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Executives

Julie M. Howard - Chief Executive Officer and Director

Thomas A. Nardi - Chief Financial Officer and Executive Vice President

Lee A. Spirer - Executive Vice President and Global Business Leader

Analysts

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Stephen Sheldon

David Gold - Sidoti & Company, LLC

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

Randle G. Reece - Avondale Partners, LLC, Research Division

Patrick C. Wang - Robert W. Baird & Co. Incorporated, Research Division

Navigant Consulting (NCI) Q4 2012 Earnings Call February 14, 2013 10:00 AM ET

Operator

Good morning, and welcome to Navigant’s Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, please disconnect at this time.

I would like to introduce today's speaker Ms. Julie Howard, Chief Executive Officer of Navigant. Ms. Howard, you may begin.

Julie M. Howard

Thank you. Good morning, everyone. With me today in Chicago is Tom Nardi, along with several other members of the corporate team. I am pleased to also have Lee Spirer, on the call for the first time. As you know, Lee joined Navigant as our Global Business Leader in November of this past year. He oversees our practice strategies and our execution and has profit and loss responsibility for all of the practices. Lee has assimilated quickly with our people and our businesses, and is providing a great pair of fresh eyes and new thinking to many of our issues. It is great to have him onboard. Lee will be available to take questions during Q&A.

I'd also like to recognize Tom Nardi today. It's quite possible that this will be Tom's last call with us, and he has been extraordinary CFO. I thank you for your service, Tom. And to all of those of you that are on the call, feel free to run him hard today in Q&A.

Thomas A. Nardi

Thanks, Julie.

Julie M. Howard

Before we proceed, I'd like to point out to all of you the disclosure at the end of our earnings release for information about any forward-looking statements that may be made or discussed on the call. We have posted our fourth quarter and full year 2002 (sic) earnings release on our website. Please review this information, along with the company's SEC filings, for a disclosure of factors that may impact subjects that we discuss this morning. Lastly, we'll all be discussing one or more non-GAAP financial measures. Please review our earnings release for all of the disclosures required by the SEC, including reconciliations to the most comparable GAAP measures.

As you saw in this morning's press release, Navigant finished the year with a very strong fourth quarter. We delivered record quarterly revenues, up 14% over fourth quarter 2011, and realized much improved EBITDA margin levels, 17% plus, on an adjusted EBITDA basis for the fourth quarter. Importantly, about 70% of our fourth quarter RBR growth was organic. For the full year, RBR was up nearly 7%, also mostly organic, and EBITDA adjusted was up 11% year-over-year, and earnings per share adjusted, totaled $0.98, which was up 17% over 2011. All of our financial outcomes were nicely in line with our communicated targets.

Our employee retention levels are also at a near record-high and that was clearly reflected in our ability to drive organic growth in a low growth economic environment this year. Overall, we achieved very strong results in 2012, and I want to commend our professionals for delivering quality client service and maintaining a laser-like focus on the market, while we went through some significant changes in leadership, strategy, organizational structure and culture this past year. Thank you to all of our professionals.

You've heard me discuss the 3 key elements of our strategy: to perform, to bank, and to innovate simultaneously. Our 2012 results demonstrate significant progress on all 3 categories. In the perform category, it's reflected in our ability to provide preeminent services in critical markets, while maximizing organic growth opportunity this past year.

Turning to our bank initiative. The news is also really good. We ended the year with a very strong balance sheet, carrying a comfortable debt level, of about 1.3x EBITDA. And these figures include significant investments made during the year in talent acquisition and retention, in capital investments, in growth initiatives and in repurchasing about 3% of our outstanding shares. I'm really pleased by our efforts to strengthen our financial foundation during the year and look forward to continued progress in 2013.

We're also making progress in growing our Technology, Data & Process service offerings, which collectively make up over 10% of our revenue across our 4 business segments. RBR from these offerings grew 60 -- over 64%, over 2011, and remain a key element in our 2013 outlook. We also expect increased contributions from a number of product rollouts that took development time and investment in 2012, for example, FACTA FIND, legal resource platform and DecisionPoint to name a few. In addition, our Innovation Development Council has identified opportunities and actions to enhance our internal catalysts of innovation. We expect to see several investment alternatives, with an eye toward maintaining close ties to 3 of our key industries: the energy; healthcare; and financial services sectors. And we'll continue to share more details on innovation as we progress our investment thesis throughout the year.

