Welcome to the Duff & Phelps Corporation second quarter 2008 conference call. (Operator Instructions) At this time, I’d like to turn the conference over to Executive Vice President and Chief Financial Officer, Jacob Silverman.
Welcome to conference call to discuss Dunn & Phelps financial results for the second quarter of 2008. I’m Jake Silverman, CFO of Duff & Phelps. With me on the call today are Noah Gottdiener, Chief Executive Officer and Chairman of the Board; and Jerry Creagh, our President.
Before we begin, I’d like to point out to all of you that statements in this call may include forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Additionally, these statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. Therefore, you should not place undue reliance on these forward-looking statements. Please see Risk Factors in our Form 10-K and other documents we filed with the SEC for a complete description of the material risks we face. We do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise.
And now, I’ll turn the call over to Noah.
It’s a pleasure for me to speak with all of you this morning in our second quarterly earnings call of 2008. Today, I’d like to start by quickly recapping key highlights of our results. Then, I’d like to discuss the current state of our business, the current market environment, and discuss key drivers of our growth before turning the floor back over to Jake for a more detailed financial analysis.
First, to briefly summarize our top-line results, during our second quarter, revenues increased 12% to $97.8 million compared to $87.1 million for the corresponding prior-year quarter. During the first half of the year, revenues increased 16% to $191 million compared to $164.6 million for the first half of 2007. As of June 30th, our client service professional headcount had increased 34% to 916 from 686 at June 30th of last year. In addition, since the beginning of the year through today, we’ve brought on 19 managing directors through hiring and acquisitions and also promoted an additional 15 managing directors from within our organization to strengthen the reach and depth of our business.
Our revenue and headcount growth are being driven by broad market trends that continue to increase in importance, especially in light of the current economic environment. In particular, the current volatility in the financial markets continues to underscore the need for greater transparency to move towards fair-value accounting, demands for independence, and a greater level of corporate restructuring.
In addition, many of you have asked us recently about the impact of new accounting pronouncements and the convergence of global accounting standards with the emergence of IFRS. The bottom line here is that the emerging global regulatory and accounting landscape presents significant opportunities for us to help our clients navigate through complex issues relating to valuation and objective presentation of value on their financial statements. As we’ve described in the past, these market dynamics continue to drive our business in meaningful ways across our services. Let me give you some further color by business.
For the first half of the year, our valuation advisory business, which represents 48% of total revenues, grew 12% over last year. Valuation advisory includes our core FAS 141 financial reporting and FAS 142 impairment valuation practices, our fixed asset real estate practice, and general valuation expertise. We also cross-utilize staff in this business unit to support our rapidly growing portfolio of valuation practice. Even with tempered demand for domestic FAS 141 valuations, which tend to track the overall M&A environment, our broader valuation advisory business continues to see lift in today’s environment as a result of other valuation needs on a global basis. Our acquisition in July of Kane Reece Associates adds to our core valuation expertise. The Kane Reece team has a nationally recognized presence in providing valuation services for the communications, entertainment, and media industries. We are very excited about the capabilities and client base they bring to D&P.
Our corporate finance consulting business, which represents 15% of total revenues, grew 31% over last year. This practice includes our core portfolio valuation practice, financial engineering, and M&A due diligence services. We continue to benefit from new and ongoing portfolio valuation assignments for private equity funds, hedge funds, and other investment vehicles. Recently, we’ve seen a strong level of interest from corporate clients with respect to their investment portfolios and pension funds, and we continue to penetrate the financial institutions market. We remain the clear market leader here, and the recent environment has drawn more attention to the need for independent portfolio valuation services. We value most of the complex securities you hear about today from structured housing products to CDOs to auction rate securities. We are building up our capability in this area to keep up with demand here, including recent hiring of two managing directors in New York to supplement our financial engineering team.
