FTI Consulting Inc (FCN) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the FTI Consulting Second 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 "*" followed by the "0". As a reminder, this conference is being recorded on Thursday, July 29, 2004. I will now like to turn the conference over to Ms. Lisa Fortuna with Financial Relations Board. Please go ahead ma'am.

Good morning. Thank you for joining us for the FTI Consulting Second Quarter Results Conference Call. 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 this 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 SEC.

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, Sir.

Thank you very much. I'd like to welcome everybody and thanks for being here with us this morning to discuss our second quarter results of FTI Consulting. While we will discuss our results as usual and as required in comparison to last year, I think it is also good to remember that this is our second full quarter since the dramatic steps we took in the fourth quarter of last year to really balance our portfolio services and offer in critical mass of full range of forensic accounting litigation and economic consulting services as well as corporate finance and restructuring services. Therefore while I am not normally an advocate of comparison of sequential quarter and analysis in that way, in this case we will provide some of that, Ted and Dom will, as may instructed as to the progress that we are making in our various initiatives to grow our businesses and increased their results.

In a minute Dom and Ted will discuss our results in detail. Before we do that however I'd like to discuss some of our recent new hires, some of whom will be a highlighted in profile in the press release that will come our later today. At a recent conference in response to a question, I restated my request that people look carefully not only at the quantity of our new hires but also more importantly at the quality. I said that if we could add five new senior level people, people with impact potential to move the dial in time for this call or by this date then that would be a good performance, regardless of the volume of overall head count growth.

Remember that our value proposition is much and hopefully more based on intellectual capital than it is on strict body count, and I am happy to say that in terms of the 5% goal we have achieved that target. As previously reported, we were fortunate to add Michael Dougherty, who joins from the nation's Homeland Security Department, Howard Loewenberg, who joins us in our recently renamed FTI Capital Advisory Group. Today we will announce two new significant hires -- Patrick Donahue and Anuj Behal (phonetic) to add traction to our transaction advisory services practice and Ryan Buckerin (phonetic) will be added interim management services capabilities, a senior executive level, who has a lot of experience and really augments our capabilities in this area.

These people represent the best investments we can make in the organic growth that is so highly valued by shareholders. We think we will begin to see return from these investments fairly quickly. Michael Dougherty joins Roger Carlile and his team in forensic accounting with a wealth of knowledge and experience in a nascent industry that is virtually guaranteed to grow over the coming years as our nation confronts terrorism here in abroad. It's an industry where those qualities of knowledge and experience are a rate commodity and can be marketed at a premium. Howard joins not only Jeff Manning but also our other professionals such as Carlyn Taylor and other leading "content experts" in the areas such as telecommunications and healthcare. With that kind of offering put together and as those industry spaces continued consolidation in the next phase of their growth and maturing, we should be well positioned to have a great product offer to the marketplace. In the case of Ryan Buckerin, there is probably no area that has more need and a lack of great professionals in the interim management business where we can go in and actually help companies work through rough spots and in an improving economy that's the business that has traditionally grown and him joining folks like Greg Rayburn (phonetic) should be a great thing for our ability to address that market.

Finally, while it has taken sometime to find the right people, Patrick and Anuj will work the way. Their joining us in transaction support should dovetail nicely with an increase in M&A activity, the same kind of activities that has started the tremendous growth in our economic consulting group, and again we should be well positioned to address that marketplace. There will be more new hires in the future. There will be several and I would issue the challenge to FTI that was issued at that meeting to have five more senior people that can move the dial by the next time we get together after the third quarter. While I say that, that's the kind of additional investment that adds to our organic growth that is so highly valued, we would miss if I didn't say that the acquisitions that we did in the fourth quarter last year, the acquisitions that gave us critical mass, brand name and really credibility in all three of those industries have made this type of hire possible. Folks like Roger Carlile, DeLain Gray, and John Klick and our folks at Lexecon who bring to us not only star power but just fundamental good reputation, enable us to go and approach people like that and continues to be one of the major places that people will go towards when there in these professions. With that I would like to turn it over to Ted to discuss the financials in detail and then Dom will address some of the operating highlights that took place during the quarter, Ted.

Thank you, Jack. Just let me point out a few things that are not necessarily self evident in the press release. The press release is very comprehensive, as you can see it goes into not only the results from the Company taken as a whole but also of our three major segments. As we say in the press release, our gross margins improved and our EBITDA margins improved from the first quarter and that happened in all three of our segments. You will also see in the 10-Q that we expect to file at the end of next week and that just there isn't enough room in the press release is that the gross margins in the three segments also improved as well as their EBITDA margins and SG&A in two out of three segments actually improved as a percentage as well, so that's where the company taken ass a whole the gross margin is now approaching 46% in the second quarter compared to above 44% in the first quarter. Our SG&A for the company taken as a whole before the depreciation and amortization still runs about 21% of the total and we think that's a well controlled expenditure, reasonably low for a company of our nature given the need for marketing and the fact that we have 24 offices in the United States and one in London.

Notwithstanding a slight uptick in interest expense in terms of interest rates this quarter, our interest expense remains approximately the same as it was and we will cover that in a moment when we get into our balance sheet. Our income tax rate for the quarter remains at 40.9%, and we do expect that will be the rates for the year taken as a whole. If there is any direction, it could go in the future, it might be very, very slightly less than that. But in general, we are talking about FTI as a full Federal tax payer at roughly 35%., the difference being the states that we operate in. Our weighted average common shares outstanding remains at roughly $42.5 million and that is a function of two things. There hasn't been much change in our stock price for a while to have any effect on that number from the treasury stock method perspective, and also our stock buy-back program has effectively mitigated the effect of our employee stock purchase program and our restricted stock and stock option programs. So they have effectively mitigated that for the last 9 months, and frankly we expect that to be approximately at same, at least mitigation effect.

