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FTI Consulting (NYSE:FCN)

Q4 2012 Earnings Call

February 28, 2013 9:00 am ET

Executives

Mollie Hawkes - Assistant Vice President of Strategic Communications

Jack B. Dunn - Chief Executive Officer, President and Director

Roger D. Carlile - Chief Financial Officer and Executive Vice President

Dennis J. Shaughnessy - Executive Chairman

David G. Bannister - Executive Vice President and Chairman of the North American Region

Analysts

Timothy McHugh - William Blair & Company L.L.C., Research Division

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

William Sutherland - Northland Capital Markets, Research Division

Ato Garrett - Deutsche Bank AG, Research Division

David Gold - Sidoti & Company, LLC

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

Operator

Good day, and welcome to the FTI Consulting Fourth Quarter and Full Year 2012 Earnings Conference Call. As a reminder, today's call is being recorded. Now for opening remarks and introductions, I would like to turn the conference over to Ms. Mollie Hawkes of FTI Consulting. Please go ahead, ma'am.

Mollie Hawkes

Good morning. Welcome to the FTI Consulting conference call to discuss the company's fourth quarter and full year 2012 results as reported this morning. Management will begin with formal remarks, after which we'll take your questions.

Before we begin, I would like to remind everyone that this conference call may include forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934 that involve risks and uncertainties. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, future revenues, future results and performance expectations, plans or intentions related to financial performance, acquisitions, business trends and other information or other matters that are not historical, including statements regarding estimates of our future financial results.

For a discussion of risks and other factors that may cause actual results or events to differ from those contemplated by forward-looking statements, investors should review the Safe Harbor statement in the earnings press release issued this morning, a copy of which is available on our website at www.fticonsulting.com, as well as other disclosures under the heading of Risk Factors and Forward-looking Information in our most recent Form 10-K and in our other filings with the Securities and Exchange Commission.

Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this earnings call and will not be updated.

During the call, we will discuss certain non-GAAP financial measures such as adjusted EBITDA, adjusted segment EBITDA and adjusted earnings per share. For a discussion of these non-GAAP financial measures, as well as our reconciliation of these non-GAAP financial measures to the most recently comparable gap measures, investors should review the press release we issued this morning.

With these formalities out of the way, I would like to turn the call over to Jack Dunn, President and Chief Executive Officer of FTI Consulting. Jack, please go ahead.

Jack B. Dunn

Thank you, Mollie, and thank you and welcome to everyone for joining us today. With me on the call from FTI are Daniel Shaughnessy, our Chairman; Roger Carlile, our Chief Financial Officer; and David Bannister, our chairman of North America.

This morning we announced our fourth quarter and year-end 2012 results. By now, I hope all of you have had a chance to review them. If not, as Mollie said, they can be found at www.fticonsulting.com for your convenient reference.

For the quarter, revenues increased 2% to a fourth quarter record of $399.3 million. Adjusted earnings per share were $0.67 and adjusted EBITDA was $68.1 million or 17% of revenues. Cash collections were at record levels, even significantly exceeding our record revenues for the quarter.

For the year, revenues increased 1% to $1.58 billion compared to $1.57 billion in the prior-year period. Adjusted earnings per share were $230 million and adjusted EBITDA was $251 million or 16% of revenues.

Most importantly, I think, the quarterly results set the stage for the launch of our 31st year and it has become our custom rather than regurgitate the press release. We'll briefly give a few thoughts on what we believe are the key takeaways from the quarter and the year, turn it over to Roger to discuss some of the financial events that we had in the fourth quarter, and then most importantly, turn it over to you for your questions.

Increasingly, as we grow from a collection of great professionals and gold standard practices into one firm, the keys to that growth will be our ability to operate globally and respond with industry expertise. In short, we need to be able to respond to hot markets with solutions wherever they occur. There is no greater demonstration of this than in our fourth quarter.

From a geographic perspective, we realized revenue increases in each of our geographic regions. In Latin America, revenues grew 8% year-over-year. Revenues were driven by another strong quarter from the Forensic and Litigation Consulting team in South America, particularly in Brazil, where our construction industry practice saw a strong growth, as Brazil's government recognized the urgent need to improve the country's infrastructure.