Given the intense level of scrutiny and attention that the credit crisis has created on Wall Street, Main Street, and Washington, we have also focused our attention on the evolving regulatory landscape. We believe we are well ahead of the curve with regard to the impact and opportunities of new regulation and accounting pronouncements. In fact, we believe we have an important seat at the table in terms of helping to shape this landscape. To this end, our staff members currently advise various organizations, including the Private Equity Industry Guidelines Group, the International Private Equity and Venture Capital Group, the International Accounting Standards Boards (the IASB), and the Valuation Resource Group of the FASB.
Our specialty tax business is a key growth driver for Duff & Phelps. It currently represents 11% of total revenues, and it has almost doubled in size from last year. About 38% of the increase resulted from the Rash acquisition, which has provided with a suite of services required to penetrate large and more complex accounts with regard to property tax services.
Our property tax advisory service has generated a number of significant contingency fees during the quarter contributing to our overall increase in rate per hour. We see the trend of value contingency pricing in this business continuing.
Specialty tax will also benefit from our acquisition in July of World Tax Service U.S. This transaction strengthens our platform of services to include global tax advice for structuring transactions and internal tax restructurings. WTSUS is part of the world tax service global alliance of tax advisory firms with 15 worldwide members. We are very excited about the global breadth of capabilities that this transaction provides us. In addition to WTSUS, we’ve hired four additional specialty tax managing directors in our Chicago, Cincinnati, Dallas, and Atlanta offices.
Another notable area that we’ve been investing in is dispute and legal management consulting. This business represents 7% of revenues and grew 33% over last year. During the second quarter, we strengthened the business by bringing on Bruce Dubinsky as Managing Director along with his team to lead our practice in the Washington, D.C. metro area. In addition to augmenting our overall dispute consulting capabilities, this gives us a physical presence in the important Washington geographic market. We’ve also hired five additional managing directors to support the dispute and legal management consulting practice in our Boston, Chicago, Houston, and L.A. offices, and not surprisingly, litigation appears to be increasing, particularly with respect to financial services, valuation and liquidity issues. Our dispute consulting business is well positioned to participate in this trend, and we expect to continue to invest here.
For the first half of the year, our investment banking segment represented 19% of revenues. Segment revenues decreased about nine percent from last year. As we’ve said in the past, we tend to look at our overall annual performance of this business given the inherent lumpy nature of success fees. Within investment banking, our transaction opinion practice continues to maintain its strong level of activity off of a record year last year. In fact, our league table standings as measured by Thompson suggests that we’ve continued to improve our market share showing the strength of our brand and credibility in corporate board rooms.
Our middle market sell side M&A practice appears to remain sheltered from the broader dislocation in the M&A and credit markets. Our sell side auctions are generating significant interest from strategic and private equity buyers with financing sources in line to back them. As we mentioned last quarter, we have seen deferral of some deal closings into the second half of the year. To be clear, the comparison of Q2 this year to last year illustrates the timing impact of closings. Last year, we had more. This year we had less. But we expect more deal closing to bunch up in the second half of the year. This is one of the reasons, as we previously indicated, that we continue to expect the company's overall revenue will be weighted towards the second half of 2008.
Finally, the overall segment decline in revenue is partially attributable to continued softness in our domestic restructuring practice. However, we believe that this business is picking up domestically. In addition, our Paris restructuring team has the ground running, and we think it will be a strong revenue contributor for this year and beyond.
Going forward, we will continue to build on our broad and well-balanced mix of businesses through organic growth as well as opportunistic acquisitions like the ones we’ve completed year to date that either directly build on or are highly complementary to existing businesses.
Let’s now turn to our international business, which we see as a major growth driver for years to come. The key secular trends of fair value, convergence, independence, transparency, and corporate restructurings are all very relevant in non-U.S. markets where we have considerable room to grow.
For the first half of the year, revenues from our international business more than doubled to over $19 million. In other words, 40% of our overall growth is being driven from our international operations. Headcount of international client service professionals increased to 126 at June 30th, more than doubling since last year. In addition, we’re taking advantage of recruiting opportunities to attract great talent in multiple service areas. Notably, during the quarter, we’ve recruited 26 client service professionals in our Paris office to build a restructuring business including three managing directors. As a result, we believe we are well positioned to take advantage of increased financial restructuring opportunities in Europe.
