FTI Consulting Inc (FCN) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the FTI Consulting First Quarter 2004 results conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, Thursday, April 29 of 2004.

I would now like to turn the conference over to Ms. Diane Hetwer with Financial Relations Board. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us to discuss FTI Consulting's first quarter results. By now you should have a copy of the news release which was issued yesterday afternoon.

Before we begin, I want to remind everyone that the conference call may contain forward-looking statements that involve uncertainties and risks. 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 expects 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, retention of staff and clients and other risks described in the company's filings with the Securities & Exchange Commission.

We'll start with management's opening remarks, followed by a Q&A session. I'll now turn the call over to Jack Dunn, chairman and CEO of FTI Consulting. Please go ahead, Jack.

Thank you very much. And thanks to everyone for joining us this morning. With me are Stew Kahn, sadly, for his last conference call; Dom DiNapoli, happily for his first; and Ted Pincus, who will be with us continuing on.

After the upheaval of January, we have spent the rest of the first quarter positioning FTI not only for the rest of the year but for 2005 and for many years going forward. Hopefully you will find us not only a better investment but an even better company as we make the transition and continue to transition from a predominantly restructuring firm into a firm that has a balanced portfolio of professional financial services to offer its clients.

The quarter saw our mix of business as approximately 39% corporate finance restructuring, 40% forensic and litigation consulting, and 20% economic. For the year, as our forensic/litigation practice continues to grow, and also economic consulting, we believe that mix will be more like 36% corporate finance restructuring, 42% forensic litigation, and 21% economic consulting.

Even within our corporate finance restructuring practice, we would expect to see progress on our initiatives to build interim management, M&A and transaction support practices to further diversify our classic restructuring activities.

Each of our practices is actively hiring at the present time. Forensic litigation is nicely growing into our expectations for it. And economic consulting is exceeding our expectations.

During the period, we continued our efforts to sign our professionals to longer-term contracts. And at the present time, approximately 105 of our 110 senior-level -- or what would be considered in a partnership, partner-level -- employees are under contractual arrangements with us.

On the management side, we have promoted Dom DiNapoli and Barry Kaufman to senior management positions. We have been fortunate to have great professionals like DeLain Gray, Roger Carlisle [ph] and John Click [ph] lead our practices.

New addition to our firms late last year, such as Ernie Penike [ph] and his team, and Dennis Carlton [ph], Dan Faschell [ph] and the folks at Lexicon have significantly not only increased our reputation but also our efficacy of FTI in the marketplace.

We are working to improve our cost structure in each of our practices. And to make our results even more transparent, we have, for the first time, reported in segments this time. So I think we have a lot to talk about this morning.

And without further ado, I'd like to turn it over to Ted Pincus to discuss the financials. Ted?

Thank you, Jack. As Jack said, we continue to increase our disclosure to you and have provided a wealth of information, financial and metric information, in this press release.

As Jack said, we are reporting as three full segments beginning for 2004, because that is how we are organized. We were not organized as segments last year and it was somewhat impractical, if not impossible, to actually report down to the operating income level for any of our practices as they are presently constituted.

I just want to point out a few highlights. In our P&L, you may notice that our direct cost of revenues is higher as a percentage of revenues than it has been. We do expect improvement in that. And our SG&A is also slightly higher than it had been. Again, we expect improvement with that. Much of that was as a result of activities in the first quarter that are not expected to continue at that level for the remainder of the year.

I also want to point out that our amortization of other intangible assets, which is the allocation of the purchase price of our three acquisitions during the year, has grown by over a million dollars as compared to the prior year, which, as you know, is a non-cash charge.

Moving over to our balance sheet, as a result of the change in our business mix, our net days sales outstanding, which is the total of our accounts receivable and our unbilled receivables, less our retainers, is approximately 75 days. We still consider that to be a good performance for the mix of our business, but we continue to work on improvements to it.

And as we noted in the press release, if I move you over to the cash flow from operations, a good proportion of the increase in accounts receivable was the refund of approximately $10m of retainers, as pointed out in the press release, in connection with the departures of some of our professionals in the first quarter.

Also on that cash flow are capital expenditures. We're $2.8m approximately in line with the annual rate of our guidance, which was $10m to $12m for the year.

We did go into our revolving credit line to the extent of $23m in the first quarter. And again, as explained in the press release, that was primarily as a result of the one-time refund of the retainers. That continued but has now been completed, funding of the working capital of the acquisition of the DAS group from KPMG. And we had a small amount of additional buy-back of shares, approximately $1m, during the quarter.

Probably the most interesting page in the tables accompanying this press release is the operating results by business segment. Again, because we are organized this way this year, it is possible for us to present this information.

I do want to give you, however, a correction in this table, which apparently may have caused some confusion overnight. Because we were not organized as segments last year but operated more along the view of legal entity, one of our -- [inaudible]. Hello? One of our legal entities had elements of both economic consulting and forensic consulting in it.

And as a result of that, let me give you a correction to the fourth quarter of December 31 '03. We reported in the press release that the head count for forensic and litigation billable was 344. That should have been increased by 368, representing the forensic group that was inside one of our economic consulting practices. Correspondingly, in economic consulting the 179 head count should have been 155.