The 2016 Olympics and 2014 World Cup will happen in a country where only 14% of roads are paved and the, World Economic Forum ranks Brazil's quality of infrastructure 104 out of 142 countries surveyed. Looking ahead, Brazil's urgent infrastructure need should provide ample opportunities for FTI Consulting.

Over the next 2 years, the Brazilian government will spend $80 billion or 1% of GDP a year on infrastructure as part of its growth acceleration program. We also saw nearly a 150% year-over-year improvement in Mexico that was largely driven by contributions from our Forensic and Litigation segment.

In Asia-Pacific, revenues increased 5% year-over-year. Revenues were driven by double-digit increases in Australia, China and Singapore. We remain very active in corruption investigations in areas like reverse mergers and investor fraud investigations in China. Corporate finance restructuring also benefited from the acquisition of KMQ in Australia, adding 70 professionals with significant experience in energy, real estate and health care.

Our Technology business also began to realize a return on our investments in its sales and marketing team in the region with new matters almost doubling during the quarter. In Europe, the Middle East and Africa, or EMEA, revenues increased 7% year-over-year. Revenues were largely driven by contributions from our Global Risks & Investigations practice in the United Kingdom, and of course, our unparalleled economics practice. Our Strategic Communications business benefited from significant retainer wins in the energy industry and saw double-digit year-over-year increases in France, Germany, Belgium, Russia and the United Arab Emirates.

In North America, revenues improved slightly year-over-year, with corporate finance restructuring leading the way with almost 14% revenue growth, including, I hope people saw yesterday the job that we did for the city of Philadelphia. I think we've discovered a pretty good formula for being able to help municipalities look at their expenses, make significant cost savings and without the cost of jobs. So I urge you to look at that as a template for other jobs that we can do in that area.

In economic consulting, frankly and especially, it's like complex lexicon practice. We're beginning to exhaust their supply of superlatives to describe their performance.

On the industry expertise front, while we are relatively new to the game, the results have been so encouraging that I think they represent a real vision of the possibility for our future. For example, in healthcare, we now have over 195 professionals with approximately $95 million in revenues and aggressive plans to grow the business. We serve broadly across the spectrum from nonprofit hospital turnaround and operational improvement to strategic advice, M&A and data analytics.

In energy, we have an intersegment practice that is active in over 65 energy matters, ranging from shale gas frac-ing on behalf of major international energy companies to drilling rights disputes in the Eastern Mediterranean. We now have more than 100 professionals firm-wide dedicated for this practice, with over $130 million in revenues from major energy clients that include energy companies, natural resources companies, utilities, pipeline, oilfield equipment and services clients and others.

Our Telecommunications, Media and Technology practice includes a group of 62 professionals and very profitable revenues of over $50 million. Recently, the entertainment facet of the practice was augmented by the acquisition of The Salter Group, the preeminent entertainment valuation firm headquartered in Los Angeles, California. In insurance, we have 30 professionals offering a full range of insurance consulting services, including actuarial, financial, underwriting and claims for property and casualty life health and pension. We have significant revenues in the area and are expanding to address Latins in the United Kingdom and in Latin America, and increase our expertise in the area of predictive analysis and business continuity.

As we mentioned, we also have specialties in areas such as construction, real estate and financial institutions.

One of our real wins has been our Global Risk & Investigations practice, where we have over 150 professionals in 13 countries on 5 continents, serving 400 clients in over 800 matters worldwide. Recently, we added 15 professionals in London, in a group hire, to complete our geographic footprint and have been dubbed by The Economist magazine as simply, "The best in the business."

While prospects in these industries may not be limitless, they certainly are attractive enough to keep us very busy for a long time. Finally, I think I should mention a word about M&A. While it is not a segment or even a virtual discrete practice for us, it is the second-largest driver of business in our company and can literally impact every facet of the firm. As you are all aware, we have seen a flurry of M&A activity in 2013 with our economic consulting group seeing its repository of potential M&A mergers as the highest levels in the history of the company.

