FTI Consulting Inc (FCN) 2004 Q3 法說會逐字稿

Welcome to the FTI Consulting 2004 results conference call. (OPERATOR INSTRUCTIONS). Lisa Fortuna with Financial Relations Board. Please go ahead.

Good morning. Thank you for joining us for the FTI Consulting third quarter results conference call. By now you should have received 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 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. Even if there are still a few people dialing-in, we'll start on time because I understand from the good folks at FRB that this is possibly one of the busiest conference call days of the year. So, without further ado, I'll get started. Obviously this quarter had its good and bad points. On the plus side, our revenues were good and our cash flow I think was excellent. On the recruiting side, recently we've announced the hiring of at least 9 new senior people, who at the time that I talked about on our last call that can move the dial. We continue to be I think the place of choice competing with the other professional services firms out there. People who are senior entrepreneur professionals looking for a place to either cap their careers or to find a better platform in the tumultuous atmosphere that is the consulting role today.

We hit the ground running with new practices, but more importantly new business in those practices in the area of Homeland Security, creditors' rights and transaction support. We have growing practices, while they certainly haven't reached their full potential or starting to support their way and to address the issue that we talked about which is the ramp up cost while we hire the new senior people. And we've also beefed up our electronic evidence and investigations practices with both senior and junior people, which as you can see from today's headlines is a very good place to be in terms of what our clients need in the immediate and near future.

We are successful in major assignments in two of the largest Chapter 11 occurring during the period, and have our first assignment in the insurance investigations currently going on in New York. We also have 2 Homeland Security assignments and transaction support as we had hoped as the economy turned as actively recruiting to immediate ongoing needs. I think that as we approach the anniversaries of last year's acquisitions, the groups are increasingly working together. Corporate finance restructuring is proceeding well. Economic consulting, based on the economy improving, increasing M&A activity, a vibrant New York Attorney General and Lexicon's great brand name is also performing very satisfactorily.

While I don't mean to be Pollyannaish, I think when we look at forensic and litigation consulting, though it's not meeting expectations right now, it is a healthy and growing practice. And a major part of it, we have to remember joined us less than a year ago, and it's still finding its way among FDI and a new way of doing things. It's quite a change to be selling as one of the Big Four to move those cases over and then begin a new case as a member of FDI. Hopefully, as you know our game plan is one day that we'll be either the functional equivalent or even better than the Big Four named for this kind of work, and it will help that practice do even better.

I believe that in the case of forensic litigation consulting, it's is a case of success delayed, but not success denied. And as the environment for their work expands, as it is clearly doing from today's headlines and they continue to attract new people, I believe they will grow into our expectations for them. Dom will discuss some particulars of this in a minute, but I now I would like to turn it over to Ted to talk about our discussion more in depth of the quarter. Ted?

All right. I'll be especially brief because as usual we have supplied an awful lot of information in the press release itself, some of which I know you will be analyzing somewhat a little later than right now. Just a few things, I do want to point out, one, our income tax rate. It is totally driven by state income taxes, and it's driven by where our clients are, not where our offices are. And unfortunately, 2 trends are arising. One, the states are continuing to in general, increase their corporate income tax rates. And number 2, we find more and more of our work is being actually done in these states that have the largest tax rates. Somewhat unavoidable, somewhat the luck of the draw, we do this depth -- in-depth analysis every year at about the end of the first 9 months. Because that gives us pretty much of a good feel as to what the year is going to be. We had an increase like this last year from 40.5 to 40.9. The jump this year is even more substantial. Frankly, if you were to ask me what is the worst it could get, if you added up the worst to the low possible state income tax rates, which I don't think you would get to. It could be between 42 and 43 percent including the 35 percent federal rate.

In terms of our margins, while our third quarter is normally the weakest of our year, as we have said many times, because of certain quantifications, we think we achieved reasonable margins under the circumstances and I'm particularly proud that our revenues continued up quite strong. As you would expect, in a quarter in which revenues are down, our SG&A not counting the depreciation, as a percentage of our revenues was a little over 22.5 percent. It's typically lower than that in the stronger quarters and we'll tend to average, as I said, about 21 or so for the year taken -- taken as whole, it's pretty much exactly as we expected.

On our balance sheet, you can see that we had an accumulation of cash, we had nearly $9 million of cash at September 30. Our long-term debt was down to $110 million. So, we were able to pay that off very nicely. All of our revolver has been repaid and of course, the schedule payments on our term loan have been made. Our DSOs are about the same as they are at June 30, in the high -- mid-to-high 80s. That's something we wish would be lower but we were not able to lower but at least it remained reasonably stable. And as a result of it remaining stable, our cash flow from operations was nearly $30 million for the quarter.

Our CapEx, which through the first 9 months, was $6.7 million, we still do expect that it will be between $10 and $12 million for the year, as we have said, primarily because 2 major capital expenditure programs are scheduled very much in the back half of the year and that is, as you know, the build up which is in progress, as I speak, of our new facilities in New York City. And also as result of our growth and to continue to prepare for the future, we are expanding and rebuilding our data center in Indianapolis.