The other change commensurate with that is in the outlook section. The 385 head count billable for forensic is expected to be 409, again, for this reclassification. And the economic, which was 175, is expected to be 151. I hope that clarifies perhaps some misunderstandings that arose overnight. We apologize for that.

Continuing on on that page, you can see that our utilization of 80% for this quarter was certainly within our expectation and we were very pleased with it. Our corporate finance restructuring practice had utilization of 83%, as did our economic consulting practice.

Forensic practice utilization of 76%, while slightly below our expectations, has been ramping very nicely and very dramatically through the entire first quarter and ended the quarter at a rate well in excess of that.

Our average rate of $357 per hour does exceed our expectations, and that is driven primarily by the changes in the mix of our practice toward a more senior mix, as well as some very modest rate increases throughout a portion of the practice.

Our EBITDA margin for the quarter of 22.5% certainly was less than we expected, primarily because of the disruptions and costs incurred in connection with that in the first quarter. We do expect improvement in that margin as we move forward through the rest of the year.

Jack.

With that, I'd like to open it up to questions.

Thank you, sir. Ladies and gentlemen, at this time we'll begin the question-and-answer session. If you have a question, please press the star followed by the one on your push-button phone. If you would like to decline from the polling process, please press the star followed by the two. You'll hear a three-tone prompt acknowledging your selection. If you are using speakerphone equipment, you will need to lift the handset before pressing the number.

One moment, please, for our first question. Our first question comes from Josh Rosen. Please state your company name, followed by your question.

Yes, thank you. It's Josh Rosen with Credit Suisse First Boston.

Hi, Josh.

I just would like to follow up a little bit. And thank you for the clarification on the head count numbers. The bill rate guidance that you have for the year as far as your outlook goes actually shows a step-down from where you are in the first quarter. And you just talked about the progress you made in the first quarter. Is there a reason that the outlook has that embedded within it, or is it just a sense of conservatism on that front?

Josh, we have not effectively changed our outlook for the entire year. To the extent that we are providing an awful lot of metrics here, you would expect that some of the metrics will clearly be different than expectations.

And I think that that is the case here. As you can see, we really have not changed this outlook from what we produced only a few weeks ago.

Okay. So just to be clear, then, there's not an expectation that the bill rate should come under pressure of any sort. It's an unchanged guidance metric.

If anything, Josh, you can see from the first quarter that that would not have been the case, clearly.

Exactly.

Josh, we would also expect that, as we go forward, we'll be hiring some more junior people in the forensic litigation area, and also, given some plans that we have, would be utilizing some more of our traditional corporate finance restructuring people at the lower levels in that practice, a [well?] which would also change the mix slightly but would certainly be a big advantage to the company.

Okay. Yeah, that makes a lot of sense. The second question I had, then, if the metric that you've historically given out -- it might be a little bit more difficult, just given the acquisitions and some of that movement. Is it just attrition levels? And where they were running, if I remember correctly, they were in the 17-18% range --

Josh, not counting the anomalous departures --

Yeah, of course.

-- they remain at that rate on an annual basis. There has been no fundamental change in our attrition rates other than the major departure situation.

So that rate being around 18%?

On an annual basis, that's correct.

Okay, thank you very much.

Thank you.

Thank you. Our next question comes from Marta Nichols. Please state your company name followed by your question.

Good morning. It's Marta Nichols with Banc of America Securities. I'm sure there's a challenge in this, but I'm wondering if you can give us a little bit of color on what you would consider the organic growth rates or rates of decline in each of the three major lines of businesses.

For example, with the financial restructuring business, can you talk about what the organic level of decline there was, for example, excluding the departures? And maybe give us some sense of how the acquisitions, on a stand-alone basis, are performing relative to their performance a year ago.

Well, first, let me take the last part of that first. Marta, we find it almost impossible to do pro formas for the last year. If you realize that the DAS practice was a sub-unit within a larger unit within a larger yet unit in KPMG, it really is impractical to do that comparison.

Nevertheless, with an attempt to answer that question, we believe the organic growth is running at the 10 to 12% rate there.

With regard to the economic practice, we had predicted it would run at a 10 to 12% rate for the year. And it is running slightly ahead of that as we move through the first quarter.

With regard to restructuring, the revenue rate is actually equal to or somewhat better than the revenue rate that we predicted way back in September of 2003. In other words, it is basically a flat business or somewhat slightly improved since that period of time. And we don't expect much movement beyond that for the rest of this year.

Clearly on the cost side we've had some challenges, which obviously we have acknowledged in this first quarter.

All right, I'd like to come back to the cost point. But just on the last point that you made, Ted, you said that the restructuring business was slightly improved. Do you mean relative to the fourth quarter or relative to first quarter a year ago?

No, relative -- Marta, certainly not relative to the first quarter of a year ago.

Right. Again, I'm talking about kind of exclusive of the departures. I'm just trying to get a sense of same-story sales, for example, of the consultants that are on staff today and were also on staff a year ago, if it's possible to say anything about that.

