Navigant Consulting, Inc. (NCI) CEO Julie Howard on Q2 2018 Results - Earnings Call Transcript

Google Inc (NYSE:NCI) Q2 2018 Results Earnings Conference Call August 2, 2018 9:00 AM ET

Executives

Kyle Bland - Director of Investor Relations

Julie Howard - Chairman, Chief Executive Officer

Stephen Lieberman - Executive Vice President, Chief Financial Officer

Lee Spirer - Executive Vice President, Chief Growth and Transformation Officer

Analysts

Kwan Kim - SunTrust

Tim Mulrooney - William Blair & Company

Kevin Steinke - Barrington Research

Marc Riddick - Sidoti

Tobey Sommer - SunTrust

Operator

Good morning and welcome to Navigant's second quarter 2018 earnings call. At this time, all participants will be in a listen-only mode until the question-and-answer session of the call. This call is being recorded. If you have any objections, you may disconnect at this time.

I would like to introduce Kyle Bland, Director of Investor Relations. Mr. Bland, you may begin.

Kyle Bland

Good morning and thank you for joining us to discuss Navigant's second quarter 2018 earnings results. We have posted a press release related to our Q2 performance as well as the presentation materials that we will discuss this morning on the Investor Relations section of our website. With me on the call this morning are Julie Howard, our Chairman and Chief Executive Officer, Stephen Lieberman our Chief Financial Officer and Lee Spirer, our Chief Growth and Transformation Officer.

Before I turn the call over to Julie, I would like to highlight the disclosures at the end of our press release and in our presentation materials for information about any forward-looking statements that may be made or discussed on this call. Please review this information along with the risk factors included in our 2017 Annual Report for items which could affect the company's financial results and cause our actual results to differ materially from those contained in or implied by any forward-looking statements.

Additionally, please be advised that with the pending sale of our disputes, forensics and legal technology segment and our transaction advisory services practice to Ankura Consulting Group, LLC, these businesses have been classified as discontinued operations and we have recast prior periods to reflect this reporting change. We will refer to the combined disputes, forensics and legal technology segment together with our transaction advisory services practice as SaleCo or discontinued operations throughout our remarks this morning.

With that, I will turn the call over to Julie.

Julie Howard

Thank you Kyle. Good morning and thank you all for joining our second quarter 2018 conference call. Stephen is going to walk you through our results in ore detail here shortly but first I wanted to highlight some of our key accomplishments that occurred in the last several months and notably here in the second quarter.

Starting with our financial performance. We delivered very strong operating results in the second quarter. Both top and bottom line performance were up significantly year-over-year and sequentially, driven by continued strong demand across most areas of the business, coupled with a disciplined cost management focus.

Beyond our financial performance, we are also excited about the pending sale of our DFLT and transaction advisory business which we expect to close here shortly in the quarter and which represents the next chapter of our multiyear transformation to pivot away from an expert based organization to a more industry focused management consulting and managed services firm. We believe that this continuing transformation will result in a higher growth, more streamlined organization with significant capital flexibility to pursue unique growth opportunities and return capital to shareholders. We feel very strong as this positions us to unlock the potential of our business to realize greater value for all of our stakeholders over the longer-term.

Also in the quarter, we established and recently commenced operations of our new joint venture, Health System Solutions, with our strong partner in Baptist Health South Florida. This has added another marquee client to our portfolio of deep client relationships similar to the strategic relationship we have with UAB or University of Alabama at Birmingham. The unique new structure with Baptist Health South Florida will leverage our industry-leading processes and technology to help drive efficiencies and improvement in net revenue collection, cash flow and cost management for the Baptist system. We are also very excited about the growth potential of this business beyond the Baptist system and look towards leveraging the platform for the benefit of other health systems in the Southeast region.

Also in the quarter, we approved an expansion of our share repurchase authorization to $175 million through 2020 and announced subject to market conditions and upon closing of the SaleCo transaction, our intention to return up to $175 million to our shareholders over the next 12 months, including the expected initiation of an ongoing dividend following the close of the SaleCo transaction. Stephen is going to speak a bit more about that in his remarks.

And with that, I am going to turn the call over to Stephen. He has a lot to walk you through, including Q2 performance in each of our business segments, but perhaps as importantly to explain how we will report our continuing and discontinued operations, as well as to highlight our plans to right-size expense base consistent with our revenue outlook over the near-term.

Stephen?

Stephen Lieberman

Thank you Julie. Given the added complexity of our financial reporting following the SaleCo transaction, we have prepared a slide deck which I will refer to throughout my remarks, starting at slide five.

