FTI Consulting Inc (FCN) 2007 Q2 法說會逐字稿

Good day, and welcome to the FTI Consulting's second quarter 2007 earnings call. As a reminder, today's call is being recorded. (OPERATOR INSTRUCTIONS.)

For opening remarks and introductions, I would like to turn the call over to Julie Prozeller. Please go ahead.

Good morning. By now, you should have received a copy of the Company's second quarter 2007 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 today for today's call are Jack Dunn, President and Chief Executive Officer, Dennis Shaughnessy, Chairman, Dom DiNapoli, Executive Vice President and Chief Operating Officer, Ted Pincus, Co-Chief Financial Officer, and Jorge Celaya, Co-Chief Financial Officer. Management will begin with formal remarks, after which they will take your questions.

Before I begin, we'd like to remind everyone that this conference call may be -- 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 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 yearend 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 & Exchange Commission.

I would now like to turn the call over to Jack Dunn, President & CEO of FTI.

Thank you, Julie. Good morning to everyone, and thank you for joining us on our 2007 second quarter conference call.

This quarter was a remarkable period for our Company. Our excellent performance is a testament to our longstanding core value of working with our clients to anticipate their needs anywhere and at any time around the globe and then meeting them with the very best people, products, and services in the industry. It is a validation of our belief that a global platform is critical in today's environment and provides us with a significant advantage in serving the world's biggest corporations, law firms, and financial institutions.

Finally, it is a tribute to our people, to the intellectual capital and thought leadership that has come together under one banner. At the end of the day, it is not bulk that clients are interested in, it is the best. The gold standard, as our Chairman Dennis Shaughnessy likes to say, and I think that our performance in this quarter underscores not just a broad global platform of complementary and countercyclical services that are the best, but an evolving Company culture and passion about serving clients that is, as I've said, truly remarkable.

We believe we have a very sound game plan, and during the second quarter we've focused on rigorous execution of our strategic goals in that plan. We placed particular emphasis on international opportunities. We pursued our overseas expansion plan through a number of initiatives, including the launch of our European restructuring business, the acquisition of [Grabitov] in Colombia, and the opening of our office in Mexico City further enhancing our presence in the Latin American work. The acquisition of Sante bolstered our London based healthcare practice, and we initiated our first presence in Spain with the opening of our office in Madrid.

In addition, we continued to build value in our technology practice, where our leading reputation, innovative products, and geographical reach have begun to provide evidence of a commanding presence in this rapidly expanding work, further differentiating our practice from the competition. Finally, we took advantage of the strength of our business to make strategic, opportunistic investments in our brand positioning, marketing, and certain other areas, all of which will enhance our ability to grow.

From a financial perspective, we were very pleased, though not complacent, with our results during the quarter. Revenues rose 50% to $239.7 million from $159.8 million last year, reflecting growth in all of our segments and the contribution from every one of our acquisitions. Organic growth in the quarter was a robust 18.2%.

EBITDA rose 48.3% to $50.7 million or 21.1% of revenues from $34.2 million or 21.4% of revenues last year. As we mentioned in the press release, during the quarter we reclassified a portion of our senior managing director retention program, interest related to forgiveness of loans, from the interest line in our income statement into operating expense and allocated it to the different segments. This had an impact on EBITDA in the quarter of about $1.4 million or about 50 basis points on the EBITDA margin, but since interest expense was reduced by the same amount, it was truly just a wash and thus had no impact on either net income or EPS.

During the quarter we also saw the results of month long efforts to review our tax position in light of our recent increased global presence. Lord knows that at 46.9% last year we may have been the world's leading taxpayer. We completed a thorough analysis in the second quarter of our tax position and took advantage of the increased international mix of our [profits] with lower tax rates in some of our regions.

Given the global mix and our financial outlook, we estimate that 40.5% is the appropriate blended tax rate for our business going forward, an improvement from 44% that we have been using. This will have a retroactive affect including even a small benefit from the fourth quarter last year, with a catch-up in the second quarter to bring our historical rate in line with the current rate. This brought our second quarter tax rate to a notional 33.3% providing a onetime benefit after the fees and expenses of analysis and tax planning to about $0.07 per share.

Going forward, based on our current guidance, we estimate that our new tax rate will save us approximately $0.03 per share per quarter in the remainder of '07, obviously, this is a function of mix of business and profitability and will grow or decrease as we go forward.

For the quarter our EPS rose 65.6% to $0.53 from $0.32 in the period a year ago. This reflects strong performance of our operations, as well as the tax benefits described above. This was accomplished despite a 5% increase in our diluted shares outstanding from the beginning of the year, costing us about $0.025 in the quarter and stemming mainly from the increase in our stock price and its impact on equity based securities which are calculated on the [Treasury] method, such as options in our convertible debt.

In short, our revenues, EBITDA, and EPS were all all-time records for the business. Cash flow from operations was $9.4 million in the quarter compared to $7.8 million a year ago, and we utilized our cash to continue investing in our business, enhancing shareholder value, repurchasing 500,000 shares of FTI during the quarter. This leaves us about $32 million under our current share buyback authorization.

We also remain committed to cash collection efforts during the period, and DSOs came in at 84% in the second quarter compared to 92 days seen a year ago.

We've always been committed to growing the business from a position of financial strength, and that commitment continued in the second quarter. Long-term debt net of cash at June 30 was $535 million and continues to be a comfortable 2.5 times the midpoint of our -- based on the midpoint of our 2007 EBITDA guidance.

