FTI Consulting's CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: FTI Consulting, (FCN)
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FTI Consulting, Inc. (NYSE:FCN) Q1 2014 Earnings Conference Call May 1, 2014 9:00 AM ET


Mollie Hawkes - Investor Relations

Steven Gunby - President, Chief Executive Officer, Director

Roger Carlile - Chief Financial Officer, Executive Vice President

David Bannister - Executive Vice President, Chairman of the North American Region


Tobey Sommer - SunTrust

Jason Anderson - Stifel

Tim McHugh - William Blair & Company

Ato Garrett - Deutsche Bank

Randy Reece - Avondale Partners

Joseph Foresi - Janney Montgomery Scott

David Gold - Sidoti


Good day, everyone, and welcome to the FTI Consulting First Quarter 2014 Earnings Conference Call. As a reminder, today's call is being recorded. Now for opening remarks and introductions, I'll turn the call over to Mollie Hawkes, Director of Investor Relations at FTI Consulting. Please go ahead, ma'am.

Mollie Hawkes

Good morning. Welcome to the FTI Consulting conference call to discuss the company's first quarter 2014 results as reported this morning. Management will begin with formal remarks, after which we'll take your questions.

I am joined today by Steven Gunby, our President and Chief Executive Officer; Roger Carlile, our Chief Financial Officer and David Bannister, our Chairman of North American. Management will begin with formal remarks, after which, we'll take your questions.

Before we begin, I would like to remind everyone that this conference call may include forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934 that involve risks and uncertainties.

Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, future revenues, future results and performance expectations, plans or intentions relating to financial performance, acquisitions, business trends and other information or matters that are not historical, including statements regarding estimates for our future financial results.

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

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

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

With these formalities out of the way, I will turn the call over to our President and Chief Executive Officer, Steven Gunby. Steve, please go ahead.

Steven Gunby

Thanks, Mollie. Welcome to everyone on the call today. Before we get into the quarterly earnings discussion, let me say, I am very much hoping to see each you at our Investor Day on June 16th in New York.

I know most of you have supported us for years and have spent a lot of time with us and on us and I am very much looking forward to the opportunity to meet and to be engaged with you at that meeting.

Let me give you a preview of that meeting before getting to the quarter. At that meeting I am looking forward to us having open conversation. One that reflects the greatness of this company, the terrific people her, this company's great positions around the world and one that reflects your aspirations for this company as well as mine and the team we have here.

There will also be a conversation that acknowledges some hard realities. Realities that you all know that this company has underperformed your expectations and many of our employees' aspirations during the past few years, but it's also going to be a conversation about where we can take the company, the positive picture ahead.

I'm excited about we could take this company in the future. To allow the team here, a set of professionals who like all great professional have substantial aspirations to meet those aspirations and at the same time to make sure shareholders are rewarded. I am committed to us having plans that are actionable, plans that boldly invest behind places where we have a right to win, plans that fix businesses where we need fixing, plans that are specific, the transparency, accountability and with leadership, plans that will change this company's trajectory. Allow it and the people here to reach full potential. I am looking forward to discussing these plans with you in June and I very much hope to see you there.

The first quarter here, in many heralds the numbers, the theme that we will be discussing in June. At one level, our adjusted earnings per share of $0.41 shows the power of this company. The fact that when the stakes are high and someone needs committed world-class experts, people turn to FTI. Major driver of these quarterly results was FLC, Forensic Litigation Consulting, which had a record quarter. That quarter was fueled by a number of front page newspaper assignments from around the globe relating to high-stakes client events, including Foreign Corrupt Practices Act investigations, mortgage-backed securities litigation and other crucial client events.

Similarly, our tech business performed strongly, driven by an ongoing FCPA, financial services investigations and cross-border M&A-related second request activity, so the first quarter in many ways heralds power and strength of this company.

I said that first quarter also heralds the majors set of work we have ahead. Notwithstanding the strong performance of FLC and Tech, our adjusted earnings per share dropped substantially from $0.59 to $0.41, which is to say we are in a rate that is a third below our earnings in the prior year quarter. In contrary, let me say something contrary, that some of your hopes that drop in performance is not due to a new CEO throwing the kitchen sink its earnings, but in fact reflects sobering financial results in a number of our business.

Corporate Finance/Restructuring's downward trend in profitability continued this year into the first quarter. 2014 adjust EBITDA was down 40% from a year ago, over 50% from two years ago and we are now down to about a quarter of the profitability of the first quarter in 2009. Strategic Communications had another down quarter in terms of revenue and modest EBITDA. Econ consulting, the one consistent pillar of profitability growth the past years also had a disappointing start to the year both, in terms of revenues and in profitability.

Let me be clear, since I stepped in this role in January, my enthusiasm had grown, the deeper I get into this business, the more impressed I am with the capabilities here, the talent, but maybe most gratifyingly, the commitment and enthusiasm that you find when you talk to our people. The quality of our people shows up in the client engagements and relationships and those engagements and relationships are outstanding. Probably most important to you and critically important me, there is enormous potential here too.

