FTI Consulting Inc (FCN) 2006 Q3 法說會逐字稿

Good morning. My name is Russell and I will be your conference operator. At this time, I would like to welcome everyone to the FTI Consulting 2006 Third Quarter Conference Call. [Operator Instructions].

Thank you, Ms. [Prosola] you may begin your conference.

Thank you operator; good morning. By now you should have received a copy of the Company's third quarter 2006 press release. If not, copies of the press release can be found on the FTI website at www.fticonsulting.com. This conference call is being simultaneously webcast on the Company's website and a replay will be available on the site for 90 days.

Your hosts for today's call are Jack Dunn, President and Chief Executive Officer, Dennis Shaughnessy, Chairman, Dom DiNapoli, Executive Vice President and Chief Operating Officer, and Ted Pincus, Chief Financial Officer.

Management will begin with formal remarks, after which they will take your questions.

Before we begin I'd like 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 revenue, operating income, and cash flow in 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. [Inaudible] 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 would now like to turn the call over to Jack Dunn, President and CEO of FTI. Jack.

Good morning and thank you everyone for joining us. By now I hope you have all seen our press release discussing our results for the third quarter. I'd like to review some financial highlights and then address what I believe are the important take aways from the quarter, review our outlook going forward, and then, most importantly, open up the call to your questions.

Let me begin by saying that we are very pleased with both our results for the quarter and the significant progress we made from an operational standpoint.

The third quarter is typically a slower period in our industry as a result of the summer holiday seasonality. This year, however, we were able to leverage a number of prevailing trends in the marketplace, including the stock options backdating issue, to generate revenues that were about even with those achieved in the second quarter, which is typically a much stronger seasonal period for our business.

Beyond the solid financial performance, it was a quarter of significant strategic and operational achievement for FTI. Most importantly, as we had committed to you back in July, we took steps to enhance our profitability by addressing underperforming segments of our business.

Just as importantly, through the acquisition of Financial Dynamics, or FD, we made a large and significant transaction that will take the Company substantially forward in terms of the breadth of our capabilities and the extent of our global reach -- a transaction that will reinforce the common culture across all our business units and drive our organic growth.

Before I get into that, however, let me briefly review the financial highlights of the quarter. In the quarter we continued to deliver strong top line growth. Revenue increased almost 22% to $162.1 million, which reflected strong performance across most of our operating segments.

Excluding the contributions from businesses we've acquired, over 15% of this growth was organic, which demonstrates the strong demand we're seeing for our services and the traction our businesses have in the marketplace.

In September we told you that we were taking actions to address certain underperforming businesses in the U.K. and non-core operations in the U.S. As a result of these actions, we recorded a one-time termination charge in the quarter of approximately $23 million or $0.33 per diluted share. We expect these steps, essentially finalized in the first week of September, to meaningfully enhance profitability going forward generating net annualized cost savings of between $12 and $15 million going forward, or approximately $0.17 to $0.21 per share after tax.

Excluding the charge of $0.33 per share, EPS rose 18.5% to $0.32 from $0.27 a year ago. This included about $0.05 per share in stock-based compensation expenses that obviously were not included in the calculation of EPS a year ago.

Adjusted EBITDA, excluding the charge, rose 11.2% to $34.7 million, or 27.4% of revenues, from $31.2 million or 23.4% of revenues a year ago.

From an operating segment perspective, we are very pleased with the solid progress we are seeing in most of our segments. Leading the way, again, was our technology practice, which put up outstanding numbers. Revenues for technology were up a robust 75% to just shy of $30 million in the period, as our hosting business continues to gain traction.

And our Ringtail Database Management system did more than just gain traction. During the period it clearly solidified itself as one of the three best systems available and it can't be ignored now as a choice by law firms [inaudible] who's looking to install a database.

As a result, EBITDA for this segment grew a strong 57% in the quarter and we are extremely pleased with the performance of our technology segment. It is well on the way to achieving its target of over $100 million of revenues for the year.

Forensic and Litigation Consulting had another good quarter both sequentially and year-over-year. Revenues increased 23% to $46.8 million, from $38.1 million a year ago. This drove EBITDA growth of 40% versus year ago levels excluding the one-time charge.

One of the primary drivers of growth in this segment during the quarter has been investigations into stock options backdating. Once again, FTI's anticipation of the marketplace, as well as reputation and leadership position in the market, have positioned it to take a prominent role in supporting companies as they deal with this issue. We are participating in about 30% of all the investigations announced to date and are in active pursuit of a number of others.

In this regard, I recommend to you the article in last weekend's Wall Street Journal for some additional color on this topic.

Corporate Finance/Restructuring revenue of $50.7 million increased slightly from the same period last year, which is remarkable given the continuation of a poor market in the core restructuring practice. It's clearly a tribute to the clear position of this practice as number one in the United States.

