Hill International Inc (HIL) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the Hill International fourth quarter 2007 and year-end financial results conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode.

I will now turn the conference over to Mr. Kevin Sullivan of the Equity Group. Please go ahead, sir.

Thank you, Dennis, and good morning, everyone. Thanks for joining us today. Our speakers on today's call will be David Richter, President and Chief Operating Officer, and John Fanelli, Senior Vice President and Chief Financial Officer.

Before we get started, I would like to remind everyone that statements made during today's call may fall within the definition of forward-looking statements under the Private Securities Litigation Reform Act of 1995. Any such statements are are subject to risks and uncertainties, overall economic and market conditions, competitors' and clients' actions and other conditions which could cause actual results to differ materially from those anticipated, including those risks identified in Hill's filings with the Securities and Exchange Commission. Accordingly, such statements should be considered in light of these risks. Any prediction by Hill is only a statement of management's belief at the time the prediction is made. There can be no assurance that any prediction once made will continue thereafter to reflect management's belief, and Hill does not undertake to uptake publicly its predictions, whether as a result of new information, future events or otherwise.

I would now like the turn the call over to David Richter, President and Chief Operating Officer of Hill International. Please go ahead, David.

Thank you, Devin, and good morning everyone. Thank you for joining us for our quarterly earnings call. We are very excited about what was a terrific and record year for Hill International in 2007, and we are very excited and looking forward to an even better 2008.

I am going to review the fourth quarter financials only, not the full year. During the Q&A, you are welcome to ask questions about anything, quarter or year. First, let me explain one change that we made in our financial statements that many of you may have noticed. After some back and forth with the SEC, we have slightly revised our financial reporting, have done away with the term RLRE, revenue less reimbursal expenses, or what we used to call net revenue, and we now have a category called consulting fee revenue; which is actually the top line; total revenue is below it. So, we will generally about consulting fees first.

Let me go through first a brief overview of our performance during the fourth quarter 2007, including some breakdown between our two business segments, the project management group and the construction claims group. In fourth quarter of 2007, total companywide revenue rose 28% to a record $86.3 million. Consulting fee revenues for the fourth quarter were up 38% for a record $58.7 million. In the project management group, our consulting fees were $40 million for the quarter, up 51% from the 2006 fourth quarter. Of that growth, about 35% was generated organically, and that was primarily from our growth recently in the Middle East and North Africa, and about 15% was due to the one PM acquisition we did last year, which was KJM & Associates. Consulting fee revenue for our construction claims group rose 16%, which was entirely organic, to $18.7 million for the fourth quarter. Both of those groups were well beyond our expectations for growth.

During the fourth quarter, our consulting fee revenue breakdown, approximately 32% in the America's region, 41% in the Middle East and North Africa, 24% in Europe, and 3% in Asia-Pacific. By client type, our consulting fee revenues were as follows. 27% were from U.S. Federal, State and Local governments; 17% was from foreign governments, and 56% from was the private sector. Our overseas operations outside of the Americas accounted for approximately 68% of total revenues in the fourth quarter. We continue to see our strongest growth overseas in both projects and claims.

The company's gross profit rose by nearly 40% in the fourth quarter to $28.2 million, which equates to 48.1% of consulting fee revenue. Gross profit for the prior year's quarter was $20.2 million or 47.4%, so we've sen an increase in our gross margin percentages. Our SG&A expense companywide rose, reflecting costs associated with both the Knowles and KJM acquisitions, as we inherited their SG&As; continued growth in our senior management team and corporate overhead expenses, including some significant increases in our costs and to our recent growth and increases both the U.S. and overseas, as we continue to build out a much stronger business development team to help us support future growth. During the fourth quarter of 2007, our SG&A as a percentage of consulting fee revenue was up only slightly to 40.9%, compared to 40.7% in the same period of 2006.

Our operating profit for the fourth quarter rose to $5.0 million, up 47% from the fourth quarter of 2006. Operating profit as a percentage of consulting fee revenue increased to 8.5% from 8.0% in the fourth quarter of 2006. Our operating margins were down slightly from 10.0% in the third quarter of '07, due to some unusual expenses that we incurred in the fourth quarter, a little over $1 million of expense that we don't see reoccurring in the first quarter of '08. That included about $800,000 worth of bonuses that were paid at the end of the year that - I'm sorry, that were incurred in the fourth quarter, paid in early 2008; bonuses tied to either annual performance or discretionary bonuses that we weren't able to approve for the - during the course of the year.

We also had about $200,000 related to the year-end holiday parties. We have now about 70 offices around the world and that has become a higher expense, and one we may look at given the size, and we had about $50,000 of expenses related to the exercise of the warrants in the fourth quarter. So we had a little over $1,050,000 that was unique to the fourth quarter that we don't see reoccurring.

