FTI Consulting Inc (FCN) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the FTI Consulting fourth quarter results conference call. [Operator Instructions].

I would now like to turn the call over to Lisa Schaefer with Financial Relations Board. Please go ahead, ma'am.

Good morning and thank you for joining us to discuss FTI's fourth quarter and year end results. By now, you should have a copy of the press release, which was issued yesterday afternoon.

Before we begin, I want to remind everyone that this conference call may include 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 flows in some prior periods and expects that 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. Further preliminary results are subjected to normal year-end adjustments. Other factors that could cause such differences include pace and timing of additional acquisitions, the company's ability to realize cost savings and efficiencies, competitive and general economic conditions, retention of staff and clients, and other risks described in the company's filings with the Securities and Exchange Commission. I will now turn the call over to Jack Dunn, President and CEO of FTI. Please go ahead, sir.

Good morning. And I'd like to thank everybody for being here with us this morning. At our last call, we discussed some of the good things that had come out of last year. Our balance sheet, our diversification efforts, and our stability, since we last spoke I've had the great privilege to meet with many of our senior management team to discuss not only our strategic direction for the future, but our execution of our plan for this year. And we realized that is of the up-most importance to you and therefore to us. These folks together with the rest of our employees are truly a remarkable group. They always leave me with a feeling that I'm privileged to be part of a company like FTI.

Our intellectual capital base includes Ph.D.'s, MBA, CPA's, some lawyers or folks with law degrees, and include certified insolvency and structuring advisors, certified fraud examiners, chartered financial analysts and even a certified anti-money laundering specialist and I'm sure you can imagine how busy he is at the time. People trust them with the most critical issues that face them, their businesses, their wealth and even our government.

These folks help in the largest number of bankrupt situations as shown by the lead tables. They help many companies avoid bankruptcy altogether. They investigate the most complicated financial situations sometimes finding the mistake. Other times, finding fraud. They analyze the most important mergers in the world and test their impact in pursuit of regulatory approval. Increasingly their work takes them abroad as witnessed by their work in two of the most prominent internal controls/fraud cases on the continent and most recently, we provided the ceremonial testimony in one of the UK's first insider trading cases in Ireland involving Fykes PLC.

The value of these people is not measured by their utilization against what we use which is the toughest standard in the industry. Nor is it measured by their revenue per billable employee at about $575,000 per person, which again I think is indicative of the kind of value and product that we bring to our clients. But it's measured by the fact that they are constantly called on in the toughest situations and we are constantly increasingly called on in all sizes of situations. And the most important part is we're then called again 75 to 80% of the time, that's about the amount of our repeated referral business. It is measured by the franchise that they brought with them to FTI when they're company may have been acquired and it's also especially measured by the franchise that we are building at FTI.

As we have seen this is not always linear and not always up to our expectations. And while I would never measure our people's value in terms of our stock price, senior management and I owe it to them and to you to do a better job of communicating the value that we are building here and that we appreciate that we're proud to be part of. To that end, this year we will try to increase or adjust our metrics to better explain to you what we're trying to build here. Last year our effort was to try to increase our transparency by adopting segment reporting.

This year we'll try to look at some of the measures that we traditionally look at and see if they're still valid. For example, let's look at the fact that in terms of utilization we have always focused on utilization at head count. But as we look at our business, we really are in the business of providing intellectual capital. At our bill rates and our pay rates, we have a significant investment in each individual and they can work on multiple assignments. They're not the kind of folks that necessarily need to be at the client doing basic research or working on an implementation project, as much as, they may be working on a design project or providing the quarterback. One point increase in utilization gives us the equivalent of seven new hires.

Second, increasingly we are launching initiatives that would build businesses that are scalable and have traction. For example, embedded in our businesses about $45 million of technology business last year. That's up from$13 million two years ago and we believe it's headed to $60 million this year. This includes our repository services, our electronic evidence practice, and our trial support. Much of this is not hourly. When you add it to the initiatives that we've also launched in terms of interim management and investment banking, you can see that as we move forward that pure head count and utilization may not be the true measure of some of the business activity and what we're building here as a franchise at FTI, as perhaps it was in the past.

This and many of your other questions I hope will begin to be answered today, and in ongoing conference calls as both your questions and we try to improve the metrics by which we explain the company. But last time, someone asked a question about shareholder value for FTI. I believe it's in the franchises we're putting together. It won't always be linear. Certainly, the fact that 40% of our business, however, you cut it is still tied to the restructuring market, which our professionals who have been in that market place for the last 15 to 20 years say that is the worst they've ever seen, we've still done a good job of finding a base in that business and augmenting that product offering. But shareholders have found value at FTI. They've found it in the acquisitions, in the base businesses we've now put together that we call our platform, and if you look at our performance since the year beginning January 2000.

We have grown our market cap from somewhere in the neighborhood about $100 million to $800 million and an investment that somebody made in January of that year of $10,000, would now be worth upwards of $75,000. So we are very cognizant of shareholder return. We are shareholders and we dedicate ourselves to doing a better job of both executing the value game plan of explaining to you what that value is. With that, I'd like to turn it over to Ted, to talk a little bit about the year-end and the release following our prerelease.

