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Navigant Consulting, Inc. (NYSE:NCI)

Q1 2009 Earnings Call Transcript

May 7, 2009 10:00 am ET

Executives

William Goodyear – Chairman and CEO

Tom Nardi – EVP and CFO

Jeff Green – VP and Business Unit Leader, North American Dispute & Investigative Services

Bill Dickenson – Executive Managing Director, North American Consulting Operations

Julie Howard – President and COO

David Allen – European Managing Director

Analysts

Tim McHugh – William Blair & Company

Frank [ph] – SunTrust Robinson Humphrey

George Sutton – Craig-Hallum

Andrew Fones – UBS

Joseph Foresi – Janney Montgomery Scott

David Gold – Sidoti & Company

Dan Leben – Robert W. Baird

Sean Jackson – Avondale Partners

Kevane Wong – JMP Securities

Rob Young – William Smith and Company

Operator

Good morning and welcome to Navigant Consulting's first quarter 2009 earnings call. At this time, I would like to inform all parties their lines will be on listen-only until the question-and-answer portion of today's call. Today's call is being recorded. If you have any objections, please disconnect at this time.

I would like to introduce today's speaker, Mr. William Goodyear, Chairman and CEO of Navigant Consulting. Mr. Goodyear, you may begin.

William Goodyear

Okay, thank you. Good morning, everyone. Disclosure wise, please note the disclosures at the end of our earnings release for information about forward-looking statements that we might make or discuss during the call this morning. We have, as we've done in the past, posted our earnings release on the Web site and would suggest that you review our Web site postings in addition to our SEC filings for the disclosure factors that may impact the subjects that we talk about today.

We will be discussing as we've done in the past some non-GAAP financial measures and our earnings release and Web site have the disclosures required by the SEC including the reconciliations that are appropriate.

With me this morning today is our corporate team, Julie Howard, Tom Nardi, Dave Wartner. On the phone, Bill Dickenson, Jeff Green and Sharon Siegel Voelzke. Here in Chicago today is our new Head of International Consulting, David Allen. He was here yesterday for our Board meeting and stayed for the call this morning and then will be flying back to London. In the Q&A session we'll be able to draw upon our management team.

I'd like to start this morning with an overview of the quarter. I think importantly how we see the rest of 2009. Then Tom's going to provide some color, particularly some detail on our expense and cost initiatives and then I'll wrap up with a little summary before we do our Q&A.

Revenues were down 9% from a year ago very strong first quarter. Half of that was the sterling weakness which we've signaled and we talked about on our last call. So currency adjusted we were down between 4% and 5% off of last year's very strong quarter and down 4% sequentially from our 2008 fourth quarter.

$0.16 adjusted earnings per share. Our GAAP number was $0.11. There's $0.04 of severance and a penny of real estate in there. We'll give a little more color on that in a minute. Importantly, we did see month to month to month improvement as the quarter progressed from January to February to March and that's encouraging.

The previously announced cost reductions which we discussed in our last call have been executed, we will exceed our targets and I think we can say with some confidence that, that puts us in very good position for the rest of 2009.

We made a comment right at the top of our release that we expect our earnings per share range, excluding severance and the real estate charges to remain unchanged from a guidance standpoint from the $0.85 to $1 that we talked about before.

I said yesterday at our Board meeting that management felt like we had a very good year in the first quarter. We stayed in the market, worked hard from an offense and a marketing standpoint. As the quarter progressed we had some nice wins which will be key to our second half performance. We executed very well on our cost and expense initiatives and we'll talk in some detail on that this morning. We took 200 people out, about 25 million of expense savings year-over-year. I think we've go the Company in very lean position and feel good about how that will favorably impact our results as 2009 rolls out.

We're in good shape financially and I'm going to take a phrase from my London experience and respecting David Allen being with us this morning. We expect improved trading conditions as the year progresses.

There are two big themes out in the marketplace that we're leveraging. We've talked about both of them before. The deleveraging that's taking place in the economy is continuing to have a major impact that is going to benefit us very significantly, already has in the dispute area, the litigation area, our valuations practice, our economic practice. We're going to talk a little bit more about distressed real estate later this morning. All of those initiatives are being favorably impacted by this deleveraging concept that we're seeing in the economy, where the consumer and the corporations are both reducing leverage and driving litigation and value reductions.

The second theme obviously is reregulation. We're beginning to see some favorable impact in terms of our energy practice, probably a little earlier than we might have thought and Bill Dickenson will probably comment on that later.

And we're also increasingly confident that it's going to have a favorable impact relative to our healthcare practice as the administration rolls out. You've seen some of the things coming out of Washington recently that are quite significant in terms of impacting the healthcare delivery systems in the country.

If we take a look at the first quarter this year versus the first quarter last year, in other words, we're going to look over our shoulder a little bit here. Our dispute practice was down about 20% from last year's extremely strong first quarter. On the consulting side of our business the financial services practice had the major year-over-year impact.

We think, just to comment on the financial services practice, we have that properly size now, we have the capabilities that we need, they're going to be important to us for the future so, we feel fine with where we're at and think that, that whole financial service thing has probably played out on the downside and now we'll look forward frankly to some upsides.

The dispute practice had a number of major investigative assignments, a year ago that were really firing on all cylinders. Those have basically, largely worked their way through our system and through our P&L frankly. We have not had major wins in the investigative area.

We expect that as the regulatory climate tightens and we've all looked at the journal just in the last two days and there's a whole series of SEC, FDIC, New York AG actions. So I think the regulatory climate is starting to tighten and over some time frame that obviously is going to have a favorable impact on us.

In the meantime, the first quarter this year, certainly vis-à-vis last year, we were impacted by the long channel disintermediation, if you will. We were impacted by the sole engagements that we had that were not ramping as quickly as we would have liked and we were impacted to some extent by law firm clients and corporate counsel exercising more restraint in terms of the staging and the monitoring of the work. So, those are all realistic things that we would have expected in this climate and that we'll be able frankly to deal with, I think as 2009 progresses.

So, I think with that, I'm going to have Tom go through some detail here and then I'm going to come back and provide a little more color on some of these things. Tom why don't you wrap it up?