Turnover, I know that's a question I typically get, remains roughly at the annual rate of 18 percent and it continues to be higher at a lower level and significantly lower at the highest levels of the Company. We used to apply and awful lot of metrics in this press release. We do that so that you can see the trends in our business, we try to be helpful in building your models, for those of you out there that do that. But it is not as easy, as you know. It's simply using the utilization and the average rate and the ending has jumped.

There are so many other factors that are taken into account. Some of which are really more competitive information that we're not going to be talking about in detail. And sometimes therefore the multiplication of these numbers while entirely accurate, does not necessarily generate revenue number due to either the use of consultants or realization rates or pass-through expenses to our clients etcetera. So again, I think most important is to see the trends. Those numbers represent the trend in our business rather than anything that you produce to be 100 percent accurate in building the model. Let me turn it back over to Jack.

Okay, at this point we'll turn it to Don to give us some view of the operating and challenges during the quarter.

Thank you, Jack. What I'll do is, I'll go through each of our large product areas and just highlight some of things that occurred during this third quarter that I think would be of interest. In some of the practices, as Jack said, there were some challenging issues that we dealt with. I'll start first with forensic and litigation consulting practice. If you take a step back, the major difference between the first half of the year and the third quarter for the forensic and litigation consulting practice, and particularly for the forensic, was the lack of a major mega case. First half we had two in particular significant cases, one of which was a government-related case that required us for a Phase II to get recertified. It took quite a bit of time to get that done and I am happy to report that we have been recertified and are currently working on a Phase II for that. But to have -- to not have mega cases during the third quarter, which seasonally is our slowest quarter because of the summer months, it was difficult to keep the utilization rates to where we believe they are acceptable and given the lower revenue. So, that was probably the biggest challenge for forensic during the quarter.

On the plus side, as Jack mentioned, we've added a number of new hires and we are able to attract people that have added skill sets to our current practice offerings and make our current practice offerings deeper because we really believe that the talent we've added is definitely upgraded and enhance what we've already have been able to provide. An example of recent hiring, Michael Dougherty, I think we may have mentioned him on the last call, he hit is ground running along with Lucy Clark who we hired this quarter. Both previously worked for the Homeland Defense Department, and both are actively out there selling and winning new engagements for us and as Jack said we've actually landed our first Homeland Defense litigation case, which is a terrific win for us.

Looking a little bit forward, as I said we have been recertified for a Phase II of a major government case. We've been retained in several high profile cases that Jack mentioned. On a real bright note though in the forensic and litigation practice is our litigation consulting practice, which includes graphics and jury consulting, and technology. That's been very strong on year-to-date basis and we believe that will continue up to the fourth quarter. We've met challenges before, moving practices from a

large big platform to a smaller less known but more focused consulting firm like FTI. We did it with the BRS acquisition that we made in September of 2002. We'll talk a little bit about corporate finance in a second but I am confident that we'll be able to reach and realize the full capabilities of the DAS practice that we bought, as Ted said, less than a year ago from KPMG. This practice still provides us with some of the largest opportunities for future growth of FTI.

To move on to Economic Consulting, Economic consulting, as Jack indicated, did have another good quarter particularly our Lexecon practice continues to kick along at a nice pace. We were challenged a bit in our legacy economic consulting practice primarily for two reasons. One, the seasonal slowdown which probably affected both practices, but more importantly the network strategies practice of economics consulting has got to reinvent themselves because of a change in mix of the clients that they are currently pursuing because of some decisions that have come down against their historical clients particularly in the telecommunication industry. And in the rail work and other type of practices that we said that they were working in the past there is not just as much activity has there been in over the years. We've seen an uptick this September, October is looking a little bit better in those areas. So, we are confident that we will take the action steps necessary to write that part of the practice so we can hum along with the Lexecon practice as far as results.

On the Corporate finance side, they had a great quarter -- the third quarter. They've got a good pipeline of new cases that have come in particularly over the last 3 to 4 weeks. As Jack indicated, we've hired new people. These 3 individuals that we've hired to expand our creditor rights practice have hit the ground running and landed 2 or 3 cases already, and they only started at the end of September. We are progressing on our plan with the $6 million cost savings that I announced in our first quarter call. All the cost savings themselves as a right side of the restructuring practice have been implemented and we are realizing cost of plan on the revenue enhancement projects that we put in place. So, I mean, the good news is even in an environment of relatively flat from last year of bankruptcies and restructuring, we think our strategy was to expand that practice to make it less dependant on just bankruptcies and restructuring and expanding the skill set. We are already in that practice, the transaction advisory services, the intra management services, and in the M&A market. All of those strategies are getting a lot of attraction and we see that continue at least in the foreseeable future.

And with that we would like to open it up for questions.

(OPERATOR INSTRUCTIONS). John Riley, Tejas Securities.