While conditions in the market remain challenging, this segment was able to grow revenue through increased participation in the transaction advisory market, specifically in the active m&a landscape.

As I said before, we took action to remedy the unsatisfactory level of profits in the division but the benefits were not reflected in the margins for the quarter. As a result, EBITDA declined to $12 million from $14.1 million a year ago.

I firmly believe, however, that with the steps we've taken, preserving our senior year people and judiciously watching staff headcount, we are not only positioned to weather a continued a depressed market in core restructuring if that should occur, but we're also poised for an up tick when it comes as it will.

Lastly, Economic Consulting revenue increased 22% to $34.6 million in the period from $28.4 million for the same period in the prior year, despite the effect of a series of proposed rule makings by the Surface Transportation Board that caused approximately five cases of ongoing casework in our network strategies practice to be delayed.

I'm happy to say that in the last two days the rule making has now become formal and final and that those cases will resume.

EBITDA in Economic Consulting increased to $7.6 million from $7.2 million a year ago.

As most of you are aware, during the quarter we announced the acquisition of Financial Dynamics, or FD, which closed on October 3. This transaction helps transform the way we think about our business and as a result our approach to our business. It diversifies our revenue stream allowing us to participate in all phases of the economic cycle.

This strategic integration drives our Company to the next level, as FD touches all areas of our business creating a common companywide culture to further drive our organic growth.

Geographically it gives us the international breadth we've been seeking. We now have a fully built-out global platform with senior people around the world that provides us with the capabilities to manage large-scale relationships across multiple countries, greatly advancing our goal to drive our business globally.

We are already on track to a very successful integration. Since announcing the acquisition we have been working side by side with our new FD colleagues to leverage key relationships and cross-selling opportunities across the Company. Our combined efforts have already resulted in numerous joint pitches and new business wins.

In connection with the FD acquisition, we issued $215 million of senior notes due 2016, priced at 7.75. The notes were very well received and were oversubscribed by approximately four times.

Shortly after the end of the quarter we announced two additional, albeit smaller, acquisitions that fit very well within our existing practices. Brower, Kriz & Stynchcomb, or BKS as it's known in the industry, brings outstanding domain expertise in the global construction industry to our forensic and litigation consulting practice and provides for a comprehensive dispute litigation and investigation service to our clients in the construction industry.

Consistent with our stated game plan, we would not have entered this market without a legitimate belief that we could be a top player in this market within three years time.

Similarly, G3 Consulting has been for the last six years FTI's primary supplier of Ringtail products in the U.K. We intend to leverage G3's capabilities across FD's broad U.K. client base. These acquisitions are all the more attractive due to the platform created and the contacts made available by FD.

This brings me to our outlook going forward. In short, we are confident that all the drivers of our main business remain in place for us to sustain our momentum into the fourth quarter and well beyond. For example, FLC-- the FCC investigations into stock options backdating are expected to continue unabated into the fourth quarter and well beyond, with some industry observers expecting that the number of investigations could ultimately reach over 1000.

FLC is also a chief beneficiary of the combination with FD where we jointly go to market with a differentiated set of capabilities that is allowing us to win business in competitive situations.

Increasingly, especially in the areas of reputational risk and corporate governance, the communication aspect of reputational risk is driving the bus and our ability to quantify and communicate facts and solutions to boards, employees, shareholders, and stakeholders, the press and the street, is an increasingly precious distinction.

In corporate finance, while the weakness in the housing market has been pretty well documented, there's also growing evidence of a slowdown in the overall economy, which would certainly be a positive driver for the corporate finance restructuring segment's core business.

We are seeing a period like we saw perhaps in 1973 and like we saw in 1998, where frothy liquidity and record corporate results, not to mention hedge funds and hedging of these types of things, may be masking to some extent exploding energy prices and rising interest rates. But they can only be masked for so long before they result in an attractive restructuring market like we saw in the late '70s and 2000 through 2003. They were okay economies but they were great markets for us.

On the flip side, we don't see any signs of slowdown in global m&a activity, which typically is good enough news for us now and good news for us later. This should continue to drive demand for our transaction advisory and economic consulting businesses and, of course, FD, which is a leader in m&a communications.

In Economic Consulting sometimes we forget how important one particular niche domain expertise could be. As I mentioned, the Surface Transportation Board's rule making activity has stunted a couple of our cases, which now seem to be on track.

In addition, we have several large FCC settlement matters that have come into the fold. We act as the economic advisor to the settlement administrators in large cases that have evolved from some of the excesses from the late '90s and early part of this century. We gained our spurs on that in the global analyst settlement where the FCC look to us to help them quantify and administer settlements. We're now involved in up to four more of these cases with, again, others the names of which you can guess from the headlines are on the horizon.