Let me take you over to the cash flow for just a moment. I had a call a little while ago actually from a shareholder, who wanted to know-- what is our typical write-off experience, our write-off experience on our accounts receivable has been running about 1%ish of our revenues. Now, our accounts receivable are evaluated, especially in today's day image under Sarbanes-Oxley one by one by one. There are no guesses involved. We have a very healthy portfolio. Most of our receivables are either from major law firms and who are very large clients. And in our restructuring business where you have some troubled clients clearly that’s where we take the bulk of the retainers that we get on advance out or more clients.

So, our portfolio remains very strong, but I will cover those in a moment when I get to our balance sheet. One thing that becomes self evident when we compared our cash flows for this year compared to last year is by this time last year, we had nearly $20 million of cash flow from exercise of stock options and from the attendant tax benefits. We have a very limited amount of that this year, so I would appreciate all of you to raise our stock prices, so that we can more of that. Thank you very for that.

As anticipated our cash flow from operations certainly switches over in the second quarter from the first quarter. As you know normally our first quarter is typically the flat or user of cash flow because many of our bonuses are paid throughout the company in the first quarter and final tax payments are made, and in the first quarter of 2004, we had two one-time events, one without getting into the details again as we refunded approximately 10 million of retainers to clients as a result of some of departures that rose in the first quarter and the second major event was our need to provide working capital in connection with our acquisition of the DAS group from KPMG whereas you know we did not acquire their working capital, so we actually have to provide it. So, that for the second quarter we had cash flow from operations of approximately $21 million, which we have effectively utilized to pay down our debt which I will cover in a moment and also to continue the implementation of our stock buyback program.

Capital expenditures and our seasonally adjusted basis were only $4 million through the first six months of the year. But we do anticipate that it still will be $10-12 million before the year is completed as we have originally estimated and that’s simply because some of the office build out that we will be doing including in our New York -- our new facilities in New York are scheduled for the back half of the year. So, we still do anticipate that to be $10-12 million for the year.

Let me move over to the balance sheet very quickly and take you down for the debt line. We continue to payoff our debt. At June 30, our term loan was down to $113.8 million and our use of our revolver was down to $11 million. As we said here to today, our revolver is either its zero or 1 million essentially paid off, and so our total debt as we said here today is 114 to 115, a quite a big drop from the $140 million that we were had earning in quarter earlier for example and as you know that debt was incurred primarily in the fourth quarter of last year in connection with the 3 acquisitions that we made.

For those of you in particular new to our story, in order to make any sense of our accounts receivables situation, you have to add on our balance sheet accounts receivable and 2 with the unbilled receivable, which represents the production, the hours earned during the previous month which are billed subsequent to be close of that particular and from that you subtract billing in excess of services provided which are the net retainers we have received from clients that are unearned at the time, as you know our accounting principal properly, so as to report retainers on our balance sheet as liabilities until such time as they are earned by the company based upon hours.

On that basis our DSOs are now approximately 83 days net as compared to the high 70s at the end of the first quarter. We are very comfortable with that but we would like it to be better than that, it has been better than that over the years, and we continued to strive, but one of our fastest growing businesses are economic consulting and one of fastest growing at the bottom line in particular. Its portfolio due to the nature of its business tends to have its receivables with clients, who are excellent payers, but they -- it's two-party system. Almost all their billings go to major law firms and in turn go to their clients, etcetera, etcetera. So, that -- what you are talking about even with 83 days it's 53 days plus roughly 30 days were the unbilled, so we are comfortable but we will continue to try to improve that.

Let me go over to the page of comparative metrics and Dom will cover an awful lot of the reasons why the results are what they are, but just begin to point out the EBITDA margin and as I mentioned the gross margin in all three of our segments have improved over the first quarter. We don’t anticipate any further improvement in third quarter as you know the third quarter of the year on a seasonal basis is the slowest quarter we have. Its vacations not only of our people, but our clients and also some court calendar are also on vacation. So you would not expect to see any margin improvement there. You might even see some margin change the other direction, but we continue to believe that we will have margin improvement in the fourth quarter and consequently margin improvement for the year at both the EBITDA and the gross margin lines. We have as a result of our performance now for half of the year, we have -- and I call it a refinement and a narrowing of our guidance, more than any thing else. We try to be realistic with this guidance, not aggressive, not especially conservative, just very realistic. And as the year goes on obviously the more information you have the more realistic you try to be.

So, for example, our EBITDA forecast is 107 to 111 for the year and the table you see attached to the press release, is at the mid point of that as a convenience, 109 million. You can see some changes among our expectations in our segments and Dom will talk a little bit about that in particular you see the major positive changes in economic consulting and a bit lower changes in forensic and more moderate change in corporate finance.

Again these are realistic expectations and they will change as time goes on. We do expect to have it roughly [single] out the revenue as we had forecast the previous quarter. We’ve tightened the range some what though that number of 437 million is the midpoint of our new rather tight range. We’ve tried to give you some estimates of our billing rates, which seems to be holding at roughly $350 per hour, give or take for the first 6 months. We expect it to be approximately that for the second 6 months and for those of you who compare that to our earlier guidance, that’s about $5 higher than we had anticipated in total at the beginning of the year. In terms of our headcount very minor tweaking just more realistic basis. We estimated 800 [inaudible] in terms of billing personal, 796 now again to same place that we expected to be just little tweaking between the practices and Dom will cover that a bit more. In fact, at this point let me turn it over to Dom to give some more color on the results.

Thank you Ted. What I'll try to do is just add from commentary on the results of the practice areas that just as Ted said give a little bit more color to the results. Particularly when you look at the second quarter of this year versus the first quarter, I will start with corporate finance. The last call we spent a lot of time talking about corporate finance, in fact it was in the wake of departure of practitioners, and we are really proud of the corporate finance practice has been able to do accomplish since this last call. On that call, I laid approximately $6 million of EBITDA enhancement programs that we have laid out in reaction to loosing a part of the team. I am happy to announce that over 90% of those enhancements are in place and with plans to put the balance in place this quarter. So they have done a great job there.