First question, I have is from very strong cash flows in the quarter. Could you tell us what you believe your appropriate capital structure is? Do you anticipate getting more aggressive on share repurchases, maintaining the debt, and tell us about what you are looking at on the acquisition environment?

I'll take the first one and then turn it over to Jack. In terms of our capital structure, we are very pleased to be able to pay down our revolver or a present trend. I know we are subject to change with our present plans or to simply pay down the terminal terms. For example, next year's principal payments are approximately 22 to $23 million. In terms of share buyback, there's nothing more I can say other than what you read in the press release, that our Board has extended the share repurchase program for another year and there was $36.6 million authorized in that and there's no way to project how much of that will actually be spent or particularly in any case of .

John, in terms of our balance sheet, I think it's a good practice for us as we've done over the last 6 years when we've taken on debt to buy companies to demonstrate viscerally that we can pay that debt off. So I think the paying down our debt has some advantages for our Company both in our marketplace and with our professionals, there is a lot of upheaval in the component, lot of folks that are joining us have had a bad experience vis-a-vis the stability of our pro forma prices. So, our ability to keep that debt in line and to show the capacity to pay down is a good object lesson for us at the corporate suite and also for the people out there coming and joining us. That being said, as we demonstrate that we have a lot of capacity, I think as you see at the level debt is now, it stands almost one to one or less than one to one for our projected EBITDA which is very healthy. So we have drive patterns in terms of looking at an acquisition. Right now, I think, we have so much potential in-house with the forensic litigation practice improvement and with new hires, but I think we're concentrating on that. We'll continue to review some acquisitions but I would see us probably use the cash in the future, to be a little more aggressive on the stock buyback plan. We didn't increase at the 50 million because we need few more , we didn't spend a lot of it this year. So we thought rather than increase or reduce some cosmetic thing, but just go ahead and complete that plan and move forward.

Just a follow up. Ted, you mentioned that your scheduled principal payments are 22 to 23 million for next year. What is it for Q4, are there any?

Well, for Q4, I believe the principal payment is 4 million approximately.

But just by math in your guidance you expect to generate -- it was somewhere in the range of 30 million of free cash in Q4 with minimal debt rating.

I think that's correct, and we've given specific guidance for the year, you can see where the cash flow from operations is expected to be. In order to achieve that we would have to have approximately a comparable or say, a better fourth quarter in terms of cash generated.

Not at all, but I think under the FBOs free cash flow moratorium we use, we just use cash flow.

One last question and I'll get in queue again. Could you tell -- I think that upcoming there are several potential contracts that come up for some pretty key employees, could you tell us where you are in the progress on that and if there are any other senior employees with upcoming contract negotiations in --

But, we have a good -- with most of the people we have a good year-and-a-half to two years left. So, we are beginning the process now of almost doing what we'd call a matrix review of those people and potential and all the rest of it, so we'll be in the process of starting the renewal talks on those during the next 6 to 9 months.

Jeffrey Rosen, CSFB.

I wanted to -- you had some success recently adding some strong hires. Wanted to just get an update on what the hiring outlook looks like for the rest of this year? You do provide I know it's quite granular in terms of the outlook that you provide now and not the exact time, but we obviously expect to have some incremental hiring as you move through the rest of the year and it would be curious as to where you see that coming in?

You know it is a very interesting marketplace out there. As I'm sure you know we are now on at least the mid-level people and the junior-level people competing with the government. I mean between the SEC and the new oversight word and things like that. It's a very interesting environment, but the good news is that -- among the senior-level professionals that at traditional places, the outlook continues to be good. I think we have our sights on several economic folks between now and the end of year. We certainly have some folks who will join us in the forensic and litigation area we are looking for. So, I'd think -- if I could answer the way I spoke last quarter, we could deliver another 5 senior-type professionals by the end of the year. I think that will be a very good job.

Okay. Now, it's probably early that we started talking about 2005 specifically, but would be curious as you guys think in a longer term about your business if 2005 is a year that we can get back to the type of growth that you guys have set, bring yourself historically in that 15-percent range is sort of a target to shoot for and managing that whether it is between bill rate, headcount addition, utilization. Is that a realistic expectation at this point, is that something that will, we are still waiting for?

Would prefer to answer that in a press release. I'll put it this way, as you know when we buy this -- when we hire people, kind of our screening processes to make sure they can deliver that kind of -- growth targets that we have traditionally had as our mantra. I think, as we get bigger and this is the sheer the numbers I think -- we have asked our folks this year to look at initial budget presentations that would be in the 12 to 15 percent revenues and that certainly -- I don't think we have changed our target particularly. I just think we have to take into account that there is a very aggressive hiring market out there right now. And that so we've asked them to take a realistic look at that and as we do the budget work through the fourth quarter. We'll report back as to what our projection or what our projection, but what our outlook is for next year.

That's very helpful. Thanks Jack Dunn. As you look at the forensic litigation factors, if you could just outline what you are doing specifically in broad spec it sounds like you expect that business to bounce back a little bit just in part because of the mega cases that marked in the third quarter. But, are there are any specific steps you are taking to bring that business more into the FDI fold that you could outline?

