Navigant Consulting, Inc. Q1 2008 Earnings Call Transcript

Apr.28.08 | About: Navigant Consulting, (NCI)

Navigant Consulting, Inc. (NYSE:NCI)

Q1 2008 Earnings Call Transcript

April 24, 2008 5:00 pm ET

Executives

William GoodyearChairman and CEO

Scott KrenzEVP and CFO

Julie HowardPresident and COO

Bill DickensonVP and Executive Managing Director, North American Consulting Operations

Analysts

Andrew FonesUBS Securities

Tim McHughWilliam Blair & Co.

Michel MorinMerrill Lynch

George SuttonCraig-Hallum

Tobey SommerSunTrust Robinson Humphrey

David GoldSidoti & Co.

Kevane WongJMP Securities

Rog Young – William Smith & Co.

Bill SutherlandBoenning & Scattergood Inc.

Presentation

Operator

Good afternoon and welcome to Navigant Consulting's first quarter 2008 earnings conference call. (Operator instructions)

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

William Goodyear

Thank you. Good afternoon everyone. Thank you for joining us for today's webcast to discuss Navigant Consulting's first quarter 2008 financial results.

Before we begin, I'd like to point all of you to the disclosure at the end of our earnings release relating to information about forward-looking statements that may be made or discussed today. We've posted the earnings release on our Web site. Please review that information along with our filings with the SEC for disclosure of factors that may impact subjects discussed in this afternoon's call.

Also on this call, we'll be discussing one or more non-GAAP financial measures. Please review our earnings release on our Web site for all of the disclosures required by the SEC and we also have reconciliation to the most comparable GAAP numbers.

With me is our corporate team in Chicago. Julie Howard's in New York City today. She is on the phone and Bill Dickenson's in Washington DC.

We last visited February 21, when we discussed a solid finish to last year and we indicated at that time that we saw a number of positive trends that were extending into the first quarter of '08. Happily, we can report today that we had a very solid start to the year. We had just an excellent quarter. Good breadth and depth. All three of our reporting segments had year-over-year revenue increases and all three segments had year-over-year profitability increases.

The dispute channel had a very nice quarter, benefiting from the regulatory pressures that are continuing to build, a number of significant white collar litigation matters and we mentioned some AML FCPA types of issues as well. But overall, it was a very nice broad, solid quarter.

In the consulting segment, we had excellent results on our healthcare practice, year-over-year, they had just a great performance. That practice also had broad based success between the pharma segment, the performance improvement segment, the strategy segment, it was running very strong, so it's just a very nice performance that the team turned in.

Financial services and energy also had very nice quarters and year-over-year performance in terms of utilization, revenue double-digit growth and improved profitability. The one piece of the consulting segment that was down year-over-year was our insurance segment, which is a significant practice for us.

The insurance markets did soften in the first quarter, particularly in the insurance, reinsurance area. Premiums were down and year-over-year, our revenues were down. And admittedly, it was against an excellent quarter last year, but that was the one piece in the consulting segment that was down.

The team's done a very nice job. They've taken a hard look at their costs during the first quarter, took out some people. They've sharpened their offerings that we're confident will offer our insurance clients near-term opportunities to work with us that have immediate, what I would call, return on investment attributes, so actually nice job by the leadership of the insurance practice.

The international segment had a nice very nice year over year continuing improvement. The infrastructure construction team was very strong and then we obviously benefited from the acquisition investments that we made last year during basically the first half of the year.

If you step back and then look at the overall financial performance of the company, utilization at 83% was excellent. I think it reflects both the market demand that was broad based and it also reflects the hard work that went into the second half of last year in terms of streamlining the company. But we're proud of that number. I'd also say that I'm not sure that you can run at 83% for the whole year, but it sure is very, very nice. That was a 500 basis point year-over-year improvement and we had a nice move on our yield and on our bill rate. Part of that improvement in bill rate was the fact that our very senior people were obviously very busy in the first quarter as well as the rest of the staff.

When you look at the productivity of our professionals, the move year-over-year was impressive. We said we wanted to run tighter, faster, leaner and meaner and our revenue per professional in the first quarter averaged $473,000. That was up from $380,000 a year ago. So that was really a nice move.

Organic versus acquisition growth was about the same as we've done historically. We had 13% revenue growth, it was about half organic and then the other half reflected the acquisition investment that I referenced in Europe.

I'd like to take a couple of minutes and talk about two things now. One would be Chicago Partners and we've had some preliminary discussions with some of you earlier this week with our announcement. And then, I'd like to talk a little bit about how we see the subprime and the credit crisis evolving, and then I'm going to ask Scott to talk about some in a little bit more detail on the numbers.

The Chicago Partners acquisition and investment that we announced earlier this week will add very significantly to our ability frankly to impact on what we say are the big economic issues of the day. I think it's a timely acquisition because the reputation and the go-to spot for Chicago Partners is working in very complex and unstructured environments to come up with very insightful answers for clients. And I think we'd all agree, in an increasingly complex world, particularly in the financial markets area right now, this is a skill that you really can't have too much of.

It's a great investment for us. We're very excited. It fills a strategic need that you've heard us talk about for the last three or four years. We now have a stable of renowned scholars, outstanding professionals and a securities litigation and an antitrust capability that is multiples of what we had before this investment. So, we're very, very pleased with it and look forward to hopefully a very successful integration and look at leverage both ways on the investment.

We are going to add a stable of testifying experts, which frankly we need, at the top of our pyramid from a consulting standpoint. And from Chicago Partners' standpoint, the breadth and depth of our platform will allow them to go after larger, more complex and longer engagements than they were able to do before that and we obviously add a very significant stable of credentialed PhDs to our team.