As Julie mentioned, we are quite pleased with our second quarter results. In the quarter, total combined revenues and RBR, which includes results both from continuing operations and discontinued operations, were $275.7 million and $252.4 million, respectively, both up 7% compared to the second quarter of 2017. The quarter benefited from continued solid demand for our consulting services in our energy and FSAC segments as well as strong performance in our discontinued operations businesses which include the held for sale DFLT segment and TAS practice.

From a profitability perspective, adjusted EBITDA improved 36% compared to second quarter of 2017 to $39.7 million on a combined basis. These gains were driven by strong revenue performance in energy, FSAC and discontinued operations, offset by slightly higher bad debt expense in the current year period. When excluding bad debt, G&A as a percentage of combined RBR, was 15.8%, a 140 basis point improvement from the second quarter of 2017.

Moving further down the income statement. GAAP net income increased to $28.8 million or $0.62 per share, compared $8.8 million or $0.18 per share in the prior year. In addition to strong operating performance, our depreciation and amortization, effective tax rate and share count were all favorable in the current year period. Additionally, in the quarter, due to our held for sale presentation, we booked a $7.9 million tax benefit related to the recognition of goodwill tax basis on a portion of the assets that were moved to discontinued operations.

Second quarter 2018 adjusted net income of $0.49 per share, which excludes the aforementioned tax gain more than doubled compared with the $0.24 per share in the second quarter of 2017. I wanted to mention that our share repurchase for the quarter was $7.5 million. This was a slower pace than originally forecasted as our process to sell our DFLT and TAS businesses create a blackout period during which we were not able to adjust our repurchase plan.

Our days sales outstanding or DSO for the quarter was down seven days sequentially to 84 days on a combined basis. When excluding discontinued operations and looking at just continuing operations, our DSO for the second quarter was 72 days highlighting significantly lower working capital requirements in the future as we move forward from the SaleCo transaction.

Combined free cash flow for the second quarter was up $15.6 million to $29.1 million versus the second quarter of 2017 driven primarily by improved operating performance and lower capital expenditures in the current year period.

Turning to our segment level performance and starting with continuing operations on page number six. While we saw improvements sequentially versus the first quarter, our healthcare segment RBR decreased $6 million to $92 million for the second of 2018, compared to the respective period in 2017. We continue to see a slower conversion of our pipeline when we do convert early-stage assessment work into larger engagements, the work has been smaller in scope than expected. That being said, our pipeline is solid and we continue to remain optimistic for improved sequential performance in the back half of the year.

From a profitability perspective, segment operating profit for healthcare declined $1.5 million compared to the second quarter of 2017 while margins improved slightly as we remain focused on cost alignment and our revenue cycle management and margin improvement plan begins to bear fruit. On a sequential basis, margins increased 750 basis points from the first quarter as we reduced our operating cost by over $5 million from Q1 to Q2,, partially driven by the benefit of headcount actions taken in the first quarter and good overall cost management.

Looking at our energy segment. RBR increased 15% year-over-year to $37 million for the second quarter of 2018, driven by strong demand for strategic and operational advice from clients around the globe and across the industry. This includes public sector clients looking to leverage our expertise in developing energy efficiency programs, utilities seeking help with good modernization projects and OEM and suppliers utilizing our know-how to build the next generation of electric transportation. Segment operating profit improved 49% in the quarter compared to the prior year period as revenue improvement was realized on lower headcount. There are many pervasive shifts occurring in the energy space and our expertise and thought leadership well positions us to support the evolving needs of our clients in 2018 and beyond.

In our financial services advisory and compliance segment, we delivered another strong quarter with RBR at $37 million in the second quarter of 2018 which was up 22% compared to the prior year period. Robust performance across the segment was driven by increased project work with some of our largest clients. Demand for our expertise in financial crimes and sanctions work as well as operational efficiency and effectiveness engagements continue to remain strong. Segment operating profit improved 15% on improved revenue performance although margins were down slightly as we added headcount to support increased demand particularly resources to support our technology delivery capabilities. Looking forward, while our FSAC segment has had tremendous growth through the first half of 2018, we anticipate a more normalized level of growth in this segment throughout the remainder of the year.

From a business mix perspective, our consulting businesses which represented 81% of our RBR from continuing operations in the second quarter continued to produce strong results with a consolidated segment operating profit margin of over 34% for the period. Our TD&P businesses, which now exclude the legal technology business that has been reclassified as discontinued operations, delivered improved year-over-year and sequential operating profit margin of 15%, reflecting progress towards our TD&P margin improvement plan which we outlined at the beginning of 2018. While we face some near-term margin pressure as we ramp-up the Health System Solutions joint venture with Baptist Health, we remain confident in our ability to continue improving our margin performance in these businesses going forward.