Yes. I think we can't give too much importance to the fact that there are just some straight logistical things, for example, the government clearance aspect was something that was pulling our side the whole way. I think it keeps down the tackling. I think we have an incredible amount of on trade into corporate America through Lexicon through our legacy businesses. I think that the folks who joined us in November of last year also have -- really is a factor of coordinating those things. I think the work that we have gotten and that we'll continue to pursue for example in the New York Insurance issue is the perfect example of where we can bring this to bear. That's where we think the real potential is for this. They can talk on the senior management as a group.

What's interesting is they despite coming over here and having some initial conflicts in terms of who our traditional clients where. We are seeing much less conflict of interest in terms of new business potential than they did as former employers because we are not in the order business. That's a great advantage for us. Real now issue is just the market penetration. That's just blocking move that some of you may remember it's been on for more than several of these calls. This is just chopping wood and carrying wood it's just getting out there with our flag and letting them know who we are. And we have done market studies, despite having over $100 million in this business and being one of the largest players, and main recognition we have ranked very well. That's something that we need to get to sooner rather than later to give them a hand and be able to sell themselves at FTI. So, we are looking at -- but really the major influence is -- again as the earnings will say -- we are ever two or more gathered in the name of litigation, we need to be there, straighten the FTI flag and just get that. It's been a slower process than we thought.

Lilia Kozicky.

Good morning, Lilia Kozicky from SunTrust Robinson Humphrey. I was wondering if you could just give us a little bit more color on the ramp up of your various new initiatives. And the timing of their growing contribution to the operating line?

Well, in each of the practices it's different. It also depends upon the individuals that we have been bringing in. When you look at Forensic and in particular Homeland Security, the ramp up is pretty quick as far as the ability to hit the ground running bringing in new cases. (Michael Dougherty and Lucy they indicated, they have handled several cases already, but it will take a little bit of time for them to really understand the resources that can be brought to bear on the cases front, rests with FTI. So there is a learning process there, there is also some time just for them to be acclimating in getting the word out to their relationships with their prior client as the way they are. So typically, it is probably, I'll take again, 6 to 9 months before a new practice is really established itself, is starting to tick along at a rate we are happy with.

There is some time upfront you go to invest and as I said a lot of the coverages understanding the tremendous resources that we can bring to cases that that they go and sell. As far as your corporate finance, I mentioned before the credit write practices that we brought in. They work closely, opposite us in many cases that we knew the individuals very well. They knew the resources that we had because they knew most of our people. So that was very easy to put together teams to go out and win, as Ted said, some of the larger cases that are out there, that were available for us to pitch. So it does vary by case. Economic Consulting made busy, the practice that takes the longest part because of the nature of the types of timings that they bring in though. We are looking at strategic hires. These are high-priced, very well recognized individuals in their field, so we hopefully shortcut some of the typical onto them to start heading to the bottom line.

Yes, for example in terms of thinking what would be a success -- in credit write practice for example starting from 0 by the end of next year we were at -- pumping in the neighborhood of 9 to $12 million run rate. That would be a good success for us. That's the kind of scope of with that practice. Good news that involves -- is being able to use some of the people that we already have at the lower levels, therefore we get increased utilization, that's across to the bottom line. In the banking area, we will see, we have seen that we are making some significant additions to that area. That's an area where -- your initial cost because of the salary structure more salary and then participating in this where we would expect a growth from where we are now, to the neighborhood of 5 to $7 million, would be nice accomplishment for next year. So it is only that in terms of Homeland Security.

I think frankly we don't exactly know what the potential there is. We have hired 2 of the best in the business and we think there may be an incredible amount of work as the government continues to focus on issues such as money mongering and thinks like that. So that will be a question of being able to utilize some of our investigatory people and Forensic Accounting on a much better basis. So those are the kinds -- we are trying to look at different increments of business that can add 10 and $12 million chunks of revenue to our business as the ramp up over the next 9 to 12 months.

Right Lilia we have just recognized that we do have leverage model and then pretty obviously any of you can do the math and know that a high priced individual will they resume it themselves, there is no leverage in doing that and therefore they . So we take some time to build up the full use of that leverage.

When you start these new practices it is interesting just as when you do one of the smaller acquisitions. Certainly the first short-term goal is to have the new people support themselves then to get to our traditional pretax or operating profit margins of around 25 to 30 percent. There are some that become superstars and really take it from there and build the practice, there are others that just go and in fact being sole practitioners or a small group and that is something you can't always know at the beginning. But the marketplace for that continues to be exceptionally fair to learn, example is transactional support, we don't know exactly where that is going to go, it is doing very well now, but as the tentacles of Sarbanes-Oxley continue to pervade whether it becomes the standard that companies and equity sponsors still got to have to use other than their traditional accounts for that kind of work, that's where the home run is varied. And we have very high hopes for that practice over the next several years.