On the employment front, attrition was a healthy and anticipated annualized 16% for the quarter, and I would note that since the beginning of the year over 200 people have joined FTI, some of them the most senior and well respected professionals in their respective fields, and all of them welcome additions to the FTI family.

Now, for the segments. Technology as we have come to expect and project had a very good quarter. Revenue was $37.4 million, 28.6% higher than a year ago from continued strong demand for software and hosting service. EBITDA was $14.2 million, up from $12 million last year. The EBITDA margin rebounded to 38% from 32.1% in the first quarter as we then predicted, and its outlook remained strong for the remainder of the year.

Technology is seeing big global projects, it's developing quite a niche in the antitrust area, and the completion of the UK technology build out has done nothing but provide us with a significant competitive advantage for global projects. As I've said, the outlook for this segment is very, very good.

FD, our strategic and financial communications segment, had another outstanding quarter, reporting revenue of $42 million and EBITDA of $11 million, equal to 26.1% of its revenue. FD's results benefitted from active capital markets around the globe, both in terms of IPOs in New York, London, and around the world, and M&A where they continue to work on a number of high profile transactions, such as the Chicago Board of Trade, ABN AMRO, and Ford. FD was ranked number one in the European M&A (inaudible), and that's getting to be a very comfortable habit for them.

Momentum in economic consulting also continued strong in the second quarter, with a 23.5% increase in revenue to $44 million, up from $35.6 million last year. The segment was a beneficiary of an active M&A environment, with major assignments in telecom, media, and food services.

We continue, also, to be the leader in the financial (inaudible) area where we are near capacity. Our work there includes not only security cases but the initial phase of litigation that we're seeing in the [options] backdating case. The segment generated EBITDA of $13.1 million, 37% higher than the $9.5 million reported last year.

Margin performance was also excellent, coming in at 29.7% of revenue, compared to 26.8% a year ago, and was driven by strong pricing and utilization, and it also reflects our unsurpassed intellectual capital in that segment. As is clear, we are actively looking for people in this segment as we're busy across all fronts on the economic consulting segment.

Corporate finance restructuring had another excellent quarter. Revenue was [$63 million], more than 26% higher than last year, which was driven by growing demand for our transaction advisory services, from private equity firms, not only domestically but also increasingly from Europe, Asia, and Latin America, as well as strong activity in the healthcare, automotive, subprime lending, homebuilding and hedge fund sectors. EBITDA for the quarter increased 65% to $16.7 million. The segment put on -- had an excellent margin of 26.4%, up from 20.3% a year ago.

Forensic and litigation consulting had a solid quarter, with revenue increasing 18% over last year to $53.3 million. Our visibility in potential cases has begun to pick-up recently in this area, as has our win rate. There still seems to be, however, a larger number of smaller matters to date. FLC's EBITDA for the quarter was $13.3 million or 24.9% of revenue compared to $13.3 million or 29.6% of revenue in the prior year.

I think this reflects several factors, including, one, that in the same quarter last year, FLC was a major beneficiary, or last year FLC was a major beneficiary of the SMD retention program, which ensures our competitive advantages and future success. However, we have to recognize there is a time delay between when the comp expense of instituting the program and our ability under renewing contracts to capture higher billing rates to offset that expense takes place. I also believe that the dynamics of the case being more of them but smaller has an impact on the profitability.

The good news is that we believe we're increasing our market share, and we do expect to have a better second half, especially driven by work in the intellectual property field, the natural restatement issues, and enterprise risk management. In addition, the Department of Justice has set, announced and instituted, stepped up enforcement and oversight in the Foreign Corrupt Practices Act area, and we expect to see activity in several major matters coming up shortly.

With regard to guidance, as you saw from our press release, we are updating our guidance for 2007 to reflect our excellent first half and what we see happening over the balance of the year. Let me discuss some of the key elements.

The most significant is the broadly based momentum in our businesses as we raise our forecast for revenue from a previous range of $904 million to $929 million to a new range of $944 million to $962 million. This is a growth of 33 to 36% over what we generated in 2006.

Our EBITDA guidance includes a couple of things worth comment. It includes the impact of the reclassification of interest in the segment results and the higher performance of the business is offsetting the additional expense, so you'll note that our guidance for margins at the segment level is on balance, unchanged.

Because of the aggressive plans for the second half for growth, we are planning to take advantage of the incremental profits and reinvest some of them back into the business to strengthen our worldwide platform. As we did in Q2 we will continue to build-out our IT infrastructure to support a global enterprise. We will continue to invest in branding and marketing opportunities as we see them to reinforce our one firm approach to the market and especially to establish FTI as the premiere brand in the marketplace. We are accelerating the integration of our international operations and building out our finance, HR, and other capabilities.

With regard to share count, for purposes of models, we are using a denominator of 43,500,000 shares compared to 41,500,000 in the original guidance that we began at the beginning of the year. This cost us, as I mentioned, about $0.025 in the second quarter and possibly up to $0.09 for the year as you compare our old and new guidance. When you take in all of that into consideration, our new guidance for EPS for the year is $1.92 to $2.00, which is an increase of 41 to 47% over 2006.

Let me close by reiterating that we are very pleased with our Company's performance in the second quarter and based on the opportunities that we currently have on our plate, as well as those that we anticipate becoming available, as many of the potentially disruptive trends in the economy come home to roost, we look forward to having an excellent year as demonstrated by raising our guidance for 2007.