Let me just cover some of the points that we're not in the earlier release. Obviously, the overall results are the same in this more detailed release than in the initial preliminary release. Let me just cover some of the additional information that is in here. For example, our adjusted EBITDA for the fourth quarter was $25.3 million approximately, within $600,000 of the fourth quarter of 2003. Our cash flow provided by operations in the fourth quarter was $28.2 million far exceeding our cash flow from operations in the prior year and our cash flow from operations for the entire year, actually, exceeded our expectations, as well as market expectations. We have provided in this release of course information related to each of our business segments.

It is essentially was the same as what we provided on a more superficial level in the earlier release. I do want to point out that in particular our economic practice while we did have admittedly modest growth, has probably the best margins in the entire industry achieving 25% adjusted EBITDA margin in the fourth quarter and did clearly recover from some diminution in that margin earlier in the year. As I mentioned, cash flow from operations was $58.4 million for the entire year and again that was after approximately $14 to $15 million of special items you might recall in the first quarter of this year including refunds to clients of retainers, for example.

Our adjusted EBITDA for the entire year of 2004 was approximately $101 million, and our net debt as we sit here today, where we have cash in excess of $25 million and had approximately that amount at year end, our net debt is about $80 million, so that our EBITDA to net debt is about 125% for example. We have provided a greater detail in our outlook for the year. We've given guidance in addition to the preliminary guidance on revenues we've given guidance as customary on our cash flows, on our expected EBITDA's and on our expected rates.

We do expect that our rates for 2005 will be approximately the same as 2004 with counter balancing reasons. We have had and will continue to have rate increases and that will be balanced by increases in staff leverage, which will keep our average collected rate at approximately the same level in 2005. We do expect to have approximately 75% utilization for 2005 and again, as Jack pointed out, that is on a base of 2,032 hours. Probably the most conservative base we can adopt and recognize and that represent our industry used base is between 1,600 and 1,800 hours. It does make it a little bit not comparable.

As we move over to our financials itself, I do want to point out that as a result of the acquisitions in late 2003, 2004 absorbed more interest expense and more amortization of intangibles than in 2003, which obviously also had a dampening effect on our EPS for 2004. And some of that amortization is over very short periods of time. And we'll start eliminating as we move forward into 2005 and 2006. On our cash flow, again I pointed out our cash flow from operations for the year was $58.4 million. Our capital expenditures were approximately $12 million. Essentially, the amount that we had projected it would be and we do expect that our cap ex for next year again will be approximately the same between $10 and $12 million. We ended the year with $25.7 million in cash.

On our balance sheet, we have achieved an improvement in our DSO's; our DSO's are down to 83 days, as we set out to try to improve them, we have achieved that improvement, we are proud of that particular result and we will continue to strive to either have that or better on a net DSO basis. And again, as we go over to our guidance, we have provided detailed guidance by our segments in addition, to which this time for the first time we have actually given the range of guidance. We had given a range of EPS for 2005 from $1 20 per share to $1.30 per share and in our guidance table we show you what the range of revenues, the range of potential EBITDA, and the range of margins head count and rates would be within our segments to achieve the high end and low end of that range. Jack, let me turn it back to you.

Okay, and with that we would like to open it up to questions.

Thank you, gentlemen. [Operator Instruction].

And our first question comes from Clayton Kinsaro (ph) with Credit Suisse First Boston. Please go ahead with your question.

Good morning it's Clayton, calling in for Josh Rosen.

Good morning.

First, looking at the corporate financial business and head counts specifically I think in your detailed guidance, you're forecasting 15 to 20% type growth in head count. Are you seeing something in the macro demand environment that gives you confidence to expect that type of head count increase or are you seeing or expecting to branch out to different market areas, maybe the middle market or other sectors that you might not have been in before?

The head count additions in the corporate finance side are feeding the practices within corporate finance that we see the most growth and right now our quite frankly that is the busiest. They include the transaction advisory services practice where we're extremely busy and we are actively recruiting in that area, and that does the due diligence and also we're doing a lot of post acquisition work for deals that have been done.

Okay. So within the restructuring piece of corporate finance and restructuring, what is your outlook as you see 2005 at this point?

We're hopeful that the restructuring business is going to start picking up in the third and fourth quarter of 2005. You know, we see a lot, as I said earlier, we see a lot of activity in the transaction advisory. M&A is also an area that we are recruiting people. In addition to the interim management practice, which we've named palladium partners, and palladium partners goes hand in hand with the restructuring side.

Okay. And lastly, were there any meaningful increases in head count in each of the segments since the end of the year, since end of your fourth quarter end of period head count number?

Well, that's not something we would normally disclose. We would normally disclose that by the end of the quarter and we do expect by the end of the quarter to have some head count increase on our way to total head count increase that we hope to have by the full year.

Okay.

We wouldn't normally disclose what our head count would be on February 17th, Clayton.

Okay. Thank you.

Our next question comes from David Gold with Sidoti and Company. Please go ahead with your question.