M&A is the most easily identifiable growth catalyst for our business with the potential to drive approximately 10% or more of total revenues as it touches each of our business segments. Economic Consulting has first looked in regulatory approval services, Technology performs high-margin second request work, and Strategic Communications is employed for communication support throughout the M&A cycle. Corporate Finance/Restructuring is engaged for due diligence on merger integration, and Forensic and Litigation Consulting does potential investigations and post-acquisition disputes.

While it's still early innings, the pickup in transaction activity in just the first 6 weeks of the year leaves us optimistic about M&A. At mid-month, M&A activity has more than tripled, reaching a level of $182 billion compared with $58 billion at this time last year.

Turning to our fiscal 2013 outlook. Our plan is to focus on organic growth and collect our cash. We will use that cash to continue our repurchase, stock repurchase program and to pursue tuck-in acquisitions where they are provided as an opportunity. Based on current market conditions, the company estimates that revenues for the year will be between $1.63 billion and $1.7 billion, and diluted adjusted earnings per share will be between $2.40 and $2.60. As always, this is organic growth and does not include acquisitions or share repurchases. Now, I'll turn it over to Roger. Roger?

Roger D. Carlile

Thanks, Jack. Under -- regarding the impairment charge that Jack mentioned, under generally accepted accounting principles, we're required to consider the book value of such assets annually. This is a point-in-time analysis using standard business valuation methods. And at FTI Consulting, we perform this analysis annually on October 1 of each year. As a result of this annual test, we recorded a $110.4 million noncash pretax charge to reduce the book value of goodwill associated with our Strategic Communications segment. The impairment is a noncash charge and does not affect the company's operations cash flows, liquidity or debt covenants.

In the quarter, we also completed a series of debt refinancing transactions, which increased our access to capital and extended our debt maturities at lower interest rates. And as a result of these actions in conjunction with our retirement of our 2012 notes in July of last year, we ended the year with $73.9 million less debt and no borrowings under our $350 million senior secured bank credit facility.

As noted in the press release as well this morning, our cash collections during the quarter were $461 million with a record $185 million collected in December. Our cash and cash equivalents were $156.8 million at December 31, 2012. For the year, our net cash provided by operating activities was $120.2 million, which included the effect of our accelerating, approximately $25 million of bonus payments end of 2012 from 2013. And as a result, our 2013 cash from operating activities will be benefited by the lack of these same payments.

Currently, we anticipate net cash provided by operating activities for 2013 to range between $175 million and $200 million, and we anticipate capital expenditures for the year to range between $31 million and $37 million. And with that, Jack, I'll turn the call back to you.

Jack B. Dunn

Thank you. Just a quick comment, that while it's a technical matter and certainly our market conditions matter, we were forced to take the action we did with regard to the goodwill impairment has not dampened our enthusiasm for that business, our belief in our people. It has been a fundamental key of our expansion around the globe and there are a significant number of our largest matters in the country in the history of our company that we would not have had without that very valuable asset. So with that, we'd like to turn it over to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go to our first question from Tim McHugh with William Blair.

Timothy McHugh - William Blair & Company L.L.C., Research Division

First, Jack, can you just give us those numbers again? And I guess, I just want to clarify what those numbers were related M&A that you said, thus far, this year has almost tripled. Is that your revenue that you guys are getting on M&A related projects?

Jack B. Dunn

No, no. What I said was that the volume of deals in the marketplace has tripled to up to, I think, over $150 billion this year in the first 6 to 8 weeks of the year. So a reference point for -- it looks to us like there's going to -- and that, combined with the fact that we have a large number of projects that we're looking at on an exploratory basis for our clients, indicates to us that there's a good opportunity for it to be a very vibrant market this year.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And then I guess just to dig in on that, have you actually seen that? I guess you mentioned kind of the exploratory projects for, I'm assuming that's for economic consulting, are you seeing it flow through to the other parts of the business yet? Or is this more just an encouraging sign that you would hope later in the year will translate to the rest of the business?