Before we conclude, I'd like to take a couple moments to mention a couple things. First, I'd like to congratulate Dennis Carlton, who used to be co-head of our Lexicon Group, who about six months ago left to go to the Justice Department, who yesterday was nominated by the President to be a member of the Council of Economic Advisors. A big congratulations to Dennis on that. As we mentioned, we're particularly proud of our intellectual capital, and things like that just come home and reflect well on FTI.

I also would like to take a moment to introduce you to Jorge Celaya, who is our new Co-Chief Financial officer, who will be taking on all CFO duties when Ted Pincus retires. Jorge brings with him a phenomenal resume that includes both global business expertise and significant public company experience that will bring valuable contributions to FTI as we continue to grow the business. I'm sure that you will join me in wishing him a warm welcome, and we'll very much enjoy getting to meet him over the coming weeks and months as we get on the road.

Most important, I'd like to thank Ted Pincus for all his contributions to FTI over the years. He has seen this grow from a small company in Annapolis, Maryland to now being a multinational on the verge of having a billion dollars of revenue for the first time. I hope that as you see Ted, he will be fading away slowly, and is available for special projects and will be -- and I'm sure that you'll still have the opportunity to hear from him and see him, but I hope you will join me when you do in thanking him for all he's done for all of us who are shareholders in FTI.

With that, we'd like to take your questions.

(OPERATOR INSTRUCTIONS.)

We'll go to Arnie Ursaner with CJS Securities.

Hi, good morning.

Good morning, Arnie.

Congratulations on just a terrific quarter. One of the items, obviously, it appears you're spending more discretionary corporate expenses to grow your business, make it a better business, (inaudible), can you give us any sense of quantification of what that was in terms of the second quarter impact, and any sense of what you might be spending on a go-forward basis in the next couple of months?

Hi, Arnie. It's Dennis. Let me just try to take that in general terms. While we've estimated that we spent about a penny's worth of income in the second quarter on the beginning and implementing the tax structure, the tax planning, it's giving us the benefit that we're forecasting. We took advantage of what at best can be described as several opportunistic marketing and sales, buys, where we had the opportunity to align FTI's name with very prominent, impression generating organizations. It wasn't planned, it wasn't budgeted, but it was presented to us in obviously a quarter where we had a lot of momentum and we felt for the long-term good of the enterprise as far as building the brand, we should take advantage of them.

We have been running, as we've told everyone, we're on a one-year program from the acquisition of FD to integrate our global acquisitions into a one platform for financial reporting and general communications. We are probably about 80% through that. We expect to be totally through that by the end of September so that every one of our offshore enterprises will be on the exact same communications platforms, as well as financial platforms. Clearly during that time you have to run parallel. That can create some dual expenses in areas that you wouldn't anticipate having long term.

I think in looking forward, I think we have to recognize the fact that the Company is growing extremely rapidly, it's growing very rapidly offshore as we had hoped, and we have to make sure that we continue to support the operations in a world class fashion to deliver the services for our clients. So I think while we're hopeful you'll see some of the increase start to abate, we're just trying to be realistic that this kind of growth in the Company does demand support. We think we're putting support in in a leverageable fashion but we're not 100% through that yet.

The second question is a little more global in terms of your business model. Since the end of the quarter in the last month, month-and-a-half there's been extraordinary volatility in financing markets, (inaudible) hedge funds or private equity firms to get [debt] capital to grow, consider mergers.

One of the questions I guess I have is if you could comment on how you've seen the business evolving in the last few months and, more importantly, how you see it evolving and if there in essence becomes a shut-down of the debt markets and the ability for companies to get financing, how it could affect some of the what I would call the positive businesses, the M&A, economic consulting businesses, and alternatively when you might see it pick-up (inaudible)?

Yes. All right. That's a very good question. First, if you look at the guidance that we gave, you'll notice that we not only increased the restructuring corporate finance guidance but we also increased the spread there. And the reason we did that is because there's a storm brewing, there's no question about that, there's $11 billion worth of bridge loans that are stuck at the moment, the stock market is schizophrenic. The driver in that business, as we all know, is liquidity, and despite the fact that there's so much liquidity on the sidelines you're reaching saturation points in some of the funds and some of the hedge funds on what they can really continue to pump into highly levered deals.

So we believe that at some point that, you know, some -- we'll see the affect of that in our restructuring business, but you're starting to see the first all-day lenders start to have the same problems that the subprime people have had. So it's a question of when stock market activity and the saturation point and the schizophrenic market all come together and really have a crisis of confidence and that will, you know, you would start to see our restructuring business pick-up dramatically. At the same time, restructuring has done an exceptional job during the first half of, again, increasing its market share, working on all -- what big matters there are.

So when we look -- when -- as you build your models, when you look at corporate finance restructuring really focused -- we weren't trying to guide people gently up to the middle there, there really is an opportunity there for that to be very big, and there's also an opportunity for it just to basically replicate what it did in the first half or so, so I think that's an important thing to keep [alive]. But we do believe that more than ever the signs are starting to grow that there could be a resurgence in that marketplace. Having said that, you have both Moody's and Standard & Poor's who had an outlook at the beginning of the year that the default rates would go to 3%. They've both reduced those down to about the 2%, 2.2% level.