From an organizational structure and an integration standpoint, we're optimistic that we can do this smoothly and effectively. We have the same clients and essentially the same sales channels, which should really help us in terms of quickly and effectively leveraging the investment. The organizational structure, we're going to discretely drop the Partners group into our company as a fourth segment and we're saying philosophically a separate team, separate resource, but leveraged across the entire firm.

One or two other comments, I know from a numbers standpoint, we didn't have much in the press release. I'll remind everybody, we have not closed the transaction yet. We're looking forward hopefully to doing that in the month of May. But, from an overall standpoint, Scott may want to comment a little bit further in his remarks, we would estimate, subject to timing of the close, $30 million of revenue and that revenue, as some of you speculated in the reports that we saw this week, will have a 20% if you will EBITDA margin consistent with that testifying expert economic business model.

A couple of areas that we are very excited about immediate traction together with Partners is the credit market litigation. So, the principals there are going to instantly add to our own, I think, very good credentials vis-à-vis the subprime opportunities that we have and they also bring a series of relationships with major financial institutions, which will complement the ones that we've built the last three or four years. So that's Chicago Partners.

Let me switch to a couple of comments, which I know you'll be interested in, in terms of the credit crisis and what we call the subprime crisis. We released yesterday, some of you saw it, an updated report as of quarter-end, first quarter-end, on our subprime study that we commissioned and did internally last year. The results were actually quite startling as we added them up. The subprime related cases exploded in the first quarter and added significantly to the cases that were already filed last year. These are at the federal level. There were 170 new cases filed during the first quarter and that approached last year's second half of 180 cases and I think 90 the first half of last year. So you can get a feeling for the way this thing is exploding. And the total number of cases that we're tracking now on our matrix is 448, up from 278. And it will soon surpass the entire seven or eight-year S&L Resolution Trust crisis, where the total caseload was 559 cases. So, it's going to take years for this to play out and there are some interesting things that are evolving as we study the data.

The class actions are about 46% of the litigation and the other interesting statistic is that very major entities are getting caught up in this thing. At least one global 500 company is a defendant in roughly half of the cases. And additionally, you're starting to see significant international exposure being developed. UK firms are accounting now for a very meaningful part of the litigation and we're starting to sense that in the work that we're doing over in London. So the international piece I think is new, just the last 90 days. From our own standpoint, I'll anticipate a question that we continue to add nicely to our engagement base in terms of subprime matters. The revenues from this sort of issue continue to exceed the peak run rates of $10 million a quarter that I referenced in our last call that were the top of the back-dated stock option thing.

So we think that the company is very well positioned, we're right in the middle of this thing and feel very good about the future. And frankly, this thing is in its infancy. We're surprised every day as to how it evolves. But we're in the very, very early stages of this, which is very exciting for us. Now with that, I think I'll let Scott do some numbers here and then we'll open it up for Q&A.

Scott Krenz

Okay. Thanks, Bill. As Bill just mentioned, the fourth quarter saw a continuation of the solid market demand that first became evident to us in the fourth quarter of last year. This demand environment was broadly based and extended across most of our practice areas. As a result, total quarterly revenue of $207 million beat our expectations. Total revenue exceeded a strong fourth quarter by nearly 2% and exceeded prior year's first quarter by 13%. Utilization was 83%, exceeding the fourth quarter by 6 percentage points and the first quarter of '07 by 5 percentage points. We also saw a nice increase in bill rates to $254, up nearly 6% from the fourth quarter and exceeding last year's first quarter by 10%. Some of this is attributable to mix, the higher utilization of our more senior people, but it is also attributable to a strong emphasis we have put on pricing our services fairly, but competitively, in the marketplace.

And I think it is worth noting that both the higher utilization and the increased bill rates are a result of the organizational improvements that were implemented in the second half of 2007. The increases in utilization and bill rates more than offset a slight decline in billable consultants during the quarter, down 48 to 1,896 at March 31. You may recall that on the year-end call, I indicated that although we took a severance-related charge in the fourth quarter, many of the actual separations would not occur until the first quarter of '08 and that we would not be surprised if the first quarter headcount declined. As you can see, that was in fact the case.

Now as I switch gears to talk about profitability, just a reminder, as in past calls, I'll be talking about profit numbers which exclude certain expenses related to our ongoing office consolidation efforts. These expenses are, of course, included in our GAAP results. As we state on almost every call, we do this because we feel it gives you a better sense of the actual ongoing performance of the company. However, for the record, first quarter GAAP results included $1.5 million in expenses related to real estate consolidations. These expenses are included in our other operating costs on the P&L. Most of these relate to accelerated depreciation of leasehold improvements in New York, where we will be consolidating to one office early in 2009. The accelerated depreciation and New York leasehold improvements will continue for the remainder of '08. These expenses and a reconciliation to GAAP earnings are included in the income statement attached to the press release.

Now with the housekeeping behind us, operating income was $24.8 million for the quarter, up 14% over the prior year's first quarter and up 4% over fourth quarter. EBITDA of $33.2 million was up 14% over first quarter '07 and up 1% over fourth quarter. Both the operating income and EBITDA increases roughly track the increases in revenue for the comparable periods.

I'd like to make a brief comment about G&A expense. Although this remains steady at 21% of revenue before reimbursements, there is a story within these numbers. We continue to make significant investments in our human capital, international and IT organizations. These investments are laying the groundwork for a more leverageable infrastructure in '09 and beyond. We remain focused on our long-term goal of driving G&A down to 18% of revenue before reimbursements. The good news here is that to date, we've been able to largely offset these investments with efficiencies found in other G&A areas, principally real estate and office services.