Turning to slide seven and focusing on discontinued operations. Our discontinued operations businesses which again includes our legacy disputes, forensics and legal technology segment as well as our transaction advisory services business, which was previously part of our FSAC segment, produced strong performance in the second quarter. RBR increased 16% year-over-year to $87 million as the results benefited from higher than usual mass-tort claim volumes. The legal technology group underpinned by strong demand for cyber security engagements was also up nicely year-over-year. As Julie mentioned, we remain on track to close the SaleCo transaction sometimes here in the third quarter.

Moving to slide nine and looking at our business prospectively. We continue to be very excited about the prospects of our business going forward. The announced divestiture of our DFLT and transaction advisory services business is a large step forward in our multiyear transformation from an expert-based event driven organization to an industry focused advisory firm expected to have higher growth and greater revenue visibility and durability. This more focused organization enables us to streamline our management practices and processes and drive investments and services and visual data and analytics solutions that can be leveraged across the enterprise.

Importantly, the new Navigant will have a stronger balance sheet with significant flexibility to return capital to shareholders and pursue growth opportunities to augment our industry expertise and technology capabilities. We believe that this new profile for Navigant supports a strong investment thesis and results in improved valuation for our business over time. The transaction does create a bit of noise in our financials over the near term as we pull through discontinued operations accounting and transition the business over to Ankura. We anticipate this being a temporary impact and expect to return to a normalized performance in 2019.

Turning to slide 10 and looking to our Q2 performance broken out between continuing operations and discontinued operations. As you can see from the results, based upon discontinued operations accounting, only G&A cost that are directly attributable to the discontinued entities can be allocated to the divested businesses which therefore leaves a disproportionate share of G&A cost retained by continuing operations. This disproportionate share of G&A which will be temporally maintained as we transition the business to Ankura impact the second quarter results for our continuing operations, which reflect RBR of $165 million, generating $17.6 million of adjusted EBITDA or 10.7% margin. This translates to EPS of $0.13 and adjusted EPS of $0.17 for the quarter. All these metrics are up nicely year-over-year but again on a nominal basis, we believe, do not reflect the real earnings power of the business prospectively.

These profitability metrics all assume a higher burn of G&A than we expect on a go forward basis. Historically, our G&A excluding bad debt has been between 175 and 18% of RBR or better over the last five-plus years, including in 2013 when we were previously, a $750 million RBR company and we are very confident we can get back to these levels in 2019. This will be through both cost reductions which will include real estate consolidation, IT contract negotiation, program management as well as through leverage. As we realize as our growth strategies in 2019 and beyond, we expect to expand our revenue base and leverage our existing G&A cost structure meaning stronger margin expansion over the next couple of years.

Flipping to slide 11 and applying the discontinued operations accounting treatment for full year 2018. Our revised RBR guidance range from continuing operations is $660 million to $685 million for 2018. This excludes revenue from discontinued operations for all of 2018 but includes updated projections for the remaining businesses and the contribution of Health System Solutions joint venture with Baptist Health South Florida, both of which help to increase our baseline RBR projections. From an adjusted EBITDA perspective, we have rolled forward the removal of discontinued operations contribution for the entire year and included the expected impact of the full burden of G&A cost that will be temporally maintained by Navigant as we transition the business to Ankura.

Further, we updated the range to reflect expectations for continuing operations based on our current outlook and also includes the projected startup cost of the Health System Solutions joint venture of approximately $5 million. This leaves us with a 2018 adjusted EBITDA for continuing operations guidance range of between $52 million and $59 million. For adjusted EPS, we have layered in the operating impact just discussed and also applied the ramp up of our expected share repurchases through the balance of the year of 2018 to get a 2018 adjusted EPS from continuing operations of $0.40 to $0.50 per share. Again these numbers are significantly impacted by discontinued operations accounting rules and the timing of the Health System Solutions joint venture startup. As we move past the SaleCo transactions, we expect to show more normalized operating results in 2019.

With that in mind, let's flip to slide 12. We thought it would be helpful to provide a projected preliminary view on potential 2019 performance given the transitional items that are flowing through in 2018. This preliminary view is being provided without the benefit of going through our normal comprehensive budget process, but does reflect the key growth and profitability drivers that we expect to contribute to 2019 performance.