As we will discuss in June, I believe we will be able in a relatively short period of time to begin meeting the aspirations that so many of us have for this firm. At the same time, I do want to underscore that 2014, we will see no rapid turnaround in profitability.

As Roger will indicate shortly, even though the first quarter was burdened with some one-time cost that will not recur in the remainder of the year, we currently expect the second half of the year to be less profitable than in the first, not more.

The key assignments that are driving FLC in and Technology are slated to be much reduced in the second half of the year, but we substantial opportunity to drive the economic performance of all our segments and regions. Most of the opportunities will benefit 2015 and 2016 much more than 2014. In some cases, we will require investment in EBITDA in 2014 to drive them. 2014 therefore will be about laying a foundation.

Launching and implementing initiatives now that we believe will result in the market positions and shareholder return that you and I looking for in 2015, 2016 and beyond. A number of you I know have commented the margins have continued to deteriorate for a while and the stock is in the same place that it was a number of years ago. I guess, someone commented in early 2007. Many of you therefore have had much patients. I want to say thank you for that and ask you for your continued patience this year as we set a solid unbelievable foundation for you for the future.

I have every confidence that over the next few years, we will again begin to reach the very justifiable high expectations that you have for us, and important that our employees have for themselves. I'm excited to embark and I ride with you, the ride that will be grounded in transparency and accountability.

I look forward to discussing these plans with you further in June.

With that, let me turn the call over to Roger to discuss the quarterly results in more detail.

Roger Carlile

Thanks, Steve. For the quarter, revenues of $425.6 million increased 5% year-over-year, compared to $407.2 million in the prior quarter. 2% of the revenues growth was organic, with the remaining 3% of growth resulting from acquisitions.

Fully diluted earnings per share for the quarter were $0.45. First quarter earnings per share, included a remeasurement gain related to the reduction in fair value of estimate future contingent consideration payments for prior acquisitions, which increased first quarter earnings per share by $0.04. Excluding this gain, first quarter adjusted earnings per share were $0.41 and adjusted EBITDA was $51.2 million or 12% of revenues.

It is important to note that beginning with this quarter, the definitions of our non-GAAP measures have been updated to exclude the impact of changes in the fair value of acquisition related contingent consideration liabilities. We believe these revised definitions when considered together with our GAAP financial results provide management and investors with a more complete understanding of our operating results, including underlying trends. Prior periods represented here and have been reclassified to reflect this change at all comparative periods [present] and the future will reflect these new definitions as well.

Turning to review of our segments, in the first quarter Forensic Litigation Consulting revenues for $121.4 million increased 21% year-over-year. Our recent acquisition of an insurance industry management consulting provider was the primary contributors to $3 million of the acquired revenues, which represented 3% of the year-over-year revenues increased.

During the quarter, we realized strong organic growth, primarily due to increased demand for global data analytics, disputes and insurance practices in North America and our forensic accounting and global risk and investigations in Asia-Pacific.

From an industry perspective, our insurance practices in North America and in EMEA, benefited from clients who were continuing to face constant transformation resulting from new and emerging risks emanating from technological advances, globalization and other business innovations.

Adjusted segment EBIT was $26.5 million or 21.8% of segment revenues compared to $12.8 million or 12.7% of segment revenues in the prior year quarter. The increase in adjusted segment EBIT margin was due to improved utilization and an employee leverage in the aforementioned practices.

Within the Forensic Litigation business segment, our Health Solutions practice reported a 10% year-over-year increase in revenues, but did see a decline in adjusted EBITDA, compared to the prior year quarter as a result of the first quarter 2014 having fewer success fees as compared to the first quarter of 2013.

In Technology, first quarter revenues of $60.1 million increased 29% year-over-year. The year-over-year increase in revenues was largely attributable to ongoing FCPA and financial services industry investigations as well as increased merger and acquisitions related second request activity.

During the quarter, and in March particular, we continued to observe strong demand globally for our end-to-end capabilities, particularly from corporation seeking large established global e-discovery advisors. These large enterprises are looking for more than just software solutions. They need a provider with the ability to integrate a variety of services in a secure environment across borders and in remote locations. This is where we play and have the ability to shine and this is how our clients think about engaging in FTI.

Adjusted segment EBITDA was $17.3 million or 28.9% of segment revenues compared to $13.7 million or 29.4% of segment revenues in the prior year quarter. The decreased in adjusted segment EBITDA margin was due to the mix of lower margin services and increased investment in business development support.

In Economic Consulting, first quarter revenues of $106.9 million declined 7% year-over-year and were largely aligned with the first quarter outlook we provided in February. The softness in revenues was due to a slow ramp up of employee utilization in January and February, following the completion of several large client matters in the fourth quarter of 2013.

