Hill International Inc (HIL) 2008 Q1 法說會逐字稿

Good morning everyone, and welcome to the Hill International first quarter 2008 financial results 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 Devin Sullivan of Equity Group, please go ahead.

Thanks Casey, and good morning everyone and thank you 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 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 made 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 beliefs, and Hill does not undertake to publicly update its predictions, whether as a result of new information, future events, or otherwise.

I'd now like to turn the call over to Mr. David Richter, President and Chief Operating Officer of Hill International. Go ahead David.

Thank you Devin, and good morning everyone. Thank you for joining us for our quarterly earnings call this morning. Let me begin by saying that we are extremely pleased with our overall financial and operational performance in the first quarter of this year, including faster than expected organic growth in consulting fees in both of our two operating segments; accelerating organic growth in consulting fees company wide; significant increases in both our total and 12 month backlog; outstanding performance in our claims group for the quarter; some real key strategic joint venture arrangements that we have been able to enter into in the last few months; and our completion of two key acquisitions in Europe during the first quarter.

We also benefited significantly from what we believe is our conservative accounting philosophy by having the benefit of a major tax credit during the quarter, which positively impacted our earnings. On the flip side, we are slightly disappointed that our operating margins have not improved as quickly as we had expected, especially with our PM group, but we expect that they will continue to improve during the balance of the year, and going forward.

Let me get now into the details of our financial performance for the first quarter. For the first quarter of 2008 our total company wide revenue rose nearly 29% to a record $80.9 million. Consulting fees for the first quarter rose more than 56% to a record $69.6 million, comprised of $49.4 million of consulting fees in the project management group, a nearly 74% increase from the first quarter of 2007, and $20.2 million of consulting fees generating by our construction plans group, which is a more than 25% increase from the first quarter of last year.

Our overall growth in consulting fees of 56% last quarter consisted of organic growth of nearly 36% and acquisition growth of more than 20%. In our PM group we saw organic growth of nearly 42%, primarily from our Middle East/North Africa region, and 32% growth from the three acquisitions that we closed in the past year, that's KJM Associates in May of 2007, John Shreeves in January of 2008, and Gerens Management Group in February of 2008. Within our construction claims group our 25% growth in consulting fees for the first quarter was entirely organic.

These are growth rates well in excess of what we have communicated to the market, which are at least 20% growth in PM and at least 10% growth in claims, so we're very satisfied with our growth numbers for the first quarter. Also as important, our strong organic growth has actually been accelerating as we have grown larger. Over the past three sequential quarters our consulting fees grew organically by 24% in the third quarter of last year; by 28% in the fourth quarter; and as I said before, by 36% in the first quarter of this year. This is a trend we obviously hope will continue.

During the first quarter our consulting fees were derived from four different geographies around the world; approximately 27% of our consulting fees were from the Americas; 28% were from Europe; 43% were from the Middle East/North Africa; and 2% were from Asia/Pacific. We are obviously generating an increasing percent of our business from the Middle East and North Africa, and expect that this region of the world will continue to be the primary driver of our organic growth over the near term. You only need to fill up your gas tank to understand the economic rationale behind the growth in this part of the world, and we are benefiting significantly from increased profits and spending in that area.

By client type, our consulting fees during the first quarter broke down as follows; 68% was from the private sector; 14% was from the U.S. federal government; 11% was from the U.S. state and local governments, and 7% was from foreign governments.

Company wide our gross profit rose by over 54% to $32.4 million or 46.5% of consulting fees. Gross profit for the first quarter of '07 was $21 million or 47.1% of consulting fee revenue. This slight decline in gross profit margin was expected as an increasingly higher percentage of our consulting fees come from our project management group, which has a lower gross profit margin than our construction plans group.

Our SG&A expense is a subject that we and the rest of our management team pay a lot of attention to, and one that we know you, our investors and analysts, focus on quite importantly as well. SG&A expenses increased during the first quarter in terms of actual dollars, but declined slightly as a percentage of consulting fee revenues from 39.8% last year to 39.5% this year. Our SG&A expense in the first quarter was $27.5 million, which represented an approximately $9.7 million increase from the first quarter of 2007.

The break down, the reasons for the increase, of that $9.7 million approximately $6.7 million was attributable to growth in our employment, in our operational units, including significant corporate staff that was added over the past year as a result of both our current and anticipated growth, as well as in connection with our status as a public company. We believe that the pubic company aspects of our higher corporate overhead growths have been substantially addressed, and don't anticipate much additional cost going forward in connection with that. Of the $6.7 million increase in our employment costs, approximately $1.8 million was related to the acquisitions of KJM, Gerens and Shreeves.

We incurred about $500,000 in new higher business development costs and corporate expenses, primarily travel, during the quarter, relative to the first quarter of last year. As you can imagine, with nearly three-quarters of our revenues now being generated outside of the U.S. our professionals are logging a lot more frequent flier miles than they used to.