Tom Nardi

Okay, thanks, Bill. And good morning, everyone. During our February conference call I commented on our first quarter outlook and cited three factors that would pressure first quarter results. They were economic weakness from late 2008, likely to continue into early 2009. That savings from first quarter cost actions had not yet been realized while severance costs are accrued immediately and adverse currency impacts.

As it turned out, all three of those did occur and revenues and earnings per share declined from year ago levels. However, this was not unexpected and as we said in the press release this morning, we believe that Navigant can still earn between $0.85 and $1 per share excluding other operating costs and severance in fiscal 2009. In addition, our estimate for EBITDA adjusted remains between 120 million and 145 million.

Let me recap some of the key metrics from our first quarter earnings release. On a year-over-year basis, total revenues were down 12%, while revenues before reimbursement, as Bill noted, were down 9% from the record levels of the first quarter of last year and were down 4% for the fourth quarter (inaudible).

As expected, lower reimbursable expenses impacted total revenue comparisons by about $8 million versus the year ago period. As Bill discussed, these lower revenues are reflective of the economic environment, more specifically general delays in both the award assignment process and the initialization of activity on sold assignments.

For the full year, we expect revenues to be at the lower end of our previously discussed range of $750 million to $825 million.

As expected, currency exchange movements negatively impacted revenue before reimbursements year-over-year by about $8 million. We had talked about a full year impact of around 20 million based on a UK exchange rate of $1.45 and that's still reflected in our current estimates.

In addition, the inclusion of Chicago Partners in this year's results added about $14 million to the comparisons.

Costs of services before reimbursables in G&A declined $6 million or 4% from last year's levels despite the inclusion of about $2.7 million of higher first quarter severance costs and the inclusion of the costs related to the Chicago Partners business, which totaled about $8 million.

We expect to exceed our previously discussed cost reduction targets and have ongoing flexibility to further adapt to challenging market conditions, if necessary. I'll have more to say about that in a minute.

Earnings per share excluding other operating costs totaled $0.12 or $0.16 per share excluding other operating costs and severance.

Severance costs in the first quarter totaled about $3 million pretax or $0.04 a share. Our balance sheet and liquidity remain strong with debt levels up seasonally from yearend, but down $7 million from last year's levels.

Bill will review all the factors driving top-line performance, so let me focus my remarks on the cost side of the equation.

As Bill said, Navigant has taken swift and substantial actions to reduce costs and protect profitability. While the cost reduction impacts will show up more significantly in future quarters, they did have an impact on first quarter results as operating and G&A costs combined were down about 4% from last year's levels. Coupled with lower amortization interest expense, these reductions helped to offset a sizeable portion of the year-over-year revenue declines.

Now, let me get more specific regarding our cost actions. As of the end of the first quarter, we accrued pretax severance costs of about $3 million related to approximately 200 employee reductions. About 100 of the employee terminations did not occur until April and therefore not reflected in the March 31st staffing numbers.

Our current yearend estimated staffing level was about 2,550 employees, comprised of 1,900 practice employees, about 550 G&A employees and about 100 project employees. This level would be down from about 2,650 employees at yearend 2008.

Keep in mind that we added about 50 positions related our Bard and Morse acquisitions that were not in the yearend 2008 numbers.

Bad debt expense increased about 1.7 million in the first quarter over last year's levels, but was in line with our original expectations going into the year that assumed higher reserves would likely be needed to reflect today's economic conditions.

For the first quarter day sales outstanding was 87 days compared to yearend 73 days and year ago levels of 83 days. While the increase in DSO reflects some typical seasonal pattern, this will be a focus area as we work to bring it down over the rest of the year. Despite higher bad debt and about 0.5 million higher severance cost G&A declined about $3 million from last year's levels.

Let me now recap our overall cost estimates for the full year. In our yearend call I discussed plans to reduce costs $20 million from originally budgeted levels in 2009. We now estimate that our total cost of services excluding reimbursements in G&A will be down about $50 million or 8.5% from original budgets despite the added severance costs and will be down 25 million or about 4% from 2008's actual levels.

Let me say that again, our cost savings are more than double or original estimates and will help overcome a sizeable portion of the revenue shortfalls. We quickly acted to align our cost levels to better match market conditions. Staffing reductions, salary freeze, reductions in discretionary spending and lower bonus accruals make up the majority of these savings. Tightened spending in discretionary areas include sales and marketing, non-billable travel, real estate and virtually all G&A areas.

Again, the fact that we tackled these issues very early in the year has helped ensure that we can realize sizeable savings in fiscal 2009. As I also said in the yearend call, we expect to benefit from lower interest expense and lower amortization expense compared to 2008 and those projections are holding. In the first quarter we saw improvements in these categories about $750,000 and for the full year, we continue to expect them in total to be about $4 million lower than 2008's levels.

Turning to our overall balance sheet and liquidity position, they both remain strong and despite a seasonal increase in borrowings from December 31st levels, we expect to end the year with lower debt that at yearend 2008, assuming we achieve our financial targets and assuming we don't find other investment opportunities to spend that money on.

In short, despite one of the most challenging business environments in memory, we believe that Navigant can deliver financial performance that will exceed 2008s levels for EBITDA, net income, earnings per share, all adjusted to exclude other operating costs and severance.

And now, let me turn it back to Bill to wrap up.

William Goodyear

Thanks, Tom. Let's go back, there was a lot of defense in some of those comments in terms of our expense initiatives and cost initiative, but we had a very good offensive quarter, if you will and a good marketing quarter. I did make some comments in the press release about our expectations of better trading conditions, if you will. And like others in our space have commented recently, we do sense some confidence returning, particularly, to the law firm channel, there's anecdotal evidence that would support that.

We do know some things, judges are setting dates on calendars, regulators are wanting answers and those things are actually moving some of the backlog into actual engagement burn. So we like the feel of that part. We're not commenting, somebody called me yesterday, wanted to know well, the market turned, and I said we're not going to call a turn or, because we don't need to, we've got the company in position to perform very well absent a turn and when the market turns, it's going to be very exciting. We're going to have a very good 2009 and we could have an exceptional 2010, not to get ahead of our skis.