As you can see in the chart, we expect the profitability from continuing operations to look much improved in 2019 and beyond as we move past the SaleCo transaction. This preliminary projection is driven by a number of visible and discrete drivers that we expect to impact 2019 performance. These include strong organic growth from our management consulting business, which are aligned with the significant transformation occurring in our three key end markets, healthcare, energy and financial services. Second, the ramp-up of Health System Solutions joint venture including the lap of start-up costs which will occur in 2018. Third, continued progress on margin improvement in our TD&P businesses for which, as mentioned, we are seeing good progress in the second quarter and remain confident in our execution moving forward. Fourth, G&A cost rationalization. As mentioned, as we complete our full transition of SaleCo to Ankura, there are several levers we intend to pull to reduce G&A spending, including real estate consolidation and IT contract renegotiations among others. With this, we expect to get our G&A cost leverage, excluding bad debt, back in line with our historical levels between 17% to 18% of RBR in 2019. Lastly, we expect these performance improvements to be further supported by our share repurchase activities which will be the largest component of our plan to return up to $175 million to shareholders in the next 12 months.

With these improvement drivers and on a preliminary basis, we expect the business to generate RBR growth between 9% and 12% on an organic basis in 2019. A large portion of this is generated from the anticipated ramp-up of Health System Solutions joint venture. This translates into an RBR range of approximately $730 million to $760 million for 2019. From a profitability perspective, we anticipate adjusted EBITDA improving by approximately 60% to range between $85 million and $95 million with margin expansion of over 300 basis points compared to 2018. We believe adjusted EPS will benefit from improved operating performance and will further enhance through our shareholder repurchase program. This translates expected adjusted EPS growth of approximately 120% in 2019. Again, these numbers are on a fully organic basis and are preliminary only, rooted in what we know and can anticipate today. It's important to note that post close of the SaleCo transaction and even after exhausting $175 million of initial capital return, we will still have approximately $400 million of dry powder including availability under our credit facility, cash on hand and near-term free cash flow to pursue growth and/or return of additional capital to shareholders, both of which have potential to push these numbers meaningfully higher.

Looking beyond next year, the business remains well positioned to achieve our five-year financial targets which we communicated last month and which represents an attractive value proposition for shareholders in the new Navigant. Again, we expect these organic targets can be further improved as we deploy liquidity from the SaleCo transaction or free cash flow prospectively.

On slide 13, as we near the closing of the SaleCo transaction, I want to reiterate our capital allocation priorities which we outlined in late June. We expect to continue executing a balanced approach to our capital allocation, including investing in organic and inorganic growth opportunities and returning capital to shareholders. The proceeds from the transaction allow us accelerate these objectives and Lee is available on the call today to further discuss our potential growth initiatives in more detail.

With approximately $370 million of net after-tax cash proceeds, we expect to return up to $175 million of capital to shareholders over the next 12 months. We intend the majority this capital return will be through open market share repurchases and expect to ramp-up our activity as we come out of our earnings blackout next week. Further, given the anticipated greater durability and predictability of our results going forward, we expect to initiate an ongoing dividend post close of the SaleCo transaction.

From a leverage perspective, we are comfortable operating the business with growth leverage between 1.5 and 2.5 times on a run rate basis, which is aligned with our risk profile and in line with our peer set. In the meantime, we will be actively managing our debt levels in order to minimize carrying cost as we seek to deploy capital in the future. As a result of this transaction, we realigned our credit facility to $350 million from $400 million, which continues to provide significant liquidity for us to pursue both organic and inorganic growth in order to augment our expertise and technology capabilities within our key end markets. As the dust settles and after our initial capital return of up to $175 million, we will be well positioned with approximately $400 million of capital to deploy to further enhance shareholder value.

I would now turn the call back to Julie to wrap up before we open the line for Q&A. Julie?

Julie Howard

Thanks Stephen. So continuing with the deck, on slide 14, I wanted to just take a minute to reflect on accomplishments to-date in 2018 and also look forward to what's ahead for the remainder of the year and into 2019. 2018 certainly has been a really busy year for us here at Navigant as we have made strides on multiple fronts. We announced the divestiture clearly, that we have talked about a number of times of our DFLT and TAS businesses which we believe strongly positions the company for improved future growth and success going forward.

We launched the Health System Solutions joint venture with Baptist Health South Florida which represents a significant organic growth opportunity for the firm going forward. We developed and announced plans to improve our technology, data and process margins. And with solid progress to-date from our business process managed services team, we have started to see some improvement here in the second quarter.

We refreshed our Board of Directors with new strong and highly capable individuals to help guide Navigant into the future. We expanded our share repurchase authorization to $175 million through the end of 2020 and announced plans to begin executing against that. And we achieved all of these successes while also delivering strong, very strong operating performance in the first half of 2018.