Turning to our existing businesses. Every segment reported year-over-year growth in RBR, total revenues and segment operating profit in the fourth quarter of 2012. Despite continued choppy market conditions, our DI&E segment delivered year-over-year growth and improved margin, as we continue to benefit from sizable ongoing engagements in the credit crisis arena, strong international arbitration demand, and increasing activity and tax controversy work. In addition, our legal technology solutions business grew RBR 30% over 2011, as companies experienced an increased need to manage e-Discovery spend.

We also benefited from increased contributions from our global construction practice, as global infrastructure spend remained strong and resulting claims are growing. And lastly, our economics team delivered a strong fourth quarter, despite the disruption that can occur when integrating a new business and team into the fold.

Turning to our Financial, Risk and Compliance segment. They continue to deliver outstanding performance throughout the year, led by 4 large mortgage servicing review engagements that we have commented on several times over the past year and we'll talk a little bit more in a minute. We do expect stronger returns in 2013 in the anti-money laundering and anti-bribery and corruption services after declining in 2012 due to the wind down of large engagements and developmental focus on new products and services.

Our Healthcare segment had a very strong year with RBR, topping $150 million, up 12% over 2011. The breadth and depth of our service offerings and combined expertise in the provider/payer/physician and Life Sciences market gives us a truly unique strategic asset among our competitive consulting firms, where we are now the fourth largest healthcare consulting practice in the U.S.

And lastly, our Energy segment had another very solid year with 2012 RBR up 5% over 2011. This group ended the year on a strong note with record fourth-quarter revenues. Demand for Navigant's energy efficiency expertise and the expansion of market research and subscription offerings in 2012 continued to drive our revenue growth. Looking ahead, we anticipate that demand for energy efficiency services will continue to build, and with renewed focus from the current administration on energy efficiency, renewables and environmental issues, we anticipate this good demand environment to continue.

And on that note, I'd like you to turn to our 2013 outlook. Embedded in our 2013 plan is continued strong activity in our faster growing practice areas including Healthcare, Energy and any technology-enabled solutions in all of our businesses. We expect solid contribution and more modest growth from our general disputes businesses, and growing contributions from our Global Investigations and Compliance services in the areas, as I mentioned, of AML and ABC.

As previously communicated, we are also very focused on continued actions to improve our EBITDA margins, as we strive to achieve an adjusted EBITDA margin of 18% by 2014. While we feel really good about our 2013 growth potential and the market conditions, 2 developments emerged over the past 45 days that have caused us to be a bit more conservative with our outlook for 2013. First, as announced a couple of weeks ago, we sold a portion of our Economics practice to Charles River. This is really a positive development in almost all aspects. We realized $15 million of cash from the transaction. We have recorded a $2 million pretax gain in the fourth -- in the first quarter, and we have also eliminated any further uncertainty over those previously announced departures that were to occur at the end of April, early May of this year. While we will lose a few months of revenue that we were anticipating in our outlook for this year, we do expect our revenues from the acquisition of AFC that we made in December of 2012 to make up for some of that loss.

The second development, which has been widely recorded and more notable, and is of a larger impact, are the settlements reached between the Office of the Comptroller of the Currency and the Federal Reserve Board with the majority of the mortgage servicers who were subject to regulatory consent orders. As you recall, the consent orders required the mortgage servicers to engage independent consulting firms to conduct a comprehensive review of their foreclosure practices. These settlements, which were negotiated quickly in early 2013 concluded the need to complete the foreclosure reviews as mandated under the consent orders. Throughout 2012, we discussed how these mortgage review engagements were the primary component driving the growth in our FR&C segment, and that we anticipate that they would continue to run at high levels throughout 2013. At this point however, 3 of our 4 foreclosure review engagements will conclude as a result of these settlements. As you know, this phenomenon sometimes happens in our business and it's an inherent part of our business model, and we work through it. Fortunately, we staffed a large portion of this work with project employees and contractors, which has allowed us to swiftly realign our workforce. Most of the work on these settlement engagements has or will wind down in February. However, one engagement did not settle and work for that client is expected to remain ongoing through mid-2013.