Okay. Which brings me to 2 follow-up questions. As you build up -- do you see your practices areas filling then in with more junior level consultants, where do you see bill rates going into '05, do you expect to see them moderating somewhat and then improving going forward or how do you see those trending?

Well, recall that there are really 2 things that affect our bill rate. One is the standard rate itself and typically each year historically we have been able to pass along in some cases modest, in some cases a little better than modest increases. What has affected our average bill rate this year of course has been the change in the mix. So, obviously we are -- and it has affected the average bill rate upward more so than the intrinsic rate increases. We are not in a position yet at this point to predict 2005, as to where the average bill rate will go, I think suffice it to say that 2 things are likely to happen. One is there probably will be some rate increases though I can't predict when or to what magnitude, but also you are quite right, as we leverage some of the senior people, the mix is likely to have a downward effect on the rates. So, those 2 factors, which are the principal factors, will either balance themselves out positively, consistently or slightly negatively. Very difficult to predict as we sit here in October.

Okay and finally can you give us -- can you quantify Sarbanes-Oxley associated expenses and where you see this going forward?

Yes, I am afraid I can't do that like every other company. As we enter the third quarter of this year, which is the quarter for which every major corporation that has a 12/31 year end have to deal with the actual documentation, the actual beginning of the testing of the controls, the costs of that have been much, much more than any of us in the industry had hoped, possibly should have expected, but nevertheless hoped. Suffice it to say the cost of Sarbanes itself in the third quarter accounted for more than a half a penny of our earnings per share in that quarter and the excess over our expectation for the year taken as a whole will be somewhere between a half a penny to a penny more than we expected when actual numbers -- suffice it to say it's a 7 figure number for external costs that we expect for the full year. Plus an enormous amount of internal time, enormous amount of hours of internal time which has also required us to hire additional resources to be able to comply fully and yet do our day-to-day operational support activities. Very, very costly endeavor and we can appreciate what our clients go through, having to go through it ourselves.

So you these expenses trailing down then in '05?

Everybody in the industry sees that the external costs for continuing to comply with Sarbanes-Oxley should be anywhere between 40 and 60 percent of what the costs will have been in the initial year.

David Gold, Sidoti.

As you speak just power up a little bit -- building up some of these practices on some of the new hires that you have been making, is it fair to say then that you are -- let's say satisfied bringing these people and giving them 6 to 9 months of leeway to sort of give us something. In other words, the hires that you are making right now, are these effectively '06 contributors, is that the right way --

No actually many of them are '04 contributors and we absolutely expect first, second quarter of '05 just enough to be running at full speed. The type of people we are bringing in are the people that don't need the nurturing, don't need us to really guide them around as much because these are all the top people in the field. So we really believe that it will be short cut -- or it will be a range for individual but on average, we are expecting people to and we provide all the support that they need to hit the ground running sooner rather than later. So it is absolutely, if you (post that will be a huge problem for us and then as a result of this we will bring in the wrong people.

Got it -- presumably they do have throughout I guess, some signing bonuses on subscriber costs, so kind of a right way to look at that for many of these people is the quarter issue.

No. It is spread over time but as they ramp up their business, they begin to cover those costs and then to become profitable at our usual margins which we base at our estimate of what we should pay them as a signing bonus. So it does not go from zero and then have a period of nothing and then in 6 months to 9 months we look as if they have cases, they just -- in some case aren't amortizing fully because they need to build up that pyramid of business.

Alright. So when has been near term too much. I guess the other question I had is -- my numbers are right. It looks like in litigation -- forensic litigation consultating-- the head count was down pretty good sequentially.

Actually David you may recall that in our August webcast we talked about, and I didn't want to repeat that here in this press release, what we talked about that periodically we reclassify people who might be partially billable into nonbillable status and it doesn't really affect the utilization or the rates because we went over exactly how we compute that. To be specific 22 people were reclassified retrospective to June 30 in the forensic and litigation practice as we got to understand over the 6 months since we acquired the DAS people to swap the actual roles of particular people were and so from the practical point of view, those 22 people were not -- who should not have been expected to have been fully billable and should not have been in that headcount number categorized that way. We went all over this in August and I -- I really don't blame you for not recalling it, frankly but one of the brighter lights though is -- year to date we have increased at the Senior Managing Director level, we had 6 strategic new hires and we only lost 3 Senior Managing Directors year to date; so and then I think that the people we brought in certainly have added to the practices and upgraded in some of the areas that we weren't as strong.

I think it's a matter of seconds. Didn't we have all but, I guess, one of the senior managing directors locked up? Contract was, wasn't it 114 to 115.

Well David, we have all of our Senior Managing Directors locked up but there still will be circumstances under which people will leave us and whether will not -- that result in any economic benefit or detriment is discussable at that time, but if someone is locked up whether he becomes disabled or wants to retire, I mean, there are just many circumstances in which the contracts cannot enforce the person physically staying with you.

And in certain cases, we had agreement that perhaps this isn't the best place for that the individual to work so we do negotiate settlements for their departure.