Our team in Tokyo is seeing a strong pipeline of engagements, and we are looking to grow that office to support our growth expectations in Japan and Asia more broadly. Along these lines, we have continued our expansion in Asia through the opening of an office in Shanghai. We have hired an experienced managing director to lead the practice and five other professional staff.
Over time, we expect valuation needs with regard to investment in and by Chinese companies to become a meaningful opportunity for us. All in all, our second quarter and year-to-date activities demonstrate our focus on prudent and balanced growth domestically and abroad. While the markets are turbulent and not without their challenges for virtually everyone, we are seeing numerous opportunities to build our business and enhance the platform.
Let me take this opportunity to repeat the long-term financial objectives that we’ve described in the past which are 15 to 20% total revenue growth which is a mix of organic and acquired revenue, 19 to 20% adjusted EBIDTA margins, and 20% adjusted pro forma EPS growth.
With that, I would like to have Jake discuss our financial results in greater detail.
Today, I’d like to discuss both company-wide financial results and then provide additional details on segments’ specific performance. In addition to GAAP measures, I will be discussing non-GAAP measures of our financial results, including adjusted EBITDA and adjusted pro forma net income. We believe these no-GAAP measures when viewed alongside the GAAP figures we have already provided in our earnings release and will disclose in our 10-Q, provide a meaningful means of evaluating our company’s performance.
As Noah mentioned, for our second quarter 2008, revenues increased 12% to $97.8 million, compared to $87.1 million for the prior year quarter. For the first half of the year, revenues increased 16% to $191 million, compared to $164.6 million for the first half of 2007.
Organic growth, which excludes the impact of the Rash and Dubinsky acquisitions, was 9.4% for the quarter and 13.3% for the first half of the year. For the quarter ended June 30, 2008, adjusted EBITDA was $18.4 million or 18.8% of revenues, compared to $16.9 million or 19.4% of revenues for the prior year quarter. For the first half of the year, adjusted EBITDA was $37.1 million or 19.5% of revenues, compared to $34.4 million or 20.9% of revenues for the first half of the prior year. Adjusted pro forma net income per share was $0.28 for a second quarter, and $0.55 for the first half of the year.
Let me describe what adjusted EBITDA and adjusted pro forma net income are. Adjusted EBIDTA represents earnings before interest, taxes, depreciation, and amortization, and non-controlling interest, as well as the following items; other income, acquisition retention expenses, equity-based compensation associated with the legacy units of Duff & Phelps acquisitions LLC, and the grant of options made at the time of our IPO. Adjusted pro forma net income represents adjust EBITDA less depreciation and amortization, interest income and expense, other income, and pro forma assumed corporate income tax. Adjusted pro forma net income per share consists of adjusted pro forma net income divided by the weighted average number of the company’s Class A and Class B shares outstanding as of June 30, 2008, giving effect to the diluted impact, if any, of stock options and restricted stock awards.
I’ll now talk about segment performance and our balance sheet. In terms of segment performance, let’s start with financial advisory, which represents 81% of total revenues for the first half of the year. For the quarter, our financial advisory segment reported 23% increase in revenues to $80.6 million compared to $65.7 million in the prior year quarter.
During the first half of the year, revenues increased 24% to $154.5 million, compared to $124.4 million for the first half of 2007. The growth in revenue was driven by demand across all business units. Of the overall increase for the quarter, approximately 59% was attributable to a higher rate per hour, 28% from a higher number of chargeable hours from the increase in the number of client service professionals, and 13% from the acquisition of Rash & Associates.