In the project management group, our operating margin declined slightly to 18% from 20.4% in the fourth quarter of 2006. This is primarily due the to a decrease on operating margins on our Iraq work. We strengthened our results from a significant increase in the work that we're doing directly, where we have significant operating costs, as opposed to just getting essentially dividend payments from our SBH joint venture. So the margins for that job have gone down as we have seen a lot of growth and increased profitability. It also related to some significant start-up and mobilization costs as we have ramped up over the last six months, a - what we think is a pretty significant business in North Africa, in both Egypt and Libya.

In our construction claims group, our operating margin was up significantly to 13.8% from 6.1% in the fourth quarter of 2006. This was due principally to improved operating margins, specifically in the U.K. operation, as we have integrated Hill's operation there with Knowles, and to what we think is successful and now complete integration of Knowles into Hill and the cutting of some significant costs there.

Our income taxes declined by about $700,000 in the fourth quarter, even though our taxable income rose by about $1.7 million. This was due to a continuing drop in our effective tax rate, as we see more and more profits in overseas jurisdictions that have little if any tax, as well as a significant tax credit resulting from the reversal of the prior year's uncertain tax position - and yes, that was written by an accounting - amounting to about $600,000. We are going to see in the first quarter of 2008 another significant tax credit equal to about $2.5 million. This amount will directly reduce our income tax expense for the first quarter.

The company's net income grew by 89% to $5.1 million in the fourth quarter, which is equal to $0.14 per diluted share. That is up from $2.7 million or $0.11s per diluted share the fourth quarter of 2006. As noted in our press release, our diluted share count for the quarter rose by about 45%, due primarily to the increased stock price during the end of last year, but more significantly due to the redemption of all of our warrants, which added about 14 million shares of common stock. As of the end of the year our financial position at Hill was the strongest it has ever been. It included cash and cash equivalents of $66.1 million, working capital of nearly $103 million and shareholder's equity of $128 million, which is about three times our net worth as of the end of 2006.

As of the end of the year, we had no outstanding borrowings under our $35 million credit line with LaSalle Bank, although we did have $7.7 million of outstanding letters of credit on various projects overseas, which does reduce our availability for borrowing by the same amount. Our backlog continued to grow in 2007; we had extraordinary third and fourth quarters of new sales and business development. We ended the year with a record $416 million of total backlog, which is up about 10% from the end of the prior quarter, the third quarter. Our 12-month backlog also grew by about 10% to a record $196 million from $179 million as of the end of the third quarter.

Regarding acquisitions, 2007 actually surprised us by how few acquisitions we did. We did one acquisition, which was KJM, back in May. We had a lot more discussions than one, but we found that the price expectations were rather high. Despite that, we have a very strong pipeline of companies that we are talking to right now. We have closed two acquisitions since the beginning of the year, which I will talk about in a second. We have a rather strong pipeline of companies we are in active discussions with, and if anything, I think the current market has lowered some sellers' price expectations, and I think that is going to work out to our benefit.

We have announced some major activities so far this year, a couple of acquisitions and a couple of joint ventures. Let me talk about those in a little more detail. In January of 2008, we acquired a company called John Shreeves Holdings and its operating subsidiary, John Shreeves & Partners Ltd. Shreeves is a London-based firm that provides project management and cost management services, primarily private sector projects, throughout the U.K.. For their last fiscal year, which was April 30, 2007, Shreeves had revenues of approximately $4.9 million. We think they're a - going to be a key component of growing for us a growing U.K. operation. We now have a little more balanced service line there. Before Shreeves, it was probably 99% claims, and we found that growing by organic growth in the U.K., you know, one person at that time, was not getting us very far. We think with Shreeves in the fold, we're now a much stronger PM presence and history, and we're going to see good things in the U.K..

In February 2008, we acquired majority control of a company called Gerens Management Group SA, which has now since the acquisition been renamed Gerens/Hill International SA, and Gerens is a major and leading project management firm in Spain, with offices in Madrid, Barcelona and in Cancun, Mexico. In 2007, Gerens achieved unaudited total revenues of approximately $31 million. We know the company and its management well. We were a co-founder of Gerens 10 years ago, and we were a minority shareholders in the company, but we divested our interest a couple of years later for what then was a very good price. We paid significantly more for the company today, but it's had a tremendous amount of growth and really became one of the leading budget management firms not just in Spain but throughout western Europe.

On the joint venture side, we announced two joint ventures earlier in the year, including one just this past week. We have established a real estate development joint venture called Makan Hill International Ltd., with a merchant banking group called Makan Capital Group. It is owned by Saudi Prince Abdulaziz bin Fahad bin Abdullah Al Saud, which is not easy to say or remember, but he is an ideal partner. Makan is going to raise at least $500 million in an equity fund that Hill will not be contributing to, it will be raised from outside investors, and together we will develop projects commercial, residential, mixed use, and other types of projects throughout the Middle East and North Africa. We intend to headquarter the company in Abu Dhabi, and we are in the process of looking at multiple opportunities. Makan Hill is really a way for us to sort of dip our toe into the development business, in a way that doesn't risk our company's capital but gives us tremendous outside and very little downside.