Good morning.

Good morning David, how are you?

All right. Ted, here we are, as you mentioned February 17, and I guess we saw some seasonality coming out of the fourth quarter and the last call we basically thought that the issue was, you know, this increased seasonality whether it be Christmas, New Year's, falling out on the weekends and people taking the week off. As we stand about halfway through the quarter have we seen a recovery there on the utilization side?

David, we wouldn't normally again say this but because it is particularly important, we are either tracking or exceeding our expectations for the first quarter as we sit here.

Okay. That's helpful. And then Dunn or Jack, as we look at hiring plans for the years, I came to think about things I guess as we look at the guidance you've given, if you hit the high side of your hiring plans, the forecast for now that would be the high side of your guidance and I almost think I guess based on some of the recent history from the hiring that it would almost be the opposite, if you're more successful on the hiring front it might hold things down for a little bit. Can you talk, I guess a little bit about that about sort of the thinking and how quickly I guess we've talked about in the past, a little more on how quickly or maybe hit it from the angle of what will drive the hiring? Are you basically going to pick people up as the work comes in or more opportunistic?

The answer is both, David. As I just said, on the transaction advisory, on the M&A, on the palladium partners, we certainly are actively recruiting there because we've got a need. When you look in the forensic on electronic evidence and some of the other practices within the forensic, the accounting specialists, we're actively recruiting, we've got numerous headhunters out there, you know, helping us identifying and recruit people.

So the piece where, as you know because you've been watching us for a long time, utilization is very important to us, we have a very high standard to maintain and we think it's very important to keep good utilization levels. So we will never go out like drunken sailors and bring in 100 people hoping we're going to get them busy. But rather and we very carefully filling the gaps and we hire, you know, hopefully towards the budget that we're provided for 2005, which shows utilization going down a little bit and that's basically to absorb the new hires rather than you know, double the size of our firm and at the expense of utilization, and ultimately we think that would be the expense of our EBITDA margins.

We start to normalize a little bit, David, when you think about the investments we've made beginning to pay off. We did despite, as I was trying to allude to earlier, the raw comparison of beginning head count and ending head count, within there where we think some good trades. We would expect to see especially additions in our electronic evidence area. We're out there aggressively hiring in our technology offering we're aggressively looking in investment banking we're aggressively looking. And those are those areas I was talking about earlier where we're starting and building initiatives that we would hope to pay off despite the, you know, whatever the so-called utilization or even the billable head count was.

The high end of the guidance, as you might expect, would include some return as we talked about of the restructuring market and the timing of that, and that's where, you know, we would be more employee concentrated than in those other areas that I talked about. So I think, you know, we made some significant investments in some new things last year and, you know, as we talked about earlier, we need to see the results of those. Their six-month trial period or cycle end period is now over and the good news is transaction support and creditor's rights we're starting to see some nice traction.

Okay. Perfect. Thanks. That's helpful.

Our next question comes from Chris Lord (ph) with Criterion (ph). Please go ahead with your question.

Actually I have a couple of questions, if that's Okay. First with respect to the restructuring picking up in the second half of '05, why do you see that happening? You know, clearly the economy is in a robust stage right now. Just curious about why you think that will pick up. And how much of your assumptions for guidance are based on that picking up? Secondly, more question of over longer term organic growth rates and what you think that number is before acquisitions. And then I've got a couple of other follow-up questions.

Okay. Let me start with the -- what we base our belief on the restructuring business. And I'm not -- when we say towards the latter part of the year, I think it will be the -- maybe in the third quarter you'll start to see some covenant defaults and things like that and maybe towards the end of the year, first part of next year you'll start to see more serious ramifications. But that's based basically on timing cycles that we've witnessed over the past and that are attested to by Moody's and Standard and Poor's. By that I look at the fact that I believe, if my statistics are correct, that last year about 16% of the high yield market issuance is were rated CAA or lower.

If you go back and look at the descriptions of CAA or lower, they're deals that are extremely speculative to be kind. Doesn't make them bad. They're just speculative and there's a place for that in people's portfolios. And if you look back at the past in 1998 which was the last time that the marketplace was really that frothy and it had that kind of issuance of CAA or lower, probably 20% of those defaulted in the year after that, probably another 20 or so percent in the following year. And I think to date probably 70% or so of those issued have defaulted. So it's a very risky genre. That's why we exist and are brought in.

Is that a pre-absolute level of the issuance, the CAA issuance to 16%?

I'm sorry, is it what?

Is it a pretty high absolute level?

Yes, of total debt outstanding right now of bonds, about 20% of the total pool is rated CAA or lower. So that is historically a very high percent.

Great.

And one of the differences is that in those good old days that he has CAA paper was 15% face with 20% warrants. Obviously it's a little different now. The basic of the makeup of those transactions, I think there were something in the order of 48 of them that were dividend payments out to sponsors and things like that. You're seeing M&A multiples reach the 7% and you're seeing leverage models now being at 5%, which are historically fairly high numbers.

Right.