We look at a number of metrics and they're all individually have some volatility, but collectively they do send some signals. Our conflict checks is an example. That's the very first thing you see when a possible engagement comes in and you look to see if you have a legal conflict or business conflict. Our conflict checks are up for three consecutive months after having been down for 12 consecutive months. So that clearly is a positive signal. We hope it continues.

When you have a signed engagement letter you submit from a control standpoint, a project acceptance form and you try to quantify the number of dollars in the engagement. Obviously, there's some speculation in that. They tend to be quite conservative, appropriately so. But the dollars of our project acceptance forms turned up in April for the first time in six months or seven months.

We also track the number of active projects per month that are over certain dollar amounts and those have increased for three straight months. We track the total number of active projects, that's turned up for three straight months. Our backlog stabilized and then turned up during the quarter. So all of these things would be indicators that would give us some confidence that things are improving out there. Now, our job is to get it from out there into our income statement and do the work.

Our business development team, as you know we have a specialized team that sits on top, if you will of all of our consulting modules and helps us get doors open and create new opportunities for our experts and our consultants and our BD team had an outstanding first quarter, which is to us is very interesting and our wins in the first quarter were up 20% over the fourth quarter. And that's encouraging because those wins should turn into revenue as the year progresses. March was a particularly good month. So that's just a few of the metrics that are behind some of our comments in the press release.

In terms of how we see the market moving and we talked about some cross currents in our call last time. As I looked at my notes from our last call, I wouldn't really change my comments very much. We see the financial markets litigation really resulting from all the deleveraging that we've witnessed out there continuing to be a growing source of opportunity for us, growing source of demand and a very, very significant opportunity for the Company over the next three years to four years.

Recall that at the end of last year, there were 866 major pieces of credit market litigation. We called it sub prime, it's really capital markets litigation. 290 cases in '07 and 576 in '08. We have not closed the book on '09, but there is a persistent level of filings that, they're certainly going to be well over 100 more cases in the first quarter of '09. Compare that to that whole S&L resolution trust cycle of 559 cases and you get an idea of the huge backlog of litigation that's building.

An interesting point that I don't know that we've emphasized enough in the past is that the entire loss, it's not inflation adjusted, but the entire loss of the resolution trust S&L crisis was estimated to be $160 billion. The international monetary authority issued a report on May 21st that some of you have seen, that's the most recent estimate of the sub prime crisis as it's called and they're estimating now $4 trillion of loss, $2.7 trillion in the United States and $1.3 trillion internationally, which is primarily London and Europe with some in Asia.

So you've got 25 times the potential loss. So the litigation and the complexity of the litigation here is multiples of what we've seen in the past. We think we have Navigant in the middle of the nerve centers on this, we're winning lots of business and I said on our last call that the race that we were running was to ramp up our success in this huge area to offset the softness in just pure investigative practice and some of the slowdown in the traditional commercial practice.

We did better in the first quarter than we did in the fourth quarter. We obviously didn't offset at all because we were down 4% quarter-to-quarter and then year-over-year obviously without the big investigations we had a larger decline. But inside of that dispute practice, we had at the end of the fourth quarter, I commented that we had 45 active engagements in this space. At the end of the first quarter that 45 had increased to 66 and we had 93 wins. So 66 of the 93 wins were active.

So we were up 50% in terms of activity, the dollar run rate on that is moving up equally strongly and it's not for us to predict where this is going, but frankly, we don't see it going down and we got a lot of momentum here and it should just be a big winner.

Now, two other areas that fall in this deleveraging theme, as our hedge fund team under our corporate finance umbrella we launched in the fourth quarter last year a specialized hedge fund team, that team has had great success.

We had a number of major assignments in the first quarter that are continuing because of our hedge fund skills. So we see that as a continued winner inside of the financial litigation area and you'll see in the next week or so, a lot of publicity around our distressed real estate team that we've formed.

We haven't talked too much about it, but it's going to be very consistent with our sub prime team, our hedge fund team and the distressed real estate team is opposite the carnage that's coming and already has arrived frankly in the real estate arena and you've seen lots of publicity on this recently. But the dramatic curtailment of available financing in the real estate sector from both banks and then the closing of the CMBS market is going to and is precipitating a wave of capital restructurings that we haven't seen before, simply stated.

It's here, it's coming. There's CMBS maturities in the next three years are $150 billion. And most of the underlying collateral on that is up by 30% or 40%. So this distressed real estate area is going to sweep through the economy. We have wonderful skills. We quietly have done $10 billion of real estate restructurings in the last 20 months where we can come in and do assessment valuation restructurings, offer different solutions, that's going to be a winning opportunity for us and we're going to be a very reliable and talented partner in that sector.

So from an overview standpoint, the financial markets litigation, whether it's sub prime, whether it's real estate, whether it's hedge funds, is going to continue to favorably impact many parts of our business model, including our economics practice.

The energy practices we see it being favorably impacted is going to have a very nice year, as well our health care practice. So the wild card here in terms of a real break out for us would be what we call the regulatory wild card. We don't need to predict that other than observing that the SEC is getting their team in place, we saw the first insider trading credit default swap litigation and investigation announced yesterday. We have seen drafts of reregulation of the financial markets and the healthcare markets coming out of Washington. So that's going to happen. I think that might be a 2010 or a late 2009 impact, but we don't find anything negative in the reregulation, it's just not here yet in terms of its impact. So we're positioned very well.

When the dispute channel ticks up or we get some investigative success we'll be in very good shape and as I've said before, we've got the financial service practice aligned right where we want it.

So that's kind of a summary and we'll go into Q&A. I'll just reiterate again what Tom said. We expect our revenues to fall at the lower end now given our first quarter of 750 to 825 range and our EPS to be in that $0.85 to $1 excluding severance and operating costs. Okay, let's open it for Q&A.

Question-and-Answer Session

Operator

(Operator instructions). Our first question is from Tim McHugh, William Blair & Company. Your line is open.

Tim McHugh – William Blair & Company

Yes, I was wondering, you talked about some of the improvements you saw throughout the quarter with April close and behind us. Can you talk about if you saw that continue into April here?