Given the impact of these 2 developments, we've had to reevaluate our initial outlook for 2013 and adjust our estimates accordingly. Let me say that we still have high expectations for '13, and we expect to carry forward the strong momentum that we have realized in 2012. Our long-term targets remain the same, and our fourth quarter 2012 performance, I believe, demonstrates that we have the capacity to scale up business and to realize our targeted margin goals as we work to refill the pipeline early in the year. Our focus at this junction will be to push forward to replace the loss of these anticipated revenues and to achieve the high end of our guidance range.

Okay, so with that, I'm going to turn the call over to Tom for more specifics on our financials and our outlook.

Thomas A. Nardi

Okay, thank you, Julie. Good morning, everyone. At NIST, as Julie said, Navigant delivered an exceptional fourth quarter, capping off a strong year. In 2012, we achieved what we set out to do from a financial standpoint. Mid to upper single-digit, mostly organic growth in revenues, double-digit growth in adjusted EBITDA and earnings per share, along with strong cash flow and a solid balance sheet.

Fourth quarter 2012 RBR grew 14% over the prior year, and about 10% of that -- or 70% was organic growth. And coupled with our continued focus on cost management, helped drive our highest margins in some time. Fourth quarter adjusted EBITDA margins totaled almost $34 million or 17% of RBR. This is up sharply from 15% a year ago. Earnings per share on an adjusted basis totaled $0.31 for the fourth quarter, up 41% over the prior year. For the full year, RBR was up just shy of 7% to $743 million. This is up, and this is after being up 12% last year, and adjusted EBITDA was up 11% to $112 million.

Consistent with the fourth quarter, about 2/3 of that growth was organically driven. Success fees for the year totaled about $11 million, down sharply from last year's $18 million, so not a big driver of year-over-year growth. And adjusted earnings per share totaled $0.98 a share, up 16.7% over the prior year. We collected a tremendous amount of cash in December, over $100 million, which drove our year-end DSO down to 72 days. And I'll have more to say about our balance sheet in a minute.

Let me provide a little more color on the fourth quarter results. Fourth quarter utilization met expectations and hit a strong 75% on an 1,850 hour basis. Up slightly from both 74% in the fourth quarter last year, and even up sequentially from 73% in the third quarter. As Julie said, but it's worth repeating, every segment reported both sequential and year-over-year growth in RBR, total revenues and segment operating profit. Success fees totaled only $1.6 million in the fourth quarter, compared to $3.6 million in a year ago's fourth quarter.

During the fourth quarter, we employed approximately 2,000 consultants, up about 100 or 5.5% over 2011 levels. Julie commented on our top line performance for each segment in her remarks, so let me now turn to a review of our operating margins. In the fourth quarter, segment operating profit totaled $74 million, an almost 18% increase over 2011's Q4. And as a percent of RBR, segment operating profit totaled 38%, which was 140 basis points higher than year-ago levels. In fact, they were the highest quarterly margins in over 2 years, and that's despite higher severance and lower success fees. Notably, both our Energy and Healthcare segments delivered strong quarterly operating margins, up 38%, their highest of the year. We indicated last quarter that we had confidence in our margin improvement plans, and that we anticipated seeing some positive results in 2013. Our Q4 results are an encouraging sign of progress.

Capital expenditures for the year totaled $20 million in line with updated expectations communicated last quarter. Most of the increase in 2012 was due to investments in our IT infrastructure, which help support our growing technology practice.

Turning to the balance sheet. The news could not be much better. As I mentioned earlier, we enjoyed record year-end cash collections, driving DSO down and resulting in $134 million of bank debt at December 31, which was about 1.25x EBITDA. Debt as a percent of capitalization at December 31, stood at 19%, the lowest year-end number since 2007. During the quarter, we repurchased 582,000 shares, the most of any quarter since this program began, at an average price of $10.66. For the full year, we repurchased approximately 1.6 million shares at a cost of $19 million. This represented about 1/3 of our 2012 free cash flow, a substantial allocation reflecting our commitment to enhancing shareholder value. Our returns on capital continue to improve as well, with free cash flow, return on invested capital, at a solid 8.6% for 2012. And our free cash flow yield, based on our current stock price continues to approximate 10%.