For the quarter, the financial advisory segments rate per hour increased 13% to $377 from $335. Utilization was 60% compared to 71% in the prior year quarter. Improvements in rate per hour benefited from a change in our mix of services provided, including the benefit from certain contingent fees, particularly in our specialty tax business. The impact of these high margin fees was approximately $34 per hour in terms of rate. The contingency gains from premium priced or contingent engagements becoming an important element of our overall mix.
As a result, to a certain extent, the utilization metric looked at in a vacuum becomes less relevant given the evolving mix of our business to include more value-added contingent fees. We believe that a key metric in terms of measuring productivity given this evolving mix of our business is revenue per client service professional. On this basis, for the first half, our financial advisory revenue per professional is tracking just below $400,000 on an annualized basis, just a few percentage points below or full year 2007 results.
Over the long term, we would expect to see continued improvement in this metric. That said, our second quarter utilization rate reflects the absorption of a substantial number of new recruits who came into our organization since last year and during the quarter, particularly overseas and in certain new service areas. In addition, some pockets of our business had access capacity. As a result, to maintain efficiencies and improve performance, we made some targeted headcount reductions this past June.
We would note that there can be quarterly volatility in both of these metrics, utilization and rate per hour, and we tend to look at both on a blended annual basis to assess performance. Rate per hour for the annual period ended June 30, 2008, was $339.
Utilization for the annual period ended June 30, 2008, was approximately 66%.
While we are pleased with the growth in realized rate per hour and overall revenue dollars, we continue to focus on improving our efficiency as measured by utilization. Financial advisory headcount increased 35% to 795 client service professionals from 588. Of the increase, 55% resulted from domestic hiring, 17% from hiring in our international offices, and 28% resulted from the acquisition of Rash.
At this point, I’d like to comment on our acquisitions year to date in the financial advisory segment. They are Kane Reece Associates, World Tax Service U.S., and Dubinsky & Company. While these transactions are small in terms of financial materiality, they are each a strategic importance to us. To give you an idea of the magnitude of these acquisitions, their combined unaudited revenues were approximately $10 million in 2007.
In terms of valuation parameters, the combined purchase price in cash and stock was
approximately $12 million, representing a 1.2 times multiple of LTM revenue, and less than five times pro forma LTM EBIDTA after giving effect to the estimated tax benefit associated with step up in basis, as a result of their asset purchase structures for tax purposes. What we value most, however, is the expertise and growth opportunities that each of these acquisitions bring to the Duff & Phelps global platform.
Now, I’d like to turn to our investment banking segment which represents 19% of total year-to-date revenues. For the quarter, we reported a 19% decrease in revenues to $17.2 million, compared to $21.4 million in the prior year quarter. For the first half of the year, revenues decreased 9% to $36.5 million from $40.1 million.
One essential point that needs to be underscored here, particularly with regard to our investment banking segment is Duff & Phelps has an inherently lumpy business model particularly with respect to M&A advisory and to a certain extent restructuring. That is why we tend to look at overall annual performance as opposed to quarters to assess key trends in this business.
Our transaction opinions business grew 5% in the first half of the year. This business continues its momentum even in a more challenging M&A environment. Although revenue from our M&A advisory business is down year to date, we believe this is driven by the episodic nature of success fees. As Noah mentioned, we believe that the second half should see an increase in transaction closing relative to the first half.
During Q2, we continued to see some softness in our restructuring business. As we’ve discussed in the past, our domestic restructured business should see benefit a little bit later on in the cycle as you have more traditional restructurings take place. The inquiries continue to increase, and we believe we should start to see lift as the distressed cycle continues to mature.
In addition, we’ve launched a restructuring business in Paris which is focused on working with companies and debtors as they begin to get into trouble. They are focused on working capital management and cash assessment needs more towards the beginning of the cycle. We’re very pleased with their performance to date. They have hit the ground running, and we believe there are significant opportunities for long-term growth here.
I’ll turn to our balance sheet. Our balance sheet is strong with ample liquidity. We have $43 million of total debt. We’re just over half a turn of trailing 12-month adjusted EBITDA. Our cash balance totaled over $52 million at June 30th. We believe this is an appropriate balance sheet that provides us the flexibility to pursue growth opportunities, including potential acquisitions and lift-ups.