We expect to carry this momentum into the second half of this year and beyond as we focus on executing against several key initiatives including the following, continuing the pursuit of growth opportunities to help expand our industry capabilities while also pursuing through build, buy and bridge strategies technology, data and analytics solutions so that in combination domain expertise and technology expertise, we can help our clients work faster, smarter and at a lower cost. We are also going to be ramping up our joint venture with Baptist Health South Florida to achieve the $75 million to $100 million annualized run rate opportunity that we anticipate.

We will be rightsizing our footprint to minimize our G&A cost post the SaleCo transaction and the transition services period of time. We are going to be returning $175 million of capital to our shareholders over the next 12 months, including not only the enhanced level of share repurchases but through the expected initiation of an ongoing dividend. And we also want to make sure that we continue to have a smooth transition of our DFLT and TAS businesses over to Ankura in the next several months. Importantly, like the first half of the year, we are confident in our ability to execute against these key initiatives while also staying focused on our most important tasks, which is delivering value and showing results for our clients and our shareholders.

We have certainly covered a lot on today's call, but in summary, we are really pleased with our performance in the first half, both from an operating and from a strategic perspective. While we certainly have a lot of critical work ahead of us over the next couple of quarters, we do remain confident in our ability to execute and we believe we are really, really well positioned to deliver greater longer term value for our shareholders.

And with that, we are going to open up the line for Q&A. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Tobey Sommer of SunTrust. Your line is now open.

Kwan Kim

Hi. This is Kwan Kim, on for Tobey. Thank you for taking my questions.

Julie Howard

Good morning Kwan.

Kwan Kim

Morning. On the healthcare segments, on the types of services that remain depressed, what gives you the confidence for a potential comeback later this year? And when could we see the pickup in hiring again to position yourself for that comeback? Thank you.

Julie Howard

Yes. I think there our confidence, Kwan, comes from a number of perspectives. We know the quality of the people that we have. We know the strong relationships that we have and the eminence that we have in the market place for the expertise that we are able to deliver. We can see and know the pipeline that we have and as we mentioned, when we have seen certain things convert, they just haven't been as large as in the past, but we hope to be able to push on that framework. We know the recruiting that we are doing internally within Navigant as needed, particularly from a strategic perspective, you saw the announcement in the quarter of a new head of our strategic consulting business within healthcare who has got some plans to redirect that team.

So it's a combination of our own internal actions as well as what we foresee as still a strong market. There is still a lot of disintermediation as it relates to replacing Obamacare ACA and what that means. There is incredible margin pressure on health systems, even more so this year than it was in the past which is going to continue to drive a need for both strategic and operational improvement capability. So I think on both fronts, internally and externally, we still feel really positive about healthcare and maybe just need to get it out of our own way a little bit and see a good second half.

Kwan Kim

Okay. And on the preliminary 2019 view, how were the growth rates among segments distributed in the 9% to 12% growth target?

Julie Howard

So thank you for bringing that up. We don't provide don't provide segment guidance and particularly as it relates to 2019, are not planning to do that this early. We tend to talk about our long-term targets and we will get more specific with you as the year progresses related to 2019. But I want to reemphasize, 9% to 112% organic growth overall, we did say that a portion of that is going to be driven by the expected ramp of our Health System Solutions business. So that would translate into a higher growth profile for our healthcare business overall. And we are going to see a lot of that through the improved operating performance as well as our share repurchase drops straight to the bottomline.

We did have an email, I just want to clear up, if there is any confusion for anybody on this call, we did have an email from somebody early this morning after the release confused by our EPS target, if you will, for 2019 and 120% growth. So I wanted to make sure that everybody can do the math. That 120% growth would translate to approximately $2-ish in that range for 2019.

Kwan Kim

Got it. Thank you very much.

Julie Howard

Thank you.

Operator

Thank you. And our next question comes from Tim of William Blair & Company. Your line is now open.

Julie Howard

Good morning Tim.

Stephen Lieberman

Hi Tim.

Tim Mulrooney

Good morning. It's actually Tim Mulrooney, on for Tim. Thanks for taking the call. First, I guess, I am not sure if you would be willing to answer this, but just wondering if you could maybe quantify in some way the growth in revenue and profits for the Baptist Health JV that you are embedding into the outlook for 2019?

Stephen Lieberman

We talked when we announced this earlier that we see a long-term type of a run rate of RBR of $75 million to $100 million type of level. There obviously is a ramp. So we are not going to be seeing that this year. But there is going to be some good progression as we move towards that direction next year. But there is a little bit of ramp in that type of a business.