We just announced this week a joint venture called Hill Jianke Project Management, Ltd. Jianke - Shanghai Jianke Project Management Company Ltd. is our partner. We own 60% and they will own 40%. It is an effort to enter in a big way the Chinese construction market, and we will work together to build a project management business in the Shanghai region, which is the only region that we are going to be focusing on. We will have opportunities to develop the Hill business outside of that area on our own. We will own 100% of the operations, but it was a good way to get our foot in the door into what is just an absolutely huge and fast-growing market. Shanghai Jianke is a publicly-owned company, not like Hill, but owned by the Chinese Government. They have about 1800 people focused on the construction sector, but primarily doing what we consider sort of lower-level work involved in section, material testing, and construction oversite. I think in each of us we found an ideal partner to really take a project management business from the ground up build it into something we think is going to be very significant in a very short period of time.

Getting on to some other financial issues, as we noted in our press release, company exceeded by about $4 million our EBIT target for the year, which resulted in an earnout payment to shareholders the formerly private Hill International. 2.3 million shares will be issued by the company some time probably in the next couple of weeks. That will increase our share count beginning January 1 of 2008. We began trading on the New York stock exchange, as I am sure you all know, on February 22nd, and we think that combined with what we expect to in June, our addition to the rest of the 2000s is going to continue our becoming a lot better known among the investment community, and we are looking forward to that as well. In summary, we are very excited about how we performed in 2007. We think that to 2008 is going to be an even better year, and we are looking forward to achieving that.

So with that, John Fanelli, our CFO, and I are happy to take any questions that anybody has.

(OPERATOR INSTRUCTIONS)

Our first question comes from Tim McHugh with William Blair.

Yes, just wanted to start off by asking about - you know, in the quarter you had some investments there ahead of growth. As we look at some of the joint ventures you launched recently, as well some of the growth reflected in your backlog, do you anticipate the need for more upfront investments as we look out to the first half of '08 here?

No, Tim, I don't think so. We have added a significant depth to our management team in 2007 at the very senior levels. I don't see any, you know, major new hires. We also brought on a CIO last year in an effort to really ramp up the quality and breath of our IT infrastructure. We have become a lot more global. The Knowles acquisition was a big part of that but so was organic growth in North Africa and Asia, and we were behind the curve. We were still very much - had a system in place for a 500-person company and we are closing in on 2,000, and we needed to make some IT investment, and that will continue, but I think the hiring is - at the senior management level has pretty much ended.

Okay. And then, if not hiring though, any additional offices or, you know, I guess recruiting costs that you would expect to spike up? Anything in that regard?

No, we have recruiting costs regularly, as we look to hire key operating people. I don't expect any change in that. We are looking at organically opening an office in Tokyo in the next month or two. We'll have an announcement on that relatively soon. We are in the process of hiring someone to run that office. It will be claims office, focused on that, so it will be relatively small, two people at first. But other than that, I don't see us opening any any new offices organically. We'll continue to look to grow by acquisition. We have added, with Gerens, not only a real strong firm in Spain, but probably the best way that we saw strategically to enter the Latin American. They have a very small presence there now, but I together we can do a lot of things there. So I don't know what is going to happen south of the border in the next couple of quarters or couple of years, but we see a lot of opportunity down there for us.

Okay. And then on Iraq you mentioned work there, can you give us an update on how that's trending? I think you said before in February of each year you get a new task order for that work. What does that imply?

Yes, we got a significant increase in our work about a year ago. That has increased our staff from about 10 to over 50 people full time in Baghdad. With e have seen a continuation of that work for 2008. We have recently entered some new task orders. We see our staff remaining essentially the same size for the balance of this year and in 2009 we just don't know yet. We have a presidential election that could change things but you have an ongoing need for us to continue to rebuild the country, and that's a client over there where people change every 90 days or so, and so it is constantly in flux. We have been one of the few constants there, and I think that as we continue to satisfy each new rotating in - management team, we continue to see our work grow while other firms have seen their work decline. I am confident for the future there and don't see any major drop-off certainly this year.

Okay. Then lastly, you obviously had very strong growth in the backlog at the end of the year. As you look at your new development pipeline, did you run through a lot of the opportunities or do you see a lot of room for continued growth in that backlog even if it, you know, maybe decelerates a little from the rate you saw in the fourth quarter?