To that end, you may have seen that earlier this week we filed a 9-K disclosing our amended credit agreement. An important element of the amendment is that it increases our flexibility and capacity to complete strategic acquisitions to the extent that we see opportunities in making acquisitions. You may see our debt levels increase somewhat, but we intend to maintain a strong balance sheet.
With regard to share count, we have a two-class share structure. The Class A shares primarily owned by the public investors and [inaudible], and Class B shares owned by the original members of Duff & Phelps Acquisitions, our operating business, which are exchangeable into Class A shares.
As of today, the total number of Class A shares outstanding is approximately $14.3 million. The total number of basic Class B shares outstanding is approximately $21 million. Thus, on a fully exchanged basis, we have a total of approximately $35.3 million basic shares outstanding. Note that approximately $1.2 million of the Class A shares are in the form of restricted stock awards which are subject to vesting and will not appear in our share count until vested for purposes of calculating basic earnings per share.
In conclusion, I’d like to remind you that Duff & Phelps provides annual financial guidance only at the beginning of each year as we did this past March. We believe that we are well positioned to continue our record of balance revenue and earnings growth over the long term.
With that, I’ll turn the floor back to Noah.
In summary, we are pleased with the overall growth of our business across services and geographies in the first half of the year. Before I close out our prepared remarks, I’d like to make one more comment. The subject actually relates to Jake whom you just heard from.
As you know, Jake has been serving as our CFO for nearly two years and has worn many hats in that role. In addition to his responsibility overseeing our entire finance function, Jake has been responsible for corporate development and acquisition activities. As the companies’ opportunities for growth and meaningful acquisitions accelerate, Jake and the management team believe that the highest and best use of his skills and experience set is to help guide the firm’s overall strategic direction in corporate acquisition activity and to focus on that full time.
I am therefore very pleased to announce that Jake will be moving into a new role overseeing strategic and corporate development for Duff & Phelps and will be moving on from the post of CFO when and only when we have found an appropriate successor. I’m very excited for the company to have Jake’s full-time attention on this critical activity.
We have engaged Heidrick and Struggles to assist us in finding a CFO who can fill Jake’s shoes and who also shares our vision for growth and integrity. Until a new CFO starts with Duff & Phelps, Jake will remain in that CFO role fully engaged in this capacity. More to come on this in the weeks ahead.
This concludes our prepared remarks. In addition to myself and Jake, our President, Jerry
Creagh, will now be available to answer questions. So with that, I’d like to open the floor up for questions.
(Operator Instructions) We’ll go first to Tim McHugh with William Blair.
Tim McHugh – William Blair
Yes, guys. First, I wanted to ask about the M&A advisory fees. Recognizing the episodic nature of the lumpiness of that revenue, I guess, given the macro environment, I think the natural question is what gives you confidence that those projects or the closings cannot get further delayed as we get into the second half of the year?
That’s a very good question. I think I’d start off by saying we have. We have very good visibility on the deals that are being worked on and are in the pipeline. Deals can always get stretched out. There are no guarantees that they won’t get stretched out. But in our view, even to the extent that they do, closings take longer to happen than one might hope. The revenues will still be – there will still be more M&A closings and more revenues from that segment in the second half of the year relative to the first half.
Does that answer your question, Tim?
Tim McHugh – William Blair
Yes, that’s helpful, and I guess recognizing you won’t give guidance, I guess I’m trying to understand, given the lumpiness, would you still hope that the investment banking segment could grow this year or on an annual basis looking at this, or is the macro environment such that may not be possible this year?
We just don’t give that kind of granularity. What I’ve said and I guess what I’ll repeat to be clear is that our view that we gave in the first quarter has not changed today, that we believe that the second half of the year will – that revenues will be weighted more to the second half of the year than the first half of the year. There are three reasons for that. One is that we anticipate that there will be more M&A closings in the second half. Two, the fact that we brought on more people and we’re in a growth mode. We expect to see as productivity ramps up for those people, we expect to see more revenues from those people, and just generally, there’s a fourth quarter effect in our business.