William Goodyear

Well, April's not closed on our books, it might be on yours, Tim. But April was not as good as March, March was just an excellent. Let me say right now, we would take nine Marches in a row and celebrate into the night. So there's a little month to month volatility, but April's, I would expect it to be fine, although we haven't closed the books yet.

Tim McHugh – William Blair & Company

Okay. And then can you talk about, you mentioned some of the areas of improvement that you're seeing. Is it broad litigation related work as well as can you comment on the SEC? There's been some uncertainty that they seem to be making some noise and restaffing, but don't seem to be overly active quite yet. What are you seeing out there?

William Goodyear

I agree with your SEC comment. I think the beginning just the very early SEC actions are just starting, but I wouldn't call them active and I don't see that impacting us certainly in the near-term. There's good breadth and depth to the commercial litigation market. It's being managed a little more tightly, but that doesn't mean our intellectual property group is strong, the economics practice has got a great backlog, so, we see good breadth and depth on this thing. And I comment a lot on the financial litigation, but that's not to exclude the litigation in the construction practice and things like that.

Tim McHugh – William Blair & Company

Okay, that's helpful. And then last question, the financial services, the business consulting area, are you seeing any loosening in the spending there or is it still primarily regulatory or litigation driven in terms of any work that you are getting under that area?

William Goodyear

Yes, heavily the latter. Heavily the latter. I wouldn't think that there are many purse strings that have been loosened this week with the stress test and all those kinds of things rolling through the system.

Tim McHugh – William Blair & Company

Okay, thank you.

Operator

The next is from Tobey Sommer from SunTrust Robinson Humphrey. Your line is open.

Frank – SunTrust Robinson Humphrey

Good morning. This is Frank [ph] in for Tobey. Wanted to know if you could give us some additional color on the healthcare practice within business consulting, what you're seeing in terms of near term trends there?

William Goodyear

Well, there are some cross currents in there. We had some engagements that we thought we're going to start in the first quarter that didn't and frankly that was, we think impacted by the lack of clarity coming out of Washington in terms of how the reregulation or the change in the healthcare business models are going to evolve. We think that's temporary. We've got some very nice opportunities in healthcare and we see some emerging conclusions that I think the healthcare industry is assuming are going to happen.

One being, as an example that the reimbursement policies are going to move much more towards a bundled reimbursement. And that will really play to one of Navigant strength. As an example, let's say, you had a bypass or some kind of heart surgery. There is a consensus building in Washington that the reimbursement for that is going to include your heart surgeon, your internist, the care in the hospital, the post-op care, all the things that go into that. That's a very complicated complex process. We have put together a service offering anticipating that because we've got a great clinical practice, which focuses on the doctor's relationship to the hospital, part of that would be a strategy practice. And then we've got great reimbursement skills. So we've rolled that concept out and we have a couple of pilot engagements in Massachusetts that we're working on. Massachusetts, as a state is going to be an early adopter of that so, we're going to try it out there. Those are the kinds of things that are going to work their way through the system.

Frank – SunTrust Robinson Humphrey:

Great. That's helpful, and if I could squeeze one more in about the pricing environment or pricing pressure you're seeing, anything there from your competitors?

William Goodyear

Well, we talked about that in the last call and we said that we thought it was going to be a challenging year from a pricing standpoint. If you look at our pricing disclosures and our average bill rate, those kinds of things, we're hanging in there very well. I think as we look at what's happened in the competitive market, we haven't dropped our prices and our bill rates are holding up very well and I think that's a function of the areas that we compete in and maybe there is a little less pressure. But what pricing is, as I said on our last call, didn't used to be much of a conversation, now it's a conversation and that's fine.

Frank – SunTrust Robinson Humphrey

Great. That's helpful. Thanks.

Operator

The next is from George Sutton from Craig-Hallum. Your line is open.

George Sutton – Craig-Hallum

Bill, I'm curious how much healthcare work do you feel you are positioned for prior to any legislative changes and then how much would you see post legislative changes?

William Goodyear

Yes, that's a good question, George. Here is our view on the whole kind of reregulation thing, whether it's financial services, energy or healthcare. We're going to position the company to be profitable and be very successful absent that impact and we want all that impact to the upside as opposed to getting us back to where we need to be. Now, so that's a philosophical response. In terms of the practicality, in both energy and healthcare, once the rules of the road are articulated and firm, it might even be more important as they're being articulated and the consensus builds, it's going to be significant for us.

George Sutton – Craig-Hallum

Okay. One of the weaknesses you mentioned in the quarter was that sold work was slow to rollout. Can you just give us a sense of how much of your enthusiasm is related to sold work that is really accelerating the rollout?

William Goodyear

I've got my own sense, but why don't I flip that one. Jeffrey, you on live?

Jeff Green

I am. Yes, Bill.

William Goodyear

Jeff Green is trying to convert his backlog to revenue. So I'll let him answer that.

Jeff Green

It's a good question, George, and I think the best way to say it is it's always easier to be comfortable when you actually have signed engagement letters that are in the files even if that work hasn't kicked off. We are happy with our backlog as it sits right now and that helps us set the tone as to our outlook for the future here. I think Bill mentioned this before, but we've got some recent significant wins and other matters that are in our pipeline and this all contributes to our positive outlook. We've got a lot of what we talked about in terms of sold work, has been put on pause. These are jobs that date back sometimes six moths or a year, where our teams would get going and then because of the slowness in the court dockets or a client budget pressures, our teams have been asked to stand down and we're starting to feel those reigns loosen up and those teams to become reactivated on those projects. So it's hard to divide it up as to how that sort of circumstance contributes to our positive outlook going forward, but it certainly helps support our positive outlook.

George Sutton – Craig-Hallum

Okay, thank you, Jeff. If I could just be a bit selfish and ask one more question, with Bill Dickenson on the line. With respect to the stimulus money that is coming out, can we be somewhat granular in terms of how much influence that will have on your energy practice?