As you look at that, there was about a $1.3 trillion worth of institutional un-banked last year and of that $480 billion was labeled leveraged debt, which would be at the higher leverage multiple. So I think while there was very little lending if any in 2001 and 2002, I think you've seen a strong resurgence, as we've mentioned, I think back in the third quarter of 2003 we believed the25% of the transactions that we were asked by our clients to be ready to participate in were able to take advantage of the phenomenal financing markets and the high yield marketplace and help their balance sheets that way.

Okay. How much of your guidance for this year is based on that market firming up and call it later Q3 or early Q4.

Not very much. Last year one of the worst years ever in the pure restructuring area did $160 to $162 million of revenues. The low end of our forecast, which was $170 million of revenues, is primarily driven by continued growth in the non-core bankruptcy area such as the transaction advisory support. Clearly the difference between the low end and the high end of our expectations are about an additional $7 million of revenue is expected to be driven by that resurgence in the third to fourth quarter.

Got it. Okay.

In our --

What was the range, sir, $170 to what?

$170 to $177.

In the guidance that we put out, those follow us for a while we don't include any acquisitions. As we looked at our 5-year plan recently we were looking to model out on a -- you know, an annualized basis of predicting some normalcy to the market balancing out somewhere in the neighborhood of 12% organic growth or something like that.

Great. Thank you. I have a couple more questions. I can get back in line if you want.

We're Okay. Let's go ahead, if you want.

Okay. Thank you. Target EBITDA margins.

Target EBITDA margin is right on that table. It's 23.5%. At the high end and 23.0% at the low end.

Thank you. Sorry about that. Lastly, on the use of cash. You guys are obviously a nicely cash deposit business. You look at this how do you think about the capital structure? Do you think about it this is a business you'd want to lever up and try to use the proceeds to buy back stock or would you look at it and say we're comfortable with less leverage and use the cash flow to pay down leverage? How do you think about it?

Well, we think about it as an opportunity to people maybe tired of this but it's what our core is, that our number one goal is to build this platform because we think there's maybe too much hyperbole to say a revolution going on in the consulting business but clearly is an unbelievably opportunity in time and we want to add businesses. If we have the opportunity to look at acquisitions at something in a realistic range of four to seven times EBITDA and we think that our business right now is to try to identify those and add them to our offering because they will be something that will, you know, lay the groundwork for a future that builds upon those returns.

Right. And.

It won't be true every year as I said. It won't be linear. But if we can start hopefully to buy them correctly, and we do our due diligence and we believe they can have the growth targets we're talking about, to us that seems like a bigger opportunity right now than to buy our stock back.

And would you use debt or stock to buy those businesses?

We would like to use a combination of the two obviously depending on the relative values. But we believe that increasingly using some of the shares to do that, if we can buy them at the levels of EBITDA that I mentioned, is a good thing for, you know, increasing the equity participation of those who are the ones that are going to deliver the freight for us and our shareholders over the next, you know, ten years.

Do you have any idea -- are you opposed to using the excess cash to -- let's say this year you only find a couple small acquisitions and you're sitting there at the end of the year and have $100 million in EBITDA and nothing to do with it. At that point would you make this decision on an annual basis at that point in time would you pay down some debt or buy back stock or bank it?

If I could take my time, I think sit back in my chair and relax and think about having $100 million with nothing to do with it. But seriously, we have no-- we're not -- you know, against buying back the stock. We have bought back stock. We have an authorization and we will buy back stock. It's just that our primary goal is to go build this business right now because we think it's such an opportune time and it's going to be such a great market.

Do you pay out your bonus -- are the bonus pay outs before or after EBITDA numbers.

The bonus is paid out of the EBITDA numbers.

Yeah, the bonuses are accrued in computing the EBITDA number. The cash used to --

That's not unforeseeable that you'd sit there with a pretty good chunk of cash. If you didn't make stock acquisition.

We project a pretty good hunk of cash. We had a pretty good hunk of cash at the end of the fourth quarter. We had $25.2 million.

Great. Okay. Thanks, gentlemen, for your patience. Appreciate it.

Thank you.

Our next question comes from Vincent Walden (ph) with Thornburg Investment Management. Please go ahead with your question.

Good morning. Nice job on the quarter on the cash flow and the continued debt pay down. I have two questions. I guess one would be for probably Dom. In the Telecom industry there's been a lot of M&A and I am wondering if that impacts your business at all and if so could you offer me some on where it might fell out for Telecom activity. The second question would be for jack. Further on the buyback, during 2004 it seemed that your prioritizing the debt pay down but now with that behind us, does the buyback have any incremental appeal at all during 2005 versus 2004? Particularly with the stock trading at fairly low levels on most metrics? Thanks very much.

All right. I'll go first. This is Dom. Telecom is certainly one of our sweets pots. The M&A activity going on there is treating us well. We are involved in some of that activity both in two of our areas, practice areas in particular. One, our economic practice and also in our investment bank are doing some of the smaller M&A and capital raise transactions that are out there. But we can't name names, but we are involved in cases that you read about on the first page of the journal.