In terms of our M&A driven practices and other things you would think would have to do with that kind of scenario, first of all, in our economic consulting group which is somewhat dependent on M&A we're sold out for the rest of the year. We're working on transactions that are funded, they're working on corporate transactions where the things are being done with stock and with people's own internally generated resources, so we, frankly, are not only sold out in the antitrust and Department of Justice area, we're sold out in the financial side so that we have a lot of ability to pick-up any, reorient any people we have that will come off a job on other work. It's a very hot market, as I mentioned, you have the options backdating litigation starting, you have all the securities cases that are coming home to roost from the late '90s and early 2000, so that's a very healthy situation.

On the FD front, I would remind you that, you know, 60 to 70% is usually retained work there, so following the huge amount of M&A work they've had in the first half, usually they pick-up a retained client out of that kind of thing, so we think they'll have -- certainly, if M&A work falls off they wouldn't be quite as robust, but they're experiencing record levels now and they're picking up retained clients, so they should be okay.

And on the transaction support area, we would think that diligence, et cetera, would remain a fairly fundamental aspect on the deals that are getting done, but that if there were the kind of situation where liquidity really drove deals to be hung-up in the stock that we would have so much work on the restructuring side that we could clearly put the [AS] people, the transaction score people to work on those cases, because the skill sets there are absolutely fungible.

All right. Dennis, again. The one thing we should look at is that the bulk of our work that's in the economic side and in the FD side and working on deal driven business is in the corporate sector, it's not driven by the private equity or the hedge fund sector. Two perfect examples would be ABN AMRO, clearly, those are two large corporations going after ABN AMRO. There certainly is debt involved in the Royal Bank of Scotland deal because of the cash component, but then when you look at Barclay's it's predominantly a stock offering.

Another good example would be the CBOT, CME in Chicago, those are clearly equity-for-equity type of transactions, huge, so you could -- I've heard an argument being made that actually you could see deals pick-up in the corporate sector if you actually see the credit markets cool because some of the corporate sector thought that some of the premiums being paid for the company has exceeded their ability to pay a strategic premium in utilizing their stock. So I think we feel very good about that.

And then, finally, on the transaction support group, they work on both sides of the portfolios for the private equity firms and the hedge funds. They certainly are active on the front end in the acquisition of a target, but they continue to work with the firms in actually profit improvement, implementing takeover plans going forward, so it's just not a one-trick pony.

That's very, very helpful. Thank you very much.

We'll go next to Tobey Sommer with SunTrust Robinson Humphrey.

Thank you. I wanted to ask a question, in your prepared remarks, Jack, I think you mentioned that given the strong revenue performance you had in the quarter that you thought that to perhaps accelerate some investments, and I was wondering if you could describe with a little bit more color what those were and maybe to the extent you can, quantify those? Thanks.

Yes, we had given, as we'd mentioned last year we had given ourselves a year to really complete the integration of our subsidiary, FD, and its worldwide operation, so we believe that, you know, probably by the middle of September, we -- we've gone ahead and kind of fast forwarded some of that so we'll be essentially complete by that time. We have kind of fast paced our internal audit function in terms of going around and approaching our 404 compliance and our internal controls for our worldwide operation.

We have some of the investments we made included what Dennis talked about, we believe that with success breeding success we have a unique opportunity at the moment to really press forward with our brand so that getting our name associated like, for example, with our recent Forbes initiative, with some of the advertising we've done in very high profile places, we thought we would strike while the iron was hot, while we had the momentum, and make sure that we grabbed all the market share we can.

So those are the types of investments that we've made, the other investments would be the legal investment that we've made and looking at things like our tax planning and looking at our, basically our organizational structure throughout the world to facilitate further acquisitions, so we just really took a [mid] course time to do a lot of cleanup things that we needed to streamline us for, you know, battening down the hatches and really having a great second half.

Would that have -- if you had not accelerated those would -- you know, was that a meaningful impact to EPS in the quarter?

Yes, as Dennis said, we would think that it was certainly a couple of cents that we -- by accelerating those kinds of things. Yes, especially on the advertising front and on some of the redundant systems that we're running. But if you think about the importance of not only our internal communications and MIS systems, but when you think about a company like FD where its lifeblood is its ability to communicate not only with its clients but on behalf of its clients with the rest of the world.

Flipping a switch to change over their e-mail system or their internet system is not just a casual thing, you run redundant for a good period of time so that you make sure that whatever happens the client is served, and then we take our time to make sure we straighten out and have all the checks and balances that we need for that.

Thank you. And I think you mentioned in your prepared remarks that with the strong utilization and the economics consulting area that you're really looking to add people there. Can you provide any additional color on -- in the context of that what the hiring environment is like. Your attrition is very low, broadly speaking, and want to know if given the momentum you have in your business if both at junior and senior levels you're having an easier time recruiting people? Thanks.

Yes, Tony, it's Dennis. Let me try to start answering that question. The environment for us has been very good. I think that clearly at the top level, trying to bring in sort of the best of breed, we have just been very fortunate. I think people, the word of mouth through the industry and people that are outside the industry that are considering changing careers, I think has clearly been in our favor.

We have been very pleasantly surprised by the overtures to us from a wide variety of acknowledged experts and senior practitioners, so at the high end we're extremely happy, and hopefully that momentum will continue.

I think clearly as far as competing for the general professionals, we've added a net 100 people for the first half. When you calculate a 16% annualized retention rate, you've got to add more than 200 plus jobs to get to your 100, so I think we've had a good first six months in recruiting. We would expect to get our younger people coming in at about the beginning of the month of August now and through the end of this month, as we normally do, and we've had an excellent recruiting through the balance of the year.