Bill Dickenson

Well, it's actually a little more complicated than exactly. The stimulus money, while we all believe it's out there, the treasury actually in the energy world, treasury has not released that money to anybody. So when you see people reporting they've got the stimulus money. What they have is they think an agreement about what the contract is going to look like when the money finally comes up. In terms of our energy practice, we believe we're going to have probably the 2010 budget approved and in place and planned for before we actually start getting a final handle on how much stimulus money is coming through. The only thing we do know is it's significant.

George Sutton – Craig-Hallum

Got you, I appreciate.

William Goodyear

Bill, when you say the 2010 budget, are we talking calendar or government fiscal years?

Bill Dickenson

The government fiscal year.

William Goodyear

Which is 10 1?

Bill Dickenson

That starts October, yes.

William Goodyear

Yes.

Bill Dickenson

We'll know before then how much it is and we can plan for it.

George Sutton – Craig-Hallum

Terrific. Thanks, guys.

Operator

The next is from Andrew Fones from UBS. Your line is open.

Andrew Fones – UBS

Yes, thank you. I just wanted to be clear on this point, you obviously gave us a lot of statistics around the pickup in new work that's being sold, but just to be perfectly clear, I should also assume that the work is coming out of your backlog and it looks as though you're kind of start to see a pickup in terms of that backlog hitting your income statement as well?

William Goodyear

Well, there's two pieces to it, Andrew. One, you sell an engagement and it goes into backlog. We don t put anything to backlog unless we have a signed engagement letter. And then the second half is getting it out of backlog into the P&L. And I think Jeff referenced this earlier, you can start and stop and burn hot and then have a delay or stand down for a while and then you restart and it's to some extent not within your control. Sometimes it's not within the clients control either. The judge and the court system gets in the way of those things too. Almost never is steady. I will tell you that. But we have a number of large matters, which were dormant and slow during the first quarter that we have every expectation are going to reactivate and as the year progresses and we'll put some people back to work on them. And I'd rather have those than something else.

Andrew Fones – UBS

Okay. The statistics you gave us in terms of the number of active engagements, 45 at the end of Q4, and 66 at the end of Q1. That was –

William Goodyear

That was as it relates to our sub prime and our credit litigation.

Andrew Fones – UBS

Okay, that wasn't total U.S. that was just within that one group? That wasn't total US disputes it was –

William Goodyear

No, no, no, no, no, that was purely and we track each one of these things so the fact that we ramped up from a year ago, let me just check my numbers to make sure I'm accurate. At the end of the first quarter of '08, so just 12 months ago when we started talking about this with you, we had 12 engagements that we billed against. In this last quarter ending March we had 66 that we billed against. Now you can do the math, put that in your model, but that's a good growth rate. Now I hope when we're here in the first quarter of 2010 that we can have a much larger number. And I'm not suggesting it's going to be 300, but we're up five times year to year and when you have $4 trillion of losses out there and you have over 1,000 major pieces of litigation which is extremely complex, we're positive about it, we're optimistic and we're in the middle of the nerve centers on this stuff, because we worked hard on it now for three years.

Andrew Fones – UBS

Okay, thanks. And then just in terms of the new hedge fund practice. Could you give us a sense of the types of jobs you've been retained on and is the demand being driven more from regulatory requirements and anticipation of new regulations there or is it litigation matters? Thanks.

William Goodyear

Yes, it's not being driven yet. We have some regulatory driven sorts of control assignments, where you go in and help the management. The work that we're doing right now is being driven either by litigation, pending litigation, but predominantly by investors in the hedge funds that say, hey, what's going on, bring in an independent third party that is reliable, that understands the complexity of these things, that can do a review, give us a report, work with management in terms of realistic valuation and where we stand on things, and a restructuring plan. So I mean it's basically hedge fund restructuring.

I would add that our first major hedge fund litigation matter in London is going into the court room or whatever call the, is it courtroom over there David? Into the courtroom this week and our experts will be over there testifying. That will be one of the very early hedge fund litigations in Europe that's gotten all the way through and wasn't settled, but is in the court room and so we'll be an early adaptor over there.

Andrew Fones – UBS

Thank you.

Operator

The next question is from Joseph Foresi, Janney Montgomery Scott. Your line is open.

Joseph Foresi – Janney Montgomery Scott

Hi. My question here is obviously if we look at sort of a guidance even if you go to lower end of it, it seems to be backend loaded. I know you've given some numbers on just what you're seeing on the demand environment. But I wonder if you could just sum up for us what you think gives you confidence that things will pick up in the back half of the year, maybe how we can think about that progression.

William Goodyear

Well, Joe, it is backend loaded. We're at $0.16 excluding the severance and we're talking about $0.85 at the low end. So we've got three quarters left. You can divide it up however you want, and we would see improvement as the year progresses. That's our judgment. That was our judgment actually when we laid the guidance out in January or February whenever we did that.

One thing that you can put in your model, which we've obviously put into ours is that year-over-year we're going to save $25 million worth of expense and you can work that through in terms of an EPS number. So basically, we've taken $0.30 a share of costs out of the firm. And we know we've done that. Now the other side of that is, okay, so where revenues going to run, where is demand going to run? And we've given you our best judgment on that, but it is backend loaded.

Joseph Foresi – Janney Montgomery Scott

Has there been any change in maybe visibility and maybe you can just talk a little bit about some of these cases, have they been slower to start than you expected and have some of them got dropped off as far as sub primes concerned?

William Goodyear

I'll make an overall comment about sub prime and that is that it has been slower to ramp than I would have thought. Now Jeff and others may not agree with me, but I would have thought it was going to ramp a bit quicker than it has. But I think in hindsight the complexity of this litigation, the volume of this litigation and the dollars at risk in this litigation probably all contributed to, and then the chaos in the financial markets and our large banks and they were frankly focused to some extent on survival and TARP money and everything else and as they get through that they can focus on their litigation liabilities and that's what we see happening. So on the good side we knew it was going to be a very significant opportunity, I think we underestimate it.

On the bad side, or on the other side, we probably estimated that it was going to ramp quicker than it has, but going from 12 cases a year ago to 66 cases this year and from 45 cases to 66 cases in one quarter, I call that a ramp, it's just not as quickly as we thought it was going to ramp.

Joseph Foresi – Janney Montgomery Scott

Is it a possibility that you overestimated it?

William Goodyear

In terms of?