Let me now turn to our outlook for 2013 and provide a few more details to support Julie's earlier comments. We expect utilization to run in the mid to upper 70s, for the firm as a whole, up 1 point or 2 from 2012 levels. We're planning for relatively flat bill rates and we expect to add about 5% to 7%, or around 100 to 135 additional consulting FTEs. As Julie mentioned, we continue to be enthusiastic about growth prospects for our Healthcare and Energy segments, as well as our technology-enabled businesses. Expect double-digit RBR growth from all 3, with most of the, I just mentioned, employee growth expected from these business units.

Let me point out that over 2/3 of our 2013 growth, expected from Healthcare and Energy, are expected to be organic. We anticipate the Dispute segment to remain relatively flat. However, upsides exists should litigation activity pick up. And we anticipate that our Economics practice RBR will be relatively consistent with 2012, with full year contributions from the late 2012 acquisition of AFE offsetting most of the impact from the recently announced sale of a portion of our Economics practice. At the same time, as Julie discussed earlier, we face some headwinds from the recently publicized foreclosure review settlements. While our teams are hard at work to replace this business, this will take some time and our 2013 outlook assumes lower FR&C segment RBR compared to 2012.

We again expect an effective tax rate of around 42%, and success fees are anticipated to be in the $5 million to $10 million range, lower than recent years due to a weaker restructuring outlook. Depreciation and amortization combined are expected to be up about 10% compared to 2012. Based on this outlook, we again expect to realize strong free cash flow in the range of $60 million to $70 million. This excludes the $16 million pretax proceeds from the Economics transaction.

We continue to believe that allocating a substantial portion of our free cash flow to repurchase shares is a good use for our capital. Especially in light of the positive outlook for our business, our strong and improving balance sheet, our low cost of borrowing, and what we believe is an attractive valuation of our stock. As a result, we plan to increase our share repurchase program in 2013 and are targeting to repurchase of as much as 2.5 million shares, depending on business performance and market conditions. Again, we repurchased 1.6 million shares in 2012. Based on this outlook for cash flow, we estimate that our year-end 2013 debt level will be in $110 million to $125 million range, about 1x projected 2013 EBITDA.

Let me wrap up my remarks, turn our -- to our estimated ranges for 2013, that you saw in this morning's earnings release. We're targeting RBR in the $740 million to $800 million range. The midpoint reflects growth of about 3.5%. Total revenues are estimated to be in the $820 million to $880 million range. And our outlook for EBITDA adjusted is in the range of $115 million to $125 million. Midpoint reflects about 7% growth and a margin of 15.5% to 16%. Lastly, adjusted earnings per share is estimated to be in the range of $0.95 to $1.10 per share, up about 4.5% over 2012 at the midpoint.

We will aim for the higher end of these ranges, as we always do. But it will take some time for our teams that were deployed on the mortgage servicing review to get back in the market and rebuild their pipeline. We are optimistic that they will do so. I'd like to briefly comment on our first quarter outlook. As I've reminded you in the past, the first quarter absorbs higher employee benefit costs due to FICA 401(K) match and so forth. This can have a $0.03 to $0.05 a share impact on a sequential basis. In addition, first quarter 2013 revenues from our mortgage servicing review engagements are likely to be lower than their Q4 run rates, as well revenues for the entire FR&C segment. On a positive note, we expect to record a $1.7 million pretax gain on the Economics transaction in the first quarter.

And with that, operator, we'll open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from Tobey Sommer with SunTrust.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Julie, I wanted to see if you could give us some more color on the technology-enabled services, what kind of margin that they provide the company, their spread among the reporting segments. And what ultimately you think that can do to the consolidated businesses' profitability?

Julie M. Howard

It is -- Tobey, it is spread amongst the businesses. A majority of it, though, would probably be -- a preponderance of it would be in our DI&E segment, where we have our technology solutions business focused on the e-Discovery market. They enjoy high margins, and we would expect that, that will continue over time. Those are different than some of the other services that we provide, for example, in Energy, our Technology and Data is more around market-research and subscription versus in Healthcare, it's a little different. But it's certainly a benefit to our margin plans, although it has not been a significant driver of that in 2012.

Thomas A. Nardi

Yes, about 75% of that revenue was in the DI&E segment, Tobey, and the margins there are strong -- stronger than the other parts of DI&E, and as Julie said, in the other parts of the company, that margins are a little lower.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

From a proportional standpoint, I'm not asking for a specific number, but maybe a range. Are they north of 20% EBITDA margins, north of 30%, kind of just your perspective would be great.