When you just look at them do the math of taking the first quarter results versus the second quarter what you don’t really see is when you take out the results of the revenue results and the EBITDA margin achieved of the practice that left the corporate finance practice has actually grown on both the revenue line and the EBITDA line quarter-to-quarter and that is testament to the quality of the people that we have in our practice. So I am hopefully, we can put everybody at rest that, that practice is coming along at a level there we expected if not better. And operating at margins at all the [NV], as many consulting firms that we compete against. As far as their revenue stream, they've got a bunch of nice size assignments in house. We all read the newspaper everyday waiting for that next Enron or Worldcom or Global Crossing to occur. We are positioned nicely to react with involving most if not many of the largest bankruptcies. We, also, as Jack indicated, moving in other directions in that space. Interim management is a key area that we're focused on as well as the M&A sector where we have just added real quality people who we think will help move it up.

Moving on to forensic and list consulting. Second quarter exceeded both in revenue and EBITDA line for that practice of the first quarter. EBITDA margin improved, so we are happy with the results that we have achieved for the quarter. The one area that we had a little bit of pause in June, one of the larger cases settled and it's taken some time to ramp up the staff that move from one case to another. So that rate of growth that we had experienced through -- actually was through May, it slow down little bit and that’s probably one of the reasons that we were finding our estimates as indicated.

As far as the pipeline goes, one big case settled, one is in a state of re-ramping up, we hope it's going to ramp up in October, and we’ve got a lot of smaller high impact cases, but they were in the $1 to $2 million range as oppose to the $6 to $10 mega cases except for the one that hopefully will ramp up in October. We do have a good pipeline of the medium size cases, and we have got a terrific team that we're able fill that pipeline until the budge opens our out there for us to set our sights on. We continue to work on EBITDA enchantments in that practice as well as our corporate finance and the economic consulting, that's one of the keys to FDI, as our ability to manage very closely to the bottom line and you know on the SG&A side indicated that, our SG&A was extremely reasonable given that a company like ourselves.

On the economic consulting front, once again another great quarter, exceeding expectations internally and showing continued growth particularly on the margin line, so that’s practice that is clicking along very nicely. Sort of the growth drivers we continue to watch in build on interim management cases, they were key to our success going forward. And we're excited about some leadership additions in the M&A practices, as I previously said.

In the forensic litigation practice, Sarbanes Oxley continues to put restrictions on the big [board] that hopefully is going to continue to provide opportunities for us as well as the financial investigation large dollar transaction losses that were now positioned to more effectively go after. On the economic consulting side regulatory changes particularly in the telecom industry, public policy, utility rate increases and they drive continued royalty in that area along with heightened M&A and the corresponding antitrust issues that needs to deal with full M&A activity.

As far as our litigation consulting, there is an increase of technology used in legal proceedings in the courtroom and that practice is done very nicely worked out. I mentioned before the EBITDA enhancement program for corporate finance, that was a key part to driving your EBITDA margins to the second quarter. I will touch a little bit again on integration that something that comes up on a lot of calls. We continue to improve the integration of the KPMG and Ten Eyck practices. We think they are operating pretty seamlessly within -- they are trying particularly between the corporate finance practice and the forensic practice, that’s where we have got a bulk of people with complementary skill set that we can move back and forth between practices and it allows us to let that then go out and hire incremental staff or able to use the same staff as they free up from there respective specialty.

Investments in the future, we continue to look for ray makers and allow them to build their businesses within FTI. We continue to invest in relatively high growth businesses, interim management and we are looking at Homeland Security and what opportunities there are for a firm like FTI there. And we will continue also to look at acquisitions whether they be relatively large or small complementary transactions to our existing practices.

With that, I would like to open it up for questions, please.

Thank you sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press the "*" followed by the "1" on your pushbutton phone. If you would like to decline from the polling process, please press the "*" followed by the "2", you will hear a three-prompt acknowledging your selection. Your questions will be pulled in the order they are received. If you are using speaker equipment you will need to lift the handset before pressing the numbers. One moment, please for a first question.

Our first question comes from Adam Waldo with Lehman Brothers. Please go through you questions sir.

Good morning everyone.

Good morning Adam.

Good morning.

Starting at high level with Jack and really trying to flash up some our comments around staff hiring particularly at the senior level but also overall. Could you give us a sense for what your targets or aspirations are for organic headcount growth during the second half for the year and any preliminary comments with respect to your goals for 2005?

Well, on the headcount growth for the second half of the year, our billable headcount right now as you see in the press release is about 750 in total and we still estimate that we will be close to 800 billable at the end of the year that’s also in one of the tables in the press release, Adam.

I would guess, you know, for next year we would look at again at our as a company that in its internal planning will put 15% plus internal growth. We would look at somewhere in the neighborhood of 7-10% growth rates. As this year has been a big year of digestion and integration. I think one of the things that you begin to see on the organic growth front is the ability of people who recently joined us KPMG to recap to folks and give them a years experience of what it's been like with FTI and I think we have some high hopes that we will be able to recruit people again not just you know the new folks who joined us with less experience but at the higher levels which should have a cascading affect. In addition, I think we are being again restructuring return to be in a net hiring position. I think we would think that would increase because as we have said before we believe that market starts to get stronger in the first quarter so middle of next year based on all of the economic activity and funding activities just taken place over the last 12 months.

Okay. And just relate to try to pen it down little more on the second half of year, I wasn’t really interested in what you've done in the year in headcount. Obviously, I saw that in the press release, but would you expect this is the second half '04 headcount ramp to be relatively linear or would you expect more of the people come on in seasonally stronger fourth quarter?

Typically, what we have done is ramp up more in the fourth quarter for two reasons, one in professional business it's not unusual to know that the July-August timeframe is a time of vacation, so we look at the September fourth quarter timeframe not only for that reason because there's no reason to bring somebody on for their extended vacations, but most importantly, as we get to the fourth quarter of the year as we said before we had get a much better outlook on, you know, what kind of work is hit the desk after everybody returns from labor down, a real good idea for the next year what our hiring needs are going to be, so I would expect to see it loaded more towards the fourth quarter.