Despite the slow start to the year, the business improved throughout the quarter and in March, in particular. While our pipeline, the first look M&A-related engagements is robust. We remain concerned about the pace of these matters moving past the first look M&A stage.

Likewise, for the segments financial litigation business, we are aware that the levels of activity created by the 2008 financial crisis will wane at some point. Adjusted segment EBITDA was $13 million or 12.2% of segment revenues compared to $26.2 million or 22.7% of segment revenues in the prior year quarter.

Adjusted segment EBITDA margin was reduced by lower utilization of financial economics practice in North America, the impact of employment contract extensions of key senior client-service professionals and lower utilization and realization at our international arbitration, regulatory and valuation practices in EMEA, which was partially offset by higher utilization in our antitrust litigation practice in EMEA.

In Corporate Finance Restructuring, our results are largely in line with the first quarter outlook commentary provided in February. First quarter revenues of $94 million decreased 5% year-over-year as low interest rates and sustained high-yield debt issuance activity contributed to the year-over-year revenues decline.

The acquisition of restructuring business in Australia contributed $4.4 million in acquired revenues or 4% of the revenues increase during the quarter. Excluding the acquired revenues, revenues declined organically by $9.5 million or 10% year-over-year. Revenues declined organically due to lower demand in our bankruptcy and restructuring practice in North America, lower average realized bill rights due to mix of services in our telecom, media and technology or TMT practice and lower demand in our EMEA-based restructuring and transaction advisory services practices.

Adjusted segment EBITDA was $11 million or 11.7% of segment revenues compared to $19.1 million or 19.3% of segment revenues in the prior year quarter. Adjusted segment EBITDA margin was reduced by lower utilization in bankruptcy and restructuring practices in North America, increased acquired overhead expenses, lower average realized bill rates due to mix of services and our TMT practice and continued investment in our EMEA-based transaction advisory services practice.

In Strategic Communications, first quarter revenues of $43.2 million were largely in line with the expectations provided in February as reduced pass-through or reimbursable revenues in North America and EMEA and lower retained income in North America contributed to the 5% year-over-year revenues decline.

The acquisition of a public affairs business contributed $1.8 million in acquired revenues. Adjusted segment EBITDA was $2.7 million or 6.3% of segment revenues compared to $3.6 million or 7.8% of segment revenues in the prior year quarter.

Adjusted segment EBITDA margin was impacted by higher non-recurring facilities cost related to the transition of our new London office and increased acquired overhead costs, which were partially offset by reduced pass-through cost.

From a geographic perspective, international revenues accounted for 28% of the quarterly revenues compared to 26% in the prior year quarter. Asia-Pacific revenues increased 24% year-over-year. The revenues increase was driven by a 45% year-over-year increase in revenues in our Forensic Litigation Consulting business resulting from a very strong quarter for our forensic accounting and advisory services and GRIP practices, Global Risk and Investigation practice, or GRIP and our construction environmental services practices in the region as well along with a 30% year-over-year increase in revenues and our corporate financial restructuring business due to acquired revenues.

Despite the year-over-year top line growth in Corporate Financial Restructuring in the region, we experienced increasing softness in the restructuring market that we expect to continue in fiscal 2014. In fact, according to Thomson Reuters, first quarter Asia-Pacific distressed deal volumes were down 71% compared to the first quarter of 2013.

In Europe, Middle East and Africa or EMEA, revenues increased 12% year-over-year, driven by 59% year-over-year increase in Forensic and Litigation consulting revenues and a doubling of Technology revenues. The year-over-year increase in FLC revenues was largely driven by our insurance practice where we grew both organically and so our revenue contributions from the recent acquisition of an insurance industry management consulting practice.

In Technology, revenues were largely driven by FCPA and LIBOR investigations in the region. In Latin America, revenues increased 8% year-over-year. The increase in revenues was largely driven by strong performance in our Corporate Finance and Restructuring segment in the region and a 29% year-over-year top line improvement in Brazil, where we recently expanded our Forensic and Litigation Consulting segments, construction and environmental services practice to match robust demand.

In North America, first quarter revenues increased 1% year-over-year. This increase was largely driven by 18% increase in our Forensic and Litigation Consulting segment and a 24% increase in revenues in our Technology segment, which was offset by continued weakness in our North American bankruptcy and restructuring practice.

Turning to our cash position, net cash used by operating activities for the quarter was $110.8 million compared to a usage of $2.3 million in the prior year quarter as a result of funding our normal annual bonus payments and retention payments to key client service professionals during the quarter.

As a reminder, in the fourth quarter of 2012, we paid $25 million of our 2013 bonus payments versus following our usual practice of paying those in the first quarter of 2013, which had the effective increasing net cash provided by operating activities in the comparable first quarter of 2013. We had outstanding short-term borrowings of $20 million in cash and cash equivalents of $77 million at March 31, 2014.

In addition, during the quarter the company used $15.6 million for acquisition related payments and expanded $4.4 million to settle transactions to repurchase the company's common stock that were made, but not settled in the fourth quarter of 2013.