Thomas A. Nardi

I'm looking at it more on a gross margin basis, and it's higher than the rest of the segment. I don't think I want to get any more specific than that at this point.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Fair enough. You cited a weaker restructuring outlook, could you give us some color on that? And I didn't exactly catch the specific expectation for success fees in '13 versus '12.

Thomas A. Nardi

Yes, $5 million to $10 million for '13. '12 was down from $11 million and maybe...

Julie M. Howard

Yes, I mean, Tobey, I don't think -- it's fairly well known that the restructuring market has been somewhat depressed, if you will, for the last couple of years. I think other firms have probably experienced a shortfall sooner than we did. As you know, we have a small restructuring business within Navigant. It is within our Financial, Risk and Compliance segment, and we expect that to be down this year, very consistent with the marketplace.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

So you think that you just felt the decline a little bit after other players? Is that what you think?

Julie M. Howard

I think we did and a lot of that has to do with our restructuring practice is very Healthcare-oriented, and we do a lot of Healthcare restructuring, so I don't think we felt the decline as early as other firms did. But it's not significant, but we're down modestly in 2013, we expect to be.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

What kind of customers within Healthcare do you primarily serve in the restructuring business?

Julie M. Howard

Providers.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Providers. Okay. And then my last question, I'll get back in the queue. Is the $2.5 million of targeted share repurchase in '13 already embedded in the guidance?

Thomas A. Nardi

I said up to $2.5 million, Tobey. And somewhere between this year's number of $1.6 million and that number is embedded in the guidance. We're not embedding the full $2.5 million at this point.

Operator

Our next question comes from Tim McHugh with William Blair.

Stephen Sheldon

This is Stephen Sheldon in for Tim this morning. First, I just wanted to ask more about the impact of the drop-off and mortgage servicing review projects. How big of a headwind is that going to be going forward, and could you quantify that? Also, you mentioned that a decent amount of that work is being done by our project employees and contractors, but for the internal consultants, how are you progressing in finding new projects to replace those?

Julie M. Howard

So, yes, I mean it is -- as you can imagine, you're preparing your outlook and then suddenly, you have these settlements that literally happened on the first day of January or thereabouts. So certainly, it's a headwind that we are working very hard to replace, including within that team and in other areas of the business. And it's not unusual. We have certainly had large engagements in the organization in the past. It's just in this situation that it's very clear and public and we knew about it early on in the year. We did staff a significant portion of those jobs with a flexible workforce. So we've had -- we've adjusted our workforce strategies. All of our permanent employees are continuing to work on these engagements as they wind down, and we are staffing accordingly in other areas of the firm. Relative to size, Tom, do you want to...

Thomas A. Nardi

Yes, it's -- we think that our FR&C segment will be down about 20% next year, based on our current view of replacing that revenue. So that gives you some indication of the size of the drop-off.

Stephen Sheldon

Well, then, great. And then your guidance assumes some meaningful adjusted EBITDA margin expansion in 2013. I was just curious, how much of that is being driven by the office consolidations and headcount adjustments made recently?

Julie M. Howard

I'm not sure what you're talking about, relative to office consolidation.

Thomas A. Nardi

Yes, the office consolidation was more in connection with an acquisition where we acquired a lease, so it's not tied to that at all. We've been talking about the measures that we've been taking all year. It's carefully managing our workforce. It's dropping some less profitable practice areas or service lines. It's keeping G&A flat, that by itself is our expectation for next year and that would help drive some margin improvement.

Julie M. Howard

It's improving the leverage in our business models, which we've done over the course of the year. It's a number of different levers, but very little impact from any office maneuvers.

Thomas A. Nardi

We do have expectations to reduce our real estate costs throughout the firm. We've been working on that for some time, and I think we're going to see some meaningful progress on that in 2013.

Stephen Sheldon

Okay. And then lastly, I just want to see if you have any update on the CFO search?

Julie M. Howard

The search is progressing very nicely, and as -- this is one of the reasons I said thank you to Tom on this call because we plan to have a new CFO in place, probably before the quarter is out. And Tom is itching to get on to his 4 days of golf and beach and whatever else he's going to do. So we should be announcing something soon.

Operator

Next in queue, we have David Gold with Sidoti.