Okay. Then finally could you just remind us roughly what percentage of second quarter revenue came from the traditional bankruptcy and restructuring practice, was it well under third or second quarter revenue again or could you give us some quantification of that?

Well, the total restructuring -- if I understand your question of the total restructuring business revenues, were 39.5 million as of 107 million. So that alone put it down of about in 37% range and there is a portion of that, that was generated by the M&A and by the transactions advisory and by the interim management businesses. So that -- I think you're fair to say, if that was in the low 30% in terms of the more traditional restructuring business, but I don’t have any exact number at my fingertips.

Yeah, and if I can to that just a little bit -- as we have told people in addition to our efforts to add to our product mix or our offering mix, the restructuring business does have a life cycle as it segways from perhaps a frothy top of a market, it goes to different phases and then as the economy improves, as we are seeing now a lot of the big bankruptcy cases that we were involved in as the restructuring agents, segway into litigation cases, so you will find that among our even our restructuring business it's not so much the traditional work that we may have done in an Enron and WorldCom, but it is also actually litigation related. So it's a business that has its own vitality in good times and bad.

Thank you.

Our next question comes from Josh Rosen with Credit Suisse First Boston. Please pose your question sir.

Hi, thank you. Just a follow up on Adam's questions regarding the hiring outlook, I am curious it seems like lot of that the new activity you had has been in the corporate finance restructuring practice group. And yet when you look at what you are tugged in yearend then I know there could be some movement with [inaudible] and it's just a rough outline?

Josh I'm sorry you are fading --

Let me grab a better phone here.

Okay. Thank you.

Is that better?

Yes, much.

Okay. Sorry about that. Just a follow up on Adams question regarding you new hiring outlook, I know a lot of this might move around as you move through the end of the year in terms of how you get to 800, but it's looks like a lot of the more recent hires have been on the corporate finance restructuring side as far as senior hires go, and yet from a guidance standpoint you are looking a growing the forensic litigation practice pretty aggressively in the back half for the year. Just curious on the visibility of that growth and also tied together with the thought on -- are you doing a fair bit of campus recruiting that would contribute to that fall.

This is Dom, Josh. A couple of things, first of all, we have significant capacity to grow these forensic practice without going on hiring a lot more senior guys. That said, we are always looking for people with a book of business to retain; when you look at the actual hiring it kind of starts getting blurry between corporate finance and forensic at the lower levels. The younger professionals have got very similar skill sets and that's one of the ways that we drive profitability by moving people around. So while, this was our best get-now guidance of the -- net add for each of those practices or 34 and 7, you really need to think of it that's effectively that the body is working in those practices, whose payrolls are actually beyond may depend upon what city and what needs there maybe for the FTI in total. So we try not to just sit hiring goals based upon needs of a particular practice in a vacuum because that wouldn't be the most effective way to move our people around to maintain the high level of utilization.

Yeah, and I think one of things you mentioned, we are unlike maybe some other companies for good or for -- we really are so much hitting the campuses for our recruiting. We are looking at probably a slightly more senior type of person for that. So the fact that we have the senior new hires, that's definitely part of our plan, that's part of our business models to be adding those people as well.

That's very helpful. Just secondarily along the same lines within the forensic and litigation practice, just being curious as you rollout this project. Was that something that was being done largely that the KPMG side, was that done in some of the existing FTI relationships prior to that acquisition and where does the scale back in expectation is coming in?

That came in police -- our acquisition of the KPMG and it was really a cross practice as we had forensic, we had electronic evidence consulting in there in a big way, that was in a truly an all encompassing litigation consulting and forensic opportunity for us.

We are showing up there is a segment of forensic accounts.

And last just update on the annualized detritions metrics for the quarter?

If I can add one thing, its one we got because we were able to produce the critical mass of having KPMG, it was a worldwide type of situation so it really helped to have -- that's one we wouldn't have -- we got it after they came and we would not have gotten it absent them.

That makes a lot of sense. The annualized attrition metrics with the quarter?

I am sorry I couldn't hear your question.

Annualized attrition for the quarter?

It's still running at roughly this 18% annual basis, Josh, I get the feeling its going to be our norm.

Okay. Thank you guys.

Thank you.

Our next question comes from Arnold Ursaner with CJS Securities. Please go ahead with your question.

This is John Reilly for Arnold Ursaner. Good morning.

Hi John.

First question I have is could you tell us what percentage of your senior managing directors you are currently have under long-term contracts and which one do you expect do leave within 12-18 months?

Which one do we --

For renegotiating?

Okay. Well the actual number today is about 112 out of 115 to the extent that that's relevant any more. And roll off over the next 12 months, very limited, some of the roll off of a group and a lot of that has changed and already also tends to happen about 2 years from now and then 4 years from now. So there is very little roll off in the next one year?

So, it sounds like you are seeing your people will be locked in -- the majority of them will be locked in for at least the next few years.

Yeah. But you know, our policy now is to negotiate early and reward people for their performance and to try and stagger some of the roll offs, but very honestly its not just the contracts that keep people at FTI. It's the environment, the opportunity and the nature of the work.

Could you just run us through some of the advantages that you have with this New Capital Advisors subsidiary? How would that provide advantages for people in that practice and your company?

What -- I think that a couple of things have happened but the name changes don't do much, there are more or less just a symbol but what we have found is that in the market we represent, which is the people recognize us in the distressed area, people recognize us in the smaller company area and M&A, that the ability -- we didn't want to be confused with somebody have just came in and sold subsidiaries of the distress company. We do a lot of work while we help to restructure financing. We do a lot of work where we do valuation work and evaluation work, we do a lot of work -- investment banker for example would be required to testify on capital structures and things like that. We also believe that with the consolidation of the banks there will be a portion of the marketplace both in some distress and not in some distress that's a smaller end of the market where with our reputation for being able to scrub things and to -- for process improvement, process evaluation and process improvement, we maybe able to give whether its bank investors, whether its in insurance company investors, whether its venture investors or other types of investors, a special kind of comfort with our due diligence and our representation of the borrower that maybe some other firms can't do. So we wanted to really get the concept across externally that we are more even just somebody that can come in and take a small subsidiary of a company that's in some distress himself.