Let me talk a little about the balance sheet and cash flow before I move on to guidance and the impact of Chicago Partners. First, DSO of 83 days was an increase of six days over year-end. This was not a surprise. As I mentioned on the fourth quarter call, you could expect some back tracking quarter-to-quarter. This is consistent with our historical patterns and pretty close to the 81 days in Q1 of '07. We continue to work hard to put in place new operating procedures to continue an overall favorable trend in DSO. The increase in DSO and the payment of annual bonuses in the first quarter were the key drivers behind an $11 million increase in total debt to $268 million.

Now let me end by talking about our expectations for 2008. As Bill mentioned, we expect Chicago Partners to contribute roughly $30 million in revenue at an approximate 20% EBITDA margin. And of course, this depends on the actual close date, which we currently expect to be in May. For calendar '08, we expect the acquisition to have no impact on EPS, given the typical amortization of intangibles of these type of transactions. After the acquisition, we would estimate total debt in the second quarter would come in at between $315 million and $325 million. We would also expect this to drop below $300 million by the end of 2008.

We will roll the impact of Chicago Partners into our guidance in the second quarter, after we've closed the deal. So to be clear, I'm now going to talk about '08 guidance, excluding any impact of Chicago Partners.

While we are obviously pleased with our solid first quarter, we are leaving our 2008 guidance, exclusive of Chicago Partners, unchanged. 6% to 9% year-over-year revenue growth, 18% to 19% EBITDA margin and an EPS range of $0.82 to $0.96. A number of things factored into our thinking here. On the plus side is the strong market environment, particularly the trends we see in our business related to the credit markets and the leaner business model we are operating. Less hopeful, however, are the general trends in the economy and assessing how they will impact certain practices such as insurance. In addition, we have a few engagements that were large contributors in both the fourth and first quarters that are trending down. And as we approach the summer vacation season, we'll see how we can maintain our current 83% utilization. Netting this out and looking at our forecast models, we would not be surprised if second quarter actually came in weaker than first. And putting it all together, we remain comfortable with our existing guidance for the full year.

And with that, I'll hand it back to you, Bill.

William Goodyear

Thanks, Scott. I'm going to anticipate one other question and then we'll open it up for Q&A. In terms of acquisition plans for the remainder of the year, we don't have anything significantly, obviously, that we're looking at right now. We're going to really focus on making sure that our investment with Chicago Partners is going to be a spectacular success. So we would make that comment and I would concur with Scott that from a cash flow standpoint, we'll get the bank revolver the $500 million facility back under well under $300 million as of the end of the year.

With that, let's go ahead and open it up for some Q&A and as I said, Bill Dickenson's on from DC and Julie's in New York City.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Andrew Fones of UBS Securities. Sir, you may ask your question.

Andrew Fones – UBS Securities

Yes, hi. Thank you. First of all, I need to ask about turnover. I was wondering if you could just comment on what the turnover has been in your staff. Perhaps when the bonuses were paid for '07 and have you seen any turnover, particularly within the (inaudible)?

William Goodyear

The short answer is, it's stubbornly at 22%, Andrew, which is what it was remember, that's the trailing 12 number, which we report each quarter. I think it was 22.1%, Scott, or ?

Scott Krenz

Yes, well actually it stayed at 22% in the big numbers. But, as we look at the trend down, the recent trends have ticked slightly downwards. Not enough to change the 22%, but it has ticked down slightly recently here.

Julie Howard

Maybe I could add this is Julie, just a little bit more color to that. We typically tend to see more of an uptick in attrition on a quarterly basis during the second and third quarter as we have a lot of new younger professionals coming in, but we also have a lot of professionals who are embarking off to pursue higher education. So, we have seen a downward trend in the quarters, but we're still carrying Q2 and Q3 of last year, so we maintain a rolling annual attrition rate of about 22%.

Andrew Fones – UBS Securities

That's great. Thank you. And then, you mentioned the strength in the disputes business and you mentioned regulatory pressures, white collar litigation, AML, CPA issues driving that. If you had to kind of quantify or break out which you thought were the more important drivers of growth in the quarter, could you quantify that at all, please?

William Goodyear

Regulatory pressure, first, second, third and fourth. Because, Andrew, I mean, as you know, that filters into all those other things, doesn't it? And I would mention I think interestingly enough, you've seen the same releases, I'm sure, that we have that the Securities and Exchange Commission has announced additional budgetary requests in the last 10 days, as has the FDIC. So I think that's kind of where we're at in the cycle.

Andrew Fones – UBS Securities

Thanks. That's very helpful. And then finally, I missed this. What were your comments regarding accelerated amortization? Can you perhaps give us some sense of what the potential accretion could be when you close the acquisition? Thanks.

Scott Krenz

Well, I mean, we stated in our release that over the first 12 months after the close, we expect it to be modestly accretive. And I don't think we're going to quantify beyond that at this point.

William Goodyear

Yes. Modest is modest. It's positive, though. And then, because you have to eat all the amortization in the first 12 months.

Andrew Fones – UBS Securities

Okay. My math using the numbers you gave for the remainder of the year, I show them adding about $0.08 before the accelerated amortization. Does that sound correct?

William Goodyear

I don't know that we back it out. I can tell you that we don't think it's going to add or impact EPS for the remaining, what, eight months of the year?

Scott Krenz

Right.

William Goodyear

Assuming we get a or seven months, assuming we get it closed in May. So whatever you're doing, figure amortization's going to offset it, Andrew.

Andrew Fones – UBS Securities

Okay. Thanks very much.

Operator

Tim McHugh of William Blair & Co., you may ask your question.

Tim McHugh – William Blair & Co.

Yes, I want to ask about gross margins. You obviously had a very strong utilization rate and you mentioned that billing rates positively moved up. But yet, I guess I was kind of thinking with those trends you would have seen a little higher gross margin. Was there anything else going on there that you can comment on?