Okay got you. And then just one last one follow up for you Ted. As we look at the forecast for head count for the end of the year, the increase is that to have begun reclassification again or -- does that weigh in there pretty heavily.

No, we don't expect the reclassification to affect the headcount estimate to the end of the year.

It is true, really are working to induce some robust hiring over the next couple months. As we continue to do of course -- but with the we have an extremely robust hiring program and also decent amounts of turnover and in some cases, the speed of one is controllable but the speed of the other is not. So in any particular moment in time, you could get a result that is not quite predictable for that particular day and with these the end of period head counts.

Bill Sutherland. Please state your company name followed by your question.

Boenning & Scattergood. Kind of surprise that the turnover has been -- is constant even through Q3, given the kind of fear that quarter has bring in number of people and can lose of kind of people too?

Bill, to a certain extent this is unpredictable, as Don pointed out, needless to say we are most concerned about it, if we were to have our Senior Management Director. And so we don't, to certain extent people younger than that just continue to make wise, talent, career choices and it is very uncontrollable. We are not disappointed with the average turnover continuing to be 18 percent, most of us came from environments in which the average turnover --

Well that actually -- I actually got a micro up in Q3, given the fact that you would be doing more campus hiring and then having people --

We don't have an active campus hiring, while we hire of a lot of younger people of course, in general we don not hire totally inexperienced people.

The guidance for the fourth quarter that has 4 factors impacting the change? Can you all wait -- ?

Yes, I can. If you wanted look at the replies and change in our guidance for example for the year taken as a whole. About 2 cents of that is attributable to the income tax rate and because of Sarbanes-Oxley. And the other 3 cents is attributable to a combination of the investments and expectations for the forensic and practices and the actual experience in the economic practice in the third quarter.

So, that is not really so much impacting necessarily in fourth quarter the economic trend?

No, but just look at this way, about 2 cents of the 5 cents change was unavoidable and 3 cents as a result of conscious investment and the combination of the change in our business mix, and it is slower than anticipated traction in the forensic and lit practice, but to quantify within in those 3 cents of course.

And you are just saying on to the original revenue range and is that way, you have such a wide revenue target for the fourth quarter, Don?

We are hanging on to it because we believe it is achievable.

That just sounds like a big range for this close to year end.

It is not really Bill, I mean we would have to generate stock more than (100 -- mid to 100 and 14 15 for the fourth quarter. The first quarter volume for example, we generated over a 110, there are 107 in the second quarter surprisingly very well, 104 million in third quarter, and the fourth quarter has typically and traditionally been very strong quarter for us that is not out of realistic range of expectations. I think you are talking about the spread between a 107 and 123 being a large spread, is that what you were saying?

That's right Jack. I got a sense kind of, a closer feel for how things might trend?

I am not sure, I don't know exactly which 2 numbers you are comparing. Hold this pressure --

Yes, high and low.

We got it. That just because rather than -- that is nothing more than rather than modify any of the numbers. We are, Bill, still anticipating that our revenues for the year will be in that high four hundred and thirtyish range. So, that we just said, we didn't tweak the parameters of better hold.

Okay. That's what I figured. And then -- that it's kind of hard given the seasonality of Q3 to understand organic growth of sequentially, can you share any light on that as far as free practices?

When you sequentially compared to of the second quarter?

Yes, and of course year-over-year it's hard because they have --

Let me give a little bit of the flavor for that. Corporate finance restructuring was flat between the second and the third quarters but honestly we did expect, we wouldn't have the seasonal decline and because of the excellent performance against their strategy. They did probably an 8 to 10 percent better than we would have expected, for example in the third quarter. We have the normal seasonal declines in economic and forensic coupled with the things that Don explained in the economic practice. For example, on a comparison to the prior year, Corporate Finance has now since September of 2003 -- adjusting for the departures early in the year -- has been running at approximately $40 million per quarter, ever since, now 13 months at that range. In terms of going back to the -- what would have to have been pro forma information for 2003 for economic and for forensic. They both grew somewhere in the 7 to 10 percent range.

Even consulting?

That's correct.

Okay. Last question is just related to the forensic litigation group again and just that the decline in EBITDA margin, about what proportion of it is just seasonal, and then what if the challenges?

Most -- a lot of the declines, I said, was seasonal. The lower margin is almost a 100 percent due to the lower revenues. They -- we've had good control on the cost side. What we're working on is growing the topline in a more focused aggressive fashion. So that -- lot of that margin was due to lower revenue and definitely a lower utilization.

But of course -- so that is just the natural seasonal--

A good part of it. But the challenge we had this year in particular was we always have the July, August -- June, July, August programs. But in prior years and what we're trying to do is have the mega cases that carry you through so you're not dependent upon selling and starting up new cases during that period. And in fact cases that have been running for 6, 9, 12 months, 2 years -- you've got a lot of backlog to get you through that. I mean, it worked in Corporate Finance , average cases are probably 18 months to 24 months. When you look at what happened towards this year in, particularly on the forensic, we didn't have that mega cases that we had in the first half of the year in the third quarter, and that really magnified the problem of keeping people busy during the summer months.