And with regard to the stock buyback, you know, we have some interesting opportunities in front of us to use our cash and our stock but we will continue and probably not make a commitment but target looking at you know, making that somewhat -- looking at tempering any equity that we would put out with being able to repurchase our stock on the marketplace to keep the share total in line with where it is now.

Great. Thank you.

Our next question comes from Bob Bridges with Sterling Capital Management. Please go ahead with your questions.

You're modeling some pretty nice revenue in growth of EBITDA within forensics and litigation. I was wondering if you could give an overview again as to what some of the stronger areas of demand are and highlight a couple of the product lines that you think are trending particularly well.

Well, forensic is one of those areas that we do see a lot of opportunity in. We've got our - as jack mentioned earlier, the electronic evidence consulting business is doing very well, our repository business doing very well. The pharmaceutical cases that you read about and some of the accounting investigations that seem to continue to pop up, you know, are providing a lot of opportunity for our people.

Along with, you know, the topic that we all talk about on all these calls is the Sarbanes-Oxley engagements being provided to us because the accounting firms cannot provide those services to their clients. So we do see those areas and those industries in particular continuing to drive the business. We've been doing pharmaceutical-related work for years and the KPMG practice that came over here had a very deep specialty in that area. So we see those industries and the turmoil that's going on in those industries continuing to provide opportunities for us.

One of the things I'll reemphasized that I talked about earlier is as we look within our company and the embedded technology business we have, it really has been a driver. It's increasingly becoming the first thing that people need yesterday, if I'm not mixing too many metaphors there. It's really -- it's been amazing to us to see the acceptance of our technology offerings.

We have people who will use us despite conflicts. We have people who when we're trying to get on a case for the content of the matter, we're brought in earlier on the electronic evidence and it's made the hand-off. One of the things that, you know is maybe lost in the successful integration of our dispute advisory services practice with KPMG is the amount they've been able to expand across their case basis, the electronic evidence and document repository work and trial support work that we do. So I think that's going to be very exciting.

We've always had --some of our products are reaching the stage where they have some recognition by the industry. And if we can crack the code on being able to have our products embedded, for example, in the law firms and law departments, then you really have an opportunity to become so indispensable to the client that the rest of your service offerings, assuming that they're pristine and number one gold standard products, are much easier to sell. So that's an exciting area for us. And we have big plans for that.

And are you servicing demand exists today that's healthy and kind of Q1, Q2,or how much of a loft of this growth from the business is going to materialize later in the year? I know you're --

This is real time. This is stuff that we're working on right now as we speak.

And then just a question on you've got a lot of hiring going on this year. Is any of that flowing through the bigger corporate expense line? Or is that --does that get reflected in terms of the EBITDA on the individual segments.

The head count that we give is a billable head count that goes do the direct cost of the segments.

Could you maybe just give a comment as to the higher corporate expense line this year? I think you mentioned the heightened marketing expenses. What are you doing differently this year versus other years?

We believe probably contrary to some others that we have -- that we have the best product and we believe there's a vibrant marketplace and we think the thing that puts the two together is an expanded effort on our part on branding and marketing. To that end we have put several millions of dollars into corporate to really focus on branding and marketing as well as several million among our --that's also in the different segments.

We are looking at what we have some dollars socked away there also because our most important area is our people to beef up our H.R. offering to make sure that when they -- people join us that they have nothing on their mind but going out and doing what their business is which is one of the hardest business in the world. So those are the kind of things I guess put investment in our brand name and people is what those corporate expenses represent.

I'll just add one thing to that also. The infrastructure to support our growing technology business.

Okay. Wonderful. Thanks a lot, guys.

Thank you. Our next question is the follow-up question from Clayton Kinsaro. Please go with your question.

Thanks. Just a quick follow-up to the marketing question that was just asked. How do you expect the -- how do you anticipate the expenses to play out as we move through 2005? Is that something that starts at a run rate level equal to 30million or does that build steadily throughout the year?

30 million is our entire corporate budget.

Right.

I said there were just several million of dollars of marketing in there.

Okay. So as we look at the uptick from the 20 million total in corporate expenses in 2004, how should we think about the incremental expenses as you mentioned related to marketing, branding, some of the other technology spending? How does the incremental dollars kind of get laid out through the year.

I also want to point out that some of those positive legal settlements that we talked about in the press release are reflected in that corporate expense for last year. So actual corporate expenses barring those activities were higher than that. So the increase is not quite as much as it appears to look.

I see. Okay.

And then much of corporate expenditures are linear and clearly some of it will be campaigns that occur at this week points of the year.

Specifically the advertising and marketing incremental costs ramp up through the year so they're -- they ramp up in the second, third, and fourth quarters, not as much in the first quarter.

Okay. Great. That's helpful. And then lastly, could you discuss retention, kind of what it was in the fourth quarter and what your expectation is for 2005?

Well, you know that we were running approximately 18% turnover rate for much of 2004. We experienced a significantly lower turnover rate in the fourth quarter, approximately 12%. I don't think we be kidding ourselves to think that we could continue at that lower rate. And I would really expect that our turnover rate for the year will continue to be in that 15 to 18%.

Okay. Thanks again.