Tim Mulrooney

Okay. And then so I guess the guidance for G&A seems to imply that expenses will actually go down in 2019 even if you are able to achieve the revenue guidance. So just wondering, how much of this is eliminating some of the trapped cost from the divestiture and how much is other factors? And I know you may have touched on it a bit, but could you just give any more detail on how you plan to achieve those cost reductions?

Julie Howard

Well, I think that we hope to eliminate a significant portion of trapped, whatever we want to call that, temporarily maintained cost in our G&A infrastructure. And as we have said repeatedly, we know that we have real estate opportunity, clearly. When you are eliminating that many people from portfolio, we have opportunity to reduce G&A through certain contract renegotiations, particularly in IT. We have programmatic types of, when we say program management, we are talking about various programs that won't be reduced and/or eliminated as it relates to that business and others. And there may potentially be people impact as well. So it's all four categories. And yes, the anticipation would be, there would be a reduction in 2019.

Stephen Lieberman

I would just add that the new business focusing on the three industry segments is a more simplified business. So that simplification is going to represent a lot of opportunities for us to become more efficient and thereby improving our G&A position and we are already working on that.

Julie Howard

I think maybe to expand on that, management is hoping dispute advisory, very different business, very different types of ways of operating and supporting those businesses. So that has effectively have two different companies within a company over the years has created a level of G&A that's been because we have supported both. So we hope to see a much easier to understand, easier to operate and easier to leverage business going forward.

Tim Mulrooney

Okay. Thanks. And then maybe just one more quick one. It seems like maybe some of the revenues in the 2017 for healthcare went up slightly compared to, I think, what we had seen in prior releases. So was there like a business or a practice that moved into the healthcare segment?

Julie Howard

Yes. We had a practice, life sciences regulatory consulting practice that was previously in our dispute business and we transitioned that in January of this year, I believe, into our healthcare in anticipation of this transaction because it was more aligned with the growth opportunities and the work that we are already doing within our life sciences business that is inside of our healthcare segment.

Tim Mulrooney

Okay. Was that the only portion of the dispute segment or the previous dispute segment that wasn't divested then?

Julie Howard

That is correct.

Tim Mulrooney

Okay. Thank you very much.

Julie Howard

Thank you.

Stephen Lieberman

Thank you.

Operator

Thank you Tim. And our next question comes from Kevin of Barrington Research. Your line is now open.

Kevin Steinke

Good morning. So referring to slide 11, the updated 2018 guidance from continuing operations. You have one of the bars in there shows 10 million increase to the RBR guidance from continuing operations improvement. I wonder if you could touch on it, however you can in terms of what's driving that improvement in the continuing operations?

Stephen Lieberman

Yes. I would be happy to. It's Stephen. So the two segments that we have really seen some nice growth so far this year have certainly been FSAC and energy on the continuing operations basis. They both have been off to a really good start and so we are, once again, really pleased with that beginning. And that improvement that we have seen there has more than offset the, what I would characterized, little bit slower start than what we originally anticipated for this year in healthcare. So we are off to a good start in the continued operations improvement that's noted here.

Kevin Steinke

Okay. Great. And then, yes, I think energy hit a very nice quarter sequentially was very good as well as year-over-year. I believe we are starting to move pass the headwind from that Department of Energy wind down. But on a sequential basis, can you talk about some of the things driving that improvement? What are you seeing internationally? Or whatever may be contributing to that?

Stephen Lieberman

Yes. We are seeing some really good breadth within Energy. It's not just one part of the segment in one geography. We are seeing good growth in the U.S., some good momentum internationally. We are seeing in both on the utilities side, the manufacturing, ORM side and with a, what I would characterize as, more sustainable public sector or government or U.S. government part of it, but the public sector of it internationally is also doing well. So there isn't just one particular area but it just continues to point to the pervasive change that we are seeing in that industry in general and that we have got the thought leadership and the technical expertise to be able to help our clients.

Kevin Steinke

Okay. Great. Now, I know you said some of the assessment work in healthcare is converting to work that's been a bit smaller in scope than expected. But what's the health of the assessment activity or pipeline in healthcare overall? How would you characterize that?

Julie Howard

I would characterize it as strong but not as robust as it was two years ago. Like I said last year, I think we saw some caution in decision making. We think that we started to see the pipeline fill a bit here in the beginning of the year and we have had some assessments begin to convert but they are just not at the same scope as they were several years ago. And so we are working our way through that, like I said.

Stephen Lieberman

Yes. But I think the other point that Julie made earlier, that's a macro situation within the health systems that are out there. They are continuing to be under increased pressure and we believe that that macro environment is going to continue to present good opportunities. So we are pleased with the pipeline. Now it is up to us to go ahead and convert that.