Jack B. Dunn

Right now, it's a very encouraging sign. And we're certainly seeing it being realized in the economic consulting group. Typically, they would be the tip of the spear and that, as we get into more deals coming to fruition, you would see the second request that would tip over into the Technology business. You would see the restructuring and corporate finance people get the due diligence assignments and Transaction Support business. And so it would build -- flow through the company in that kind of direction.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And as we look at the type of M&A, is it right that the strategic M&A is better for you than kind of the LDO-type activity?

Jack B. Dunn

Yes, historically M&A has been the place where more approval is required because you have the impacts from in terms of the Justice Department and the organizations that have to approve people in the same industry or look at the antitrust impact. But increasingly, one of the things that we're seeing is that portfolio of companies in PE firms are doing strategic acquisitions of their own. So I think there's -- we've seen that just recently, so that would probably be a pretend good for FTI as well.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And then on the Electronic Discovery business, can you remind us where we're at now at year end with the kind of the 2 large engagements that have been a headwind for that business this past year? Can we see better growth in '13 or will they continue to be a headwind?

Jack B. Dunn

I think the comparisons will -- the good news is that some of those jobs are continuing to wind down and still have an impact in our company. We are doing a pretty good job. As we've mentioned, we've made investments in the sales efforts in that area. We picked up a couple of new ones, but they would still represent a significant number of revenues for us to replace during the year.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay, and then just one more and I'll jump off. The size of our success fees for the Restructuring business you mentioned in the press release, how significantly did that increase, I guess?

Jack B. Dunn

Roger, you want to answer that?

Roger D. Carlile

Yes. Quarter-over-quarter, these excess fees in corporate recovery or corporate restructuring and finance were about $3.5 million greater. So they weren't substantially greater. I think we should say, because we've had the question many times, that the Lehman fee did come in, in the fourth quarter. Weren't sure at the time where that would -- is the last time we spoke, well, that would be fourth quarter or first quarter, but it did occur in the fourth quarter 2012.

Operator

We'll go next to Tobey Sommer with SunTrust.

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

This is Frank, in for Tobey. Quick question. In terms of the environment for hiring an attrition, can you comment on what your plans are for hiring and what attritions it might go with?

Dennis J. Shaughnessy

Yes. It's Dennis, Frank. The environment, I don't think has changed very dramatically over the last 6 to 9 months. I think our plan for hiring is, clearly, we are hiring aggressively either through group hires, as Jack referred, or through tuck-in acquisitions in strategic parts of the world. So yes, we're bringing a lot of people on in Australia, we're bringing people on down in Brazil, Mexico, over in the U.K. In our group practice, we are bringing more industry expertise into the company, specifically in some of the areas that Jack talked about. Our turnover at the top is as been negligible, if almost, nothing. And our turnover, sort of in the bottom third, the younger people has not seen any significant either increases or decreases from our prior history.

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

Okay, great. And you performed very well on ECON. And just wanted to know how much you think is share gain versus the market versus change of mix of pricing. If you could give us some of the underlying kind of drivers of the ECON group's performance, that'll be great.

Dennis J. Shaughnessy

Well, I think -- it's Dennis again. I think they do have -- I mean, we do have, in our opinion, the premier operation there around the world. I think we are benefiting from almost all 3 of the areas you touched on. Number one, we probably have gained share in certain areas. I think we're gaining share in certainly competition, we're gaining share in complex financial litigation and we're gaining share geographically through our South American operation. And especially over in Europe, they had an excellent year over there. We do have pricing power, so we have been able to increase rates. And finally, I think Jack said it fairly clearly. Our backlog there, especially on the competition side, is large as we've ever seen it, and is now starting to act -- activate. And I think as you see these companies starting to pull the trigger, we will be very busy in liaison with the U.S. government and Washington and with Brussels. So we anticipate the second half of this year, once sort of all of the political noise dies down, that if, in all honesty, about 20% of the retentions that we have right now actually activate and go forward, they're going to be extremely busy. So the answer to your question is all 3.

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

Okay, great. And finally, you mentioned I think 14% revenue growth in Restructuring. What are you seeing there? Is it still a strong pipeline or is there some tail to be expected?