William Goodyear

No, I don't think so. That's kind of where we would expect the gross margin to be, given the way we're running the company. I will say that the way we fund our bonus pools is a function of performance, so that we share on the upside as well as take away on the downside. So we, obviously, funded a lot money into the bonus pool into the first quarter.

Scott Krenz

We have some practices, as Bill mentioned, disputes and investigations in particular, who were extraordinarily successful in the quarter. And we paid based strictly on performance in our bonus plan. So the amount of bonus we actually funded during the quarter was somewhat higher than we had in prior quarters.

Tim McHugh – William Blair & Co.

So then as we think across the year that you mentioned you probably won't be able to sustain an 83% utilization rate necessarily for the full year or at least it will be difficult to do so, how should we think about gross margins at this point? Is this the optimal gross margin that we should look for across the next year?

William Goodyear

No, first of all, I don't want to say we're not going to try to keep our utilization up. We're going to try to stay behind demand, but being realistic about it, those are some boxcar numbers. So I don't think that we're putting a ceiling on our gross margin here.

Tim McHugh – William Blair & Co.

Okay. And then you mentioned the insurance weakness and the risk to the guidance, the macro economic conditions. Can you quantify how significant would the pieces of your business be that you think are at risk to macro issues at this point?

William Goodyear

That's a difficult question. The topic of Tuesday's Board meeting. And there are I frankly think that we're relatively neutral, but in the dispute area, budgets are tighter from the client base, but there are maybe more critical issues. So how do those play out? And you can almost do that all across our business model. In the healthcare area, there are obviously increasing pressures on our customer base in the healthcare area, but that means there's need for consultants our expertise, to help them sort it out. So you're always fighting the two. I mean, there's a counterbalance in there and we tend to think we're, to some extent, over reasonable time frames, neutral. But there are periods of time, like in the insurance, reinsurance in the first quarter, that part of the insurance industry struggled and rates went down, so we've got to react to that. But over time, I think we'll be fine.

Scott Krenz

Also, making it a little difficult is there's crossing over between our practices as well. I mean, there is some interplay between them, which makes it difficult where we can redeploy people where areas are stronger. So I think it's a fairly complex mix to decide and I think the big thing in here is just how deep is this recession, if we're in a recession, going to become. And we're all trying to guess at that.

William Goodyear

Yes. When we put that original guidance out there last year, during the fourth quarter, whenever that was, we thought that was attractive, robust, let's go get it guidance and we still feel that way and so we're sticking with it.

Tim McHugh – William Blair & Co.

Okay. And then lastly, could you quickly comment on, you'd mentioned there's a few large engagements that are on their way down at this point, what were the nature of those, were those disputes engagements, and how big exactly were they?

William Goodyear

I'm not going to comment on how big exactly they were because that's proprietary, but they were not any particular quarter or any particular time, you're going to have some larger engagements and you're going to be bringing in new engagements. So we had some significant engagements in the dispute channel that were attractive and frankly, I think they'll continue to be attractive for awhile. But, they will come to an end, they will trend down as the year progresses. And in the financial services segment, we had a couple of large engagements, which are ongoing. But, over time, they will wrap up. And those were restatement sorts of things, which are attractive and leverageable jobs. So it wasn't just one area, it was but we had obviously we had a number of very favorable factors, both in the fourth quarter and continuing into the first quarter.

Tim McHugh – William Blair & Co.

Okay. Thank you.

Operator

Mr. Morin of Merrill Lynch, you may ask your question.

Michel Morin – Merrill Lynch

Yes. Good afternoon. I was wondering, were there any success fees in the quarter?

William Goodyear

Yes.

Michel Morin – Merrill Lynch

Is it possible to quantify those?

William Goodyear

I don't think we typically let me say this, the performance fees, it's a little bit better to call them performance fees, to be politically correct. And they were in the first quarter, consistent with a year ago's first quarter. So there wasn't anything in fact, I think we had a little less, got a little less performance – well, they were Scott's tickling me. They were down a little bit.

Michel Morin – Merrill Lynch

Okay.

Scott Krenz

It was not a significant factor in the quarter. There were some performance fees, but they were not a significant factor in the quarter.

Michel Morin – Merrill Lynch

Okay. It's just that in the fourth quarter that was part of the upside had come from that. So I just wanted to verify.

William Goodyear

No, this was year-over-year performance fees were actually down a little bit and we love them. But, they weren't all that significant this quarter.

Scott Krenz

As we mentioned at year-end, for whatever reason, fourth quarter performance fees, it always seems to be that's where they tend to cluster. We always have the most in the fourth quarter.

Michel Morin – Merrill Lynch

Okay. And then, Scott, on your comment about the accelerated depreciation related to the office closures, that'll continue for the rest of this year at the same amount?

Scott Krenz

That which is related to New York, yes, it is absolutely going to be the same amount for the rest of the year each quarter.

William Goodyear

Let me clarify. You mean $1.5 million each quarter?

Michel Morin – Merrill Lynch

I think it was 800 and something, right?

William Goodyear

Yes. That's about right.

Michel Morin – Merrill Lynch

Okay. All right. And then, Bill, I'm going to play devil's advocate here. How is the Chicago Partners acquisition different from what your predecessors did when they went after LACG?

William Goodyear

Well, it's completely different.

Michel Morin – Merrill Lynch

I guess the question is, the rationale for needing the expert testimony capability. Are there have you seen situations where you've not won engagements where that would have been critical?

William Goodyear

Yes. All the time. And look, we have a number of very talented testifying experts in the company, obviously, or we wouldn't be performing the way that we are. But, the quantity that we have – we've been running our experts frankly extremely hard and not in a real sustainable way. So what we're adding to our stable here, is we're adding a significantly expanded base of experts. And if you remember, I'm the one that sold LACG, so I think I understand what we sold and what we bought. And let me tell you, we could not be more pleased with this investment.