The company did not purchase any common stock during the first quarter of 2014. As of March 31, 2014 the company had $328.6 million in available capacity on this revolving line of credit. DSOs or days sales outstanding increased nine days from December 31, 2013 to 106 days at the end of the quarter. The increase was partially driven by slowdown in collections falling with seasonal collections spurt at the end of December. The remainder of the increase resulted from an increase in unbilled accounts receivable given the accelerated revenues experienced in March at the end of the quarter and the cycle time of billing and collections on several large engagements in our economics practice which are subject to certain milestones for billing and collections.

Turning to our second quarter outlook. As we discussed during our fourth quarter earnings call, due to the ongoing strategic review through which Steve is leading the company and the potential for related one-time cost-reduction actions and EBITDA investments resulting from this review, we will be providing second-quarter guidance today. We will provide our full year 2014 guidance at our June 16th Investor Day.

Based on current market conditions and the second level driver described during today's call, the company estimates that revenues for the second quarter 2014 will be between $430 million and $445 million and that adjusted earnings per share will be between $0.32 per share and $0.42 per share. Expectations for the second quarter 2014 adjusted earnings per share consider projected shifts in business mix and increased cost as compared to the first quarter 2014, notwithstanding the non-recurrence of certain costs incurred in the first quarter of 2014. This guidance assumes no acquisitions and no share repurchases.

As discussed previously, full year 2014 revenues and adjusted earnings per share guidance will be provided during the company's Investor Day on June 16th. As additional background to our second quarter 2014 guidance, Forensic Litigation Consulting and Technology entered the second quarter was solid starts and we expect a good second quarter for both of these businesses. However, we do not expect second-quarter revenues or adjusted segment EBITDA results to be a strong for either of these businesses as was the case in the first quarter of 2014.

In Economic Consulting, we are expecting revenues to improve from the first quarter of 2014, to point where they were reflecting mid single-digit percentage increase compared to the second quarter of 2013. In Corporate Finance Restructuring, we expect continued weakness in our core bankruptcy and restructuring practice in North America. In fact, according to Thomson Reuters, U.S. distressed debt deal activity totaled $4.5 billion during the first quarter, a 26% decrease compared to the first quarter of 2013.

Further, there were 22 restructuring transactions announced during the quarter, which represented 51% decrease compared to the first quarter of 2013. In light of the challenging bankruptcy and restructuring backdrop in North America, we continued to focus on our go-to-market initiatives on our non-distressed product offerings. As a result of this focus, we currently expect an improvement in revenues compared to the first quarter of 2014 in this segment to a level that represent a flat to mid single-digit percentage increase in revenues when compared to the first quarter of 2014 and a related sequential improvement in adjusted segment EBITDA due to the expected improved realization and a reduction in SG&A.

In Strategic Communications, we currently expect second-quarter 2014 revenues and adjusted segment EBITDA to improve compared to the first quarter of 2014 as a result of unanticipated mid single-digit increase in revenues and a sequential reduction in SG&A. However, I want to point out that a significant portion of that revenue increase is related to low-margin pass-through revenues.

Regarding corporate unallocated SG&A expense, we anticipate finalizing actions in the second quarter of 2014 to terminate the leases on the company's West Palm Beach office and the corporate airplane. These actions, when completed, will result in cash expenditures and a special charge in the second quarter.

While we are not in a position to provide full year guidance at this time, I want to reiterate Steve's earlier comment that we currently expect the second half of 2014 to be less profitable than the first half of 2014. Even though the first quarter included certain costs that will not recur during the remainder of the year, key client assignments that are driving Forensic Litigation Consulting and Technology are expected to be reduced in terms of activity and revenues in the second half of 2014, and though we see opportunity improve, the economic performance of our business, these opportunities required investment in 2014 and they are expected to benefit 2015 and 2016 much more than 2014.

With that, I will turn the call back to Steve for his closing remarks.

Steven Gunby

Thanks, Roger. Let me close briefly, so we can get to whatever questions people have for us. First, let me reiterate my invitation to each of you to join us in June, both so we can share information, plans, but also just so I can get chance to meet finally one-on-one. I am very much looking forward to that.

Second, obviously, let me say this quarter what we would like it to be and our current outlook for the year is unlikely to delight us or any of us financially. Having said that, I want to underscore my excitement about begin here and my confidence in the future success of this company. The people I have now around this company are extraordinary. We have great positions around the world. This company has the right to win. We win today in many places and we have the right to win in many, many more places. We have opportunity to leverage those positions, our capabilities and the market to meet the high aspirations of our talented people and also the high aspirations that you and our shareholders have for FTI.

I am looking forward to sharing our concrete plans and the disciplines in accountabilities will allow you to have confidence in that journey in June.

With that, I guess, we are ready for question. Mollie.