Dennis J. Shaughnessy

I think I'd turn it over to Dave Bannister, who is literally sitting in our Annual Restructuring Summit that we host for the industry. David, what's the word out there?

David G. Bannister

Yes. Thank you, Dennis. We have about 80 of our restructuring professionals gathered here for an annual conference. And we'll be joined by about 300 clients, primarily the leading figures in the restructuring industry, lawyers, bankers, hedge funds and so forth. I would say that the general feeling is that the default rate, which is now running about 3% in the high-yield issuance, is lower than average and will probably remain lower than average for the balance certainly of this year. The liquidity in the market would drive that more than anything, but also, we have a reasonable economic outlook. On the other hand, and something we have not focused on in the past, is the overall scale of the market. The scale of a subprime issuance, sub of debt that it would be the type that might go into default, is almost exactly double what it was 5 years ago. So the size of the opportunities that are out there, the number, the sheer number of opportunities is much greater. So in simple math, if you took 3% of twice as much it is a bigger market opportunity than having the default rate go from 3% to 4% on a smaller opportunity. So I think people are generally -- will think it won't be a banner year, but it will be a solid year. Many of us saw, for example, yesterday, the JCPenney announcement where they announced comp store sales down something like 40%. So there's still some trouble out there in the economy, and I suspect our folks will get their fair share of it. Dennis?

Dennis J. Shaughnessy

Well, I mean, I would reiterate that. I think our people who are on record is having concerns about certain segments of the retail industry. Some of those segments have been levered and re-levered again, and they're not reporting either good comps or some of their creditors are getting very concerned. Because, in all honesty, big-box real estate is not the most easy thing to use to defeat debt. So I think that's certainly a sector. So you might see along the lines of what David said, just given the scale, you might see certain sector weakness in the face of maybe an overall rising economy, but certain secular weakness that could contribute to at least industry pops in restructuring business. And I think, clearly, you could not have the velocity capital that is moving into areas, in Asia and Latin America, be digested 100% efficiently. So we are adding significant strength in our Restructuring business out in Asia and we are not doing that in anticipation they won't be busy, and we are now insinuating assets in Brazil. Anticipating that, again, while there are tremendous opportunities on the infrastructure build side, there's going to be excesses there, there's going to be inefficiencies that are going to need our help to sort of restructure and sort out. So we would anticipate over the next 2 to 3 years sort of a wealth of opportunity not only on a pro-cyclical side in Brazil, but also on our restructuring side.

Operator

We'll go next to Bill Sutherland of Northland Capital Markets.

William Sutherland - Northland Capital Markets, Research Division

Restructuring. Can you give us a sense of the dimension of that part of the corporate finance revenue line at this point, both -- if you could give to us maybe globally and then in the U.S.? I'm just trying to get a sense of the mix there. And then associated with that, to what degree -- I mean, you talked about the global opportunity, and I'm curious to what degree you can move resources as needed to where the demand warrants it in that area?

David G. Bannister

I'll start. It's Dennis, Bill. We don't break out, obviously, every line of service item there. Far and away, classic restructuring is the largest driver of the business, and that would also be the case globally. The other segments are transactional support, which as Jack said, tends to be support work done in the front of capital flows or in the middle or post integration type of deal work. We do have a healthcare practice. Part of the healthcare practice that Jack talked about is housed in corporate finance. But again, in Europe, there would predominantly be a Restructuring business with some transaction support. Asia, without a doubt, it would be a Restructuring business. I would say, globally, the classic restructuring would be north of 60% of all the revenues there.

Jack B. Dunn

On your second question about moving resources around, I think the key to our business is that we have the people in area. The reason we're the -- not too presumptuous to say, one of, if not the most successful in Latin America, because we have resources there. We have taken the trouble to build a business down in Brazil. In Europe, we are the next to the big -- we're probably the biggest presence there in the London market. So it's key to us to have the people in. Because the people that don't succeed at that are the ones who try to fly in and do the work, and it just doesn't work as a very good formula.