Well, I mean, you can see that last year's first quarter had revenues for the corporate finance practice of $72m. And those revenues are $43.3m this first quarter. That is, of course, a very significant decline, recognizing, of course, that the first quarter of 2003, as we said then, was somewhat of an extraordinary quarter. Everything was running at full speed ahead.

Importantly, I think, and even more importantly from our perspective, was the prediction that we made in September, Marta, that the business had basically reached a trough in terms of its revenues. And it's basically continued at or slightly above that rate from that time until now.

Okay. That's really helpful. Thanks. And then, separately, Ted, you mentioned that both your cost of sales and SG&A were ahead of expectations. And I know the press release mentioned some very specific relatively small dollar amount associated with the departures.

Can you give us any sense, either in terms of a dollar amount or in terms of sort of a target year-end basis, how much over your expectations those numbers were in the quarter and what we might expect over the next several quarters?

Let me give you just a little flavor. Not all the departures happened exactly on January 28th, Marta. It took some time for people to decide and for FTI to decide how the careers of certain people would be going, whether with us or someone else. Therefore, we continued to incur costs, particularly during the months of February and March, in connection with those departures.

That subset of the business actually ran at a loss. The old P&M subset ran at a loss, effectively, until it wound down to zero. It didn't all stop on January 28th.

Also, the month of January itself was quite disruptive, not only on the P&M side but also on the remainder of our restructuring practice as well, as a result of the situation. And a lot of that had to sort itself out. And obviously there were costs that we incurred as a result of that, in addition to the people costs. But we would expect that the margins would improve throughout the year.

One indication of that is, for example, the month of March, when things have tended to stabilize, were improved; in addition to which, on the SG&A side, we had some advertising programs that had been in place to benefit our overall practices. And those are programs that were not expected to continue at the same rate for the remainder of the year.

And, last but not least, we did clearly incur some additional legal costs in the first quarter that are not expected to continue at that rate for the rest of the year either.

Okay. And is it possible at all to quantify the dollar amounts, either on an annualized basis or on a quarterly basis --

For each of those --

-- how far ahead you were?

Marta, it is possible to do that, but I don't think it would be particularly helpful to take any individual expenditure of $1m to $2m and try to quantify some annual rate in connection with that. You can see, for example, that our corporate expenses in total for the quarter were 5.4%, which is, on average, a higher percentage of our revenues than we had typically incurred in the past.

Okay. And just a final kind of housekeeping question. You mentioned that there was a shift in terms of the billable head-count numbers for fourth quarter in the outlook for '04. Does that at all affect the numbers that you provided in the release prior to the fourth quarter?

No, it did not affect the revenue numbers or the EBITDA numbers. It was a misclassification in the head-count numbers only between the litigation and the economic practices.

But just in the fourth quarter and in the outlook, not in any of the prior quarters?

That is essentially correct, Marta.

Okay, thank you.

Thank you. Our next question comes from Arnold Ersaner [ph]. Please state your company name followed by your question.

This is John Riley [ph] for Arnie Ersaner [ph] at CJS Securities.

Hi, John.

Good morning. The first question I have is related directly to your billable head count. It looks like you're building in a pretty substantial increase for the outlook of the year from Q1. Have you made any new hires during the quarter? And when do you expect that ramp to pick up?

There were hires - this is Stew Kahn, John. There were some hires in the quarter, as you can see from the corrected information that Ted has just given you. There were some hires in some of the practices.

Most of the forensic and litigation consulting people, Dom, we expect would be coming on board over the next six to nine months?

Yeah. The goal there is to bring people on as we can deploy them so they're not sitting on the bench waiting for new assignments. So we're carefully bringing in and ramping up to the levels that you see on the outlook for 2004. That's the estimated year-end number of professionals. They will be brought on board throughout the year as the demand for their services picks up.

Do you expect any problems, given the volatility in your stock price and some of the employee attrition you saw in Q4? Do you see any problems in reaching the targeted head-count numbers?

We haven't experienced stock price having any relationship to our ability to bring in people. Anybody that knows FTI and is in litigation and/or restructuring practices, they see us as a leader. And I don't think we really have run into a problem because of any fluctuation in stock price.

Most of the people we're bringing in are lower levels to balance out the professional ranks. And, you know, we're always looking for senior rain-makers. But the lion's share of those hires you see are at the middle to lower level.

Got it. The next question I have is specifically in the economic consulting. You're forecasting a high single-digit drop in the average billing rate and a decrease in utilization from Q1. Could you just give us a little bit of color on that? And are these the long-term sustainable rates, or do we anticipate these numbers in utilization going up?

Let me just reiterate what was said earlier. We did not change each of the individual metrics in our outlook section. Clearly our economic business is doing better than we expected in the first quarter. And it may continue to do better than we expected. And that would account for any differences in what you see here.

It's really nothing more than our decision not to change the individual metrics which were at generally midpoints of the estimated ranges of performance.

Certainly, because that was one of the segments which I had expected some increase.

And you did see such an increase. You saw higher utilization than we would have expectation. You saw a higher average rate. You saw also a much higher margin compared to its revenues than very honestly most of its public competitors.

Then just one last question. Are you still looking at additional acquisitions, or are you focused on the integration for this year?