Question-and-Answer Session


Thank you. (Operator Instructions) We will take our first question from Tobey Sommer of SunTrust. Please go ahead.

Tobey Sommer - SunTrust

Thank you. I wanted to start out with a broad question, Steve, what kind of economic conditions in trends in the economy do you view as positive for the business as it currently exists. I asked that question in the context of what you said is with M&A and kind of technology first look and economic stuff related to M&A. Historically, I have understood that to be a driver and activity there seems to be up. At least in the headlines, but yet you express some caution. Thanks.

Steven Gunby

Yes. Tobey. Nice. Thanks for the question. I look forward to seeing you out in June. Look, I think, there is a fair amount of different analysis that's been done in the past around that question. I haven't had a chance to go deep into that and update it. I'll let Dave or Roger, if they think it's useful to comment on the past analysis they had done. Maybe I could take your question a little bit different. I think, my sense is that this company has the right and the ability to succeed in any market conditions. Maybe - too strong you know I assume that there are 9/11, then you know world changes, but I think many market conditions, the companies outperform the markets.

My sense is that history of this company is when we were soaring, we were outperforming the market. Some of the market conditions were favorable to us, but we also outperform the markets in which we were participating and I think a lot of the focus that I have had over the last three months is less around identifying when certain market conditions will create a tide for us and saying even if the market conditions don't improve, where do we have the opportunity to improve this business and I think there is opportunity there, Tobey, and so I hope to share some of that with you in June.

Dave, do you want to add something?

David Bannister

Yes. Tobey, Thanks so much for your note earlier. We read that, we create interest on the M&A as a driver and we fundamentally would agree with that across some of our businesses. I think just a couple observations. One is that the data clearly support that the overall M&A environment has improved and improved significantly, however that's based on a dollar value and the dollar value is up significantly, but the number of transactions really started going up a year or two ago, so that's not a dramatic change, so number of transactions would translation number of engagements, dollar value might translate to size engagements.

Our biggest opportunities are when post when something is announced, so if you think of the things we really do, the antitrust work is typically done after announcement, the second request work is done after announcement. Communications work will be done after announcement so forth, so I think that the harbinger if those trends continue then those should be good drivers for us, but the near pressured activity, the activity that will proceeded mergers we will do some work on that, but it doesn't have the fees and scale associated with it, so hopefully that helps you a little bit, Tobey.

Tobey Sommer - SunTrust

It does. Thank you very much. Then my follow-up and I will get back in the queue after this, is from a compensation standpoint the prior quarters report, I think we were caught by surprise by the adjustment to the structure in the economic practice and with a couple more months under your belt I wanted to get your sense for whether you thought there were broad changes that would perhaps need to be reflected in other segments or at this point you feel like the economic practices is different structurally than the other businesses. Thanks.

Steven Gunby

Let me make sure I understand the question. I think, the question is do I anticipate major changes in the cost structure over the next several quarters. The answer is no. We are not signing major new contracts that will fundamentally shift the economics of our business. If the question is do I think overtime we need to look at our pay structures, make sure that we are doing a combination of always paying enough to get the very best people, but also making sure we do so in a way that enhances shareholder returns, of course, that's a subject of examination throughout this year. Did I answer your question, Tobey?

Tobey Sommer - SunTrust

You did. Thank you very much.


Our next question is from Jason Anderson with Stifel. Please go ahead.

Jason Anderson - Stifel

Good morning, guys. On the Q2 guidance, you referenced I believe, some expenses there. I don't think go back over, but it sounds like some of those are non-recurring. Is that included in the guidance and could you quantify that?

Roger Carlile

No. It's Roger Carlile. I guess, what I was referring to in our first quarter call, we referenced that there were cost in that quarter that don't recur. The biggest ones are employee benefits related, FICA, pension those things. Also, equity compensation related to our SMB incentive compensation program, where the accounting for that tends to put a greater portion of that in the first quarter as related to the other quarters.

I think, we referenced to a $0.15 to $0.20 impact in the first quarter related to those and in fact those costs don't recur in the second quarter. Notwithstanding the fact that those cost don't recur in the second quarter, there are other changes that go on in the second quarter that keep earnings as you see there at the midpoint relatively flat to the first quarter and those include things like business mix shifts in terms of which businesses we expected to better and the margins on those. Some investments in the business in a variety of areas, including some of the things you heard on the call this morning in technology and business development support and those types of things, as well as merit increases for our employees around the world. I am sorry, to the that was all of that is being considered and you go from a $0.41 first quarter to a midpoint of the range of $0.37 in the second quarter.

Steven Gunby

It's Steve. Just to be clear, Roger mentioned two specific actions we plan to take in the second quarter. Termination of the plan, the termination of West Palm Beach office, those are not included in the guidance and will be called out as special charges.