Based on results for the third quarter of 2006 and market conditions, and excluding the restructuring charge described above, we continue to expect earnings per share to be in the range of $1.26 to $1.35, including the impact of the FD acquisition and expensing stock options.

Revenue for 2006, which will include FD for the fourth quarter of 2006, is anticipated to range from $677 million to $693 million.

With the acquisition of FD and the growth of FTI's technology segment, we believe utilization and average bill rates are no longer quite as meaningful metrics for FTI taken as a whole. Nevertheless, we have presented them for the Company's three other business segments in the press release issued today.

Revenue generating headcount at the end of 2006, including FD, is anticipated to be approximately 1,583. In short, we think that our headcount is right, utilization is strong with a good outlook, and turnover is right where it ought to be with extremely low, almost non-existent turnover in our senior people and a judicious watch at our junior people in the headcount there.

So, to wrap up, we are very pleased by all that we have achieved this quarter. We believe we are well positioned to capitalize on future growth opportunities and to grow our business to $1 billion international business consistent with our game plan with 25% EBITDA margins before FASB Statement 123(R) expense by 2008.

As we look ahead to the fourth quarter of 2007, we are excited about our prospects and enthusiastic about the opportunities that lie before us.

With that I'd now like to open it up for questions. Operator.

[Operator Instructions]. [Arnie Ersener].

Hi good morning. Focusing on FD first, you had mentioned when you acquired it that your annualized revenue expected for '06 was $120 million. You had indicated at that time that you probably would carry it as a separate segment. Given that, can you comment on what the fourth quarter revenue contribution you expect to get from FD?

Yes Arnie, we're expecting between $30 and $31 million of revenue for the fourth quarter.

And EBITDA contribution please?

Between $8 and $9 million.

And the second question I have is churn has been a little bit of a positive issue for you in the last year and I think you were cautious about it going into your August bonus payments. Can you now freshen up-- now that August bonuses were paid, you had expected churn to return to normalized levels, did in fact that occur?

Yes, churn in the period was about 17% plus or minus, which is good for our industry and about average for us and right on what we expected. And it was in the levels where we expected, again, for younger people who make career decisions, go back to school, et cetera, like that. So we were- it was right on target.

Final question, again, going back to FD for a second. FD has had excellent growth prior to your acquisition. As we think about '07, I know you're not going to give formalized '07 guidance, but specifically on FD what sort of growth rate would be a reasonable number in your view for '07 in revenue?

We believe, based on the market dynamics and based on our business plans, that we would expect them to grow at 20% or more during that period.

Thank you very much.

David Gold with Sidoti.

Can you update us, Jack, on how many heads were cut in the restructuring?

Sixty-one people.

And really just following up on Arnie's question on attrition. The 17% number that you put out there is quite a step up say from the experience we've had the last couple of quarters. How do you feel about that? Are you sort of happier that basically it's inline with presumably the hiring plans or has something changed there that you're seeing?

Well, it was actually inline, I believe, with the last quarter. The first quarter was the anomaly where we had virtually no turnover, which is extreme-- I think it was 10% something like that. So that this would be an annualized rate that realistically when you look at the accounting firms that are in the upper 20s, and you look at our competitors that are in the 20s or so, it's just normal factors based on the fact that people have spouses who get different jobs. There was nothing out of the ordinary and it's perfectly consistent with both our hiring plans. And in some respects, as everybody knows, it's good to have a healthy turnover in the business as long as it doesn't take your critical people.

And then just lastly, integration of Financial Dynamics, can you update us on plans for both introducing it to your professionals and introducing it to existing clients?

Yes, hi Dave it's Dennis. We have really sort of two in parallel efforts going on. Number one started prior to the acquisition and that was forming mirror image industry teams to do the obvious client mining on both sides, joint pitches, and working with each other on opportunities that were either in the works where one of the comp bases working on it and the other could be of assistance, or were identified to be a candidate for joint pitches.

I'm happy to say that's already yielding fruit. We've received some very nice engagements from it. We are involved in some potentially very large engagements which we're optimistic on. And so that will be continuing as we go forward and hopefully will increase.

In parallel with that is the classic nuts and bolts integration that has been started. Obviously, FD is a global company. We would probably be looking to phase some of that integration in around the world, U.S. being obviously the easiest place to integrate communication systems reporting, the U.K. would probably, and continental Europe be next given just the magnitude of operations that they have there, and then swinging through the Middle East, South Africa and Asia to finish it up.

So I would say obviously the revenue integration and cooperation will be ongoing. The nuts and bolts conversions and integrations will probably be 90 to 120 days. And I think we are very pleased with the cooperation that we've seen on both sides of the house especially on the income production side.

Very good, thanks a lot.

[Operator Instructions]. At this time there are no further questions.

All right, with that I'd like to thank everybody for being with us and we look forward to talking to you after the end of the year. Thank you.

This concludes today's conference call. You may now disconnect.