The compensation structure for this new division -- will there be any incentive based or more incentive based work?

Yes, as long as with -- to compete to my marketplace you will have to provide incentive compensation and we're -- probably I won't go into the details but it's consistent with our overall profit goals and probably at market. I think when you track people like Howard and like Jeff that you are showing that you are in the ballpark with what they can make some place as they recognize, the opportunity here is one from working on such a large number of matters which at the end of the day are involved with financing that there is potential work in there for those that wouldn't necessarily compete with the larger investment banks and certainly not with their bank clients

And one last question. Can you just update us on where you are you are -- you've opened a new London office, are you fully staffed, are you at capacity, just update us on where you are with that?

No, we continue to be taking that in the traditional FTI mode, which was business first and then due to growth that way. And we're still taking a look see attitude to that. In speaking with our other practices what we have asked them to do is to analyze and prepare their own plans for being in Europe by the -- in the next 6 months, and so probably the next thing you would see there is hopefully a filling out of the dance card with our other services over there. We think there are some opportunities certainly on the economic consulting side and we think that through our expanded senior leadership group that they know some folks over in Europe where we also may on the forensic accounting side, be looking at doing something soon. But again it will be a step out that will not be anything that would be a major commitment of dollars at this point. So we further assess the market.

How many employees are in the office now?

Four.

Thank you very much.

And we – by the way that’s four there but we have – we are continuing to supply those cases with people coming back-and-forth from the U.S.

Great. Thank you.

Thank you.

our next question comes from Mayank Tandon from Janney Montgomery Scott. Please pose your question.

Thank you. Good morning. Ted I had a question for you regarding the margins once again. Just looking at the metrics, utilization slipped a little bit and pricing came down. Could you explain how the EBITDA margin improvement came through from all the three segments? Or is just a function of cost cutting?

Let me take on that statement where pricing came down. Pricing did not come down. Average rate as you know Mayank, is a very comfort function. It deals with the mix of people on average on the engagements during a particular period of time. As a matter of fact, there was no downward pricing pressure at all and in fact there was a modest price increases per se. So, you can’t tell from this what the profitability of particular assignments are until you look at all 3 metrics together, the headcount, the rate, and the utilization, as I think we expressed over the years, anyone of them can be mitigated by any of the other. Suffice to say that it was at both the gross margin line for ’03 of the practices and gross margin is a function of the revenues per engagement minus the cost and most of the cost of the direct compensation of the people including their incentives. And in two of the practices that was actually improvement in SG&A as well, so I am not sure I could give a better answer other then we pay attention to our costs, we pay attention to the nature of the incentive programs that just everybody at FTI has and there was no pricing pressure.

That’s very clear. Thank you and I also wanted to ask you about SG&A level -- I think you said that you expect SG&A level to sustain at these levels going forward as a percentage of revenue is that right?

Yes, roughly 21% before depreciation and amortization.

Okay, obviously third quarter would be little bit different right just because of seasonality?

Well the third quarter is a little bit different with the period and everyone does the metrics.

Okay. Thank you very much.

Thank you. Our next question comes from Marta Nichols, Banc of America Securities. Please pose your question.

Good morning and thanks actually this is a follow-up on your comments about seasonality in the third quarter. You obviously had, you know, both normal seasonality and some dislocations in the corporate finance business last third quarter. I’m wondering if you can give us some sense of what we should be thinking about in terms of seasonal decline on a quarter-to-quarter basis this third quarter?

It’s different among the three practices of course, but and this is going to be a very, very rough estimate model. You are probably talking about between 5 and 10% and that is really very rough for the third quarter.

Okay and can you talk about where we are on expenses just as a general rule I guess both on the direct cost and the SG&A line with respect to -- are we at good run rates for the second half and in to fiscal '05 and I am interested specifically because Dom mentioned about $6 million of EBITDA enhancement effort and I am wondering does that refer to revenue enhancement that will flow through the EBITDA or is there are some cost control or cost reduction in that?

That is the -- he was referring totally to an annualized run rate of cost.

About 98% of that was cost Marta.

Okay. So there is no revenue increment you’re anticipating in there.

That was very little

Very little/

Yeah, that was very little -- I may get -- 95% of that enhancement was on the cost line and all of those -- the cost enhancement have been achieved?

Okay. So in general the cost run rate that we are looking out right now are or for the second quarter will actually be slightly low when looking at third quarter numbers. Because you have achieved from additional cost reductions you are saying just very recently?

Yeah. Now we achieved those during the second quarter.

Okay. And -- then Ted can you discuss what your, what your expectations are for debt pay down between now and the end of the year and then you know, should be the assuming that you are nearly debt free by the end of calendar '05 assuming no further acquisition?

Mona, as I said we were essentially out of our revolver right now, so what is left is a 5-year term note. Scheduled principal payments for the remainder of the year on that note are approximately $8 million and scheduled principal payments in 2005, which would bring the total at that point to about a $105 million of the term loan, scheduled principal payments in 2005 were about 20-25. I don’t have the exact number. Let’s assume that if we don’t do anything earlier then we are required, we would still have about $80 million of debt on that particular term loan whether we do anything earlier as a function of an awful lot of things I couldn’t predict right now.

Okay. So $80 million is on the term loan at the end of next year.

That’s roughly what would be scheduled the principal remaining at that time.

Okay. And we should assume then the rest of the cash either goes to toward acquisitions or shareholder repurchases.

That's --

We have said that in terms of that there are three major part is that we know right now those would be the big three.

Okay. Thanks so much.

Thank you.

Thank you.

Our next question comes from David Gold with Sidoti & Company. Please pose your question.

Hi, good morning.

Good morning, David.