Jason Anderson - Stifel

Okay. I think, those were the ones I was also referring to, but that was great color. I appreciate it. Then also on the FLC business, you talk about that slowing down in the second half. I guess, maybe you can provide a little more color on that, because it seems like there obviously a lot of strength in the first quarter and you referenced still pretty good second quarter. I don't know if you could maybe help us out there a little more. Obviously, you see in the pipeline there some more extreme falloff there in the second half.

David Bannister

It's Dave. Let me take a first swing at that and Steve and Roger can jump in. Recognize that we are comparing the second quarter to the first quarter for FLC, which was an all-time record for that business, so we are not suggesting that business will be weak or even weaken materially versus norms, but rather that first quarter was just so hot with a couple of very significant engagements that were intense in their size and intense in their - that need to get work done very quickly, so we are not suggesting that this is going to be poor or weaker. Just we are comparing it. Again, it's just a tough comp.

Roger Carlile

This is Roger. I would just add to that. We have had a number of questions in the past regarding the utilization and capacity, so what you see is that they had that capacity when they had large matters that come in. They have a lot of revenue. They have a very high fall-through too in terms of what hits the EBITDA lines. You saw their margins jump substantially. I think that Dave is right. It's not that we are saying that the business is weakening. It's just that you have got a very strong revenue results in the quarter.

Jason Anderson - Stifel

Great. Very helpful. Thanks.


Our next question is from Tim McHugh at William Blair & Company. Please go ahead.

Tim McHugh - William Blair & Company

Yes. I guess, just following up on that last one. Are there specific reasons, I guess, in terms of the large cases that helping now that you expect them to end in terms of deadlines or is it just that you are cautious about assuming that it's going to continue and that's why you are kind of talking about the second half being lower.

Roger Carlile

Hi, Tim. It's Roger. I think, in FLC, particularly and maybe in technology as well, there are specific matters they are working on in the quarter that are very intense, I think they are concerned both about the intensity of that continuing and the deadlines of those and how long they will continue into the future.

Tim McHugh - William Blair & Company

Okay. Then just to understand comments, so your comment was overall profitability for the firm then. I guess, just in terms of EPS or EBITDA would be lower in the second half than first half of the year?

Steven Gunby


Tim McHugh - William Blair & Company

Okay. Then I guess more on a bigger question, Steve, you gave some color on I guess how you are trying to turn around restructuring and get ECO while it's a tough time, you are still comfortable long-term with what you can do with that business, but I guess Strategic Communications, I apologize if I missed it, but do you have a view yet you can articulate in terms of what plan or changes you need to put in place to start to drive the turnaround in that business?

Steven Gunby

Yes. Thanks, Tim. Look, let me be clear. I think there is potential in every business that we have. Now, every business we have has a set of sub-businesses with different market positions and so forth, what I have had is the opportunity over the less than while to get deep into some of these businesses. I asked every business to think through where we have a right to win and where there is untapped opportunities in that space, we are adjacent to it where we have real credibility in the marketplace and people came back with those ideas and I also talked about where you are underperforming and asked for plans against that. I have asked that for every business. I think there is opportunity in every business, so that is the foundational work that we have had underway that I am compiling and that we are going to share with you in June and so I look forward to that, Tim. Did I answer your question?

Tim McHugh - William Blair & Company

I guess, you will in June.

Steven Gunby

I'll reserve seat for you there, Tim, okay?

Tim McHugh - William Blair & Company

All right. Thanks a lot. That's all for me. Thanks.


Our next question is from Ato Garrett at Deutsche Bank. Please go ahead.

Ato Garrett - Deutsche Bank

Good morning. I just want to get a little more details on the trends within Corporate Finance Restructuring. You mentioned that the restructuring market within North American had seen continued softness. Can you speak to that on an international basis, particularly within EMEA? Are you seeing some similar trends there?

David Bannister

Hi. This is Dave. The EMEA market is somewhat different. One of the things you have to remind yourself of is that we are a relatively small participant in that market. The big four will continue to dominate that market, so while the overall health or vibrancy of the demand in that market is important to us, we are small enough that it really comes down to individual engagements and the success and profitability of those. I think the restructure market is a bit more robust in EMEA. There is a slightly higher demand level and our business has been somewhat stronger there, but it's a pretty small practice there.

Ato Garrett - Deutsche Bank

Okay. Great. Then also looking at the Technology segment, I know you had a couple of large engagements that had been cycling ebb and winding down over the last few quarters. Have you completely cycled both of those at this point?

Steven Gunby

I think, we have referring two engagements for some period of time. Actually one of those, but two particular ones that we are referring to has been gone for some time. The second of that is they are continuing at a much lower pace. It came off a great deal from where it was last year. We expect it to be fully wrapped up probably in the middle of this year.

Ato Garrett - Deutsche Bank

Great. Thank you.


Our next question is from Randy Reece at Avondale Partners. Please go ahead.

Randy Reece - Avondale Partners

Good morning. I am trying to get a feel for what you are saying about your end markets as opposed to your company-specific execution. I was wondering if you might summarize that for me at least in analyst [palatable].