I think we're not seeing anything that particularly constrains us except timing, and the economic side we absolutely are constrained. We would admit that. We -- we've had a wealth of riches as far as our ability to attract senior people who the financial and capital based communities want to use in these large transactions or large litigations, and we have to put underneath of them the requisite support group. And the rush of business that's come into us, you know, demands aggressive recruiting, and we're out there recruiting. So I would say to reiterate Jack's remarks, we're happy across the board, that would be the one area where we're aggressively sort of playing a little catch-up.

Thanks. One last question, and I'll get back into queue. You've mentioned a very strong and positive outlook for the technology unit for the balance of the year, just wanted to ask you is that still the unit that you would expect to have the strongest organic growth for the year?

Well, you know, FD is having a fabulous year and technology is having a fabulous year, and it's -- we have the best of all worlds. We have a great horse race going on between economic, FD, and technology. So corporate [FIN] had a fabulous first half. So it's -- I don't like to -- it's like picking among your children, I don't want to pick one, I love them all.

Fair enough. Thank you.

We'll go next to David Gold with Sidoti.

Hi, good morning.

Good morning.

Hi, David.

Just a little bit of follow-up on the hiring, particularly corporate finance. Headcount there it looks like you're up I guess 35 sequentially. I'm curious how much of that is London and how much of that is hiring sort of domestically? And there, thoughts on how aggressively in light of everything we know you'd like to ramp-up particularly that practice?

I think 18 of that -- I think Ted is telling me is London, but if you think about last year we ramped up significantly with adding a healthcare practice, which is going through --so we're kind of filling in the dance card now for those folks. As we've said before, when you have good hiring, and we did last year in that group, it takes you about, you know, when you hire senior people to come in with the transition and everything, it takes them three to six months to ramp-up, and I think we're seeing the results of really the filling in of that, and before we get ahead of ourselves let's make sure we keep that utilization where it is.

Uh-huh. Okay. And then, too, Jack, on brand building, one, how long as you look at it just now how long a plan is it? And, two, and that may not be a fair question -- and part two if you could speak to -- I know we saw the sign at Yankee Stadium and some of the other initiatives there, and I actually liked your placement.

Thanks.

There as far as getting in front of presumably the right people?

Well, the -- what we're trying to do, as you know, is focus on the corporate suite and on the directors and, as an aside, we figure that probably every financial executive in America passes through the Yankee Stadium at one time or another and probably every financial executive in Asia is watching [Matsumi] and others on television, so that is a prime space, and we also get space on the new stadium when it comes. So that was just an opportunistic buy.

I liked it.

But the -- but to answer your question, I think that, hopefully, branding never stops. We are at the tip of the iceberg. We've done studies and have begun additional studies with our clientele and our potential clientele that we are not a household name, I'm sure that's no shock to anybody on this call, so until we become that it'll be a continuing effort. We're looking at, you know, several millions of dollars of expense this year at the corporate level. We have an additional several millions in the budget, especially FLC, and restructuring where they really do go out and get clients like that as opposed to the economic consulting business, for example, which is very much a, you know, a repeat and referral business.

So we don't -- I don't think this is ever over on one shot. I think this is as we grow in our ability to spend our dollars, as we continue to integrate and our ability to get everybody under one brand, means we not only have the money to do it but we have the single brand that we can get the most bang for the buck, so that's the plan.

Yes, David, Dennis. A lot of this stuff it's hard to measure, but we can at least give you one initial measurement. We've agreed with Forbes Magazine to sponsor joint with them a series of CDO/Director of Public Company Forums. We had our first one in New York, it was very successful. We're having another one in San Francisco, and this will be an ongoing relationship with Forbes. We've been running ads with Forbes, it's basically our fishbowl ad, and clearly it links to a website that's unique to the ad.

Forbes had told us that in the first week that they were in the ad it was one of the highest hit rates they every had, so if it shows any kind of indication, at least that people are worried about governance, they're worried about linking up with the right resources to help them make risk mitigation and risk management decisions, we may be getting some traction, but, as you can imagine, it's not cheap.

Uh-huh.

That doesn't include the guy spotted on Coney Island riding the (inaudible) with his FTI hat on.

These pictures have a way of getting around; don't they? And one more, can I make Ted work for a second?

(Inaudible.)

Well, more -- Ted, I'm not sure I fully understand the shift, I mean I guess I understand the shift in interest versus comp and the forgiveness of the loans, but curious what brought that on sort of now? Were there targets or metrics that they have to hit to have these loans forgiven, or how does that work?

It was something that had been suggested to us by our auditors quite awhile ago. Not anything that they required but a suggestion. And we thought it over very carefully and came to the conclusion that it did represent more of an operating cost as compensation to people, and we decided to reflect it as such. Nothing more than that, David.

I see. So it's not a onetime, it's really a go-forward?

Oh, yes, go forward, go forward.

Yes, that's reclassification from something that we were charging interest -- David, these are on the SMD retention loans.

Uh-huh.

Where we were booking it as an interest charge and we're just simply putting it up into the segment as a direct cost of the segment in comp.

I see, I see. Okay. Yes, just wanted to be clear if that was sort of a here or gone. Terrific. Thank you, all, and, particularly, Ted, thanks for all of your help over the years.

Thank you.

Thank you, David.

We'll go next to Dan Suzuki with Merrill Lynch.

Yes, good morning.

Hi, Dan.

Hi. Just a few questions here. In terms of the UK restructuring practice, I know that just got launched. Was that a drag on utilization this quarter?