Yes, we really don't track the percentage growth the backlog. We look at the total number and how it relates to our revenue, and I think the backlog is certainly the healthiest it has ever been. A lot of the big projects that we are winning overseas in the Middle East and North Africa particularly are very long-term in nature, and the backlog that we booked doesn't even fully reflect, I think, what the potential of that work is, and the client relationships we are building over there. We are more confident with the work that we won. The third and fourth quarters, as I said, was very strong for us. We are seeing continued growth in - continued strength in our sales and business development efforts so far in 2008, and we think this is going to be an even better year than 2007.

Okay. Thank you.

Our next question will come from the line of David Gold with Sidoti.

Hi, good morning.

Morning, David.

Question, Dave, first can you break down the backlog for me between the two businesses? I don't think you did that.

We did it in our 10-K. John if you have those numbers in front of you.

Yes, I do.

He's a better page flipper.

The backlog for project management group rose to $382 million at the end of the year from $349 million in September and $211 million at December of last year. The total backlog on the claims was $34 million at year end, up from $31 million at September 30 '07 but down slightly from the year ago. And the 12-month backlog at the project management group rose to $172 million at year end from $156 million at the end of the third quarter of '07 and $103 million at December of '06. The 12-month backlog at construction claims rose by $1 million to $24 million at the end of '07, from September of '07, but was down from $26 million at December of '06.

David, we have seen some real strength in our claims business. You know, as we have integrated Knowles, as I think have taken advantage of the resources that we have and I think what is a growing reputation in that area, we've been able to get some real significant growth, much more than, you know, we have been projecting.

Uh-huh.

As you know, we have talked about long term targets the growth of about 20% PM, about 10% in claims. And you know, we have grown significantly more than that. I think the number - John, correct me if I'm wrong - was 16% for the fourth quarter.

Yes.

And an operating margin that went from 6.1 to 13.8%. We have been able to bring a lot more profitability out of Knowles, what historically was Knowles, and get that operation back up to what our traditional operating margins were for our claims group of about 15%. We see that is where the - that number is where the claims group is heading in the short term.

Got you. Then, that brings me to my second question. When you look at claims, presumably it sounds like you attribute some of the sort of excess success more to say Knowles, and I mean let's call it more market share gain, say, rather than strengthening the overall business, or are we seeing the overall sort of bucket of claims, the whole pie growing, are things extremely busy there?

It is almost impossible to define the whole pie in a constructions claims warranty. It is too small to really get anybody to put together a list or to track the size of the industry. Our best guess is about $1 billion a year market.

I mean more along the lines of, you know, are the phones these days ringing off the hook, you know, for you guys is it a lot busier than you have seen it as - you know, the sort of industry or environment or is it more you know, Hill is doing a better job of catching work?

They're actually seeing the phone ring off the hook.

[ LAUGHTER ]

I know it is a metaphor but we are seeing a lot of opportunity. We just won for us what was a huge claims assignment on a nuclear power plant in Europe. It is about $7 million in fees. We beat Navigant, and we were the two finalists, and they are our principal competitor in that market. So we are very happy about that, and we see a lot of opportunity going forward.

Uh-huh.

We don't see anything that's going to turn the pie in that regard. We have got a - when we look at what is our sort of the other performers in the business overall, there are really only two that we see. One is in the claims group, one is in PM. Our Asia Pacific operation isn't making the kind of money that we wanted to. It is in fact losing money, as is the European project management operation. We have a strong focus on the two of those. We have had some management changeover in the Asian Pacific region, which is one we inherited from Knowles, and we see that getting much, much stronger and certainly being profitable in 2008. And the same thing in Europe, I think that's a size issue, with a big management team in place there and they've spent a lot of resources, and we have - have a strong acquisition focus on Europe as well as the U.S., and we think with size, you know, we will get a lot of leverage out of that and we'll get that operation profitable as well.

Just lastly on the acquisition front, with - presumably it may be getting a little easier on the price side issue, sort of alluded to - have your goals changed any or do they sort of remain the same?

No, our goals are exactly the same. We are focused on the project management business for acquisition growth, focused on organic growth for the claims group. So, I would say that - I think it is fair to say 100% of the firms we're talking to right now are project management firms. We are focused in both the U.S. and in Europe. We are seeing probably more firms out there available for sale at good prices than we have ever seen before, and I think, you know, the pace that we are on, with two acquisitions in the first quarter, we expect to continue possibly for the balance of the year.

Terrific. Terrific. Thank you both.

Thank you.

Thanks, David.

Our next question will come from the line of Arnie Ursaner with CJS Securities.

Hi, good morning. I want to focus a little bit more on the SG&A line and a couple of items related to that. You mentioned obviously you are building for future growth. Can you give us a feel for either the number of senior people that you have added tor cost of these senior people that you added in Q4 and give us a run rate SG&A level entering Q1? Assuming you are bonuses appropriately, can you give us a run rate SG&A level entering Q1?

John, do you want to tackle that?