Our next question comes from Jason Selch with Wanger Asset Management. Please go ahead with your question.

Yes. My first question has been the increase in the G&A expected to 30 million from the 20 million. And you're saying that the 20 million, that actually was substantially higher than that but it was reduced by some legal settlements, is that correct?

That's correct. A couple of million dollars. So the increase is about 8 million dollars and much of that is expected to be a combination of marketing activities and infrastructure building.

Okay. So with the sharp increase in marketing expenditures would you imagine that if I opened up a "Wall Street Journal" or I don't know, various different publications I might be seeing some advertisements for FTI Consulting this year?

I would think especially if you opened up magazines and periodicals targeted to CEOs, CFO's, and board members and audit committee members you would see us prominently displayed.

And that would be a change from last year, right?

It would be an increase from last year, yes.

Okay. And then, you were talking about these technology businesses that you have and you said that they are not head count related and I don't really understand what these businesses are. Could you just describe them a little bit for me?

Yes. And I didn't mean to say they're not head count related. What I meant to say was that perhaps utilization and head count don't properly manage or excuse me, express the scalability of the businesses. The businesses would include the following, they would include our legacy trial support business where we do everything from run all the computers in the courtroom to help people put their documents and their exhibits and their ideas into graphic and other forms. And that would be the most kind of utilization head count sensitive because it requires an operator.

The other would be our EEC business which is our electronic evidence business where we do -- today everything from an antitrust case to a -- you know, it's not even a litigation case but maybe a -- you know, an FTC or justice department case, involves millions and millions of documents, the review of those documents by your own side and then the transfer and production of those documents to the other side. And that's a business where we go in, we have a lot of ability to be able to search the documents to figure out what's on there to be able to really review the documents and get them in order so that our clients have a good command of them and they aren't worried about a smoking gun.

Are you the -- do you have the number one market share in that business?

No, we don't. It's a very competitive market right now and by competitive I mean at this point it's driven by demand. What we have is the ability to provide sophisticated and secure document -- data management in that area so that our clients have -- go through the products that we use, they can tailor the database interface to their -- the way their law firm does it, etc. So it makes it very easy for them to use.

This is the kind of thing where I'm talking about embedding ourselves with the client. There are a couple of law firms that have chosen to use as a protocol the type of product we use and that really gives us a leg up with helping them. We do claims management. We're on a couple of matters that involve multiple claimants or settlements. We're the people that use technology to organize that and make sure the pay outs are made on an orderly and documentable basis.

And then there's our repository business where for several clients, I think it's almost a $15 million, $13 million business right now. We have a provided database that all the different law firms can linkup to in a multi-district multinational litigation so that we host all the documents. And again, a secure and sophisticated manner. When Ted talked about our infra structure we're going to build some additional housing hosting requirements for that because it's turning into a very good business. So we would be an ASP in that area.

Thank you.

Thank you.

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

Good morning. Jack, cutting to the chase a little bit, I think a lot of people are asking a similar question which is you have a choice of using the cash on your balance sheet for acquisitions or using it to enhance shareholder value more directly with share repurchases. What is the status of competition for acquisitions? You, I think, mentioned four to seven times seems to be the multiple. How aggressive are you about not being -- how tight are you about making deals with people at this point?

We're pretty disciplined. You know, we are -- we're typically in our business not seeing deals particularly shopped around. We've had investment bankers call with some offerings, but typically on the people that we look at, we know them from prior experience and they'll come to us or they'll come to one of the competitors and not really put them in competition because it almost heightens the risk profile of the transaction when it becomes known something is for sale. So I think we're going to be able to adhere to our discipline of looking at that spread of EBITDA that I talked about.

Who is your most direct competition these days?

Well, certainly Navigant has been active, Kroll has been in the past. I think there was a slight period where they maybe weren't as active and they seem to have done some things recently. Charles River has acquired some in the past. I think as we look around to people who have acquired the most, it looks to us like Navigant and Kroll up to a little while ago.

Do you have a more formal metric evaluation between share repurchase versus acquisitions?

On the acquisitions we try to look like many people do at something akin to a 20% return on our invested capital. And on the share buyback, we have not been quite as formulaic. Unfortunately we've had some buying opportunities over the last year that were compelling and I think we keep our powder dry, you know for any reason that should happen. But I think that probably going forward, as I said earlier, we'll look at using that capital to try to keep in balance the number of shares we might issue in terms of acquisitions or for other reasons for personnel retention or something like that.

I think on behalf of your shareholders in the same method you have a formula for acquisitions, I think they would like to hear you be more specific about how you approach shareholder repurchase.

All right. That's a good point. Thank you.

Our next question is a follow-up question from Chris Lord (ph). Please go ahead with your question.

Two questions. What is the kind of the organic share count per year just based on issuing options to employees? Obviously this is prior to acquisitions. That's the first question.

Subject to before acquisitions the grand total of options and stock purchase plan would approximate 300,000 to 400,000 additional shares a year were we not to counter balance that with the share buyback program.