Joseph Foresi – Janney Montgomery Scott

Size, scale, and timing?

William Goodyear

No.

Joseph Foresi – Janney Montgomery Scott

Okay. And then just one last question, we've talked a lot about the SEC and when that regulatory starts to hit. What do you use as sort of your gauge for the progress of any potential changes in litigation resulting from the change in administration? Do you have a particular metric that you look at or anything in particular that maybe you could share with us to as far as that progresses?

William Goodyear

Well, I'll ask Jeff and Bill, you jump in on this, anybody that wants to, but first of all, you got to get the heads of the different agencies in place. Then the heads have to put their new teams in place. Then the new teams have to figure out, okay, what's our strategy, there's obviously a lot of regulatory and enforcement opportunity out there, so, if you're the head of the SEC or if you're Sheila Blair at FDIC, you've got a lot of opportunity so you have to say, okay what's our strategy and then you implement your strategy.

There was an interesting article relating to the SEC in the press either yesterday or today that the SEC now has formed, maybe they're using the Navigant model, they've formed the hedge fund working group, they've got 30 professionals now that are in their hedge fund working group and that is the group that is going to set their hedge fund strategy from a regulatory and an enforcement standpoint. And the first little piece of that initiative probably was the Deutsche Bank credit default swap insider trading thing that popped up this week. So you watch those kinds of things. Sheila Blair came out yesterday and with the increased FDIC budget wants broader regulatory powers. So you begin to see these things. But these are longer term impacts, not month to month and probably not even quarter to quarter. Jeff, do you have any particular metrics that you or Bill look at in D.C.?

Jeff Green

Yes, I don't know that there's a particular metric. I think I agree, Bill, with your point. One thing we know is that the budgets for these agencies has gone up and the staffing is anticipated to go up. While it's not tangible certainly the tone and tenor that is coming out of the SEC and under the new administration and in light of the economic disruption we find ourselves in is very, very serious and we expect strong regulatory stances, strong enforcement stances. And the areas that the SEC, for one, seems to be focused on as we would expect are the very markets and the very activities that have produced the trillions of dollars in losses that we have experienced here. So while that's not a tangible metric, put it all together, increased staffing, increased budget around enforcement, selection of enforcement and regulatory priorities that swirls around the activities that are at the root of trillions of dollars of losses and we have good reason to believe that the future is bright when it comes to regulatory driven activity for and demand for our services.

William Goodyear

Joe, one other comment. Thank you, Jeff. One other comment I'd make is that regulatory competition and we've seen this in the past, is a healthy thing for consulting spend. I'm not sure I'd go beyond that. On May 1st you saw where the Andrew Cuomo, the Attorney General in New York issued 100 subpoenas relative to the pension fund investigation. That I'm sure has been noted at the SEC and probably noted by other State's attorney generals, including Illinois.

So that's an interesting phenomenon, we've seen that in the past and that usually kind of accelerates the regulatory mantle and I'll give a nod to John Gerin [ph]. I don't think John in our New York office is on the call this morning, but John said a couple of years ago, just mark down pension fund, because it's going to be big and we're studying what role Navigant should play in that or what role we could play.

Joseph Foresi – Janney Montgomery Scott

Okay, well thank you for the explanation.

Operator

The next is from David Gold from Sidoti. Your line is open.

David Gold – Sidoti

Hi, good morning.

William Goodyear

Hi, David.

David Gold – Sidoti

First question for you on headcount, just want to confirm. Tom you said after the end of the quarter about 200 cut?

Tom Nardi

200 cuts have taken place, about 100 in the first quarter, about 100 in the second quarter will actually happen, but most of the severance was accrued for all of those in the first quarter.

David Gold – Sidoti

Okay. So essentially today as we stand, the headcount is closer to I don't know, 1,820 say than the 1,920.

Tom Nardi

The 200 were the reductions. There's obviously other things taking place, the additions of the Board staff. So the headcount at the end of April is more in the 2,500 range, total company.

David Gold – Sidoti

Okay, well. For comparison purposes just because it's what I track more closely, put that for me in perspective if you can of billable professionals.

Julie Howard

David, it's Julie Howard.

David Gold – Sidoti

Hi, Julie.

Julie Howard

We'd be somewhere in the mid 1800s on billable professionals.

David Gold – Sidoti

Okay.

Julie Howard

So of that 200 professionals that we reduced, those were people that were communicated to in the first quarter, even though some of them their departure date wasn't until April. That was about 75% billable and 25% non-billable.

David Gold – Sidoti

Okay. Julie, can we go over if you can a little bit of what practices the cuts were taken in?

Julie Howard

It was a clearly across the board in a variety of areas, but part of our disputes practice, clearly, our financial services area, as we've said, we've rebalanced that to a core team. We saw some movements in our healthcare practice as healthcare we do a lot of very kind of best of breed specific things. So certain areas we were rebuilding in and hiring staff and other areas we were eliminating. That's the three predominant areas.

David Gold – Sidoti

Okay. Alright. And then, Bill, broader question for you, over the past couple weeks you spent a lot of time at some of the different law firms, major law firms, offices, particularly here in New York and what I'm hearing consistently is there still looking to cut out costs, they're still taking heads out, they are genuinely scared and that's litigators all the way on down to sort of all sorts of other practices. One of them discussed a major restructuring for the first time in their history that sounds like it's about to be announced. How do we gel that with sort of the thinking of on your end that business presumably does pick up the second half? Are they just being short sighted or are they being overly conservative or is it just a difference of opinion?

William Goodyear

Well, I think the whole law firm channel essentially been restructuring, David, for the last year. Some restructured faster and some restructured slower, but you got to get inside of the law firm to see the winners and losers and if you went back two years ago, the partners in the law firms that we deal with were not necessarily the rock stars, they were the grinded out litigation partners, the commercial, the industrial, the financial service litigation things. They didn't have the aura of the transaction guys. Okay? The securitization guys, huge securitization teams were built up. Huge M&A teams were built up. Huge teams were built up solely to service the private equity markets and appropriately so there was a lot of fees there, there was a lot of work there and so forth. That all went away. This year to-date the total amount of CMBS financings, which was a huge source of business for the law firms, zero. Last year, it was $280 billion and then before, I think through nine months and then it went to zero. So the restructurings are absolutely happening and they're going to continue to happen. Fortunately for us, the people that we deal with, the litigation partners, their business is now the strongest part of the law firms.