David Gold - Sidoti & Company, LLC

First, just the gain from the practice sale, is that embedded in the guidance?

Thomas A. Nardi

We would normally strip that out, David. So, no, it's not.

David Gold - Sidoti & Company, LLC

Okay, perfect. And that was the easy one, and then the harder one, it's presumably shouldn't be that hard. Is -- I was interested to learn at legal tech about a more, let's say, aggressive focus that you have on the technology side of litigation, and about some hiring there. And I was curious if you can elaborate a little bit and just give some color on some plans on that side of the world, presumably should be a decent growth driver and it seems like more attention is being paid there by Navigant than I had realized. So I was curious if you could comment and just give us some color.

Julie M. Howard

Yes, David, we would be happy to, and I think this is a good time to introduce Lee. Lee has been -- he has this expertise and experience in his background and has spent a lot of time with the team since he joined. So Lee, you want to take that?

Lee A. Spirer

Sure, David. We do see this space as a growing market for us. The market, overall, in legal technology is growing and we want to participate in it. We've got a growing business in core e-Discovery. We also have some great skills in structured data discovery, which comes to play much more in financial services where we're very strong, and we see the combination of those 2 really driving growth for us. They have launched it or have soft launched it. Legal tech was around an e-Discovery litigation case management platform that we view as a way for our corporate clients to be able to get control of all their e-Discovery spend across all their matters. And we see, obviously, a pretty good connection if they're going to use that as a management platform, to want to use our e-Discovery services as we're seamlessly integrated. So overall, this is going to be a focus for us. We think it fits really well with our Disputes & Investigations business because we are in the general counsel's office, we're in the law firms. And they have the need for these technology solutions in order to deliver on their requirements of cases.

David Gold - Sidoti & Company, LLC

Terrific. And is that an area that when we talk about, the FTE growth this year, is that high on your list of focus?

Julie M. Howard

Yes, it is and that was part of the driver of our FTE headcount growth last year, as well.

Operator

Our next question comes from George Sutton with Craig-Hallum.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

This is Jason on the call for George. Just wondering in regards to your staffing plans for 2013, maybe if you can just provide a little bit more color on your expectations for hiring by segment, and then anything on the junior and senior mix?

Thomas A. Nardi

Well, I think I said we expect to hire 100 to 130 employees. Most of that will be in Technology, Healthcare or Energy, with a little bit splattered around the rest of the firm. And it shouldn't be any different than our typical mix. As we're trying to improve our leverage, it will be more tilted obviously to junior hiring than senior hiring.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

Okay, and then in regards to that on the number. The results in the quarter reflected a nice improvement in gross margin, but G&A ticked up a little bit higher than we expected. So wondering if there was a shift in cost between those line items, or if we still expect to see more G&A leverage in 2013?

Julie M. Howard

It's -- our G&A in the fourth quarter just ticked up a little bit because we have more severance in that area as we restructured or reengineered some of our departments.

Thomas A. Nardi

We also had some search firm costs related to our search for Lee and my replacement as well. So that drove some of the sequential boost there over Q3, otherwise...

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

Okay, we'll go back to more normal levels next year?

Thomas A. Nardi

Yes, well, actually, as a percent of RBR, you should see those going down as we're working hard to hold G&A costs overall flat to 2012 levels.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

Okay, and then any updates to your CapEx outlook for next year?

Thomas A. Nardi

Yes, we expect CapEx to be in the $15 million to $20 million range again, spread among IT growth capital, tied to our technology business, our normal IT maintenance capital and some targeted toward real estate investment, as we have ongoing leasehold improvement issues.

Operator

Our next question comes from Randy Reece with Avondale Partners.

Randle G. Reece - Avondale Partners, LLC, Research Division

I was wondering if you could give us more detail on the growth in 2012 and your expectations in '13 for the sub-practices of Healthcare.

Julie M. Howard

We've -- Randy, we've never actually broken it down, relative to our sub-practices and frankly, as I mentioned in my commentary, they all work pretty collaboratively together between -- I mean, in the Healthcare practice, I have said this before, Healthcare is the predominant -- I'm sorry, provider is the predominant sub-practice, but we do a number of different things there from strategy to revenue cycle management to implementation, et cetera. That's the largest piece of the Healthcare business. All of them are growing and contributing nicely, including Life Sciences, including payers, so that's about most that I want to say on that.