Steven Gunby

Randy, that could be a very long answer, is there a way to break that down? Like these are some particular segments or regional market you would like us to focus on?

Randy Reece - Avondale Partners

If you aggregate your segments as a whole, do you believe that in each case demand is stagnant, improving, declining or unclear.

Roger Carlile

Okay. Let me try to do it briefly and then Dave or Steve can add in as they see fit. I think, if you start with corporate finance restructuring, I think we have been fairly consistent in the past and today that we see the core particularly, North America bankruptcy and restructuring market is weak and the demand there is weak, so we can see that end market is weak and continues to be so.

I think, Dave just mentioned that the markets may have some more strength in EMEA and we referenced more strength in Latin America. As David mentioned, relative to our overall firm, those are smaller portions of the business of the corporate finance restructuring segment.

Turning to Forensic and Litigation Consulting, I think you have sort two effects there. One, we have those particular matters that we wanted. It's our execution that there is feeling strong results, but I think the demand in the market is generally stronger than it has been a year ago. I think we started seeing improvement in those markets mid-last year and that has continued, so I think those end markets have better demand.

I am not sure that we'll get there roiling or hot markets, but you see stronger demand there. I think it's the same in the Technology segment. I think simply that a lot of those same issues that that they would work on with FLC or those kinds of matters, investigations and major litigations. I think there's some more strength in that, so I think they have that. End markets straight has improved and they have particular execution on a number of key matters.

With respect to Economic Consulting, notwithstanding that business got off to a slower start this year, and notwithstanding our commentary that we have some concerns about the number of matters in our first look M&A pipeline and how those will turn into M&A transactions and the crisis 2008 crisis what do we have going on and the lifespan of that will remain. I think, generally we see the end markets for that business as consistent as it has been over the last several quarters. I think, there's good end markets there, again we obviously there were stronger, but I think good end markets.

With respect to Strategic Communications, it's as Steve mentioned, I think it's a more mixed story. I think, the things that we have been strongest in, in the past I think the market has been weak and continues to be weak. The business has been transitioning organically and some acquired into other areas of the market, I think, have better strength such as public affairs and digital marketing and some of those kinds of things, but some of the core services that we have offered for a long time, I think those markets have been weak and continue to be so.

Maybe to add to the discussion that was earlier regarding M&A and the question that Tobey had and how that impacts the businesses. I think, one thing we have discovered over time is notwithstanding how M&A and maybe IPO activity fueled strong results of Strategic Communications in the past, it's not doing so anywhere near those levels at the present and that's I think primarily because people aren't spending on the communications budgets in those matters at the moment at the same way they were before, possible because there are not as many contested deals or possibly because people, they are just happy to do transactions again. I think, that then has had a detrimental and adverse effect on the pricing of those services in those matters, so I don't think gives sort of an overview of the end markets versus the company-specific execution. David, do you want to add anything?

David Bannister

I think having seen a number of the other companies, I don't want to get into the comps on the call, particularly, but seeing other companies reported over the last week or so, we would be seeing the same trends they were, so you have seen comments by the technology space. Our demand has been consistent with that. You have seen comments around the economics space. Our demand has been consistent with that.

Roger did mention healthcare, and while we have some, because again it's a relatively small business for us, we had some ups and downs as it relates to individual engagement timing, we would concur that that continues to be a healthy market.

Randy Reece - Avondale Partners

I couldn't have asked for a better answer. Thank you.

Our next question is from Joseph Foresi at Janney Montgomery Scott. Please go ahead.

Joseph Foresi - Janney Montgomery Scott

Hi. You mentioned some of the cost-cutting with the corporate plane in the West Palm Beach office. Is there a philosophical change going on as far as how you view cost and can we expect more of that taking place going forward?

Steven Gunby

Joseph, nice to meet you. It's Steve. Look, I don't want to comment on a philosophical change, because of course I wasn't there, right? You can figure out whether there was a change. Look, I think, I'll just tell you simple - year we are looking how do we drive this business so that we need our employees' aspirations also our shareholders' aspirations and we are looking - I am going to be willing to invest EBITDA where that supports that thing, but we also have to look hard at - think we are spending money that don't support those aspirations and then management team looked at look it and looked at the plane in West Palm and decided that those were not critical investments to support where we need to take the company going forward and so we moved on that and that mental map is one that we will take into the business going forward, so does that help?

Joseph Foresi - Janney Montgomery Scott

Yes. I am sure your shareholders are pleased as well. On the restructuring side of the business, can we talk just a little bit about what actions you may take or may not take if this continues for another year or so given sort of where we where or do you view it as a bottom and you think that maybe there is reason to keep resources or more resources there?