Well, in total, our SG&A, which includes the corporate and obviously the SG&A relating to our operations, we are seeing that that percentage of our consulting fee revenue will be trending downward as the year progresses. So it is going to go be difficult in the first quarter to see if that trend will fall, but over time it will, based on the growth factor in our revenue. But we also have to factor in the following. You know, we, David individual mentioned the JVs that we are now involved in. There's going to be some initial costs relating to those JVs, and future acquisitions. So there's a lot of factors in this mix of the SG&A, but as David mentioned a lot of the senior positions have been filled. There may be some lower-level positions as we grow that may have to be filled in, but overall we see it to be trending downward to a you 36 to 38% overall.

You are talking about total SG&A as a percentage of revenue?

As a percentage of consulting fee revenue.

And then Arnie, to address the first part of your question, the hires we are talking about took place mainly in the second and third quarters. I don't think we made a major senior management hire in the fourth quarter.

Okay. But I don't think you have answered or attempted to really answer the question of what the run rate level of SG&A is going into Q1 or in the current quarter, because there's some specific things that one would follow post that, but --

Well, the run rate should be, you know, based on the fourth quarter run rate of $24 million of SG&A, and with the $1 million of - let's call them "unusuals." So I wouldn't anticipate that number deviating significantly from that 23 number.

So the starting point for run rate to SG&A in Q1 is likely to be $23 million?

I would say that's fair. Dave, do you agree?

Yes, I mean obviously we continue to grow and you will see some growth in the SG&A of the operations themselves, you know, on the bonuses I think we are going to have more. We did some discretionary bonuses at the end of the year, because we didn't have really a senior management bonus plan in place. I think that's going to change in the first part of '08, and we will be able to account for it throughout the course of the year so we don't have this hit in the fourth quarter.

Okay.

But if you pull that $1 million out, you know, out of a $5 million operating profit, it is a 20% increase. If you do the 20% increase on the 8.5% operating margins, you will get 10.2. So we continue to see, you know, what I call marginal increases in our operating performance. We expect that to continue as we grow. We expect the SG&A to continue to come down, but as John said, once you throw an acquisition in the mix, every company is going to be different and they're going to be skewing the numbers up and down and here and there, and as I just said to David, we see a lot of acquisitions coming in the next couple of months.

Going back to the $23 million.

Arnie, just one more comment on the $23 million that I spoke about. You know, that number probably will go up just on the fact that the company does its increases in its salaries at the end of the year. So that will be a factor in that $23 million, and also the way we do our audit fees, we recognize that as incurred and obviously we had our year-end closing during the first quarter. So that is going to be a factor as well. So that 23 will probably go up based on those two factors I just mentioned.

Sure. That's where I was going to go next. Remind me again, when you had consolidated Knowles, KJM, my recollection was that you had incurred some fairly substantial duplicate costs which were going to end in Q3, and you were going to reduce headcount as you integrated their systems. Can you quantify the benefit you got from that in Q4?

John, are you going to answer?

I think what, because of the increase in the operating profit and the - let's call it the Knowles business in the U.K. that has dramatically increased, I think the integration has worked. I think our senior management that is running the - the U.K. operations, we've integrated both Knowles and our U.K. operations just from an accounting and reporting position, so we got some leverage there, and I think there has been some increase - decreases in the costs and the SG&A area. Maybe not just specifically headcount, but I think there's other operating costs that we leveraged.

Yes, also Arnie, on the KJM business, the costs that we took out in the third quarter were principally the entire finance department which was about John, five people, out of about 100 in the business.

Yes.

So we picked up some significant savings there. We - also in the early part of the first quarter of '08, Karen Mask, who was the founder of that business, and was chaffing under now having a corporate parent, she left the business, and we thought it was a good time for both of her children, who were managers of the business, to depart as well. We were less than impressed with their ability to run the business without her. We made a management change there, and I think - we haven't put in - we have temporary managers running those two offices, Seattle and Dallas, but I think with a management changeover, they're going to do significantly better than they were doing under Mask's family ownership, and we talked to a lot of clients who see a change, and a lot we believe who are happy to see a change. So we think in '08 we are going to be able to take at that business to a new level.

What was the IT investment spend in Q4, and what do you think it will be in '08?

I will take the first one. If '08 we anticipate $4 million in the computer equipment and software, and probably another $2 million just equipment [that crosses] due to the acquisitions of Shreeves and Gerens, so it would be in total around $6 million. I don't have the specific fourth quarter capital, but in terms of the full year, our investment in PP&E and equipment reached approximately, let's see if I have it here, $3 million for the year.

Okay.

We will probably double that in 2008.

We will go from 3 to 4 on the sort of core Hill business, and then $2 million on the acquisitions.

Okay. Just to be clear, your 36 to 38% SG&A guidance as a percent of consulting feeds embeds the wage increases you are building in, the new headcount you are building for the JVs and $6 million of IT expense are embedded in the 36 to 38% guidance?

