to how much seasonality there might be in that number. And then, secondly, if you can say, I mean, is it possible just to pull out the people who were working for BRS and to look generally at what those people are billing to get a sense of a revenue run rate, or is there some reason why that specifically wouldn't work?

Marta, that wouldn't work because the businesses aren't run that way.

Okay.

The first part of it, their seasonal patterns are entirely different than ours, because of the responsibilities that they had at different times of the years for all the things Stew talked about from recruiting to administration, to firm meetings, an entirely different pattern than ours, and not a pattern that we are comfortable in relying upon on a quarterly basis yet, to give any guidance on. But certainly on an annual basis we've given that guidance.

Okay, thanks.

There are no further questions.

I'd like to thank everybody for being with us, and we look forward to speaking with you next quarter.

Thank you for participating in today's call. You may now disconnect.