David Bannister

It's Dave. Let me start off with that and then I will let others jump in. As everyone on the call recognizes FTI has long been identified as the leader in the restructuring market. We have a fabulous practice there, fabulous group of practitioners and continue to have extremely high market share and delighted clients when they are needed. It is also clear that we are operating in an environment much like 2007, where we had covenant-light loans, we had tremendous access to capital, we continue to - although slowing a bit, we just read this morning, slowing a bit continue to buy bonds and capital in the market.

It's unlikely that we could predict a rapid turnaround I in that. I would suggest that over the course of the last 30 to 40 years when these things turn, they are rarely predicted and they turned quickly, so we look at 2004, 2008 or 2000 when we had this quick turns the result of either or back in - when we had the invasion of Kuwait, or we had exposed in a dot com bubble or we had great financial crisis. Those things happened quickly and dramatically, so I don't think we believe philosophically that there will never be a robust restructuring market again, but we are guiding ourselves accordingly. We have certainly taken some difficult headcount moves in that practice we are realigning some of the marketing emphasis around call it earlier stage unhealthy, but not distressed companies to try and help work with people as they moved through their portfolios and we will continue to look hard at it.

We also have some work as Steve mentioned, work going on in terms of aligning compensation structures there more appropriately with demand levels and we have some work to do on that that we will talk about in June, but we think that there is, there has been in the past and there will be in the future a role for FTI in the restructuring business. We it's a flagship business for us. We are not going to give up that very important positioning of the business, but demand really is weak now.

Joseph Foresi - Janney Montgomery Scott

Okay. I just wanted to squeeze one last one in here. Can we get some color on what the attrition rates look like across the managing director group?

Steven Gunby

I apologize. I don't have those numbers in front of me at the moment, but they haven't changed dramatically and our attrition at SMB are all senior level has been very good. The retention rate, the attrition rate has been very low and remains that currently.

In the MDs, next year down. As it would be in any order as you move down, you have a bit higher attrition, but again I think our retention of our key people has been very good.

Joseph Foresi - Janney Montgomery Scott

Okay. Great. Thank you.


Our next question is from David Gold of Sidoti. Please go ahead.

David Gold - Sidoti

Good morning. Just a couple of quick follow-ups, a lot of headwinds, I am still not clear on the bridge there from first quarter to second quarter given the higher revenue in the $0.15 to $0.20 headwind, so I was curious that either you can give a little color if there is something in the first quarter that was just exceptionally profitable for you that sort of led to that caught you guys by surprise versus say the guidance or what matter. How do we get down earnings in the second quarter?

Roger Carlile

Sure. Hi, David. It's Roger. I mean, I think, the premise of your question answers the question. FLC particularly in March was very, very strong. As I mentioned because they had the capacity, they didn't have to add any cost. You had a very high fall through in terms of profitability on that additional revenue and you can just see that when you look at that their EBITDA margins. I don't know the last time they have had EBITDA margins at that level.

As we mentioned in the call, we have concerns about some of those projects continuing into the second quarter and the second half of the year, so that's why obviously technology was strong as well. Working on in some cases some of those same matters, so we have the same concerns there a bit, so I think that gets tied up in the in the mix shift issues I spoke about, because we are no expecting those businesses to be as strong and have that kind of fall through, particularly with FLC to the EBITDA line, so I don't know if that answers the core of your question, but those businesses were strong.

David Gold - Sidoti

Got you. Okay. It does. Then, second, I remember there was some commentary maybe around technology side about increased in that market business marketing. Curious if there were other areas that you can talk about where you have made changes to-date that you can sort of call out, whether it would be the way you are selling to that matter I think someone asked earlier compensation.

Steven Gunby

Yes. I think that's the primary one to call out at the moment. I mean, there are investments that are being made as a part of our strategic review to assess our positions and do something. Those things, I don't think that the core of that as Steve mentioned in his comments. The core of that doesn't really kick in until the latter half of the year, but there are number of smaller investments, but I think Technology's business development support is the primary one. David?

David Bannister

David, how are you? I would say it's hard for Steve to say this about himself, but we are going through a very rigorous process. We have had three-day sessions of, what we call, our executive committee are really stripping apart different businesses and activities and are looking hard at any number of projects that are underway, underneath that in a way of looking where we opportunities to grow, where we have the opportunities to rationalize costs and so forth and so on. Those are all very much in process now, so I would I would beg of you some patience until June to where we are going to speak wholesomely about this.

I think if you try and pick out individual things and say we are doing this in R&D and Tech, we are doing that and staffing and build the tower something like that really would be incomplete and unhelpful until we have - sort of pull it all together in June.

David Gold - Sidoti

Fair enough. Thank you.


At this time, I would like to turn the call back to our presenters for any additional or closing remarks.

Steven Gunby

Thank you all for the questions and for the engagement. I really appreciate it. I do really hope I can see you all in June, and looking forward to sharing what we know at that point, and also going forward just engaging with you individually and as a group. I think, we can take this company quite a bit further and I am excited to be on that journey and I am excited to be connecting with you throughout that journey.

Thanks very much for your time today and look forward to seeing you in June.


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

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