A little less than 1%. Okay. The second question is I'm just curious if you could give me a little more on the philosophy of the acquisitions because I live on the West Coast and I think one of the problems with a lot of the companies in silicon valley is they're enamored with the concept of growth for growth sake and this obviously is relating back to the capital structured question that people are pressing on.

I'm just curious. I mean, if you're running a business and it's growing organically at 10% and throwing off, you know, kind of a 11, 12% EBITDA yield, 10% for you yield, why is that not a good business? Why do you need to make acquisitions? Is it because there's incredible advantage to be had through scale in the industry? You've already done a good job of diversifying your businesses to get, you know, you're not entirely dependent upon restructuring. I'm curious about the philosophy behind it.

There are a couple of things that we're looking at as we go forward. I think the scalability issue is important. For example, we have a vibrant and growing transaction support business. At some point we've already started to but we need to augment that with tax because if you really want to make a mark in that business you've got to in some respects on a smaller scale recreate what the big four had when they did that business. There are certain national go-with as we look around.

Similar to a resource connection?

No, no. No. Not that kind f. We're talking about doing -- you know, somebody hires you to help look at a potential acquisition, what they need to do is an assessment of how to structure it for tax purposes and things like that. Increasingly the big four, we believe, will not be allowed to do that kind of work. So that's -- if we're going to sell our transaction support, and that's just one example.

Sure.

Another example would be, you know, domain knowledge in a particular industry. We have a great Carla Taylor and her folks are great on Telecom and they're housed in our restructuring corporate finance area. They've been able to take those skills and move them over with our investment bankers and be able to get some nice financing and M&A transaction as Dom mentioned earlier.

We think coming up in the future that the health care is going to be a fabulous area in terms of a bunch of both nonprofit and for-profit operations needing operational improvement, needing our help in our people who -- in restructuring do that but to have the domain knowledge to be able to bridge them into more transactions would be very good. Those are the kind of areas we look at. Then again, as we've said, not for pride of authorship or ego or even the free trips to London, we need to be more of a presence in the UK.

I mentioned we had two very large matters for us that were across the pond this year and we got those because we joined venture with people. Increasingly you need some kind of presence. As we look at the bondholders and other constituencies cross boarders, we need to have a presence to help them. We believe it's not a couple of our to go over and set up shop. It may be an advantage to look at an acquisition so we have a critical mass.

Let's say within the next two to three years you get these things filled out you want to get filled out, acquisition for a functional purpose or vertical or geographic presence, let's say it takes two or three years to get the right ones. You know, at that point in time, I mean, is there -- you know, at some point in time does the company function fine without being in acquisition mode? Philosophically are you aligned with that or are acquisitions something that are just in the blood of this company and are going to have to continue?

We've put together a five-year plan that shows us needing a couple of acquisitions to get there, maybe three.

Yep.

And there is, as I say, we're not acquisition hungry. At that point, you know, one of the -- for example, you talked about critical mass. One of the reasons, and it was exceptionally fortunate to find a fine group like the KPMG folks to add, we now have a second to none in terms of size and capability forensic accounting litigation practice. We don't need to acquire that. We need now, set the table where they can tell their contacts in the industry this is a good place to be. That allows them, they have the critical mass now to perform organic growth. Same, we don't need to add a vanilla restructuring practice because we have, thank goodness, the best in the world. And that can grow organically to meet those market demands when that market becomes vibrant again.

Okay.

What we need to be cognizant of is the unwinding of some more of the big four practices as we go forward. And those may create buying opportunities for groups or for segments. We'd certainly have to be aware of that because it may be an opportunity we just can't bypass. But we have consciously tried to build the legs of the stool so each one then has its own size to be able to grow organically. That's our goal.

How much of the stock is management owned right now?

I think we own -- we did some numbers on this. We have about 3 1/2%. And it's an interesting dynamic because there are no founders here. There is nobody that started with 80 or 90% of the stock or 45% of the stock. Frankly, the stock that we do own, we've either gotten through buying it through the currency of selling a business to FTI or my case, our options have all been issued at fair market value or higher in my case and so I think that we have bought and held the stock. That's how we've built up that.

All right.

We would hope going forward that through our compensation mechanisms that we would start to use some equity in lieu of cash to build up that kind of allegiance to the firm through equity ownership with our people.

Yeah, in it's more in generals, also thinking like shareholders do. That's what I'm driving at.

I meant that, too.

I think that's what a lot of these questions are about. I think if I get the feeling on this call that people really like this business and the cash flowmetrics and merits of it, and yet, you know, if you're -- if management owned35, 40% of the company, they'd be maybe more focused on the stock price as opposed to expanding the business to these different ventures. I think that's a sense I'm getting.

Thank you, gentlemen.

I would be -- we do spend an awful lot of time about thinking about shareholder value. It's our analysis that, as I said, if we can perhaps invest the money at this critical time when the market is in such a liquid or fluid state that that is perhaps the best way to build that shareholder value. And we're here for the long term so we want to see that play out.

Yep. Okay. Thank you.

Thank you.

Our next question is a follow-up question from Vincent Walden. Please go ahead with your question.