Andrew Hall. Plese state your company name followed by your question.

Brunswick Capital. I guess you mentioned you've hired 9 new Managing Directors this year. And I wonder if you'd be able to quantify at least in terms of order of magnitude, the size of the crowd, the businesses, the data developed, so we might be able to get a sense for modeling going forward. I know that when you lost those restructuring people last year, you were sort of quickly able to quantify the amount of revenues that were going out the door. Is there any way to look at it on a reverse basis?

That's extremely difficult for us to do here because the individuals that we are bringing in are different individuals in different practices. The individuals who had left us were one discrete group that had always worked together really never -- integrated extremely well. So it was easy for us to quantify the loss there. A lot more difficult to quantify all the positives in a quick flight fashion. These are the new hires.

Right, especially since many of them are in the ramp up stages of the development, whereas the people who departed us where quite matured in their development, and it was very easy to understand what the anticipated revenue and EBITDA loss was going to be from them.

And to tell the team around, more so. When you look at the individuals that we're bringing in, that we're leveraging existing support that we have already to help obviously raise utilization. It's more difficult. But, as it figured out, incremental revenue is going to be -- but we'll some -- we look for at least 3 to $4 million out of the SMDs that we bring. Some more, some less depending upon how big the opportunity is. Was it out a -- for a new area that we are building or if it is an area that we just adding on additional talent.

So and were each of these 9 SMDs then? The 9 that you mentioned, were they all Senior Managing Directors?

Yes the numbers that I quoted were .

I'm sorry -- is the 9 a net number or did we lose 3 or 4?

That was the first number. Dom, did we -- I think we're about 6 or 3 or 6 probably that we losed.

In forensic and litigation, we added through the year 6 new Senior Managing Directors -- and we lost 3. If you pull out the individuals that left in corporate finance, the group that left in January and February, we have lost 10 and out of that 10, a number of them were cancelled out, but we've added 9, lost 10.

And that's as of -- looks like a year-over-year, you know, apples-to-apples kind of a comparison?

No, that's just an account of what we did this year since January.

Oh! since January, okay.

If you just take -- if you don't take into consideration the practice that left us in January and February. This is on a normalized basis, if you we had 10 departures and as I said, a number of them, more than half of them probably were either cancelled out or it was mutually agreed that we would be confident to move on.

So net-net the change in the Senior Managing Director roster is neutral with January 1?

That's why we remain with approximately 115 Senior Managing Directors, picked up a little bit.

I think it's important to point out that we also rely upon several other levels of our business to generate revenues as they develop and become Senior Managing Directors so that our Managing Director and Director levels to certain extent are also held accountable for certain elements of business generation as well.

Is there any comment you can make on the litigation that you are involved with the people who left last year?

No, there is no further comment we can make on that.

And has any of that business that left, did any of that comeback?

Well, the specific engagement that left, neither to say did not comeback, but we continue to get business from the same sources that referred those engagements to us.

We are very happy with our win rates in patches. It's good news, bad news, I mean certainly you would never like to see a big chunk of your EBITDA or hope to have EBITDA lead, but on the other hand, leaving when they did when we were going into a very relatively soft restructuring market probably didn't impact us as much as it could have if the restructuring market was continuing to grow. We still believe we have the largest practice and we still believe that we win more than our fair share of opportunities.

Marta Nichols, Banc of America Securities.

I am wondering if you guys can talk about whether you are using stock-based compensation at all in a different way now than you have had historically and give us some color about the structuring of contracts today to protect yourself from future unwanted departures like what happened in January. Is it simply I guess is what I'm getting at?

I don't think we are particularly using stock-based or equity-based compensation differently than we have in the past any great extent. I think that maybe a little bit more restricted stock but not enough to be significant and probably maybe it's had more cautious on the options side although even traditionally most of our option issuances have been in connection with acquisitions as opposed to normal course of business, new hires. I think what we are going to do though is in conjunction with the question earlier about starting our strategic plan -- the strategic compensation plan over the next 2 years most of our people, I think we are going to use some outside consultants to look at that issue generally because it impacts us not only from what our people would like to make this the place to which they are devoted, but also in terms of the changing ramp date with regard to the tax treatment, etc., that's something we are going to do on a global basis between now and next February when we kind of put our compensation plans into effect, but no, there has been no major change. Typically our compensation packages are strategies that have both incentives through bonuses based on EBITDA production and things like that as well as handcuffs in terms of spreading or deferring some of the payment of the bonuses and any final end bonus over a 4-year period so that we over time as the bonuses, the deferred bonus part and that there is a fairly significant financial decision as well as psychic decision to make when the person's contract is up.

And just as I understand it, is it sort of a type thing where everything you've done over the last 4 years or so is paid out on at the end of those 4 years, or is it rolling?

It's rolling.