Michel Morin – Merrill Lynch

Great. Thanks very much, Bill.

William Goodyear

Yes. Fair question.

Operator

George Sutton of Craig-Hallum, you may ask your question.

George Sutton – Craig-Hallum

Thanks guys. Congrats to the teams for these numbers. Could you, Julie, discuss hiring plans for the remainder of the year?

Julie Howard

Sure. From a college campus recruiting perspective, as we generally have done every year, expect to bring in somewhere between 100 and 110 professionals over the course of the normal time frame. We've had a few already start in the first quarter and we would expect the rest to float in throughout September and October. And then in addition, each of our segments has reasonable hiring goals through the balance of the year, such that I think we will have relatively modest growth when you think net-net on the attrition front, plus our hiring goals. We'll have relatively modest growth in our headcount from here throughout the rest of the year. And I think that'll allow us to continue to maintain our utilization rates and improved performance.

George Sutton – Craig-Hallum

Thank you. That's good.

William Goodyear

George, let me ask Bill Dickenson to make a comment because Bill has had a series of conversations and has, in terms of recruiting. Bill, do you want to add any flavor to where you kind of see things going on that front? Or do you want to stay behind the curve, so to speak?

Bill Dickenson

Staying behind the curtain, you mean, yes. No, I guess what I would Julie's absolutely correct about what she says on our plan and I have to say that what we've been able to see in the marketplace, is we remain somewhat successful, I guess I have to say, in getting some of our recruiting goals met. So in fact, given the fact we still have our 22%, roughly, attrition rate, we're doing very well, I believe, and you'll see a modest growth in headcount as time goes by.

William Goodyear

Is that all right, George?

George Sutton – Craig-Hallum

That's great. Now, from a Chicago Partners standpoint, you had suggested that you would wait until you felt internally you were ready to make acquisitions again or you would move when you found the perfect deal. Can you give us a sense of which of the two areas this might fit?

William Goodyear

Yes, I think it probably fits both. One quarter doesn't make a trend. Two quarters doesn't make a trend. But, we've had seven or eight months now that we feel we've got a lot accomplished. And so we feel good about the business model. I personally think that the management and the leadership team, going back to the efforts that we made to streamline things a bit last year has done an outstanding job and carry water on both shoulders. And we have had a long-term dialog with the Chicago Partners principals and those things all kind of came together at the same time, George. So fortunately, we were comfortable that we had the company in the kind of shape that we could entertain this and it was strategically critical to do that and we're very excited about it and I'm very comfortable that we'll be in good shape here.

George Sutton – Craig-Hallum

I'll ask the question I tend to always ask. But we talked a lot about subprime, so I think that's an opportunity. Could you discuss and/or update us on healthcare litigation opportunities and then, more broadly in the energy area?

William Goodyear

Bill, why don't you start with energy and then you can evolve into healthcare. But, I'll say the healthcare thing is feeling really good now and I'm so pleased for our leadership team there because they've done an excellent job of getting us repositioned. But, Bill, why don't you start with energy?

Bill Dickenson

Yes. Our energy practice continues to have increasing demand across all of its sectors as well. I have to say, it sort of mirrors what's happened to the firm as a whole in its very broad-based increase. However, there are a few bright spots or demand drivers, if you will, that are pushing things up more than they have in the past, and those are relating to energy efficiency and renewable energy technologies, which is coming out of the Energy Act of 2007, it's driving most of that. And that's at the federal, state, local and as well as ROU and public providers of utility services. So we're really seeing an increase there across the way and that's one of our growth areas for sure. And I would say, (inaudible) renewables and the energy efficiency efforts are also demand is increasing overseas, not just in America, so even though in North America the energy practice is seeing demands outside of that.

On the healthcare front, as Bill just said, their results are really strong. There's a lot of drivers underneath that, that is increasing the demand. The regulatory impacts, the quality, financial pressures that are being experienced across all aspects of where we are serving big hospitals, insurers, our pharma practice as well as life sciences, and we sort of feel like that's going to keep up here for a while and I will add a little bit more color to what Bill said before about the macro drivers based on somebody's other question.

In our experience and our business and most of the industries that we see, what really drives services for us is rapid change or the face of rapid refocus of regulatory priorities. And we're seeing that in most of the businesses that we are in. As long as there is this rapid change, people have to deal with it and they need help in that. That increases demand for our services. And I think we're seeing that right now, and that's what I'll say.

George Sutton – Craig-Hallum

So, Goodyear, you'll never hear Bill Dickenson sound more positive. That was nice to hear. Thanks a lot.

William Goodyear

Bill, you overachieved. I would add one kind of anecdotal thing, George, on the healthcare, is that the industry, particularly the big not-for-profit hospitals, the teaching hospitals and the research hospitals and so forth have been heavy, heavy users of variable rate municipal financings. And all of those that market came to a halt February 11 or whatever that day was. And so, there's a huge impact from an interest cost standpoint as the auctions failed, where you were going along at 2% or 3% and probably had that modeled into your plan for the year, and now the auction's failing and you're paying 15% or 20%. So that has blown apart a number of budgets and caused I think nervousness and concern within the industry, and that's generated some work for us. And I think it will continue to, because you've got to find ways to get back what you weren't expecting to lose on that interest rate expense.

George Sutton – Craig-Hallum

Great. Thanks, guys.

Operator

Tobey Sommer of SunTrust Robinson Humphrey, you may ask your question.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you. I wanted to harken back to the fourth quarter call and ask you what is the labor market like relative to competition, both at the low levels in terms of less experienced consultants, and then maybe contrast that with what you're seeing in terms of your more senior people? Thank you.