William Sutherland - Northland Capital Markets, Research Division

Okay. Switching over to the FLC just for a minute. I want to get a sense of the revenue trend there. In terms of decline, in the year just ended in the fourth quarter, in particular, how much of that was -- would you call rightsizing? And then kind of what do you -- how should we think about that line within the '13 guidance in terms of revenue? And also I'm kind of curious about the margin recovery there potentially?

Jack B. Dunn

Roger, why don't you take that?

Roger D. Carlile

All right, thank you. I think if you look at FLC, it's a mixture. As we noted in the press release, in Jack's comments, that business, particularly in North America, continues to face some headwinds in the areas that would deal mostly with U.S. Federal or other kinds of similar international government investigations. That's something we look forward to turning around. As you get through the election, you get various regulators confirmed into new positions and things change. So it's a mixture. There's obviously, from the reductions of special charge that was taken earlier in the year, you have a small amount of revenue reduction related to that. But most importantly, they're dealing with the headwinds, mostly in the North American market, mostly in their forensic accounting and investigations business.

William Sutherland - Northland Capital Markets, Research Division

And do you expect -- I mean, not to get into too much detail, but directionally, what should we sort of expect in '13?

Jack B. Dunn

I think we're looking for -- as I've said, we're looking for that business, that particular part, the U.S. focused Forensic Accounting & Investigations business, to improve as we get May Jo Widen [ph], others confirmed in the SEC and those organizations and institutions maybe get back to a bit more normal activities than they did in the mid to latter part of 2012. We also have been -- we've been fortunate to be retained in some engagements that have gotten quite notable publicity that would be post-merger type of disputes or accounting disputes around deals that have the potential. They're brand-new retentions, but they have the potential to be extremely big because they are very large transactions.

William Sutherland - Northland Capital Markets, Research Division

Okay, good. And then I guess in Tech, just a little bit perhaps in terms of how you see your new product offering developing this year, kind of how the market -- I know you just introduced the decoding and related solution. Where is the market headed, do you think, or how fast is it adopting now?

Jack B. Dunn

Well, I think, I'll refer to the industry. Gartner obviously feels the market is going to get there a lot faster than maybe some of the practitioners do. But I think without a doubt, just given the continued proliferation of electronic data, there has to be a way of more efficiently capturing and managing the need to understand what you have and to produce it. So I think our feeling is strongly that predictive coding will be embraced. There could be debates about how quickly it's going to be embraced. And again, a lot of it is going to depend upon the receptivity of it by judges and court rooms. But I think, without a doubt, it's here, it's not going away. And we think that our offering represents the beginning of a good first step for people to start to embrace it and use it. So I think the initial feedback we're getting back from people confirms that thesis. And our feeling is that this is a first step in predictive coding, which should be followed by many, many applications, hopefully, most generated by us.

William Sutherland - Northland Capital Markets, Research Division

So I guess what you're saying, Dennis, is that the new business that you've started to get, that helps to offset the decline. And this decline has been...

Jack B. Dunn

Sure. I think the offset will declined across the solutions offering. So I mean, we, without a doubt, are starting to get some initial feeling of what second request might look like on some of these large M&As, as some of the clients get closer and closer to pulling the trigger on them. So I mean, that's very intense business, it's very profitable business. And again, I think we're positioned as well, if not better, than anyone to do that. So we would anticipate if we're right on the increase in the M&A activity, especially in the second part of the year, that vicariously we're going to get our fair share, if not more, of that business. We have several engagements that are growing. They are not of the size of the 2 that -- I think most people have referenced that we've been publicly outed on, that are winding down. On the other hand, they are growing, and they are complex and they have the opportunity to offset to a larger extent than maybe we originally thought some of the burn off of the others. But make note, we're not trying to say we still don't have headwinds, those 2 assignments were massive. We were happy to have them. But now, we have to replace them. So I think they're going to be replaced across the board. They'll be replaced by increased use of our technology, especially some of the new apps. But they'll also be replaced by second request work and increased consulting offered on some work that we already have that's starting to grow.