It certainly influenced it by a very small amount. In all honesty, Dan, they really came onboard sort of en masse at the beginning of May.

Uh-huh.

So they would have been there maybe roughly eight weeks out of the quarter, so maybe it was a point. I wouldn't attribute much more to it than that.

Okay. And then just another question on the hiring and recruiting, would you say that it's safe to say that the -- it was more top weighted this quarter than usual, that you're hiring more senior consultants than usual in this quarter?

I would not say that. I think we have a good mix. In fact, in a couple of cases you're lucky enough to bring in a team of people which has its own kind of leverage in place, so it definitely wasn't more top heavy, it was a nice mix.

Okay. And then where, without giving any specific numbers, where are you seeing attrition the highest across your segments?

Probably in the practices where we have the most number of young people which would be in FLC and restructuring. That's just a normal, you know, we hire people out of college, they come to us, they love it, they hate it, or they go back to business school, so that's where we would normally see it. We, as you know, we don't see very much attrition as people get seasoned here at the age of 40 or so years of age. You've kind of picked your career.

Yes, I think in the technology side clearly it's been growing so rapidly and so successful that it's been able to really not only keep the people, but it's a very exciting place to be. It's gone global on a big way now and I think it's very exciting. And economics, you know, clearly attrition is not our problem there. And FD really doesn't have a model where attrition plays very large into their number, so it would really be, as Jack said, in those two segments.

Yes, and while we're on the subject, I would be remiss if I didn't say that all of our Divisions are looking for people right now, so that (inaudible) before, I know our competitors listen to this call, so I don't want anybody to feel left out.

Okay. And last question, here, on the forensic and litigation business are you seeing the -- and forgive me if I missed this -- are you seeing the slow-down from the options investigations work wrapping up, is that impacting meaningfully?

Yes, I would think that the investigation side of those cases is pretty well wrapped up by now. As I mentioned, you're seeing the litigation phase begin to start so that we see some activity there in the economic consulting area, and a little bit in the FLC Group.

So that's part of what's driving the weakness on the margin and the top line front?

I think the margin impact is really -- they were the last group, just happened to be sequential that we rolled out the SMD program, which rolled out the end of last year. The SMD program we have, you know, has a significant impact in the beginning on margin as you burn off some of the amortization. And you're passing it on through rate increases, but as I'm sure you're aware you can't retroactively go back and increase the rates of engagements that you have, you have to basically use the increases as you burn off and add new stops.

So I would say in all honesty, Dan, that the margin hit is from our activities in finalizing FLC as the last Division that we implemented the SMD program. It's just timing. If we had done it a year ago, you know, for example, we -- the first program we put in was more than a year ago, almost two years ago, in corporate finance, and you can now start to see that their margin is expanding, even though last year they suffered the same thing, they had a hit to the margin due to the SMD program and they've been able to start to grow through it. So we view the SMD program as creative and clearly a key element of building and preserving our enterprise value going forward, but it does have a negative impact on March in the first year.

Okay. Thanks very much for the color.

We'll go next to Andrew Fones with UBS.

Yes, hi, guys. Great job. A question on corporate finance. I was just kind of looking at your guidance for the balance of the year. I think you're implying something like $58 million to $60 million per quarter on average. With kind of what you did in the first half of the year, and also the strong hiring in that Division during the second quarter, how should I think about that? Are you looking to invest there but you're not banking on seeing a pick-up just yet or are you just being kind of conservative for your guidance, would you say?

Well, I think, first of all, as we've mentioned there, the -- that's very much -- the hiring there represents a lot of looking for specific skill sets, so that we are -- we always try to be somewhat conservative in our guidance. But, as I say, there really is -- it's in a schizophrenic stage right now where they're seeing all the [minutia] of a crisis of confidence when you have deal prices where they are and starting to get hung-up, and you see the stock market doing what it's doing, but they can't ring a bell. So I think they're cautiously optimistic. You have the hiring SKU'd by the 18 people in the London area that came over, and so I think it's -- I don't -- I wouldn't put the one together with the other to judge that we're being cautious about that.

Yes, Andrew, Dennis. We're -- I mean we're busy there and clearly they had -- I mean they had a great first half, there's no, no denying it. I think we are active in the subprime world or we're active in the homebuilding world and we're active in the hedge fund world and the challenges that they're seeing. I think our caution here, if there is any, is that while we see the momentum, we read the same headlines you do, we're getting the calls ahead of the headlines often times, it does take awhile sometimes for an engagement to mature into a lot of activity, and it's tough to call these things on a quarter-by-quarter basis.

So I think Jack couldn't have been more accurate when he said we didn't just put the range out there to say, okay, here's a low and a high, and [split] the difference. It easily, you know, depending on how rapidly some of these things mature could be the low end, and easily if they mature very rapidly, could be the high end. It's not something that we have more visibility than that kind of a spread.

Okay, thanks. That's really helpful. And on this Technology Division, I saw you had some nice margin improvement there. You were at 38% in Q2, I think, and you're looking for about 36%, 36.5% for the year. As I think about that is, you know, should we expect some of the hiring that you did in the quarter to kind of [wear] our margins a little bit in the second half? Or do you think you're pretty comfortable with that kind of 38% level?