One of the reasons that you pointed to as far as tightening with guidance was some of the investments you made in new hires and I was curious, I think you can talk a little bit if the strategies change there or I mean you just been -- have been more expensive hires than you initially had anticipated or is it just more opportunistic hiring going on there?

I think, it's a couple of things I think we have, you know, our eyes are being opened about the availability of certain people that we think are really spectacular and at the same time with a rebound in the economy and frankly some of our competitors adopting our strategy to similar -- to hours, I’m trying to offer a broader array of services. There is a little more competition, you know, frankly for people than there was a while back and the last thing I would say is that these are individuals who have a you know typically a ramp up period they don’t have the kind of practices that you just bring over and start up day 1, so we are making an investment in that start up period. The good news is that I don’t believe that start-up period is very long so we are optimistic of seeing that start to reverse itself as said in the fourth quarter. And obviously other people have contractual relationships where through a period of time they are required not to compete a solicit or do things like that and we try the best we can honor those commitments because we are in the same business.

Great. Okay. Fair and then also if you can just talk for a second Jack on economic consulting, it looks like I guess over the span of the quarter determined by year-end, you are looking to add less heads than before and just curious there, if that’s more a function of a tough hiring climate or a function of, you know, we could demand some combination.

David, I am not sure I understand what’s [inaudible] done before. Our headcount target for economic remains the same number from our previous guidance.

Okay. I must have an error in my model, okay.

151 billable headcount same as before.

Yeah, again we will be opportunistic with the results we’ve seen so far. You know, suffice to say, we won’t hold them that. It’s just a question of who becomes available and then we will add there that sometimes the best folks there are people that need to ramp up, you know, with their initial foray out of academia or their initial foray out of the government. So, again that will be an investment, but I am not giving any warning [like] that, but it’s just those folks are going to be very valuable folks going forward because that market is going to grow.

Got you. All right. Thanks a lot.

Our next question comes from Bill Warmington with SunTrust Robertson, Humphrey. Please pose your question.

Good morning everyone.

Good morning Bill.

One question for you and this is – now that you diversified your revenue base and repositioned the company. What are your thoughts on target longer term revenue and EPS growth rates for the company as a whole. In terms of -- you know, how do you want investors to think about this business as a whole?

You know a bill a long time ago, we had talked about 15% at the topline, 20% at the bottomline. We don’t really articulate it that way anymore. Publicly, we have gone to a more proper guidance approach. Over the last two quarters, we have talked about that our expectations for growth in our forensic and our economic practices were kind of a minimum of 10-12%, though we still hope to achieve 15. And clearly over the long run in the restructuring practice because it’s the most cyclical. We believe we can still hold that 12-15 range over a cycle, so taking as a whole I don’t think we are vary very much from our aspirations of 15%.

When we do our budget rates and our internal hurdles and we make an acquisition we look at it to make sure that it has a good pleading chance to meet that kind of growth rate on an ongoing base. So that’s when we asked our people that in the beginning of the third or fourth quarter and end of the third quarter to look at their budget that's the target they are giving and then it's up to them to prove that they really can't or they really can't. But that would still be our target for a professional services business to do responsible growth, we think we can handle that amount.

Right, and clearly economic has exceeded that as compared to any pro forma basis from the prior year. Forensic litigation is actually on target then we had expected that might have accreted it. And the restructuring is still essentially flat in the fundamental restructuring business until that market begins again and we are making investments in some of those other businesses areas in corporate finance like the M&A or interim management transaction services, which will have some growth rates of their own as they take over.

In addition, we continue to focus on industries that were strong and looked that as a leader end, which includes healthcare and telecom which will seemed to only have great opportunities for us and we are always evaluating in Ten Eyck acquisitions or acquisitions of senior people in those spaces that also enhance our revenue.

So it sounds like on the topline, so that the longer term goal would be to grow the revenue sort of 12% to 15% range and then the bottomline, let's say maybe 15% to 20% depending on the specifics of plan, one business --

I think would you do in the summarizing reflects that we would [inaudible] just said now whether we -- and in fact that we achieve that in any short run period of course.

Well, understood. I mean, you are doing some investing at this point to build the business to get it to that rate and just saying --

Yeah.

In terms of --

We are not disagreeing.

No, I'm just saying --

That’s in fact you -- trying to get your question was solid, we like people I think it was --

Exactly.

What it made it dedicated to doing that.

Okay. Well, thank you very much.

Thank you Bill.

Our next question comes from Rod Shannon (phonetic) with Merrill Lynch. Please state your question.

Hi, guys.

Hi, Rod good morning.

Good morning. All of my questions have been answered. One area, I wanted to touch with the restructuring business.

Rod, you are breaking up a bit.

Can you hear me better now?

Yeah.

Much better, much better.

So I wanted to talk a little bit about the restructuring business excellent departure of consulting, has there been any -- I know Dunn mentioned, that there was some improvement in restructuring area, could you talk of what market are you seeing there, you know, if it's rising -- are you -- when do you expect the market conditions sort of start favoring your restructuring business and traditional restructuring business?

You know, the restructuring business is part of that's now our main corporate finance business.

Okay.

Restructuring is still being the largest piece of that. And we see, you know, hopefully, first quarter of next year in the middle of next year that getting a lot stronger than it is now -- there is a lot of new loans being made now. There was a period where credit had dried up so there were not many new loans being made by the banks. Now there is awful lot of liquidity in the market -- when you make a lot loan some of any good there, this is not a -- a knock on bank is just a fact that the more you make that brings the chances of some defaulting and provides the opportunities for us. In addition, you know, as some of the high yield that's been issued overt the last 12 months start getting there -- break start get adjusted or amortization starts kicking in, that’s going to put some pressure on company. So it's a combination of the bunch of thing that we see, probably starting to hit in the first to second quarter of next year. But in the meantime you know one thing that we have gotten is -- we have gotten way from being primarily a bank or credited side shop -- the price of our Coopers practice that we acquired was 50-50, company side and bank/creditor side. It's pretty much a mix that we maintain now. And you know the money area that Jack and I had mentioned that we are really putting an emphasis on at the interim management space. We didn’t involve in health companies refinance or fix their operations before there is a bankruptcy, before there is a default and we see that is another key opportunity because it's a same skill set as though as working in the bankruptcy.