David G. Bannister

If I may jump in for just one second on this. One phenomena, which I think you'll hear us talk more and more about as the year progresses, is the increasing frequency of us being an installed provider in a client for a long period of time. Our sales force efforts and some of our larger merging engagements are really intended to be a long-term service provider with major companies that have ongoing litigation needs, not merely responding to a crisis or an event. I don't want to diminish the importance of prices or events or secondary request or what have you, but I would say a larger and larger portion of our revenue is where we are embedded in the client and really acting as their partner on multiple matters over multiple years.

Dennis J. Shaughnessy

Yes, to that theme, David, it's a good point. I also would note that of probably of the 3 largest potential matters we picked up in the back half of 2012 were all takeaways, as many of the largest matters we have in our history are aware in complicated stuff. We are still the gold standard of people who either fix it when it's gone wrong or get it right from the first time. If you've been a prior client, and you know that. So I think that's also an encouraging sign because it really shows that in the elephant hunting, we are the gold standard.

William Sutherland - Northland Capital Markets, Research Division

Great. And then -- so I guess what I'm taking away here is that those 2 biggies are largely going to wind down in the course of '13. Is that a good way to think about it?

Dennis J. Shaughnessy

I think it's fair, Dave. The answer is yes. How -- it doesn't mean they will go away, but they will wind down to where they will not be a headwind. I think it would be aggressive. Though, right now, to forecast that we will replace all of that business to where the full year's benefit of it will offset what we'll lose this year. So I think this is more of a year of starting to build back growth because you're having to basically replace the aircraft carrier in your fleet, and it takes a while to get that done.

Operator

We'll go next to Ato Garrett with Deutsche Bank.

Ato Garrett - Deutsche Bank AG, Research Division

I just had one quick one. And again, relating to those 2 large engagements within the Technology segment. I believe a year ago, you guys disclosed, that they were about 40% or 44% of revenue for the Technology. Can you -- do we have a similar sizing of what the contribution was in the fourth quarter?

Jack B. Dunn

They're of equal size for us as they worked out. I don't have the exact statistics on that. I don't actually recall us disclosing that, though we may have. But I don't have that in front of me now. But they are still -- the largest matters are still a significant amount of revenue.

Operator

We'll take our next question from David Gold with Sidoti.

David Gold - Sidoti & Company, LLC

A couple of quick ones. One, on Strategic Communications, can you give a sense today for how much of that business is retainer versus episodic, as things have changed?

Jack B. Dunn

I'm sorry, Dave, state that question again.

David Gold - Sidoti & Company, LLC

On the Communications business, it was a number -- or many years ago, before the world started to change, how much of the business was retainer?

Dennis J. Shaughnessy

Yes. I think -- we think of it a bit -- in terms of pure retained revenue, there are fewer retained relationships coming out of the financial crisis, than there were heading into it. But still, looking at it now in terms of the number of retained relationships and the level of recurring revenue, we're perhaps are no longer paying the monthly retainer. But they're -- we have a steady level of recurring revenue from that relationship. That's still approximately 70% of the revenue base.

David Gold - Sidoti & Company, LLC

Got you. Okay. And then a quick one on restructuring. Did you give -- I don't think I heard you give a number. If you can, it'd be helpful as to what the Australian acquisition contributed during the quarter.

Dennis J. Shaughnessy

I think we actually reported when we did the deal, and it is consistent. Our expectation was consistent of about $5 million in revenue for the fourth quarter. But I think we had -- it actually did not contribute much on an earnings basis because of the stamp tax that we had to pay out there. And all the closing costs of the deal now, we deducted in that quarter.

David Gold - Sidoti & Company, LLC

Got you, got you. Okay, perfect. And then one last one. I guess, probably not a bad moment to give you the opportunity to remind us on how much of a step down do you expect in profitability between fourth quarter to first quarter from the increase in payroll taxes, et cetera?

Dennis J. Shaughnessy

Well I think, as you know, we've said in the past, it ranges around 250 to 300 basis points. And it has ranged typically around, say $0.08 to $0.10 per share. So I think it would stay in those basic ranges. Obviously, we have some tax changes that are flowing through that we're trying to make sure we understand those and what the impact of those will be.