William Goodyear

Well, that's a multi-layered question. I would go and I don't have the transcript in front of me from our February call. But if we think at a high level here and then we can kind of peel away the onion, you've seen a series of cuts in New York City financial and related sort of staff at multiple levels because of the pressure that the Street is under, and I think there the estimates are now 30,000 jobs. And those are very qualified, experienced people with the kinds of finance and accounting backgrounds that potentially are attractive to us at certain levels of our business model. And you notice also that the there's been recent publicity that the law firms are throttling back quite significantly on hiring of associates and those entry level sorts of legal professionals.

And somehow that gives us pause because the law firms are our partners and we want them to do well, but it also means that there's maybe in a significant way less pressure on the labor market. Now, if the regulators start to hire again, that could be a partial offset on that. But, I think at the lower and intermediate levels, I think it's probably a better labor market than we've had in the recent past. At your senior levels, your really top people are always going to be attractive in the marketplace and you have to pay, compensate and reward them in a way that makes sense competitively. So, I would kind of separate the two and I don't know, Julie or Bill, if you'd want to comment on my observation?

Julie Howard

No, I think you've represented that fairly, Bill. And the only thing I would add to it is that we have a number of diverse businesses and markets we serve at Navigant, so that competitive marketplace is a little different in each one of them. And in some cases, we feel more pressure competitively when we are recruiting and others not as much is what I would add.

Bill Dickenson

Yes.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you. I was wondering, just to follow up on that, you said turnover kind of moderated recently but not enough to bring down the trailing 12 months. At the higher level, is it still holding relatively low? And then as a separate question, I was wondering, Bill, if you could comment a little bit more about the credit crisis and the work that you're getting. You mentioned some international work, if I heard that correctly, earlier in your prepared remarks, just kind of comment on breadth and depth of the engagements that you've obtained so far? Thanks.

William Goodyear

Yes, Julie, I'm going to kick the attrition question to you, but let me address the credit stuff, because it's really interesting. I mean, intellectually it's interesting. It is hard to we were reflecting and we had a subprime task force meeting yesterday and we meet at least weekly, if not a couple of times a week. And if you had a month ago, if somebody said we're going to have this type these engagements that we're just talking about, I would not have been able to conceive that we were going to be doing that particular engagement or that type of work. It's very interesting the way that stuff works around and the issues that come out of it. It's really interesting.

So, the overall response is that it the really interesting thing about this, it is very broad based and there are multiple issues and resources that are needed to work on these engagements. First of all, there are multiple there are so many parties involved. You've got regulators, you've got investors, you've got issuers, you've got structures, you've got investors, so you've got multiple parties and they all have a little different issue.

And then, you've got work that is valuation work, because all that stuff ultimately is about valuation and that's why our investment in Chicago Partners is so exciting because of their valuation skills. You've got your forensic investigative needs, your analytical needs. Ultimately, you're going to need testifiers to go on the stand and say here's what we think and here's why. So, there's almost no part of your business model that is not impacted in some way. So, it's very exciting and it's hard frankly to anticipate where this stuff goes from week to week or month to month. And let me just say it again, we really are in our infancy on this and that's what I think makes it hard to predict as to where it goes, other than it will go.

I would throw one kind of interesting sound bite out and we were joking yesterday, ghosts from the past. We picked up two meaningful engagements this week that relate to the SNL crisis. Now, let me just say that again. Two new engagements this week that relate to the SNL crisis. The peak of the SNL failures, just for those of us that have been around that long, was 1989. So I mean the tail on this stuff is obviously almost generations. It's very, very interesting and this one's going to be multiples of that one. I don't know is that enough color or …

Tobey Sommer – SunTrust Robinson Humphrey

Absolutely, thank you, and just that last little bit about turnover at the top level. Thank you.

Julie Howard

Absolutely. And as I said previously, we've seen our turnover number hold steady on an annualized basis. But that generally has some higher trends in certain quarters. Relative to our senior level, I don't know that we've ever I don't believe we've ever kind of broken out junior versus senior, but I will say that we went through a significant restructuring, we took a real hard look at all up and down the organization, but particularly at our senior level to ensure that we had the right contributors here. And so we've had an uptick in our involuntary attrition at the senior levels, and I think (inaudible) a little bit of an uptick in our senior levels, which on the voluntary side, which I think goes hand in hand. Any time people know that you are going around the organization and really evaluating and looking under rocks and so on and so forth at performance that sometimes causes people to leave voluntarily on their own as well. But, like I said before, we also feel good that the we're starting to see some downward trends on a quarterly basis.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you very much, very helpful.

Operator

David Gold of Sidoti, you may ask your question.

David Gold – Sidoti & Co.

Hey, good afternoon. A couple of questions, just a little bit of follow-up on headcount, curious if you can give the number of the cuts that you guys made that hit in the quarter, just so we can get a sense on that headcount number?

Julie Howard

I'm sorry, David, the number was how many cuts we made?

David Gold – Sidoti & Co.

Yes. Scott, I guess had mentioned that some of the separation "had hit in the first quarter," so basically the involuntaries.

Julie Howard

Right. The involuntaries in the fourth quarter was hold on, I am just looking at it we had an additional 42 involuntaries in our consulting levels in the first quarter.

David Gold – Sidoti & Co.

Perfect. And then part two, you're from I guess the general tone obviously, Bill, sounds like based on the guidance, there's some conservatism there. But generally speaking, business seems to be going decently well. And going back to I guess a comment on the last conference call of managing headcount to the business, curious there, you have the fact that we're looking for headcount to be up sort of modestly for the year, is that more a function of the attrition being sort of where it is and it being tough to bring in that many heads, or are we just being more conservative? In other words, in a perfect world, would you be adding more aggressively this year or are we still sort of shy about that?

William Goodyear

Okay, David, we tried the aggressive thing.