David Gold – Sidoti

Bill –

William Goodyear

Now, that's not to say that they aren't impacted and that we haven't been impacted by some of this center mediation. But our guys are not being cut, the big headcounts we talked about this on our Board, we've got some very senior people who understand the law firm market well, we talked about this yesterday at our Board meeting, frankly, most of the major cuts that you read about in the newspapers in the law firms are the associates and the younger people.

David Gold – Sidoti

Sure. But what I'd say to you though, Bill, is the polling I've done because obviously as you know, I dig a bit deeper than that is with litigation partners. And the folks there that we're talking to were saying they are starting to do some of those cuts they've been doing. And, in addition, actually at the point of asking partners to leave, that's how bad business is right now. So that's sort of what I'm trying to get. In other words, I understand that when you look at a headline and say 10% cuts, that's not all the litigation, but in the litigation groups they're seeing it too. And so, as I say, maybe they just I guess have a different opinion on how business plays out this year, so just trying to gel that.

William Goodyear

Well, I wouldn't argue with, I mean these people are inside their firms and they're obviously I think is firm to firm decision and frankly its partner to partner decision. I mean we just took 200 people out, David, 150 of those were consultants, and some of those were senior consultants. So I mean that's the world that we're living in. But I do stand by my statement that we see some sense of confidence returning and some spend loosening up, because frankly, it has to. Dates have been set in court rooms, regulators want answers. Julie, you want to make a comment?

Julie Howard

Yes, David, I'd just like to add a little bit because I think I heard something similar, I had dinner with a couple of law firm partners last week, but discussion was around the fact that over the last ten years, we've had a significant churn of business and law firms and other firms have had the flexibility to retain a lot of professionals who may not have had similar performance delivery across different levels. And so the comments that I was getting from these law firm partners (inaudible) litigation were that as business has gone down, it really shines a light on those individuals who were perhaps not performing at the standard that were required of a partnership or a senior associate or a junior associate and so that in their opinion, in particular, those people, this was with one particular law firm, they had had I think 25 partners reduced and their belief was that about 75% of them were through the performance evaluation process as opposed to necessarily a need to reduce because of business. So, I think we can say that ourselves, clearly, when your business is down, that's where you're going to look first.

William Goodyear

Jeff, I mean you've spent a lot of time in partners offices, would you want to comment on that?

Jeff Green

Well, I think the point was made already, that it's partner to partner and certainly law firm to law firm and what we've seen in the economy is some major clients of law firms dissolve into non-existence or get merged in and out of existence. So the impacts of the economy on a particular law firms practice can be very, very acute and can impact on all their departments including their litigation department.

The other thing I would mention is that the headline, David, as you pointed out is, relates to the firms overall, and the biggest impact that we've seen have been around the corporate departments and less so, historically, or to this point in the litigation markets. When you have the certain aspects of a law firm down, it puts a lot of pressure on the profits per partner measure and the revenue per attorney measure that are very, very important to law firms. So, when the pressure on profits per partner are down, because the corporate business is down it causes law firms to look more closely at their litigation practice and how it's organized. So I think that's probably some of it as well.

David Gold – Sidoti

Very good. That's helpful. Thank you, all.

Operator

The next question is from Dan Leben from Robert W. Baird. Your line is open.

Dan Leben – Robert W. Baird

Great. Thanks. Could you talk a little bit on the litigation side? You talked a lot about court dates getting delayed and so forth, and as we get this big sweep of additional litigation coming in, is there issues on the court capacity side that just these things have to get stretched out over so many years because (inaudible) court dates and judges and so forth available. Could you talk about how that process works?

William Goodyear

Inefficiently. We view this as four years, five years, six years at a minimum sort of run, Dan. And I think capacity could very well be an issue. But when you've got $4 trillion of losses out there, it's going to have to be dealt with and it's going to have to work its way through the court system, and it is working its way through the court system and that's why we track every single one of these cases and we talked last time about the '07 vintage, which is really where we're being engaged now and there was a 70%, there was a 30% dismissal rate on the '07 vintage. So that means that most of those matters, after being filed over a period of time, where then coming to fruition, if you will and companies and teams like Navigant has had to be involved and so we're the beneficiary of that.

I did look at the '08 vintage, which is a big vintage, if you will, big harvest, 596 cases, if I recall. And the dismissal rate changes from quarter to quarter as these things happen but the dismissal rate on that was I think between 10% and 15% and I would expect it to get back up to the same rate over time as the '07 vintage. But I mean so there's a very large amount of work. Jeff, you've commented before on court capacity or lack there of. I don't know if you'd want to add to that?

Jeff Green

I'm not sure I have too much to add. I would just say that certainly the states are under budgetary pressures and we know that, that has impacted on the state courts ability to pass cases through their docket efficiently. But beyond that, I think these cases take a long time to resolve typically and I don't have any particular reason to believe that the court system will get too mucked up with the volume of activity that's built up behind the dam here.

Dan Leben – Robert W. Baird

Okay, great. And then you mentioned the reducing some bonus accruals, could you talk about the impact of that in the quarter, and then just also kind of looking forward, what the approach is going to be to incentivizing people and returning that when the top line does improve, either later this year or in 2010?

William Goodyear

Yes, we have a pay for performance model as we've talked about before. I think we've performed very well kind of from a leadership and a management and a marketing standpoint, but our $0.11, $0.16. So the amount of accrual that we had in the quarter is consistent with that. And as we progress in the year we'll have the same sort of relationships. But we're not going to get into the specifics of the actual accrual.

Dan Leben – Robert W. Baird

Okay, great. And then just finally, to take advantage just if you could touch on the international business, David?