It's not an either/or for us. We continue to, because we need to, to keep abreast of our clients' needs, to review and pursue acquisitions. We, however, also have people who are dedicated to the integration side.

Great. Thank you.

Thank you. Our next question comes from Adam Waldo [ph]. Please state your company name followed by your question.

Good morning. Matt Keating [ph], Lehman Brothers, standing in for Adam Waldo [ph]. First off, thank you for the greatly increased transparency on quarterly historical segment operating results and drivers included in the press release.

To that end, could you please provide more specifics on the cost containment actions and consultant utilization improvement steps being contemplated for the balance of 2004 at the corporate financial restructuring segment?

Dom, maybe you could take that one.

Okay. In the first quarter -- I mean, it's no secret, particularly on the restructuring side, revenues have flattened. Hopefully they've bottomed out, but never say never. We are hopeful that over the next nine to 12 months we'll see some more action in that particular line of business. But right now we're planning for it to be relatively flat.

And for that reason, in the first quarter we've identified and executed on approximately $6m in cost reductions just in that area, most of that coming out of employee costs through head-count reduction. And we're also looking at some comp reductions, yet providing people with the ability to earn it back if their performance picks up. So out of the $6m, probably $4m, $4-1/2m, came from head-count reductions, primarily at the senior level.

Great, thank you. Additionally, your hiring plans for the balance of the year, then, is it right to assume, then, that it's all on an organic basis in your guidance for 2004?

That is correct, yes.

Okay, great. Thank you very much.

Thank you. Our next question is from David Gould [ph]. Please state your company name followed by your question.

Hey, good morning. It's Sedodi [ph] & Company.

Hi, David.

On the restructuring side of the world, can we talk a little bit - and maybe this is best for you, Dom -- about the timetable that you're looking at? Is it essentially -- I'm sure you've made some headway, and I guess you alluded to some in the press release, as well as we handicapped for the quarter.

And now that we're sort of without those issues, does it take us another quarter or two to kind of start to see some recovery? Is it a slow process? Will it be quick? Just by way of margin, we're talking.

I think you'll see some margin recovery over the next probably three to six months. You know, it's largely due to flat revenues. You can't pull costs out quick enough, because taking costs out, particularly on the people side, there are severance costs that offset some of the near-term benefits. They don't feel the results right away.

But the plans we've got in place we'll start seeing, you know, again, over the next three to six months probably. And hopefully by then we'll start seeing some revenue pickup also.

Okay, fair. And then, Jack, could you speak for a little bit about two things? Number one, how we should view the additional contracts that you guys were able to secure over the last, I think it's a couple of months, number one. And then, number two, the costs basically these days of adding people. It's become more expensive to bring people in, or people are still kind of available, particularly in the forensic side of the world.

Okay. First of all, on what we've done to date is we typically have gone to try to get people to sign somewhere between three- and six-year contracts. And what we've done is offer them basically a good solid, in effect, floor on their salary for that period.

So the quid pro quo is that they would get, in effect, a guaranteed kind of salary for a period of years that would have some flexibility in it to be reduced in times of economic necessity, but also obviously ability to increase, because we think these are the people that will be the movers and the shakers for our company for some period of time.

In addition, in some cases where the person's been here a long time and it warrants, we have some equity inducements that we might use, such as stock options, things like that. And it's been very well-received.

In fact, the whole company has, I think, rallied together very much in the face of January and is moving forward and interested in moving forward and still believes we have an exceptional platform here.

Okay. And as far as recruiting these days?

Recruiting is -- at the entry-level jobs, we have a very interesting job offering to make people. We've always paid good wages. We've always been very competitive. The work that we do still tends to be the most interesting work in the world, so we have an advantage there.

On the senior people, as always, for the people that you want, the price of poker has gone up, although I will say that we're seeing some very interesting opportunities as the effect of Sarbanes-Oxley -- after Sarbanes-Oxley, there was a lot of movement of people around, so they're still trying to figure out if they can work easily in the new harness.

So we are seeing some opportunities there from people who are perhaps one step removed from a big four firm where they were before. So we have some opportunities there. I haven't seen a dramatic increase in the price of either a signing bonus or anything else to get those people to join us at this point.

Okay. And then, just lastly, you have given out some equity options as you bring people in. As we start to think about next year, do you guys have a plan or a thought in place as to whether you'll be shifting to restricted stock or stock options can just stay, you know, as you have to start to expense these things?

Well, as you look back, the bulk of our options have been in connection with acquisitions where people had an ownership interest in their prior organization through a partnership interest or whatever. So on an ongoing basis, we have no problem with using restricted stock, if, in fact -- I think we have a problem with valuing stock options at the Black Shoals value, and I think we're not alone in that.

So I think it's just we need to wait and see -- even the strong proponents don't advocate taking a charge at that amount. So I think we need to see where we come out on the economic impact of stock options.

We have always been in favor of restricted stock, because in that case the employee has a real economic value. They're not just based on the vagaries of the stock market but a real economic stake in the company. So we're not afraid of that and we think we can accommodate that within our existing structure.

Perfect. Thanks so much.

Thank you. Our next question comes from Rog Charma [ph]. Please state your company name followed by your question.