David Gold – Sidoti & Co.

Yes.

William Goodyear

Okay? Bill Dickenson, do you want to comment about the Dickenson Kool-Aid?

Bill Dickenson

Well yes, a little bit. We tend to more take a balanced view, I have to say. So, when we have our plans for the business, I'm looking at the operating statistics that go with the increased headcount. So, we're looking to follow our business. So, if the business continues to grow in some of our practices like it has been, we'll add in there, and if doesn't, we won't. It's not a just hire all you can and stuff them in. If you do that, they'll come. We're not taking that approach.

William Goodyear

Now David, your question is a good one, so it's the balance. But if your question is, can we attract and recruit and hire people, absolutely. If your question is, are we going to be careful about that, yes, we're going to be very careful. We don't want to give back a lot of the hard work that we went through on this thing. But, we're cognizant that we're people are working really hard right now and you've got to watch that balance.

David Gold – Sidoti & Co.

Sure. Fair enough. And then just

Julie Howard

David, it's Julie, I just wanted to interrupt because I threw out an incorrect number. I was looking at a different line. It's 52 in the first quarter.

David Gold – Sidoti & Co.

52?

Julie Howard

Not 42, and I would echo what Bill said. We've just gotten done with two quarters, six months of restructuring where a number of people left involuntary, so we have to be very careful about ramping up quickly on that.

David Gold – Sidoti & Co.

Yes. Sure, fair enough. And then, just to follow up on the attrition, at this point, are we still sort of thinking about or let's say trying different things to try to get that down some? Are we I know in the past we've talked about maybe this is sort of systemic, it's just something that we just have to live with. Where are we in the thinking on that just now?

William Goodyear

Well, we're obviously going to run the company in an effective way at whatever rate we have to deal with. I personally think it's going to be going down, but we'll find out at the end of the year where we're at. I'm willing to do the over and under on that.

David Gold – Sidoti & Co.

But, we're still trying initiatives to try to reduce it?

William Goodyear

Yes, sure.

David Gold – Sidoti & Co.

Perfect, thanks.

Operator

Mr. Wong of JMP Securities, you may ask your question.

Kevane Wong – JMP Securities

(inaudible) question other people were asking but trying to get to a similar answer. When you're looking at the guidance that you gave, obviously you've had a couple it's actually a few great quarters here in a row and you're talking about obviously a strong market environment, subprime, et cetera blowing up. Obviously, you have some of the large engagements trending down, but it's really a question of how much are you sort of building in a tougher economy, people sort of pulling back on some of the maybe more discretionary work they have? Can you just help us to understand a little bit about how much of that is simply conservatism coming into play versus any sort of trends you're actually seeing? (inaudible) this, how far as far visibility on the top line do you have, is it do you feel really strong about what you can see for a quarter, two quarters, how far out is sort of your really solid visibility on the top line?

William Goodyear

Well, we've talked in the past about the visibility and we've said that your view and confidence in where you can run the company over a 12 month period frankly is higher than you can sometimes see on a 90-day period. There is some volatility in the consulting model. Engagements come in, they roll off, and the part of the market that we occupy, you can hit you can hit one and it really is very attractive quickly and then these things roll off. So, you've got to be very careful on your quarter-to-quarter expectations.

But, when we looked at all of the cross currents that we had and feeling very good about the first quarter and very pleased and satisfied with the way the company performed, we looked at the guidance and we said we went back out to all the practices and we re-project and we tumble these things, and our judgment is, we like what we've got out there right now. So, I can't really break it down into quite as much granularity as you are asking. But, our judgment is that we've got good guidance out there and we're sticking with it. And I don't think it's overly conservative or overly aggressive. I think we started with 82 to 96 range, because that's about what we thought it was and that's still how we think it is.

Kevane Wong – JMP Securities

Got you, okay. And maybe a little bit of the same thing, but well maybe I'm qualified a little bit. So as far as the year you like for that is, is there anything about the second quarter that we should be aware of besides from those maybe particular engagements that are coming down, or is it it's really sort of those as far as the quarter, but it's simply the overall outlook, you just currently like where it is? And all those sort of preps, I mean, doing the stock analyst thing, I'm just looking at if you'd just annualized what you did in the first quarter, that takes you already to I think on the higher end of the guidance. So, that either indicates that you guys are giving a cautious guidance or one of these quarters is sort of coming down a bit and I'm just trying to get a feel on that.

William Goodyear

Well, the answer is in there somewhere. If you annualize what we just did, you're kind of in the middle of what we were looking at. And Scott said that we had a couple of engagements that we expected to trend down. The second quarter could come in a little lighter than the first quarter. It might come in better too, but we're just trying to be realistic on this.

Bill Dickenson

We are, it's a Kevane, it's a …

William Goodyear

That's why we're not giving quarterly guidance.

Bill Dickenson

Right, yes. Trying to work through this, the things which ramp down and come off and how demand picks up relative to the marketplace and credit crisis and stuff, that's a fairly complex environment that we're all trying to grip come to grips with, which is exactly why we don't try and get as granular this quarter.

William Goodyear

We weaned ourselves from the quarterly thing and we're not going back there.

Kevane Wong – JMP Securities

Got you, fair enough. And then just one other thing, just for modeling purposes, looking at Chicago Partners, is this sort of an average utilization bill rate, et cetera, that would be useful for us to use on that modeling, or is that we'll just have to wait and see?

William Goodyear

I think you've got look, let's get the deal closed, let's get some run rates under our belt. We can bring a little more specificity to that when we talk in July. I think that's probably the way we should run it. And if you look at their headcount and you look at the way they've run the company and the disclosures that we've made, they are north of $500,000 per professional, as they should be in that model. We're not too far away. Navigant's not too far away from that based upon the last quarter ourselves, so we've got some pride.