Yes, it is. Yes.

Okay. Because I want to follow up on this a little bit more, David, structurally as it relates to your business. You have always said that gross margin is not where you expect to get the leverage in your business, but much more so in leveraging the SG&A, and yet the operating margin miss versus our estimate this quarter was entirely related to the G&A line. Should we assume that you have changed your view and clearly want to spend ahead of growth? And are we likely to see, again, discretionary SG&A expenditures continue to be something that may - I do not to say gets out of hand because I think you are doing the right thing to run the business, but you clearly seem to be spending a lot more here with much less leverage.

No, I wouldn't say that's the case. I think the leverage is still there. We have increased our corporate spending quite a bit in the last two years. Some of that is related to growth, some of that's related to being a public company. You know, if you look at the top line, and I think obviously everybody's job on this call, whether professional analysts or not, is to look for the holes in the swiss cheese, but you know we are seeing unprecedented growth for our industry, unprecedented growth for Hill; it takes money for that to happen and it takes money after it happens to be able to manage the business to make sure that it continues.

We are going to continue to try to maximize the business for the long term, not manage it quarter-to-quarter. That may be you unique among public companies but I think we have the really the discretion to do that, and while we are not going to ignore bottom line, I think that for us, continuing to improve the quality of the company and the quality of the people that work here, the geographic region of the business, our ability to sell new work, to continue the growth that we have seen, that is going to continue.

I think what you will see, because we have heard it from you guys, is that SG&A is an important focus, and I think we will take a renewed look from now through the end of the second quarter at things that, you know, may have gotten a little out of control. It is obviously easiest for us to see the corporate spending, and I think we will delve deeper into the operations themselves and make sure that we are not spending more than we need be, and make sure that - certainly getting leverage, we may not be getting as much as you expected as fast as you expected, but we don't think there's an issue with the model and we are going to try and maximize our long-term growth, and we think that's what going to maximize our long-term shareholder value.

Okay. Two more very quick questions for John. Tax rate guidance for the upcoming year, I know you mentioned the tax benefit in Q1, but for an annualized number what should we think on tax rate and what should we be thinking here for fully diluted share count?

On the tax rate, our effective tax rate we are using is anywhere between 14 to 16%, which includes that tax benefit in the third quarter.

Okay. And fully diluted share count?

It would be around 41 million.

Okay. Thank you very much.

You're welcome.

Thanks, Arnie.

(OPERATOR INSTRUCTIONS)

Our next question will come from the line of Kevin Liu with B. Riley and Company.

Hey David, hi John. Just on the first question, you guys have talked in the past about getting more into the energy side of the business. I just wondered if you could provide us with an update on your progress on getting some more oil and gas work, and also on any sort of progress you might be making in the joint venture that you guys announced?

Yes, that was the one joint venture I did announce, because it happened in the fourth quarter, but we entered into a joint venture arrangement with the Egyptian Ministry of Petroleum, with two of their operating companies, and we are going to be building a project management business based in Egypt to manage oil and gas projects principally for their behalf, but also the ability to chase other clients. And as you can imagine with a government bureaucracy, that effort is taking a little longer than we expected to get off the ground. We think the impact it's going to have on us in 2008 is minimal. Cost will be relatively minor as well, as we ramp that up slowly, but by 2009 we could be seeing some significant work and significant profitability out of that joint venture.

We also got at the end of the - of 2007 for us what was a major and long-pursued contract with the Kuwait National Petroleum Company, about a $20 million contract for us on what is going to be the largest refinery in the Middle East, their Al-Zour refinery, as well as some retrofit of some other, older refineries, and they are a major potential client for us. We have done a lot of work, it hasn't made any press releases because it has been done in the claims group sort of behind the scenes, but we have done a lot of work on the Kashagan fields in Kazakhstan, helping that government manage the essentially $135 billion construction program developing those fields, and we think that is going to be a long-term client for us. The effort to open a Tokyo office is really driven by some of the work that we have done over there on the claims side, principally from big contractors that are involved in oil and gas construction in the Asia Pacific region, and we want to get closer to our clients and make sure they continue to use us.

Most of the work we've done historically is on the claims side:, but we think we can leverage that with both the experienced relationships and the individual people's experience, and do a lot of work on the PM side. That market is just so huge and right now still is a very small piece of what we do.

And then, in terms of the construction claims group, I know during '07 you guys mentioned that you were able to kind of raise prices there I guess in the neighborhood of 10%. I mean, what should we expect for 2008? Are you going to be able to raise prices nearly as much? And then also kind of what your expectations at this point are for maybe utilization rates versus '07?

We increased on average our claims fee schedules by about 8% on January 1st, and the group's average salary increase was 5%. So we see some increased leverage there.