So. Outside of the group consultant that left, has the business improved over -- would you see business improving a little bit, I think you mentioned that actually outside of the group that left outside of the new hires in interim management. The tradition of restructuring business is that sort of stabilized, is it --

I believe it is stabilized and you know we were -- as I mentioned earlier moving people with the skill set in that business to work on transaction advisory services, interim management service especially M&A work, it’s really the same area with just a little less focus on bankruptcy but more on just company needing help. It’s all a relative degree of stress for company is in. But it’s really the same space and you know they really feed it to each other.

Right. Just one next question that I had was, what sort of visibility do you now see when you go into a quarter? What percentage of the revenue for that quarter is already in projects?

It really hasn’t changed very much. You know, in the restructuring business, which has typically the greatest visibility, it has the greatest visibility over the years is probably seeing 70 or 75% visibility to a quarter. Given that the forensic end of the business also has some particularly larger assignments as well, probably a little less than that in any given quarter and probably you know something probably about the same thing for economy today, because our economic business takes on some very high profile, this is regulatory issues that are not should, you know, necessarily short-term. So this [isn’t a science] in doing that, you know, because of lot of cases can settle, things take twist and turn in the wind. But they are not exact backlogs, as you know everything will do for the most part as time and material. There are no fixed contracts or anything like that where you can have an exact burn rate, know exactly what is what. It's an estimates and I would estimate in the 70-75% range for a given quarter.

And then that’s a good point, certainly corporate finance quarter-to-quarter has more visibility and as we've broadened our service offerings and this let to a lines on corporate finance. It makes a little bit more difficult to anticipate when a large case may settle and that’s the risk and the challenge of projecting the forensic and to a lesser extent the economic consulting business.

Great. Just one last question on the potential new acquisitions if you may do them. Is there a sort of a level of debt or maximum level of debt that you would want to take on to do that? Is there internal guideline or a target or a range you can talk about?

No, I answered that question typically by saying that whether our term loan, richest public information allows us to do is 2.25 times you know EBITDA.

Okay.

And we are, give or take about one-to-one EBITDA, so we have an awful lot of room to go just under our existing bank lines, awful lot of room. Is our level of comfort that would -- no, I think I have stated over the years that, you know, if we started with we were in the 1.5 to 2 times EBITDA range, we will act real quick to get that down as quick as possible after incurring in. But even at the full 2.25, Roger (phonetic), it's really not a difficult thing for the company to manage.

Okay. Thank you so much.

Our next question comes from Jonathan Schaeffer (phonetic) with Kramer-Smeldman (phonetic). Please pose your question.

Hi gentlemen, two questions. First, regarding your revised earnings outlook for the remainder of 2004, it will be helpful if you could just break it down to rough percent? You said the two factors behind it, two primary factors, one the less than anticipated growth in forensic litigation consulting and two, a bit of a drag as some new investments ramp up to their return rate, if you could just break down as a revised guidance roughly how much can be attributable to those two factors? And as a second follow up question, on the forensic litigation slow down or lets say less rapid acceleration then anticipated, to what degree is your revised outlook a revised structural outlook to carry forward to let's say passing under 2004 and to what degree is it quarter-on-quarter or this noise related to you have a big assignment ramping down and but this should be the same structural growth trends that you were thinking up earlier in the year. Thank you.

Lot of information on the question. I am going to try to answer the parts I remember to start with. We don’t really want to be that exact, but we have added as you can tell just from our press releases and some of the ones that Jack talked about that are beyond tonight, some very senior people will require some appropriate reserves and very god compensations, some good sign-on compensation. I really don't want to be this exact. Suffice it to say it could be anywhere from 1-3 cent, just with that effect itself.

Okay. But then the overwhelming there is the majority of the impact comes --

Yeah. I think majority of the impact rolling the top end of the guidance was just a question of being realistic. Rolling and narrowing the bottom part of the guidance is more affected by what I just mentioned. We do appreciate that the bottom ends of our previous guidance and the top end of our current guidance still do overlap each other significantly. So what we are trying to do here is narrow and refine, because half a year has passed.

Half year has passed, and we see July -- we look really close to utilization and new business coming in for July and as Ted indicated, this is the quarter that is the most challenged because of vacations and court schedules. So based upon what's in the office today, we come up with our best estimate of --

I don’t want to be defensive what we did we took two major practices, put them together, that's going pretty well, they have done a good job, there were delays in a couple of job and I think part of your question was has our outlook for next year dampened by this and I think I couldn’t be more optimistic -- we have the right people in the right place, they are going to be in the ramp up phase, the delay of the job is much more critical than it is, when have a years experience behind us next year. So I wouldn't -- I am not projecting and I am not [sellmin] and I am not doing anything else. I am just say in it we have a first class practice, we have prospects for something this will increase the volume and it will say dampen the effect of any hiccup any other -- any jobs. So I wouldn't -- much too early to say that this will have the collateral effect next year.

Right. And regarding the longer-term growth trend of the forensic litigation practice, has that materially changed as sort of a long-term trend line or and what we are looking at now is shorter-term noise in that. Would that be a fair characterization?

Those the overriding trend line which is somewhat counterintuitive but if you practice as well remarkably of one minor is that as the economy improves the marketplace for the forensic accounting and litigation consulting improves as well.

Okay. Thank you.

Our next question comes from Charles Rough (phonetic) with Deensay (phonetic) Investment. Please state your question.

My questions were answered. Thanks.

Our next question comes from Tom Persow (phonetic) with Viking (phonetic). Please pose question sir?

Hi this is Dan Somehine, I just wanted a clarification. A modest question you said that third quarter you set a 5-10% decline in the EPS or was it --

Very rough. I know I said that that was very, very rough, because we don’t give quarterly guidance.