Kevane Wong – JMP Securities

Got you. Okay, great. Thank you.

Operator

Rog Young of William, Smith & Co., you may ask your question.

Rog Young – William Smith & Co.

Hi, good afternoon guys.

William Goodyear

Hi.

Rog Young – William Smith & Co.

Hi. In reference to the two primary growth markets that you referenced in the press release, that being energy as well as financial services, I'm just wondering is there a difference as far as contract duration that they have on an average basis?

William Goodyear

I don't know. Bill, is there?

Bill Dickenson

Yes. I've heard that. I think that's a little tough for me to say. I'm not so certain that there's a big difference in the contract links, actually. Both practices have a mix of long-term as well as short-term contracts.

Rog Young – William Smith & Co.

Okay, great. And then with the energy focus, is there is it more linked internationally or North American or …

William Goodyear

Well, we are certainly the fundamental part of our business resides in North America and we are doing some major efforts in the long term in the States, and the United States government in the form of DOE remains a longer-term, large client of ours and is expanding. Now having said that, there's – countries around the world are looking at bio fuels, looking at solar renewables and looking at energy efficiency because the price of oil, if you haven't noticed, is very expensive. So, that is driving our business in that area. So, it's going to lead us to overseas and we have contracts over there currently. And we're in line for a couple of fun ones, but that's because of that concern on the part of the world, if you will, of what to do with energy consumption.

Rog Young – William Smith & Co.

Okay. And then, do you see similar growth statistics in the energy that you guys are seeing with financial related items?

William Goodyear

Yes, it's pretty good.

Rog Young – William Smith & Co.

Okay, great. And then in relation to Chicago Partners, I know that that's been brought up a couple of times, but as far as the ramp-up time frame of those guys, them being set for possibly the later stages, how long until those guys are really hitting on all cylinders, I guess?

Bill Dickenson

About eight hours.

William Goodyear

These are outstanding professionals. We expect to leverage this thing as soon as we can get it closed, and we're not looking for a long ramp-up here. We're looking for leveraging what we've got so that we both do better.

Rog Young – William Smith & Co.

Okay, perfect.

William Goodyear

We got a we have obviously high expectations for this.

Rog Young – William Smith & Co.

Right. Okay, and then Bill, I'm not sure if you mentioned, but your statistic that I've seen before regarding the change in utilization and how that affects earnings per share, I was wondering if you could comment on that?

William Goodyear

No, I can't. I don't I have …

Bill Dickenson

It changes every period and we've got to recalculate the whole mix every period.

William Goodyear

Ask us in July and we'll give you an update. It's too early in the year to celebrate on that anyway.

Rog Young – William Smith & Co.

Okay. Well, that's all I had. Thank you, very much.

William Goodyear

Okay, thanks.

Operator

Our last question comes from Bill Sutherland of Boenning & Scattergood. You may ask your question.

Bill Sutherland – Boenning & Scattergood Inc.

Thanks a lot. The insurance business as it looks now, what is the what's the size of that segment of that piece of business for you?

Bill Dickenson

What's the size of it?

Bill Sutherland – Boenning & Scattergood Inc.

Yes.

Bill Dickenson

We don't break out the individual sizes of the practices within the segments. It's a considerable practice, but we don't give individual numbers.

Bill Sutherland – Boenning & Scattergood Inc.

Okay. And on the Chicago Scott, on the Chicago assumption of $30 million in revenue this year, is that seven months assumed in there?

Scott Krenz

We're assuming a May close, yes.

Bill Sutherland – Boenning & Scattergood Inc.

Okay. And on the original guidance on the diluted EPS, you were should we think about that in terms of your GAAP report, or your adjusted report now?

Scott Krenz

Well, we talk about everything with the charges, which we talk about, principally real estate charges, out of it. So, the guidance clearly excludes that.

Bill Sutherland – Boenning & Scattergood Inc.

So, it'd be adjusted, that's what I thought.

Scott Krenz

Right.

Bill Sutherland – Boenning & Scattergood Inc.

And then one last thing for you Scott, if you could just get into a little bit more color on the G&A dynamics, right now, there is a lot of moving pieces between the initiatives and the saves that you're already getting and then also from a cash flow perspective in terms of the working cap, that'd be great. Thanks.

Scott Krenz

Yes. I'm not sure we've got some feedback here, but I'm not sure how much I want to get into it because it is a very complex thing other than we are looking at, as we've said before, at putting together an infrastructure here that we can decouple from the growth of the company. It'll grow but not as fast as the company grows creating a leverageable infrastructure. That is largely enabled by the work we're doing in IT and the work we're doing in human capital here. So, we're making those investments and we've always kept an eye on the fact, can we make this neutral to the company and looked at other areas where we have low-hanging fruit like real estate. And to date, we've been successful doing that. It's no guarantee in the future, but that's clearly what our goal is. Beyond that, I think it's a much it's a long, long conversation and probably not something we want to get into at this point.

Bill Sutherland – Boenning & Scattergood Inc.

Okay, I understand. And then in terms of the real payoff on the real estate, that start next year or later?

Scott Krenz

That started almost the day we began. We had a major payoff last year. We eliminated about $5.4 million in annual rent costs last year. We continue to consolidate. I just signed an agreement consolidating two of our offices yesterday, so as we go through the year, we'll continue to move towards our footprint, which I've laid out, which is about 250 square feet per person across the firm and that progress will continue on, and we constantly become more efficient.

Bill Sutherland – Boenning & Scattergood Inc.

Okay. That's fine, thanks a lot.

William Goodyear

Okay. Listen, thank you very much and we look forward to talking in July.

Scott Krenz

Thank you, bye.

Operator

Thank you for participating in today's conference. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!