All right. And then, as we look at the new acquisitions, for Shreeves and Gerens, I know you talked about kind of the annual revenues that they have delivered; what type of backlog do you see for them right now?

Gerens has about - I always pronounce it the Spanish way because that's the way they pronounce it - Gerens has about $40 million in backlog that was not included in the 416 for year end, and Shreeves had about 3 or $4 million of backlog. So if you add that in, we're talking about 460 of backlog altogether. We said it is very strong, the Spanish market is holding up very well. They're continuing to see a lot of new work and a lot of optimism toward what Gerens is going to do for us.

All right. I guess just lastly, kind of more generally there's obviously a lot of much higher wage and material costs throughout the world. Just curious if that is causing any sort of, I guess, difficulties in terms of your project management capabilities, and if there's been any impact relative to your relationships with the project owners that you are working with.

No, not really. Obviously there's a very - wherever there's a very strong construction market, labor is going to be in very high demand, and salaries are going to be heading north. Really, the two biggest places where we see that happening right now are in the Middle East and Las Vegas; [surprisingly], Las Vegas is still strong, not in the housing market but the stuff that we chase - hotels, casino, infrastructure, schools, and a lot of other areas. We have seen a lot of articles, they're very pessimistic about the construction sector, but it is really because of what I think is a horrible residential market, which we are not in, and I think a peaking and starting to head down commercial office market in the U.S., which is an extremely small percent of what we do, less than 1%.

Everywhere else we are seeing nothing but strong growth. You have oil at $108 a barrel, so you know, everything is happening in the Middle East is not anywhere near being a bubble; we see that continuing for the long term, and obviously in that kind of a market, we have multibillion dollar projects being announced everyday, you are going to have upward pressure on salaries but our clients acknowledge and understand the business we're in, and when our costs go up, their costs have to go up, too.

Actually one more question on - in terms of the European business that you mentioned was a little below your expectations, just curious if, given the cost structure there, do you see opportunities to take anything out of that business or is this really a business that you just have to grow in order to get better leverage?

I think it is a business we have to continue to look to grow. One of the downsides of where we started, which was the Balkans, is that it seemed like every time we won a new contract, it was in a new country. So we weren't getting a lot of synergy or economies of scale from growing it, and it is still pretty diverse across that region. We are doing work in Romania, Serbia, Croatia, Latvia, Macedonia, Turkey, we [in work] down in Greece. So I think as it continues to grow, we will see a lot of leverage on that, and the - our expectation is a return to profitability.

All right. Great. Thanks a lot.

Our next question will come from the line of Chris Bamman with Morgan Joseph.

Yes, hello. I was wondering if maybe you could just talk a little bit more in terms of, you know, the profitability and pricing of the revenue that already - that you have already booked, and how does that relate - how dis does that compare what you have in your backlog and new business that you are booking, in terms of the potential profitability and any pricing issues, if any?

Our pricing really doesn't change quarter-to-quarter, year-to-year. Markets, our industry is, both projects and claims, is highly competitive. We haven't seen real shifts in pricing either way, so our pricing - and therefore, you would see it in our gross margin, is relatively consistent over time. Certainly the overseas markets are a little more competitive on pricing than the U.S. markets, and we are seeing more growth over there. So that is a slight - I mean really a marginal downward pressure on our gross margins. The claims business, as - we integrated Knowles, and that picked up profitability. We've had a little bit of ability in claims to push our pricing higher, that sort of offset that. So it has been relatively consistent. The new work we are winning, if anything, because it is bigger and longer-term work, tends to be a little more profitable, but you're really not talking about any significant, you know, changes in that regard.

Okay. Thank you very much.

Thanks, Chris.

Our next question will come from the line of Bill Sutherland with Benning and Scattergood.

Thanks. How is my line, okay?

Yes, can you hear you fine, Bill.

David, could you speak to maybe target profitability in the project management group given, you know, all of the changes in the mix since the last year or two?

We have been running at a fairly consistent 20% operating margin. We took a little dip in the fourth quarter to 18, but we that being at least 20% going forward, and we're hoping that long term we can start to pick that up a little bit, 21, 22, but I don't think you are going to see - long term much higher than that.

Okay.

We certainly don't see any downward pressure on our margin.

And a prior question about your U.S. business. I know you have almost no office, you have zero residential, how do you characterize your commercial in the U.S. and about how much of the total is commercial?

When you look at the U.S. project management business, it is really predominantly public sector work, probably 75 to 80%. I think with KJM it probably is even more so in that regard. They have a couple of utility clients that aren't doing any commercial work whatsoever, and the private sector work that we're doing is not principally for developers, it is typically for Fortune 500 type of clients, industrial clients. We are doing work for - a significant amount of work for Merck, Sonoco, for utilities, and it is not a lot of work for developers. Okay. Really, all that pops in my mind that we're doing in the U.S. is two commercial projects, one of which is the Comcast Center in your hometown, which is finishing up early this year, and a suburban corporate business park in New Jersey, and you know, really I don't think there's any major project other than those two.