That was the revenue or EPS you are referring to?

In one sense it’s both.

Okay. Okay. Thank you.

You can see -- if you go back with in terms of -- how we have adjusted the mix of our businesses, you can pretty much see this pattern at FDI in the third quarter going back as many years, as we have had this financial consulting business in effect, so no secrets in that pattern.

Absolutely, thank you.

ladies and gentlemen if you have you have any additional questions, please press "*" followed the "1" at this time. As a reminder if you are using speaker equipment, you will need to lift the handset before pressing the numbers. Our next question is a follow-up question from Adam Waldo with Lehman Brothers. Please state your question.

One broad follow up question, one specific financial one. On the broad side Jack given the comments you made in response to my earlier questions about targeting 7-10% organic and hiring growth for 2005?

Hiring growth and that traditionally -- we have augmented that with price increases, and what reason I was -- I give it in generality, because we have to look again at what the price increases are going to able to be next year, so that we would still target that 15%.

No absolutely you really anticipated the second part of my question or the second phrase of it which is -- so if we are looking at 7-10% net hiring growth as your aspiration and let's call it 4-6% price increases given your current diversified practice mix and the rate increase trends, is it unreasonable for investors to expect that in 2005 with relatively high degree of confidence that the company should post at least low double-digit top and bottomline growth and possibly better?

We really I mean it’s hard to disagree with you, but we are not in a position yet to give guidance or forecasting to 2005.

You know, we believe that the economic consulting business is doing very, very well and that people and especially premium people like ours are indeed a premium. I believe that forensic accounting especially with the concentration of the audit firms now on more of the ends then some people who traditionally be competitors on the audit themselves and on the 404 compliance, but I believe they will not only be fully employed but we will have a potential for raising what people are able to charge for both those services and for the collateral services that might be done by them. I think so in those two market places I think the market is right for the kind of price increases that we usually like to have and then in the restructuring business, as we’ve said we are optimistic to buy the middle of next year we will again be masters of our own destiny in regard to that as well. So all those things put together that would be -- as Robin Hood said in a movie of [this is the] target to shoot at, so that would be as we do our budgeting at the end of this year that would be certainly something that we will be looking at.

Okay and then Ted just to go in a specific financial questions, obviously DSO performance again somewhat disappointing in the quarter even adjusting for retainer in practice mix. What specific corrective actions do you target for the second half for the year that allows you to comfortably comment your operating cash flow guidance and can you update us on your current thoughts with respect to hedging the floating rate debt position in our rising industry environment?

We’ll take the second one first because it’s something we look at almost on our real time basis with the three banks that advises constantly on that. That’s the function of math as the banks best estimate as to the rate at which interest rates are going to rise, model against the speed at which we will pay down the debt and the cost at any moment in time of the cost the hedge which at this point is 300-350 basis points. And we continue to come to the conclusions. That I hedge at this time and we are not the only company coming to this conclusion by the way. And hedge at this time is still not warranted for those factors. The first part of your question against the Adam, please repeat it?

Sure. I'm sorry, just on the interest point though so it would sound like your intention that would be to use free cash flow as aggressively as possible to retired debt over the coming quarters or is your expectation that you might undertake a term debt offering or would you care to comment on that?

Not as aggressively as possible. Our expectation is that we pay it off as it’s due.

Okay.

The ability to pay it off much faster, for example if interest rates were to really rise precipitously and you cross the point in which a hedge becomes practical or then you have to consider whether or not simply paying off some of that debt or earlier, it makes more sense then to hedge. Because one of the things that hedge prohibit is in earlier pay down of debt on which you were hedged.

I see.

Yeah. If interest rates raised precipitously or rise precipitously we may have in fact more cash to pay --

Like as you make a bunch on the hedge.

That’s the other hedge we represent.

What was the second--

Sure the second party question was around DSO, I think you all were very candid in saying the performance was disappointing in the --?

We ware not happy with this. We now look there are of few occasions, few clients in there in which you make payment arrangement because it’s the nature of the client in which the payment terms are not the best you can get in the marketplace but the clients are super A1 quality. And there was a little bit of trade-off in that sometimes that really is -- so the quality gets better to get those you know, sometimes the DSOs [inaudible].Now with said one of the actions we are taking is to builds a little bit faster than we have been doing, we have been encouraging our people through various carried and stick approaches to build their accounts best, it was the faster you build, the faster you will collect it even if you don't compress the collection time, its gone. And the truth of the matter is that it is primary one of our practices that is intrinsically has a lot of tremendous opportunities, but intrinsically they are with clients that like--

No I understand that about the economic consulting business but if that -- you know the corrective actions don’t take in the second half of '04 in order --

I don’t see any further deterioration though.

No, no I understand, but are there other levers you would pull either in, in the way DSO is managed or in terms of bonus accruals and so on that would allow you to deliver your operating cash flow guidance. This is really what I am getting at?.

Adam, part of our discretionary the compacted discretionary components of our incentives for our senior people measures how well they do on a lot of qualitative and quantitative aspects including their effectiveness in billing and collecting from their clients. Though it is already there are those incentives whether you want to call them sticks or carries?

So their focus really goes up as bonus time comes around?

Well we don’t wait that long.

I see.

But on the other hand we still have disappointments in that regard.

Okay. Thanks.

Thank you. Management at this time we have no further questions please continue if any further remarks that you would like to make.

Again I would like to thank everyone for joining us this morning, we look forward to continued support and we are very thankful for that and look forward again to chatting with you at the end of the third quarter with 5 more new significant hires that can move with our force. Thank you very much.

Ladies and gentlemen, this concludes the FTI Consulting second quarter 2004 results conference. If you would like to listen to a replay of today's conference, please dial-in to 1-800-405-2236 or 303-590-3000, and use the access code of 11003015. Once again, if you’d like to listen to replay of today’s conference, please dial-in to 1-800-405-2236 or 303-590-3000, and use the access code of 11003015.

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