Yes, I think we're -- I don't think we're looking for expansion there. I think what happens is the, you know, it -- as with all of our Divisions we have the heavier load of human resource expenses and things in the first quarter, and we mentioned the first quarter that they had a project coming on a little slower in line and also made that investment in the facility in [Retidge]. Those things have evened out as we anticipated they would, so that that margin for the second half will give you the blended rate for the year and that's when we're very comfortable with that.

Okay, thanks. And then, finally, on strategic consulting and financial communications, I was wondering if you could just remind us there about the seasonality we should expect? I think you said in the past that the Q4 quarter tends to be much stronger depending on what happens with some success fees?

I think, Andrew, historically Q3 and Q4, you know, have been their strongest quarters, armed with the fact that we have not owned them except for one Q4, we don't have a lot of legacy experience in monitoring that, all we can do is look at the numbers, so we don't have a lot of qualitative -- I think without a doubt they benefitted from a robust deal marketplace in the first half, so they would not -- they did not budget the success that they had, they exceeded their budget, and part of that was driven by them being involved in some very, very complex deals. Now, again, I'll caveat that the vast majority of their work had nothing to do with the private equity world or hedge funds, it had to do with corporate, more corporate consolidations.

But clearly that is a icing on the cake to their retainer business. The retainer business is going extremely well. You normally have the benefits in the second half of the new retainers that you had in the first half, which is why they've had a seasonal bias, but I think we have to be a little careful this year in that we had such a pleasant experience given the deal marketplace in the first half, that the rates (inaudible) and annualize that and say that their seasonal bias towards the second half ought to yield a result higher than we're forecasting, we just don't have the experience yet to be able to do that.

Okay. Very good. Thanks. I appreciate your comments.

We'll go next to Jim Janesky with Stifel Nicolaus.

Hi. Yes, good morning.

Hi, Jim.

Hi. My first question has to do with your technology segment. You did not have this segment during the last downturn when corporate finance and restructuring was at its peak. How do you expect that segment to act or benefit from any pick-up in restructuring activity?

Well, actually, we didn't have it as a segment but we did have it as a practice, and it was, you know, we were incubating at that time and it was, you know, the promise was very visible there. Right now, what's been interesting is in addition to some of the drivers I mentioned about antitrust and the kind of the supercharge we got out of the facility in London is recently restructuring and technology has been finding a number of ways to work together. We've developed tools that help them with the financial analysis and reconstruction of databases, so several of technology's larger cases going into the second half of the year are driven by restructuring.

So typically litigation and restructuring work don't go away in those (inaudible) people, and that's, you know, that kind of dispute, that kind of [refco] matter or something like that is what drives technology. So what we would hope then and expect would be to see even bigger and bigger matters with bloodier outcomes, so I think that would bode well for the technology business.

It's become a useful tool to our restructuring people and when they're being brought into some of these complexes, especially where they're financial organizations, like hedge funds or subprime, to get a handle on the data, which tends to be spread out worldwide, you need these tools, you need these platforms, and it's a very easy cross sell and almost becoming a necessary tool for them. So we would think, you know, they would work very complementary with restructuring as restructuring tends to accelerate a little bit.

You know, and many of the larger restructurings, too, or failures, there's oftentimes we're asked to do an investigation as to the causes, and the technology professionals are integral into evaluating what the problems were by going to the e-mail searches and the database searches, as Dennis and Jack have mentioned.

Yes, so, maybe a better way to approach the question would have been to say you were incubating it during the last time period. I mean clearly it's more mature at this point, so you would expect directionally a lot more benefit from any pick-up; right?

A lot of work -- we would expect to pick, you know, to help and continue, it's a fabulous growth trend where it is, yes, absolutely.

Sure. Okay. And in the reclassification of the interest, what segment or segments did that have the most negative affect on?

It would have to be in FLC and in --

Corporate finance.

In corporate finance, because those are the two that have the most people and the most -- in fact, I think in the press release we give on -- we give the bullet points on what it was. It was forensic litigation was .4 million.

Okay.

And corporate finance was .8 million, and the others were $100,000.

That was for the quarter.

For the quarter.

Right, right. And as you move into the back half of the year, especially within forensic and litigation, how much of the pick-up that you expect in EBITDA margin has to do with just more -- the price increases catching up, as you had said, and how much is more to do with the business, itself, and what is going on that you do expect the margins to go up other than seasonality?

Well, we think that -- we know for a fact that there were several large [IP cases] that were put on hold in the second quarter due to waiting for a judge's ruling which has now come down, which would -- which should start those up. We have another, you know, we have some visibility of some larger matters that will keep a lot of people busy, so I would think that the, in effect, the price increases would probably be the smaller part of it, but the increase in business would be the larger impact of that.

Okay. That's very helpful. Thank you.

We'll go next to Scott Schneeberger with CIBC World Markets.

Hey, good morning.

Good morning.

You've given us a lot of color on restructuring, but if I could delve a little deeper, you've mentioned homebuilding, healthcare, automotive, subprime, could you kind of assess out for us what, you know, kind of in order of magnitude which is providing the most business now, and going forward kind of prioritize what you think will be driving most business in the coming quarters?

Well, automotive has been a -- no pun intended -- a driver for us for any number of years. We're a recognized expert, we just opened up the Detroit Office, so we would continue to see that as just solid blocking and tackling for us as a base of our business.

Healthcare, we really in the restructuring area, got into in the last 18 months, and we have two types of work we do there. One we do actually hands-on, turnaround work, and advisory work in the hospitals and healthcare institutes, and the other is we do also process and profit improvement plans from a strategic basis. Both of those are going very well. They're doing nothing but ramping up, so I would continue -- I would see those as solid drivers for the next 18 months or so.