Okay, and then Dunn you mentioned that the new creditors rights practice that you're building with these recent players. Is that a completely new capability for FTI and is there any potential that you have -- any kind of client conflict there as you did with the BRS business and the folks working in opposite sides of the bankruptcy or restructuring project?

No, it's really not a brand new business, many of us that began in this business probably 20 years ago were in the creditor rights practice. We represented unsecured creditors. It's been an evaluation of the unsecured creditors committee that used to be -- they were just trade creditors. Now it's a combination of trade creditors and buyers of trade claims -- it could be banks, it could be insurance companies -- but the whole business has changed. As we've moved to focus heavily on company side where we see a huge opportunity and the senior lender side, we haven't paid as much attention to the trade side as we had in the past. We saw an opportunity to bring these 3 senior people into the practice to rejuvenate the focus on that. We have been doing that for a long time. We go after unsecured creditors committees and we win them. This group has been focused on that for 15 years, some of them I think that maybe doing this so much as long as I am for 20 years. And it's just putting focus back into that practice, we don't see a lot of conflicts with that practice. We looked at that long and hard before we committed to go and focus close to bringing them on, and we're confident that the net adds will be significantly more than that what is due to conflicts.

Okay, and then I'm also wondering about the cost structure. They were a little higher than we -- the cost in general were a little higher than we expected in the quarter. And I think you mentioned that you're essentially largely done with the cost saving. Can you give us maybe some more specifics on what -- specifically you've done to reduce cost and whether you think there's anything more to do going forward either to reduce overall cost or to at least increase the component of variable costs in that?

I assume in the corporate finance side, back in the first quarter we had a call . There was some concern because of the loss of service of the individuals that have left, and we saw the downturn coming while it hit us between the eyes in the bankruptcy restructuring practice that we implemented the $6 million cost savings programs that we did. That's pretty much done, that practice we believe is right sized. We're always looking at cost. We're pretty proud of our relatively low SG&A and our high margins, but that doesn't mean it can't be better. So, we're looking at ways to more effectively provide continuing education, communications, IT. Ted's done a great job in keeping the corporate overhead as we always as we think it could be in a company like ours. But, that doesn't mean it can't be better. I don't have any specific programs of cost savings other than group buying of recruiting fees. I mean, there is a lot that we can be doing better that -- we're going to always -- we're going to be looking at for fourth quarter and into the 2005 particularly as we're putting our 2005 budget together. It gives us a chance to reassess and challenge every question line on the P&L.

Ray Sharma. Please state your company followed by your question.

Ray Sharma. My questions are all been answered. Thank you.

Patrick . State your company name followed by your question.

Newburger Berman. You mentioned in the press release that you believe the restructuring market will improve sometime in '05. Can you spell out what leading indicators you look at that suggest that to you?

We look at a couple of things. High yield debt that has been issued over the last 9 months. And we've also looked at the general loosening of the lending by the major financial institutions. Ther has been a -- there was a period in 2004 where really wasn't a lot of new loans made by the bank. The banks were cleaning up their existing portfolios and that caused a lot fewer opportunities for us. The more loans are being made, chances are a number of them are going to have to be restructured then there will some of those loans that's going to be -- made to companies that may help them So it is just a matter of supply out there, a product that was put on by the financial institutions. It is not just the banks, it's the insurance companies and others that are playing in that space and once it is put out the chances are we are going to get back to lending at with -- more aggressively in which case the opportunity for us to help in some of the workouts should be greater.

Coupled with the trends in interest rates of course.

Okay, can you talk about what work you are doing in the insurance area. I assume it is related to this investigation?

Yes. We can't talk about the specifics of what we are working on but it is involved in that investigation. Yes.

You also can't mention the 2 Chapter 11 cases you won recently?

Yes we can. Interstate Bakeries and . That's public. We are -- in the bankruptcies, we are part of the filings. So, that's why we are allowed to do that.

What kind of business is Intermed?

It is auto secondary auto part supplier.

And what was your historic bill rate increase prior to this year?

Prior to this year we had start historic bill increases of between 5 and 8 percent per year. This year it has been more modest than that.

What was it? Is it 3 percent this year?

About 3 percent.

Do you expect to return to your historical levels in '05?

It's a little premature, as I answered earlier, to be able to quantify that yet we do expect to have some market based rate changes but it is too early for us to quantify.

At this time we have no further questions. I'd like to turn the conference back over for any concluding comment.

Right. I guess we are very encouraged -- continuing to be encouraged by the platform we are building. As I said I think any delay in the success is only delay and not denial and we will continue to work our souls to the bone to make sure that we can deliver the promise of the great platform and the great people that we have assembled. So, with that I guess I'd like to thank everybody for being on the call, and we look forward to speaking to you with our year-end call in 3 months. Thank you very much.

Ladies and gentlemen, this concludes the FTI Consulting third quarter 2004 results conference call. If you'd like to listen to the replay of today's conference, please dial 303-590-3000 or 1-800-405-2236. You will need to enter the access code of 11010703 followed by the pound sign. Once again, thank you for participating in today's conference. At this time you may now disconnect.