David Allen

Yes, in local currency, our first quarter this year over last year was up in revenue terms, margins were a bit flat. That was impacted by some severance costs and some provisions for accounts receivable. There are five practices in the international business. Interestingly, financial services had a very good quarter against budget. Notwithstanding the meltdown in the financial markets, they've really focused their efforts on operational transformation, helping people take out costs. So that's been good and the pipeline looks good for the second quarter too, so that's encouraging. Construction had a reasonable quarter. Public services was impacted by the largest piece, which is education has been on budget, but there's a new practice, which has been a bit lumpy. We've been winning some work, but haven't been able to turn it into revenue yet. Insurance had a really good quarter. What have I missed? I think that's it. Oh and disputes investigation, bit challenging, but some of the stuff that Bill talked about, particularly in valuations looks very encouraging and we see some optimism for the balance of the year there.

Dan Leben – Robert W. Baird

Great. Thanks, guys.

Operator

The next is from Sean Jackson, Avondale Partners. Your line is open.

Sean Jackson – Avondale Partners

Hey, good morning. On the cost savings front, I think you mentioned that the expense level is 25 million less in '09 versus '08. Is that just operating expense or does that include the cost of services line as well?

William Goodyear

Yes, it includes the cost of services and G&A.

Sean Jackson – Avondale Partners

Okay. Alright. Thanks. And also talk a little more detail about the March to April progression. You mentioned that March was a very strong month and is that more of a result of pent up demand, more of a one time thing, considering that April was not coming in as strong?

William Goodyear

Well, look, I'm not going to get, your next question Sean is going to be well, how was yesterday and how was last week. I mean come on. We're going to have a good thorough review of the second quarter when we get back together whenever we set that date. March was very good and it was better than February. February was much better than January. As I said, we take nine Marches in a row for the rest of the year and we haven't closed April yet, and looks like it might be down a bit from March, but I mean I probably shouldn't even have made that observation other than mentioning it, I wouldn't draw any conclusions one way or the other.

We think that we're going to have a very nice year improving results as the year progresses. The costs that we've taken out, I wish we've taken 25 million out of our overhead, but we didn't have that much to take out. So that's our total number that we referenced earlier. But that gives us a lot of flexibility here in terms of our financial performance and we're thankful for that.

Sean Jackson – Avondale Partners

Okay, and just lastly, you did mentioned about, you gave all these metrics, conflicts, checks improving and so forth. You did mentioned that the dollar value of projects in either March or April was the highest or went up for the first time in six months or seven months. Can you just remind me exactly what you said on that topic?

William Goodyear

I think you got it. Right. When we have a contract, an engagement contract signed, we put into our system a project acceptance form and you need to have the acceptance form before you can get a number to bill against and those kinds of things and you look at the risk of the project and what kind of controls (inaudible). So it's kind of a risk management thing. And at that time, you estimate the size of the engagement, each managing director that submits that puts a number down and those numbers sometimes are good, sometimes they're bad. But I mean there are thousands of those numbers. And so in aggregate you can begin to get a feel and the aggregate dollar amount of the acceptance forms that came in, in April was up smartly and that hadn't happened for a while.

Sean Jackson – Avondale Partners

Okay. Alright. Thanks, guys.

William Goodyear

Yes.

Operator

The next is from Kevane Wong from JMP Securities. Your line is open.

Kevane Wong – JMP Securities

Hey, how are you doing? I'll keep it (inaudible) since getting a little late here. Hey, one just to, hope to be the last one on this, Bill. Regarding the monthly improvements, January through March, do you normally see a seasonal uptick like that and if so, is it simply markedly better?

William Goodyear

No, this was a different quarter, January was very quiet and while we talked a little bit about that because it slopped over from December and February got better and April got better. I don't recall in my past that sort of sequential improvement. But I'd have to go back and look, I didn't, but this one felt different to us.

Kevane Wong – JMP Securities

Got you. No, that probably helps us knowing that the feel was different. And then lastly, just looking at obviously lot of expenses coming out. Two things about that. How do we look at it? I mean should we be looking for just a big jump as far as operating margins from 1Q to 2Q and then you sort of have a normal sort of seasonal changes to the rest of the year or is that move up just sequentially as things sort of roll in. And then the other part is that, when we're looking at it by segment, is there a particular segment that are really going to get the benefit of it versus others, versus just corporate activities kind of line?

William Goodyear

Well, let me see. I'm like President Obama, I got five questions in there, I'm going to have to write them all down. Julie already or Tom, one of them already talked about. We had costs and expenses coming out of multiple segments, so I wouldn't see any dramatic jump there. Further, I wouldn't see a dramatic jump in terms of profitability, I would see a steady, I think your word was sequential, I think that's a good word. And as the year progresses, look, we're very volume sensitive. If we get some pop on volume then we're going to look like we're really, really smart. If we don't then we're going to have to work hard to deliver a good year.

Kevane Wong – JMP Securities

Got you. Okay, that helps. Thanks.

Operator

The next is from Rob Young, William Smith and Company. Your line is open.

Rob Young – William Smith and Company

Hi, yes, good morning.

William Goodyear

Hi.

Rob Young – William Smith and Company

Could you just comment a little bit on hiring opportunities throughout the rest of the year?

Julie Howard

Rob, it's Julie. That's an interesting question. Clearly, we will be evaluating the hiring environment and opportunities that we'll want to undertake in several of our practices, and as Bill said, if our volume pops, then we will be back in the market, probably in a more significant way than we have been. But we're anticipating that we will have very modest hiring throughout the balance of the year just based on our current expectations and if that changes, I think the market is certainly in a situation where it will be beneficial to us.

Rob Young – William Smith and Company

Okay. And then just secondly, on the under utilized areas that you've mentioned, can you quantify or qualify the level of non-billable time that is being used to foresee to possible engagement working on pitch books and the such?

William Goodyear

No.

Rob Young – William Smith and Company

Okay.

William Goodyear

That's a level of detail. And it just varies so dramatically to each pitch. As an example, in some cases, Rob, I'll get very involved myself on a few selective cases and others are pretty straight forward, so it just vary dramatically.

Rob Young – William Smith and Company

Great. Thank you. That's all I have.

William Goodyear

Alright. Thank you, all. That was a good session. We look forward to get back some time in summer.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect at this time.

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Source: Navigant Consulting, Inc. Q1 2009 Earnings Call Transcript
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