Julie Howard

Yes. And that's why we announced that we have got a new head of strategy to help really better define those opportunities and pursuits for us.

Kevin Steinke

Okay. Good. So also going back to the slide 11, on the adjusted EBITDA guidance for the continuing operations, you have built in there the JV start-up cost of $5 million. Is that the all-in start-up cost? I know you had mentioned when you were still kind of assessing the plan that may be a placeholder of roughly $10 million is what we should think about? So I am just wondering if maybe you are coming in a little lower or if that $5 million reflects the full start-up cost?

Stephen Lieberman

Yes. When I gave that original number, that also included some of the CapEx and other requirements, working capital that we were anticipating needing in that business. So when you look at the amount of cash we put in with our partner on a combined basis, it was closer to that original number. But from a pure operating loss perspective from this year, we are anticipating on a combined basis, meaning us and our partner, about $5 million.

Kevin Steinke

Okay. And I assume in terms of margin cadence for the second half of the year, we should expect fourth quarter higher than the third quarter. Is that correct? And do those JV costs more fully hit the third quarter? Just trying to get a sense of how margins play out in the second half?

Stephen Lieberman

Yes. We are thinking the fourth quarter is going to better because as we are anticipating, you have a little bit higher start-up cost as we begin operations and we start operations in July.

Kevin Steinke

All right. And then lastly, you mentioned you are making some progress on improving the margins in your TD&P businesses, I guess, more specifically the healthcare revenue cycle management. How far along are you in terms of the progress? What are you thinking for timing to get that kind of up to where you would like it to be longer term?

Julie Howard

Kevin, I think it's a work in progress. I don't see an end date. I think we are always going to be pushing to figure out how to drive more leverage in the business. But as the margin improvement you have seen thus far was driven by lower headcount. We have lapsed some of the non-profitable contracts. We have got better leverage of our resources that are supporting these engagements. We are beginning, we have implemented time tracking within that business. So we have better understanding of our operational efficiencies as we deliver the work. Our new leader in that business that came in, I think, in the fourth quarter of last year has just really done an amazing job in identifying a whole track of, different tracks of margin improvement opportunities. He has not done yet. And then you can think about how we are going to leverage the growth of Health System Solutions and potentially other growth opportunities on to that platform. So work in progress.

Stephen Lieberman

So that being said, I think we believe that there is still a lot of potential in that business as all the points that Julie made, as we look over the next couple years.

Kevin Steinke

Okay. Great. Thanks everyone.

Julie Howard

Thanks very much Kevin.

Operator

Thank you Kevin. And our next question comes from Marc Riddick of Sidoti. Your line is now open.

Julie Howard

Hi Marc. Good morning.

Marc Riddick

Good morning. I wanted to start with maybe if you could give maybe some thoughts, it might be early for this, but I was wondering if you were getting some feedback from your customers? And I wanted to get a sense that, if you are getting some thoughts and views following what their views on the divestiture and the greater focus on these verticals? I just wanted to see if you had already begun to get some feedback from them and how they felt about the transaction?

Julie Howard

You know, Marc, I can honestly say, I don't think we have had much in the way of feedback on either of the divested business or the remaining. I really think the clients, they really focus on what their engagement is with our practitioners. I don't really think they focus other than what's the balance sheet look like with the larger company we engage with. And until we start to get out in the market from a rebranding perspective or not a rebrand but an enhanced brand, revised brand and really kind of drive that home, the simplified streamlined version of Navigant, the capabilities across enterprise, capabilities that we can bring, I just don't think they pay attention to it, in all honesty, for now.

Marc Riddick

Okay.

Stephen Lieberman

I think one of the positive attributes, so when we continuously evolve and as we talked about, we have got significant liquidity that we are going to continue to look to invest in the three different industry groups. And so that, if anything, is just to going to continue to make us more relevant to our clients.

Marc Riddick

Okay. Great. And now shifting gears over to FSAC for a moment. Certainly, it's got nice momentum going in energy and FSAC but I wanted to delve a little bit, you maybe mention on some of the headcount additions for increased demand and I think you highlighted technology. But I was wondering if you could dug a little deeper into that and maybe what you are seeing that you feel confident on acting on?

Julie Howard

Go ahead.

Stephen Lieberman

So I think as we look at our delivery methods within FSAC, our technological savvy and capabilities and solution sets are becoming more and more important. So as we are looking at building up that organization, one of the key focus areas is making sure that we have that capability. So that's where you are seeing the majority of the build up in FSAC as relative to enhancing our technology delivery capabilities.