Hi. This is Rog Charma [ph] of Norman Carr & Ford [ph] Company. Hi, guys.

Good morning.

Good morning. I have a question on the costs related to that. The revenues have been good. The margins have come down, as we talked about. This quarter, EBITDA margins were closer to 22%, but the outlook for the year is closer to 26%. Should we expect margins much higher than 26% in the coming quarters?

Well, Rod, let me put it this way. Our economic consulting practice has excellent margins. Our forensic and litigation consulting practice has excellent margins and has room for improvement. Our corporate finance restructuring practice for the first quarter did not have good margins. And you've heard some of Dom's plans for improvement.

Whether or not the total of that improvement would take us beyond our guidance to 25 or not, I couldn't predict that right now, Rog. We're staying at this point with the guidance that we have given within the slightly modified ranges that we gave.

Okay. So I have a follow-on question. Are the compensation levels of costs on an average, have they gone up? Have you seen that? Is that what's affecting the cost at all?

It has to be relative. I mean, obviously what we are saying here is that most of the increase -- or should I say the decrease in our margins has been the increase in direct costs relative to revenues. And direct costs are comprised primarily of compensation.

However, it is complicated with some of the one-time compensation situations that arose in the first quarter. If you're asking, are there some pressures intrinsically in any of our practices in terms of the ratio to revenues, yes, there are in the restructuring practice. And that's what Dom was addressing.

Right. So I just want to understand, if ongoing there are compensation pressures versus one-time --

In one of the practices. And that's exactly what Dom was addressing.

And then my last question. Can you give us some color on what kind of pick-up, if at all, you're seeing on the restructuring side? Is it on the high-yield workout, the pre-bankruptcy work? How is that looking right now?

Well, the one bright area on the restructuring corporate finance side is intra-management. We're making investments in that area. We brought on a senior person. And we just received our first success fee.

And we're looking forward to that space being one that's going to generate some more opportunities for us, because, unlike some of our competitors, we've got a lot more -- a greater scope of services that we can bring to a situation, so we can bring in a complete firm to help a company rather than just an individual. And that is an area that we've got high hopes for. And hopefully, over the next couple of quarters, we'll be announcing some big wins.

As far as the balance of the practice, it's pretty flat. You know, just the number of opportunities are fewer. We're still getting more than our fair share because we still think we've got the best practitioners in the business. But you just get fewer times at the plate. So you're not going to -

And then what's happening in Europe? Could you give us the progress in Europe on the restructuring side?

Our Europe restructuring practice is on plan. We haven't added more people yet, but we're evaluating sending more people to Europe and recruiting in Europe for local practitioners to help in the local market. Right now we're primarily servicing our U.S. clients that need assistance in cases in Europe.

Thank you so much.

Thank you. Our next question is from Patrick Swendle [ph]. Please state your company name followed by your question.

Avenel [ph] Partners. Looking at the competitive landscape and restructuring, have you noticed a change in the pricing environment for new engagements, given that there are far fewer new engagements relative to last year?

In restructuring, we haven't felt any pressure on pricing yet. You know, when a company's in trouble, they just go out and get whoever they think can fix them. You can't afford to hire someone based upon price. That's the good news there.

But, you know, we have heard rumors -- we haven't verified -- but some of our competition are considering dropping some prices and maybe have dropped some prices, just as their competitive advantage, in their mind, against us or others that are holding the line because we think we provide the premier service. And historically our clients and prospective clients have been willing to pay for the best talent.

Same question. When you talked - in the conference calls, you all were talking about the departure of the Policano-Manzo group. You talked about trying to reposition some of the resources to focus on the creditor side that would not be covered as well in their absence. What have you all done in that area to work or to, I guess, penetrate those engagements with the other side of the house?

Well, the engagements that the Policano-Manzo people took were engagements that they had been working on for many years in some instances. The larger cases had been going on in excess of 12 months; in some cases 18 months.

So, you know, it would just be totally impractical to keep those cases, although Bob Manzo, who is still with us, is working on some of those cases as the lead person because of his senior level and his skills.

As far as moving people and credit aside, the team that's left is the legacy Price-Waterhouse-Coopers team, which historically our work had been roughly 50% creditor side and 50% company side anyway. So, you know, we had many of the relationships in the same institutions as the Policano and Manzo people had, yet there were different individuals.

So, you know, we still continue to work with the banks, work with unsecured creditors committees, as well as going directly to companies that are experiencing financial difficulties. And oftentimes it's the banks themselves that recommend us to their troubled credits, because they've worked with us in the past and they believe we know how to get a job done quickly.

And so you would say that you would not necessarily have seen a change in the relationships with those banks?

No, that's correct. We continue to work with the banks that we've always worked with in the past, which are most of the major money-center banks in the country.

Thank you.

Thank you. Our next question comes from Jonathan Schaeffer. Please state your company name followed by your question.

Hi. I'm with Kramer-Smeldman [ph]. I have a few questions. First, some of the concerns about FTI concern the attrition rate at your firm. Would you say that the attrition rate is materially out of step with your peers? And, if so, is there a reason for that?

Actually, we believe that --

[Audio difficulties.]