Two quick ones for Jack. One in terms of the timing of any potential acquisition. It occurs to me that perhaps if the company did not acquire anything for a couple of quarters focused on some basic blocking and tackling for maybe six months, it might restore some confidence in the stock market as well as within the company. Could possibly result in a lower cost of capital, a higher stock which would result in lower dilution in the context of a deal and probably increased willingness of a potential acquiry (ph) to partner with FTI. Do you think there's any merit to that, of potentially holding off on the acquisitions for a little while? And second question would be related to the asset loss that the company incurred about a year ago. What do you think is the risk or exposure that the company faces to such an asset loss at this point and what are you doing to sort of mitigate that?

With regard to the first question, I think we remain opportunistic and in fact we have -- interestingly we have somewhat of a bifurcated existence in that I know that our stock performance has been disappointing to some but our marketplace performance within the industry has been very credible, if not fantastic to the practitioners so that in terms of them wanting more to be a partner with us, I think we're seeing people right now that very much want to join us with FTI because they believe in the vision and especially in the ability to hitch their products where their particular service offering to us. So I think realistically we're opportunistic and working on some things now that, you know, I hope that we're back announcing some successes sooner than later.

With regard to the second question, a lot of management time this year and a lot of resources, economic, psychic, everything else were applied towards bringing a lot of our people into that weren't under contract, under contract. Our senior folks. And as we try to say almost every time we talk that the hiring and even more importantly the retention of our people is our number one thing. So part of our mission this year is to make sure that we revise and review our compensation structures and our equity participation structures and everything else to make sure that we have those people stay in the boat and we don't have things happen like happened last year.

Could you offer an update of how many of the senior people are currently under a medium or long-term contract and when you would have sort of a rollover or wave of people coming off of contracts?

Including senior management there are about 120 of our senior people under contract, and they roll off some in groups and some individually over the next 5 years. With a few groups coming up in about a year and a half to 2 years, another coming up in 3 to 3.5 to four years, etc.

Great. Thank you.

Our next question comes from Toby Sommer with SunTrust Robinson Humphrey. Please go ahead with your question, sir.

This is Jack Churkin (ph) for Toby Sommer. I was wondering for your expectations of the Sarbanes-Oxley spending in 2005, is that what you're seeing on that front.

At this time of this year, we just had our review with our accountants so we're very up on that question. I can answer both macro and micro. It's interesting, one of the things we talked with them is we like to benchmark our services off of the accounting firms and they're expecting a second consecutive 9 to 10% price increase in their fees.

Our best estimates from our audit committee chairman, who is on several other boards as well as around the table was that you would expect Sarbanes-Oxley spending on just on poor type internal control stuff to be around 60% maybe what it was this year that's 60% probably outside fees and like many companies, you know, we like many companies have also briefed up an internal audit situation so you have the internal costs as well. So when we looked at ours, we were probably estimating something Ted, I'm looking at Ted, about a million and a half dollars or something like that.

About a quarter million and a half dollars or actually about 80% in total of what we spent last year.

What is interesting for us, I know that some of our competitors were beneficiaries of the 404 certification processes, where they provided teams of people, etc. to go in and actually help companies do the actual testing and compliance with the 404 internal controls legislation. As we have said several times, our role is not that front end. We don't do that kind of work that maybe a resources connection or possibly even I think maybe Navigant or some others do that I'm not positive.

Our role is much more to take when the companies come back and find areas of remediation or areas that have shown some kind of problem, that's where a company like ours would go in and perhaps help with an investigation or review of that. And in fact, you know, almost on a daily basis we're now started to get the calls for that. So, we're kind of, in that regard, excuse me a second wave Sarbanes-Oxley. We were certainly a first wave in respect of the restatements that were going on. So, we would be what we would call a therapeutic response to Sarbanes-Oxley as opposed to the original diagnostic stage.

Our next question comes from Patrick Gimgolsien (ph) with Newburgher (inaudible). Please go ahead with your question.

Good afternoon. I was just curious about the average bill rate projection for '05. Ted, when we met recently you made some comments about the rates at which accounting firms and law firms are raising prices and that provided a pretty good umbrella for you. I guess I'm surprised to see the bill rate projection being flat with Q4. Is the mix offsetting it?

Yes, that's exactly right.

To a larger extent?

Yes, we do expect to have rate increases effectively counter balance by changes in the mix. As we expand our staffing, it's going to be expanded at the lower and mid levels as well and that has a dampening effect. Remember, these are average rates. Our actual rates range quite a large range. So these are basically collected average rates. And there will be bill rate increases and we do expect a dampening from staff leverage mix.

I guess -- let me ask it this way, if you kept mix equal to '04, how much higher would the average billing rate be in '05 versus '04.

At least 5%.

I am sorry.

About 5 to 6%.

Thank you.

Thank you. [Operator Instructions].

Gentlemen, at this time we have no further questions. Please continue as any further remarks you would like to make.

I just would like to again thank everybody for being on the call and I look forward very much to see for our next call. Thank you.

Ladies and gentlemen this concludes the FTI Consulting fourth 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 11020542. Once again, if you'd 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 11020542. We thank you for your participation.