Marc Riddick

Okay. And one last one for me. Between the energy and FSAC, some of the shifts that you are seeing, thematic shifts, if you will and what have you, as strategic opportunities that you are seeing there, I was wondering, does that in your view or on your end change the level of visibility that you have in those businesses? Or do you think it's any more or less visible than it was maybe a year or two ago? Thank you.

Julie Howard

I think probably there's two answers to this question. Strategically over the long term, we believe, we have gotten more sustainability in our business model going forward and therefore more visibility and predictability, just in general. And I also think that given some of the work that we have been awarded, we probably have greater visibility within FSAC and energy just looking forward now because of the types of engagements, the longevity or depth and breadth of those engagements are more significant. So kind of both.

Marc Riddick

Interesting. Okay. Great. Thank you very much.

Stephen Lieberman

Thank you.

Julie Howard

Thank you Marc.

Operator

Thanks Marc. And our next question comes from Tobey Sommer of SunTrust. Your line is now open.

Tobey Sommer

Thanks. I had a question for you about --

Julie Howard

Tobey. It is you, Tobey.

Tobey Sommer

Yes, it is. This version is definitely me

Julie Howard

Okay.

Tobey Sommer

With a good amount capital available to you post divestiture, I am curious if you could update us on your financial metrics like when you look at with acquisitions, accretion to margin, EBITDA, EPS, however you would like to describe the vigor and philosophy that you have to capital deployment, et cetera, as that's going to be a significant focus of investors going forward. Thanks.

Stephen Lieberman

Yes. I will start and then Lee or Julie may want to jump in here. But we have a very discipline approach as we are looking at the pipeline of different opportunities that are currently available and as we continue to look to redeploy the capital. We have a corporate development group. We go through multiple analysis. We go through return on investment analysis. And all of the different types of metrics that we are looking for the holistic business, we look at how does apply to this new business. And importantly, it is a good match from both a cultural and on an economic basis. So does it improve our metrics? And so synergies is often a component of that. So whether is taking a solution capability and reapplying it into our distribution network. But I would say that depending on which business it's flowing through, we look at a holistic basis, how it's going to flow through. But the normal things that we are going to look at, the return on investment. What does it mean from a cash flow perspective? How quickly does that turnaround? And is it going to be accretive? And so certainly we want to go ahead and be disciplined in our approach.

Lee Spirer

Tobey, let me add a little bit to that. So your question was specifically about around financial metrics. Well, we target returns in the 20% to 25% as a bare minimum for those businesses, from a strictly financial standpoint. But as Stephen started to highlight, the process of balance of the financial business case which is that appropriate ROI, what it does to our accelerated growth profile, what it does for margin profile and importantly what it does to our stability of revenue. But it starts really with that strategic fit and alignment. So do these investments make us a more valuable company relative to new capabilities that we can build? How does it enhance our value to clients? How does it raise our competitive position? So that's where we start. But relative to the financial metrics, I think between Stephen and my answer you have a view and that is what we have done historically and it's absolutely what we are committed to do going forward.

Tobey Sommer

Okay. Thanks. Could you describe the pipeline for the JV and also for areas outside of the scope of the JV? I am curious what that looks like and if there is any difference between the two?

Julie Howard

So I think the question was the pipeline for Health System Solutions where at present is a Baptist Health System. And Baptist Health System has some growth initiatives before it that will likely increase the size of that health system, which will then endorse to the benefit of Health System Solutions. So you have Baptist and then there are other health systems within the Southeast region that we are beginning to have conversations with a couple of them. And so that would be a growth to be all to kind place those on the health system platform but also means significant growth in the future. And then, of course, outside of that, for the rest of the revenue cycle managed services business, we have plenty of, we have been focused on more modular types of opportunities which tend to be a bit more profitable than the large comprehensives. And so the team is executing, we have improved our performance and they executing at UAB which is one of our large contracts and then focused on adding more profitable modulars.

Tobey Sommer

Is there a difference between the two, because you kind of described activity on both levels? Does one seem more promising than the other?

Julie Howard

No. We think there is a good combination for now. We want to go up the food chain, if you will and be considered for the much larger opportunities. We think that our Health System Solutions business has great commercial opportunity and the Southeast region is a bit of a test case for that. So we are going to pursue both paths, Tobey.

Tobey Sommer

Thank you very much.

Stephen Lieberman

Thank you.

Julie Howard

Thank you. And I understand that there are no further questions in the queue. So I would like to thank all of you. I know it was a very, very long dialogue this morning, but we had a lot to say because we have had a lot that we have been doing and we look forward to continuing that momentum in the balance of the year. Thanks so much for joining.

Operator

Thank you. And that concludes today's conference. Thank you for your participation. You may now disconnect.