-- someone thought they didn't mind traveling five days a week to work on cases, but when they're actually in the battlefield, they get fatigued and they decide to do something else. Many of our staff go back to college for master's degrees.

So it's a part of doing business when we've got a much more diversified staffing complement to have high turnover, relatively high turnover. I don't think anything under 20 is high. I think anything under 20 is pretty good when you compare us to the large accounting firms, which historically have been our biggest competitors. And it's just our job to replace the individuals that decide they want a different career path with new people.

As an 18-month consultant a while ago who discovered flying out of town four days a week was less fun than was promised, I can certainly -- that explanation makes sense.

Question number two. On prior calls you said the departure of your P&M staff, you expected net was not going to have an impact on business generation in your other lines of business, in economic consulting, in the litigation consulting. Do you still see that to be the case?

Yes, we still believe that to be the case.

Okay, great. And the final question is, going through the press release, you say January and February, if I'm correct, were below-expectation months, whereas March things picked up appreciably.

If I'm correct, your original guidance for the year was issued on February 9th, and then that was reconfirmed on February 19th. Is there a reason, then, if January and February were being seen to be running below expectations, then the guidance was reiterated on February 19th?

Allow me to answer that. The one thing that would have been crystal clear to us by February 19 would have been revenues for January. And there was absolutely no difference. And if there was any difference, it was better than we had expected, as you can see from the actual results.

A lot of the costs had to settle themselves out and settle themselves down. And obviously we were focusing in that period from January 28th, not through February 19th, not only on the disruption itself but also literally at the same time as we were preparing for our fourth quarter earnings release, closing our books, et cetera, et cetera.

So it was not practical for us to have had a good estimate for February, by February 19 itself, again, on the cost side -- again, on the cost side. And, of course, it continued somewhat into March as well.

Okay, thank you.

Thank you. Our next question is from Ted Brinn [ph]. Please state your company name followed by your question.

Hi, guys. It's Ted Brinn [ph] with Western Reserve Capital Management. I was trying to get my arms around the -- am I right to assume, based on the change in the fact that you're keeping your revenue guidance consistent but your EBITDA and EPS guidance are coming down by what appears to be essentially just the delta in the first quarter, does that mean that your margins, as you had outlined them in prior guidance periods, are actually going to be consistent going forward? Or am I missing something?

No, you're not really missing anything. You're not missing anything with that. The change in our guidance was fundamentally to take cognizance of the results of the first quarter.

Okay. And so essentially you're saying the delta between the first quarter's performance and the rest of the year is the one-time items.

They weren't all one-time items, of course. Some of them were structural, which Dom has addressed, but which we believe will work themselves out. That's the answer to it. We do not expect at this point that the rest of the year would be dramatically changed.

Okay, thanks. And if I could follow up, you said March was better from a margins perspective. Can you give us some clarity on the March EBITDA margins?

We don't normally report on any given month, as you might expect. And I'm not looking forward to doing that. I did bring it up simply as an explanation as to comparative between January and February. But just since you've asked the question, to give you a little flavor, for example, the margins in the corporate finance restructuring returned into the 30s.

All right. And then the integrations of the acquisitions you guys did last year, those are going smoothly?

The integration of the EAS practice, and especially their working with the existing corporate finance restructuring practice, has gone exceptionally well. And the Lexicon, because they had folks out in Chicago and in Harvard Square, have gone a little bit slower because they are a different type of business traditionally. They have different systems. They have a different skill set.

Given their absolute unbelievable prolificness, or whatever, we have some conflict issues there and things like that. But they are, in terms of -- we also had different goals for them in terms of integration.

In terms of the forensic litigation and the corporate finance structuring people, we firmly believe, especially at the more junior levels, they have complementary skill sets and can work on each others' jobs.

That was not, in our view, for the economic consulting practice. Our view there was, because of their tremendous relationships and because of their reputation in the marketplace, that they would provide an exceptional entrée for our other businesses as they become comfortable with our other people.

So we are seeing them start to provide introductions and that kind of thing. So from that standpoint, it's going very well. But the actual day-to-day integration will be a little bit slower than we would usually encounter.

And then you guys are suing the folks that left. Is that right?

Correct.

How's that going?

We're in the early pleading stages, so there's really nothing to report on that.

Okay. All right. Good. I appreciate your time.

Thank you.

Thank you. Our next question is from Bill Warmington [ph]. Please state your company name followed by your question.

[Inaudible.]

Bill, did you forget your name?

He switched off.

Hello?

Are you going to be okay or not?

No, we cannot hear.

Can you hear me now?

Yes.

Yes.

Sorry, my mistake. Bill Warmington [ph] from SunTrust Robinson Humphrey [ph]. A question for you on how you think Q2 is going to look at a high level, top and bottom line, given that Q1 -- given the changes that you've made in the business, Q1 doesn't seem like a very good indication of what the company is going to look like going forward to help us in the modeling of that. I just wanted to ask for some high-level guidance there.

Bill, the pattern for the year -- and we apologize if we didn't make this abundantly clear --

You probably did, but I probably had my phone off the wrong way.