So you know, the way I would answer that, Tim, is to say that our view that we gave you in the first half about second half in the first quarter that second half will be weighted more has not changed.
Tim McHugh – William Blair
And then, on the restructuring piece, recognizing it’s expected to be rebound a little later than most of the other restructuring pieces that you might see out there, I guess I thought you might see some progress right now. Has there been any change in the people or what are you looking at there that gives you comfort that you still hold a solid competitive position and will get the work as it does rebound?
You know, we just do. There hasn’t been a change in the people. We feel good about the business. We’re seeing more inquiries. In addition to that, we’ve invested further in the business by hiring the group in Paris that has 26 people that have hit the ground running, that are a bit more focused on the debtor side of the business where we expect to see traction and are seeing traction earlier on in the cycle. For all those reasons, we feel good about the future of our restructuring practice.
Tim McHugh – William Blair
OK, and then lastly, you’ve obviously been hiring a lot of MDs lately to really support the growth. Do you expect to continue to do that or have you built up now such that you need to allow some time for those people to mature, I guess, in the organization?
Yes, I think that’s a fair statement for this year. We’ve probably done most of the hiring that we’re going to do on the MD level, not necessarily all of it, but I would say that going forward as we’ve said in the past and this hasn’t changed, we expect to grow the business 15 to 20 percent. We expect part of that growth, a good part of that growth, to come from headcount increases which we will continue to do. So we’re active recruiters. That hasn’t changed. We’re recruiting on campus. None of that has changed in any manner.
We’ll take our next question from Roger Freeman with Lehman Brothers.
Eric Berg – Lehman Brothers
Hey, this is actually Eric Berg. I’m calling for Roger. On the rate per hour, you commented that the benefit from the contingencies was about $34 an hour. Is that really lumpy or is that actually where it’s been running and should we expect to see that sort of benefit on a quarter-by-quarter basis?
That’s a great question, Eric. Listen, because some of it driven by contingencies as we mentioned, particularly in our specialty tax business, there is an element of lumpiness.
There’s also an element of seasonality to it, particularly in Q2 and potentially to spill over into early Q3. That’s just when the tax season really hits in terms of the recognition of some of these contingency fees in that business. That said, as the overall business continues to evolve to be able to price certain engagements on a more of a value basis or contingency basis, not jut in property tax, you might see that sort of impact from gains be a more prevalent part of our overall rate structure, but there is an element of lumpiness and some seasonality, Eric.
Eric Berg – Lehman Brothers
So would you characterize, all things being equal, the back half rate per hour should be less than the front half? That was about three-fifty?
What we said in the past is that we think our overall blended rate per hour on an annual basis is really the way to think about this and that we expect to see low to mid-single digits growth in that overall blended realized rate annually.
Eric Berg – Lehman Brothers
And then on the headcount in the same segment, financial advisory, you guys tend to have a lot of seasonal hiring in that third quarter from the incoming class. Given that you’re well into the quarter, could you help us size how big that class was this year versus prior years and that sort of stuff?
Jerry, would you like to address that?
Yes. For this year, we brought in 99 campus hires. This is for ’08. That was about 20% less than what we brought in last year, and approximately 30% less than what we had originally anticipated bringing in this year. So we clearly pulled back on campus hiring as a result of much lower turnover rate in the business, because the turnover rate in the business has decreased substantially from where it was in ’07. In ’07, year to date, we were at 11.6% for voluntary. This year, we were only at 6.1%. Last year, for the total year, we came in at around 21% in total turnover. This year, we’re only estimating that number to be approximately 15% plus or minus. So, we have much less turnover, which is very positive for the business, and as a result, we’ve adjusted the campus recruiting during the course of the year.
Eric Berg – Lehman Brothers
To what would you attribute this lower-level turnover? Is the macroeconomic environment, better retention, on your own firm’s basis?