Randle G. Reece - Avondale Partners, LLC, Research Division

When do you expect the outcomes consulting practice to start to become any material driver?

Julie M. Howard

Are you talking about physician? What do you mean by the outcomes practice?

Randle G. Reece - Avondale Partners, LLC, Research Division

Quality of care, probably an emerging practice for everybody, but it's going to be increasingly important in future years?

Julie M. Howard

It is an emerging practice and although we don't -- we, personally, at Navigant don't call it out as a separate practice. It's already work that we are focused on and it's embedded in the results of our provider segment -- or sub-practice right now.

Randle G. Reece - Avondale Partners, LLC, Research Division

Okay, and also, when we spoke recently, you'd talked about a number of strategies that you'd taken to improve the company's operating leverage, going forward. I was wondering how many of those were visible in the fourth quarter results, and how will they affect, let's just say, the sequential trends in 2013?

Thomas A. Nardi

Well, I think a lot of them were evidenced. I think we grew revenues from Q3 to Q4, $15 million or so, and cost of services were basically flat. So I think that reflects all the practices are very focused on managing their costs, managing their margins. And that will help drive momentum into 2013. Keep in mind, though, on a sequential basis, we do have this impact where the benefit costs and things, they spike in the first quarter. So not likely to top the fourth quarter mark -- or hit the fourth quarter margins in Q1, but we do expect, as our guidance indicated, 15% to 16% EBITDA margins for the year, which would be another piece of, say, improvement from where we've been over the past couple of years.

Operator

Our next question comes from Dan Leben with Robert Baird.

Patrick C. Wang - Robert W. Baird & Co. Incorporated, Research Division

This is Patrick Wang for Dan Leben this morning. Can you comment on demand consistency within DI&E? I know we saw some inconsistent quarters during 2012, but do you see stability going forward?

Julie M. Howard

It's an interesting question, and as I mentioned in my comments, it's been a really choppy environment and I think it will probably remain so, in kind of the core disputes areas. Certainly, we're seeing law firms are rethinking how they handle investigations. In some cases, that's been taken internal, so that's impacted our business a little bit. Certain areas of complex commercial litigation are more important right now in this environment than others. We have clearly been the leader, I think, in financial services litigation and really benefited. But as I mentioned before, patent litigation is a very strong market right now. That's an area of expertise for us. So you don't always benefit from everything. I think it's safe to say that it's -- and this is why we have built in what we consider just kind of a very steady, stable expectation for that business, going forward, because I think they'll be ups and downs and ins and outs. So it's not a business that we expect to be significantly high growth in the 2013 timeframe.

Patrick C. Wang - Robert W. Baird & Co. Incorporated, Research Division

Okay, and then were there any signs of a rebound in the forensic investigations area?

Julie M. Howard

Not really, no. I mean, that remains -- we certainly have a steady business in forensic accounting investigations but not as significant as it was in the 2007, '08 -- '06, '07, '08, '09 timeframe. So we remain cautiously optimistic that, that will return with our new SEC enforcement and new SEC Chairman.

Patrick C. Wang - Robert W. Baird & Co. Incorporated, Research Division

Okay, got you. And then last question for me. So the margin initiative, that appears to have worked quite well during the quarter, and the margins were up overall with Healthcare margin up significantly. But it looks like that margins in Energy were roughly flat, slightly down year-over-year, was there anything different in Energy, or is this something I don't need to look at this much?

Thomas A. Nardi

Well, Energy had a little bit softer first half of the year in terms of revenues, and we added some people in connection with one of the acquisitions that took a little while to ramp. But Energy, historically, has been a high margin practice. They got back to where they typically would run in the fourth quarter and we expect margin improvement from both Energy and Healthcare going forward in 2013.

Julie M. Howard

Yes, one other thing I would add to that is we made a small acquisition in the summer, Pike Research, which is our market research and subscription services business. And we invested heavily in the growth of that business over the second half, which impacted the margin. So that put a little drag on the Energy practice.

Operator

This concludes today's question-and-answer session. I would now like to hand back to Julie Howard for closing remarks.

Julie M. Howard

I think that I don't have anything further to say. Thank you for joining the call today. We look forward to seeing all of you at the Baird Conference next week.

Operator

This concludes today's conference. You may disconnect at this time. Thank you.

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