[Inaudible] that two of our practices were expected to have 10 to 12% growth, and one of the [inaudible] restructuring was going to be flat at the revenue line, with all of the practices affected, as customary in the third quarter primarily, and a little bit at the end of the second quarter by vacations of people and clients, so that you would expect that kind of pattern.

We don't give quarterly guidance, because the nature of this business is such that the range of volatility in any given quarter is much greater than it is in the year taken as a whole.

With that said, we would expect to see improvement as the year goes on, subject to what I just said about the third quarter, culminating with a much-improved fourth quarter, with the grand total equaling the range of our guidance.

Now that everything has settled down, I wanted to ask for the account of senior managing directors and ask a little bit about how many of those are under contract and if those are still two-year-plus type arrangements.

Jack actually did answer that question, but allow me to repeat it, please. We have approximately 110, 111 senior managing directors, 105 of which -- that isn't an exact number -- are effectively under contract.

Perfect. And I wanted to ask about -- Dom had mentioned in his comments, talking about revenue pickup going over the next three to six months. I just wanted to ask a little bit about what was going to drive that pickup.

It was a revenue pickup. We thought that the EBITDA would improve over the next three to six months from the cost savings that we've implemented in the first quarter.

So it's not the revenue -- it was actually -- okay.

Yeah, the corporate finance we're looking at being relatively flat for the year.

Okay. For the other two practices, where you're seeing the 10 to 12% growth, can you talk a little bit about what the drivers are for that?

I'll talk to the forensic and litigation. That practice has picked up steam nicely on a month-to-month basis. January was a slow start, but they just came on board. And we're seeing literally weekly improvements in utilization and activity with respect to securing new engagements.

So we're just hopeful that they will just naturally pick up to the point where we had expected them to as far as revenues for the year.

Bill, I think part of the drivers have to do, of course, with some of the improvements in our economy. There is some thought, of course, that the litigation type practices do tend to do somewhat better in better times. Plus also these businesses are not as finitely market-constrained, if there is such a term, the way the restructuring business might be.

So it is very possible for us to continue to grow in those businesses without coming anywhere near what might be the size of the markets, which are almost inestimable. Our litigious and regulated society doesn't appear to be changing.

And the new regulations that are coming into place, even under Sarbanes, are continuing to drive boards into seeking outside assistance when it comes to some of the difficulties that companies face. FTI is well-positioned to take advantage of all those opportunities.

Do you feel you've got the scale you need in the three segments you have? And do you feel you need to add a fourth segment?

I think we absolutely have the critical mass that we've been looking for to continue our presentations into the boardrooms of the Fortune 500 and say that we are the -- we used to be the alternative, but now maybe even the preferred provider to the big four in some of the services they need, that they're now not as sanguine about purchasing from their traditional sources under Sarbanes-Oxley.

Just to add a little bit on the market front, the economic consulting has always been a vibrant beneficiary of increased M&A activity and antitrust activity. And literally, as the antitrust activity moves from a national to an international flavor, you can't help but pick up the paper every day and see the potential marketplace for a firm like Lexicon, or for our folks down in Washington, John Click [ph], Chris Kett [ph] and Mike Baronowski [ph]. So it's a very fertile marketplace for them right now.

All right. Well, thank you very much. And I apologize for the technical difficulties.

[Laughs.] No problem.

Thank you. Our next question comes from Shari Twadry [ph]. Please state your company name followed by your question.

Highland Advisers. I was just wondering if you could comment on what a rising interest-rate environment might have on your bankruptcy business and that if rates -- I don't know to what extent they go up -- whether you might start to see perhaps even an improvement from your guidance that you stated today in that business.

Dom.

Well, I mean, to the extent rates go up, obviously people have to -- companies have got to spend more money on interest expense. Some of the deals that have been done recently, you know, you're not going to feel that for six to nine months.

And interest rates are going to have to come significantly higher, obviously, than what they are now. But that is certainly one of the things that we watch, that and issuance of more speculative type debt to put band-aids on some of the operating problems that some of these companies really have.

And that's really been the problem that we have had on the restructuring side, where the banks had basically stopped making loans for a while. And then, when companies started getting in trouble, the high-yield market was very fertile. So that was putting band-aids on some of these problems.

And ultimately, though, interest payments are going to have to be made. And to the extent rates are higher, some of those payments are going to be defaulted or covenants are going to be breached.

Thank you.

Thank you. Our next question is from Bill Sutherland [ph]. Please state your company name, followed by your question.

Bennington Scattergood [ph]. Good morning all. Ted, I apologize. I got connected a little late. Did you address DSOs?

Yes, I did, Bill. They're running the -- the net [of?] retainer is about 75 days, which is very good performance, frankly, but nevertheless still needs improvement. And we do expect it to improve. Much of that is caused by the difference in our mix of business today than it was in the prior year.

Right, the restructuring being lighter.

And the economic and forensic being heavier. And those businesses have almost two-stage billings, where you tend to bill a major law firm, for example. And then that law firm in turns bills the client, and so forth. So the nature of that business has higher DSOs than restructuring in addition.

So when you look at a peer group in that sector, Ted, you feel pretty good?

Oh, we still feel very good compared to peer groups, yes.

So can you get below 70 again now?