I think it’s a number of things. I think it’s, first of all, clearly, our platform has become much more attractive and so people are staying, and I think the economy is playing a role in it.
Eric Berg – Lehman Brothers
Okay, and then, lastly, on the utilization rate, understanding that it is becoming somewhat less relevant. It did come in quite a bit lower than prior periods, could you help us understand what were the big drivers there, even though hiring wasn’t really that big this past quarter to have reduced that? I’m just trying to understand how it came in so low.
Yes, I would look at it as four components that had an impact on the utilization number. The first one is obviously what we’ve discussed, which is a greater mix of contingency fee type revenues. The second component would be a very significant investment in people in our international operations. The third component is just the partial absorption of campus hires. And the fourth component is, we’ve had some over-capacity in certain areas which we have addressed in the month of June. So if you take all of those, that is what had an impact on utilization.
Eric Berg – Lehman Brothers
The last follow-up and then I’ll hop back in the queue. On those areas that you actually reduced, which areas would those have been that actually had overcapacity and then you shrank a little bit? Any particular segment that you want to point out?
No particular segments. We regularly review our capacity in all our areas, and we go through that and make appropriate adjustments.
We’ll take our next question from Andrew Fones with UBS.
Andrew Fones – UBS
Yes, thank you. First of all, I’d like to ask you about your acquisition pipeline. Obviously, congratulations to Jake with the new appointment, but if I could ask you, Jake, what areas are you looking at that you think are attractive at the moment in terms of acquisitions? And obviously given the fact you’ve increased your credit line, is your pipeline fairly full at the moment?
First of all, thank you, Andrew. We are actively looking at a number of acquisitions, really, across the spectrum of our business. We have, as you’ve seen at least over the course of the past few months, been focused on what I would characterize as relatively small but strategically important lift-out type acquisitions in our financial advisory segment. And they’ve really been, at least the most recent three have been, in three different business units, so we’re really seeing opportunities across our spectrum of services. I think an area of focus for us will continue to be international. We are looking overseas, both in Europe and potentially Asia. We are looking, as Noah said, in terms of areas of investment to continue to focus on building out our overall restructuring business, domestically and overseas, and then again more broadly on an opportunistic basis where we can really find businesses that fit culturally within our organization, have appropriate valuation parameters, and just make overall strategic sense, but the pipeline is active.
Andrew Fones – UBS
Okay, great. Thank you. If I could just kind of understand this put and take between the utilization in the quarter and the rate per hour. Should I read that as the rate per hour was increased sequentially due to strength in the tax businesses and you mentioned the incentive fees there? Perhaps the other businesses weakened a little bit, and we saw that in terms of the utilization falling off. Is that kind of the mix and what happened in the quarter? Thanks.
I’m not sure that’s how I would characterize it necessarily, Andrew. I think that, again, utilization in its own, in a vacuum, is one indicator, but it’s not a total indicator of the health of the business. The contingency fees were an important contributor to overall mix, particularly in specialty tax where there was some what I would characterize premium price engagements or contingent engagements in other elements of the financial advisory segment as well. And as Noah said, and I’ll repeat it, there were some pockets of overcapacity that we did address. I don’t think that speaks to an overall level of market demand, but more supply capacity at our end.
I would also add that the increase in rate per hour is not strictly a result of contingency fees. That’s one factor in it, and we’re getting premium pricing across many of our services because they’re viewed as value-added services today. They’re viewed as services where the client just can’t afford to get it wrong, and they’re prepared to hire us and pay us well for those services, and we’re seeing that reflected in the rate per hour across many services.
Andrew Fones – UBS
Thank you. That was really helpful. And just to kind of touch back on that question earlier on the excess capacity. Can you actually quantify the number of people? I know you said it was across different areas in financial advisory, but can you quantify the number of people that left in June?
I would say it’s under 30 people as a result of that rebalancing.