Operator

[Operator Instructions] We'll take our next question from Randle Reece with Avondale Partners.

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

The revenue guidance looks stronger than the implied profit margin guidance, and I was wondering how many different dynamics go into that equation.

Dennis J. Shaughnessy

The revenue guidance, the implied profit margin is predominantly influenced by one area on the negative side, and that's Europe. Our margins are expanding in Latin America, they're expanding in Asia. Discounting the negative impact of the closing costs of the deal out there would have expanded, and they're stable and we think have some ability to expand. They're certainly holding their own in economics in North America in restructuring. And actually, our margin expanded in Strategic Communications. The biggest, basically drag on margin is Europe. And while we're profitable across the board in all of our offerings there, we're growing. And we're able to extend in some areas, the margin such as, in the economic competition area, there is an overall margin pressure that we are not immune to, that I think most service businesses in Europe are dealing with. And so I think that we're trying to be realistic, we're obviously looking at costs very hard in Europe, we're looking at alternative ways of delivering things in Europe. But at the end of the day, the most profitable high-margin business for our communications group, which represents about half of our revenues in Europe, is capital markets work, and it just simply does not exist in Europe right now. It's not there, we have a big backlog of people, clients who wish it would be there, but the fact to the matter is it's not there. So you start off with sort of one element that always gave you one of your biggest margin enhancements, and that's the capital markets work, and it's not there. Secondly, there's just general pressure on the company's P&Ls over there, because they're sitting in an environment that either, one, they're experiencing negative growth or sideways growth, and they're certainly experiencing a lot of stress within the overall fiscal and monetary marketplace there. So the companies are watching their own cost that puts pressure on your margins, in all honesty, with the exception of the economic group where the deal cost tend not to be a big factor. There is significant pressure across all of our groups in Europe on pricing. And I would not say we have anymore pricing power in Europe than any other professional firm. We may be taking share in some areas, but again, it's at a lower margin than we would experience literally in the rest of the world. So the reason for our caution on margin, and believe me, it is a major, major initiative here to try to get that European margin up to a level that's commensurate with the rest of the company is Europe. And I think that we're pleased with the direction of the margin in South America, which is -- would mimic the whole company. We're pleased with Asia, where we have a similar experience. North America speaks for itself. The drag on margin is Europe, and Europe right now is more of a high single-digit profitability margin. And with the size of our operation in Europe, you could sort of do the math and see how that pulls it down.

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

Can you give the domestic versus international revenue mix for the fourth quarter, as well as what you assumed in guidance?

Roger D. Carlile

It is Roger. We assume roughly the same, because it doesn't -- lets it step while it's moving more internationally, has not shift that rapidly other than by some major acquisition. We were essentially about, for the prior year, a little over 25%, 26% international, 75%, 74% U.S., and I think that held in the fourth quarter as well.

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

So that was -- the 26% is full year '12?

Jack B. Dunn

Yes. And that would be our assumption. Again, we expect growth in Latin America and in Asia, but you're growing off of smaller numbers, and not a lot of growth in Europe.

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

Do you have any comment...

Roger D. Carlile

Overall, if you have growth in the U.S., you're going to stay around a 74% to 26%, 73% or 27% mix.

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

Do you have any comment on headcount trends so far in 2013?

Roger D. Carlile

I think you would expect to see -- generally speaking, in our business, you'd expect to see headcount growth commensurate with revenue growth in each of the segments except Technology, which has a higher component of non-hours based revenue than the other segments and I think for FLC at this time, because they have capacity availability. So they would have -- they can have revenue growth that would exceed their headcount growth.

Jack B. Dunn

In fact, they should, Roger, because we've made some significant investments in some senior people in the areas that we pointed out in the press release. So they're looking to grow into those people, so that should be a positive going forward.

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

The headcount numbers were very positive versus my expectations.

Operator

That does conclude today's question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Jack Dunn for any additional and/or closing remarks.

Jack B. Dunn

Okay, great. Well, I just want to thank everybody again for joining us. And we look forward to speaking with you as we announce our first quarter results. Thank you.

Operator

This does conclude today's conference. We thank you for your participation.

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