Well, you know, years ago, when we reported to you that we were at 90, we eventually got ourselves down to below 50. So I would have to tell you it continues to be a focus of FTI. And whether we can get below a particular number by a particular time, I don't want to commit to. But we work on it.

Okay. And the cash-flow impact of the acquisitions, working cap in Q1, does that essentially go away in the forward quarters?

That is correct, Bill. That is correct. We are not supplying any further working capital to any of the acquisitions.

Okay. And then, last thing -- I just got distracted. You were addressing this with Bill, the sequence of quarters from a high level. And you said that Q4 would be the big pickup?

It's more like our traditional pattern, where Q4 will be -- we would expect to be our best quarter, with the third quarter being light, for all the usual reasons, and the second quarter [inaudible] sometimes about the same as the first quarter, sometimes somewhat different. This first quarter, of course, was anomalous. But, no, not a drive pickup; there's no [inaudible].

Oh, okay. But, I mean, I didn't know with this mix maybe if Q4 did have a little bit more of the holiday/vacation --

We don't seem to be as affected by the holidays and the fourth quarter, taken as a whole, as you might think intellectually we would be.

And then I get asked now, what kind of grower is FTI? And you've addressed the organic growth expectations of the three groups this year, Ted. Is there a long-term kind of target growth rate you want to have for this ongoing mix of business that you have now?

Well, you know, Bill, the fact that the restructuring business is flat and we do expect it to resume, as Dom has pointed out, probably early to mid next year.

When that business is at its peak, as you know, it can start growing with well over 20% given year-to-year comparison until the next cycle. So that kind of growth would probably average out to 15% or so for the company taken as a whole at that kind of time, which is where we had been for many, many years.

Right, right. But lower double-digit for the other two groups, at least for the time being?

That is correct, Bill.

Okay. Thank you, all.

Thank you. Our next question is a follow-up question from Marta Nichols [ph]. Please go ahead.

Thanks. You guys have mentioned a few times on the call today Sarbanes-Oxley being a driver of demand. And we've certainly heard from a lot of companies that the activity around Sarb-Ox has picked up quite a bit in the last four quarters.

Can you give us some sense of the magnitude, either specifically or generally, of the impact to forensic accounting and your other practices from Sarbanes-Oxley requirements?

I want to make sure that we're not confused. We don't go in and do 404 internal audits and things like that, so we're not a beneficiary in that regard.

Right. I understand. But I know it's had an impact for you in the sense that forensic accounting has had some work there.

Right. I mean, and it's hard to -- I mean, corporate fraud, et cetera -- we use it a little bit as a euphemism for our corporate fraud practice, white-collar crime, that kind of thing. So to the extent that corporate governance is a focus of the world, and we believe not just as a spike but as a trend, it's done everything from allow us to have folks like the PWC folks and the KPMG folks join us -- because without Sarbanes-Oxley, they would have never left those two homes -- to going down to the work that we're getting with an Ernie Tenike [ph], whose specialty is securities litigation, things like that, which is an embedded practice in our forensics/litigation consulting. And he came to us because he thought he might be able to do some bigger projects.

And we certainly -- he's exceeded expectations -- to the fact that, looking at the new client list the other day, seeing in a couple of cases that were on there where we were directly the beneficiary of getting him because they were choosing a [inaudible] person to do the internal investigation.

It would be impossible to quantify the amount. But I think it would be probably safe to say that, in an atmosphere of cases like Freddie Mac and things like that, it would not have come our way absent a Sarbanes-Oxley type of environment.

Okay. And then separately, Jack, I think you mentioned that on Lexicon, the somewhat slower integration there in part was driven by some conflict issues. Can you flesh that out? Were you talking about client conflict issues or system conflict issues?

No, no, just talking about generally business conflicts. You know, as I say, they are the first choice of the host of people. And we obviously have a fairly good client book already. So we're just getting used to each other in our modes of business and how we accept engagements and that kind of thing.

To make sure essentially that you're not trying to serve the same client in your two different --

No, no. We were happy to serve the same client in all kinds of matters. We just don't want to find ourselves against each other.

Right. Were there any conflict issues when you acquired Lexicon? Did you have customer overlap, or you had to opt out of some engagements?

It was not very large at all, actually.

Okay. Thanks.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the star followed by the one at this time. As a reminder, if you are using speakerphone equipment, you will need to lift the handset before pressing the numbers.

Gentlemen, we have no additional questions. Please continue.

Okay. Well, with that, I'd like to thank everybody for being with us today. And I'd like to thank Stew Kahn for being with us for the last five years. It's been -- despite some bumps here recently, it's been a tremendous growth and creation of a company.

We provide jobs now for a thousand people, and those thousand people provide exceptional returns for a whole lot of other people. And we wish Stew the very best in his future endeavors. He has agreed to be a consultant with us over the next several years. And we wish him the best. And again, thank you all for being with us.

Ladies and gentlemen, this concludes the FTI Consulting First Quarter 2004 results conference call. If you would like to listen to a replay of today's conference, you may dial 303-590-3000 or 800-405-2236, followed by access number 576523. Once again, we thank you for your participation. Have a pleasant day. And at this time you may disconnect.