Andrew Fones – UBS
OK, thank you. In terms of the bankruptcy business, could you talk to your areas of perhaps specialization there? You mentioned as bankruptcies broaden into the wider economy, you expect to see a pickup. What areas are you looking at that you expect you might benefit early in that bankruptcy practice? Thanks.
Let’s go back and I wouldn’t call it a bankruptcy practice, I’d call it a restructuring practice because it deals with distressed companies generally so not necessarily in bankruptcy. That is one of the issues that we have not seen as many bankruptcies or Chapter 11s as we saw in the last restructuring cycle, yet. So as companies do actually file, that results in demand for additional services where we have expertise that could help lift that business. That’s why I say as the cycle matures, we’ll see a pickup there, but we’ve definitely broadened the practice to not only do creditor and debtor representation in bankruptcies, but to do various types of what I would call distress due diligence, working capital management, helping companies identify where they can find cash when they’re strapped for cash, so we’ve broadened the services somewhat, and we’ll continue to do that because we like the business and plan on continuing to invest in it.
Andrew Fones – UBS
OK, thanks, and lso thanks for the additional disclosure this quarter. That was appreciated.
[Operator Instructions]. We’ll go next to Michael Weisberg with ING.
Michael Weisberg – ING
Let me second that. The additional disclosure was tremendously helpful, so congratulations and thank you. Just one clarification on Rash and the impact. I think you said that of the gains 38% in that category was the acquisition of Rash. Did you mean 38 points of the 73-point gain specialty tax, or did you mean 38%?
That’s a good question. It’s 38% out of 100, the 38%.
Michael Weisberg – ING
So 38%, so that means organic would be more like 45%, if I’m understanding that correctly. Is that right?
In the specialty tax business?
Michael, are you referring to specialty tax specifically?
Michael Weisberg – ING
I’d have to go back and recalculate that, that specific question. I haven’t done that on paper.
Michael Weisberg – ING
OK, just whatever the dollar gain was for the year, the dollar gain was because of the acquisition?
That’s right. That’s right.
Michael Weisberg – ING
That’s great. Noah, could you expand a little bit, I missed it, what did you say about the FAS 141 demand? I think you talked about understandably some softening and maybe you could talk a little bit more about that?
What I said is that our VAS business, that our valuation advisory business, is up 12% for the first half and that that business includes both FAS 141 and FAS 142, the latter being impairment valuation, our fixed asset real estate, and general valuation businesses that generally there is some tempered demand for FAS 141, which is work that correlates to some extent with M&A activity, but you can see a general growth in the overall business because some of the other services within that business sector.
Michael Weisberg – ING
I see, so the weak spot with FAS 141 and the growth was because of better demand for FAS 142 and other related products?
That’s a fair way of putting it, and the way I would look at it is we have good balance within that business.
We’ll take our next question from Tim McHugh with William Blair.
Tim McHugh – William Blair
Yes. I just had one quick followup on the dispute and legal management, it’s grown pretty quickly. Some of the companies in the dispute consulting area have had so-so results lately for that piece. Are you just gaining share from hiring people or do you think some of the recent issues in the credit markets may just be better suited towards some of the services you offer. I’d be interested to hear your opinion.
Hey, Jerry, did you hear that one? You want to address that?
Yes, I heard it. First of all, I think that we have tried to stay very connected to the rest of what we do which is a valuation type of business. So clearly, we think in the space in which we play in the dispute area, we are well positioned. We don’t have large forensic operations, so we deal with a lot of commercial disputes that relate to value, and so we think we’re very, very well positioned, in particular when you think about all the valuation expertise that we have especially in financial engineering. We believe that it is a growth area. We believe that clearly the subprime issues are going to create a lot of opportunities in the future, and we believe that the people we are brining in play well into not only that market, but also, complement the existing skills that we have right now, so I think we have just a different orientation in terms of dispute consulting.
It appears we have no further questions at this time.
Thanks, everyone. That’s it.
That does conclude today’s call. We do appreciate your participation.
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