Okay.

We are chasing some big projects in the U.S., but you know, it is you know, one or two percent of our business in the U.S., I'd be surprised.

Okay. You may have given this out or John did, I got on a few minutes late. What was the corporate expense number in Q4?

John, yes that was in the press release.

Yes. I have it. It is pretty.

I have 4.8 million.

Okay. Thank you. I condition see it in the release. And then last, David, I have been reading about some of the immense plans going on in Abu Dhabi as far as development. Have you guys been sort of positioned there yet or have you been active there?

Yes, everyone is focused on Dubai, when they ask questions and they think when we are talking about the Middle East, it's all Dubai. It really isn't. For us, we have made a real strong effort to be growing outside of there. Our big push is, as you know, in the last 6 to 12 months, we're into Saudi Arabia and into North Africa. And we see Abu Dhabi, even though I think we've got a fairly strong presence there now and some really major programs, you know, continuing to grow and surpassing the kind of construction spending that Dubai's had in the last 5 or 7 years. I mean surpassing it by a wide margin; there's a tremendous amount of wealth in Abu Dhabi, much more so than in Dubai.

Right.

The kind of success, and notor - not notoriety, fame that Dubai has brought upon itself with theer construction program, and I think it will be playing catch up. We have a major presence in Abu Dhabi and we think that's only going to grow.

Okay. Actually one last one, in the China joint venture, how quickly do you think you guys could see activity there?

My guess is we could see work in as little as six months.

Okay.

We are going to spend about a month just getting the company up and running, share office space with our partner, and we are going to have management move over there and begin the process of selling, work and it wouldn't surprise me if we have one or more projects within six months.

Okay. Good. Thanks very much.

I would expect though the joint venture to have a limited impact on us in '08.

Right. Okay. Thanks again, Dave.

Our next question will come from the line of Michael Chapman with [Enerossi] Capital.

Hello, gentlemen.

Hello, Mike, how are you?

Good. Parts of this question have been addressed earlier, but perhaps it would be helpful to kind of review the various joint ventures, how much expense is to go into each in the short run prior to projects being acquired, and what your expectations are on the timing for each in terms of project acquisition.

Sure. In Egypt we expect to be putting in no more than half a million dollars this year into the joint venture. That will principally be covering start up costs and overhead expense, until the company is up and running and profitable. For the Makan Hill joint venture, we that number is closer to $1 million, maybe $1.5 million, and that company I think is probably the fastest to get to profitability, because we've had a private partner that is as aggressive as us, if not more so, in getting this business up and running and off the ground. The Chinese joint venture I think is going to be a very limited amount of expense. There is no capital contribution whatsoever but we need obviously to fund whatever the overhead expense is until that business is profitable. I think that's going to be relatively minor, and given the partner that we have, I think up and running the fastest of the bunch.

We are also talking about another potential joint venture for a client in North Africa, a private developer, putting up essentially something very similar to the Egyptian Ministry joint venture, it is actually where we have the opportunity to have a locked-in client, somebody for whom we do all of their project management work, they become a partner so they get a dedicated workforce focused on them, and half the profits back for a service they were giving away. It is a very synergistic relationship and we are looking to do more of it, and we think that might get off ground in the second quarter. So these things are real big opportunities for us. They generally have a little bit of a startup cost, but believe me that is going to be more than offset by the profits that we are able to bring back from these efforts.

In each case, are the JVs fully consolidated with minority interest backed out?

Yes, that was important to us. In each case, even when we own 50% we have either majority control on the Board or we have the right to name the CEO, which gives us operational control and therefore the ability to consolidate their financials.

And the various overhead and startup expenses prior to project revenue, would they be classified in the SG&A columns? up.

Yes.

I think that's correct.

And that's in your earlier guidance of 36 to 38 as well?

Yes.

And as far as revenue coming to the various JVs, could you review that, your expectations on timing?

Pretty much the same for all of them, which is the middle of 2008. The Egyptian one was the first one to get off the ground, and probably the slowest one to get going, but I think by the third quarter, I would expect that we'd have revenue out of all three of them.

Thank you.

Thanks, Mike.

There are no further questions. I will now turn the conference back to management.

Thank you. We appreciate your time this morning. For those of you so inclined, if you are tired of listening to my voice and actually want to see what I look like, I am having the pleasure of being on Neil Cavuto's show on Fox Business Channel tonight between 6:00 and 7:00, so you can dial in. Other than that, thank you very much. We are happy and excited about the performance we had last year, the growth that we're seeing, and the opportunities that are being presented to us both for new work, for new clients, for acquisitions. We think we're going to have a fantastic 2008 and are happy you're along with us. Thank you very much.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.