I think subprime, as we have mentioned before, there seems to be a number of cases. So far, they have relatively short lives so they're interesting and they're most interesting as harbingers of what may come. And on the hedge fund area you're just seeing the ripple affects of some of the major ones we've seen that have filed for bankruptcy and the (inaudible) you're seeing have all clamped down on their ability to get your money back (inaudible). So I think we're just seeing the -- I think that could be a relatively large area for us going forward.

You know, subprime so far, I think as you would probably intuitively feel, there's very little turnaround in these mortgage companies, it's pretty much becomes a representation of the creditors and a liquidation, and I think, you know, we're certainly getting a lot of new engagements in that area but I think we need to sort of figure out how long the runway is going to be in those workouts.

The hedge fund is totally different, and I think the hedge fund area where we're being retained again now more and more frequently, as Dom said a few minutes ago, it really pulls in more than just the Restructuring Division, it pulls in the Investigative Division, as well as the Data Management Division, as you try to get your arms around what caused the declines in the hedge funds, you know, what's the asset value that can be realized for the investors and what's the potential liabilities, if any, going forward against potential security lawsuit assaults?

Thanks. And just real quick on that topic, you had a big automotive contract or event in the first quarter that you said was going to wind down in early April. Did it, in fact, wind down or was it still (inaudible) in the quarter?

It wound down. What we had advised was we had a -- you know, when you looked at annualizing the results or whatever, that we had a, you know, a significant (inaudible), so it was a discreet matter that did that.

Okay. Thanks very much.

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We'll go next to Jim Wilson, JMP Securities.

Thank you. Good morning, guys. The -- on the corporate finance side, I know you've talked a lot in the past about the leverage in that business, could you describe a little bit, even in trying to normalize it with how you reported a few years ago, in a much more robust environment how high margins can get? And do you have any -- you used to historically occasionally have participation in their success fees and deals, do you have any of those kind of structures in today's environment?

Yes, well, several years -- 2001 before the advent of our transaction with PricewaterhouseCoopers, where Dom ad his team came over, our leverage model was really in the neighborhood of one-to-two or one-to-three, it really was a very senior advisory type practice. We were advisor to the banks and financial institutions, and somebody else would typically be the heavy lifter.

So an example would be a large retailer would go in, a firm like PricewaterhouseCoopers then would go in and basically do everything the Company needed from running the call centers, to the creditors, to do all the original reconstruction on the books of records, and our folks would essentially be the reviewers of that for the secured lenders.

We believed after the 2002 cycle to the early part of 2003 that as the market reshaped that the banks will be holding very little paper going forward and that the real place to be would be the PricewaterhouseCoopers model, which we purchased, which would be to work more on the creditor side than the debtor side which requires that you have more leverage. We've adopted what we call a modified leverage model where our leverage in that division is somewhere in the neighborhood of one-to-eight to one-to-ten, and we do all that heavy lifting stuff that I mentioned.

Dom, you're the expert on this, you might want to embellish on that?

Yes, well, you know, you're comparing a period of unprecedence level of activity, so the large cases allows us to put the maximum leverage which creates the highest margin because we do obviously make more on our younger professionals than our more senior professionals. If we ever get back to an environment where the restructuring is as robust as it was in 2001 and 2002, you know, clearly there will be a margin pick-up tempered a little bit by the SMD program that we put in place and some of the incentive programs that were put in place to recruit and retain our best professionals. But certainly there would be a margin pick-up if we went back to an environment as robust as it was in the former period.

Dom, could you address also a little bit about the different areas in corporate finance where we have success fees?

We have success fees in our [Palladium] partner practice, that's our interim management practice where we'll go in usually on a retainer basis, monthly retainer, and then the success fee or completion fee is based on certain metrics or, you know, just getting -- recruiting a new CEO and hitting certain benchmarks with respect to what is success for the engagement.

We've also got success fees in our healthcare practice, particularly [Cambio] where they go and -- they'd go in and take over a hospital or medical facility and there would be points in time where they would get success fees.

We also get success fees for financings, you know, Palladium practice, to the extent we're able to help secure new financings we usually get $100,000 or $200,000 to $500,000 depending upon the size of the financing.

Yes, you also have creditors rights, we are also structured as a retainer based business then you have a success fee at the end of the project depending on what we recover for the creditors.

Yes, so that's a little bit more prevalent, less prevalent than on the Company side.

Right.

But that's certainly (inaudible) to get a lot more traction.

Yes.

Okay. And then just one other question on the strategic and financial communications side, is there a (inaudible) for the economics of related to the (inaudible) M&A activity versus basic financial relations or investor relations for new public companies?

Yes, I would think that a couple of differences. One is the -- on the M&A side or on the transaction side, they tend to be discreet projects of a short duration with very intensive work where there's a whole lot at stake, and the retainer business tends to be, you know, a monthly retainer that then is increased for them so that they come up, whether it would be an Analysts Day or it would be a particular event or something like that. So I would think that probably if you did an analysis of the projects in and of themselves you would find that the M&A type projects or the swat type projects would have a slightly different profit margin.

Okay, great. Thanks.

And having no further questions I'd like to turn the conference over to Jack Dunn for any additional or closing comments.

I'd just like to thank everyone for being with us and we look forward to speaking with you in the -- after the third quarter. So thank you very much.

This does conclude today's conference. Thank you for your participation. You many now disconnect.