We also had a nearly $850,000 increase in rent expense, including about $310,000 in Europe and the Middle East; and nearly $340,000 related to our three acquisitions. We also incurred over $400,000 each in higher IT infrastructure expenses, and computer related expenses, as well as in increased property insurance costs due to our expansion and significantly higher office count world wide.

We continue to believe that SG&A as a percentage of consulting fees will track at approximately 36% to 38% of consulting fees for the full year of 2008, so we see increased drops in that number. But because acquisitions are, and will continue to be, an important part of our growth strategy, SG&A on a quarterly basis is likely to fluctuate one way or the other, depending upon the specific expenses of the companies that we acquire, and I'll talk about our acquisition pipeline a little bit more in a minute.

All three of our recent acquisitions had significantly lower operating margins than the balance of our PM group. For the first quarter of this year our PM group, not including the three acquisitions, had nearly 17% operating margins; but KJM achieved 9%, Shreeves had 8% and Gerens had 12% operating margin. So these three acquisitions have had a substantially negative impact on our operating margins for the PM group as a whole. And you can see that in our overall operating margins as well.

Our operating profit for the first quarter of 2008 was up nearly 59% to $5.5 million, but was only 7.9% of consulting fee revenue. Last year the number was $3.5 million or 7.8% of consulting fee revenue, so it was up, but not nearly as up as much as we had anticipated. Despite this increase in operating margins quarter-over-quarter, we think we can do better and we still expect that we will achieve operating margins for the full year 2008 of approximately 10%.

In our PM group operating profit was $7.4 million, up 36%; our operating margin though declined to 14.9% from 19.0% in the first quarter of 2007. This was primarily due to the acquisitions that I just discussed above, by a significant loss in our pre-acquisition European PM business, which we are actively working on turning around, and by a few disappointing results in some of our key U.S. offices, primarily New Jersey and D.C. within the project management group.

In our construction claims group we had an exceptionally strong $3.5 million in operating profit for the quarter, up 118% from a year ago. Even better our claims group's operating margin was up significantly to 17.5% in the first quarter of this year from 10% in the first quarter of 2007. This is well above our stated goal of 15% operating margins for the claims group for 2008, and was due principally to higher gross profit margin percentages as a result of high utilization across the claims group, recent fee schedule increases helped us in the U.S., the Middle East and Europe, and this was despite some disappointing performance still in our Asia/Pacific region, which we inherited from Knowles, which has yet to make a profit, and by disappointing results in our western U.S. claims operation, which we're actively working to correct.

On a consolidated basis, our pre-tax earnings rose 78% to $5.7 million from $3.2 million last year. As we noted in our fourth quarter conference call, we did, in the first quarter, realize a $2.5 million income tax credit, that produced a net benefit of income taxes for the quarter of approximately $1.2 million versus a $700,000 income tax expense for the prior year's quarter.

Our net earnings for the first quarter increased significantly to $6.8 million, or $0.17 per diluted share, up from $2.5 million or $0.08 per diluted share for the same quarter last year. Our diluted share count for the first quarter rose by about 41% due primarily to our increasing stock price, but even more significantly, due to a redemption of all of our warrants, mostly in the fourth quarter of 2007, which added 13.6 million shares to our common stock count. As we noted in our year end release, the company exceeded by about $4 million our EBIT target for the year, the year being 2007, which resulted in an earn out payment to the shareholders of our formerly private sells of an additional 2.3 million shares, which were issued in April of this year, but were counted in the diluted share count from January 1, 2008. For the second quarter we anticipate that our diluted share count will be approximately 41.5 million shares.

We ended the first quarter with a very strong balance sheet as of March 31, 2008, our balance sheet included cash and cash equivalents of $49.0 million; working capital of nearly $93.6 million; and shareholders equity of $136.2 million. The use of cash during the first quarter reflected cash used for the acquisitions of both Gerens and Shreeves of approximately $16.6 million, net of cash acquired, as well as capital expenditures of approximately $2.2 million, principally related to our build out of our IT infrastructure.

At the end of the year we had no outstanding borrowings under our $35 million credit line with LaSalle Bank, and we continue not to have any, although we do have about $8 million of outstanding letters of credit related to various overseas projects. We are in the process of talking to several major commercial financial institutions about expanding our borrowing capacity significantly, we're doing this well ahead of our need for the capital, but it's driven primarily by our expectations for the acquisitions that we're going to do during the balance of 2008 and going forward.

Our backlog had a very strong performance during the first quarter, at March 31 our total backlog rose by more than 15% to $480 million from the end of the year. Our 12 month backlog increased by nearly 24% from the end of the year to $242 million, both very strong numbers and significant increases.

Let me touch base with you on our acquisitions efforts, both to date and going forward. As you know during the first quarter we acquired John Shreeves. Shreeves is a project management and cost consultancy firm, primarily on private sector projects in the U.K. For the first quarter Shreeves made a contribution to our consulting fees of $1.2 million, they contributed gross profit of $500,000, and they achieved operating profit of approximately $100,000.

In mid-February of 2008, we also acquired majority control over a company then called Gerens Management Group, now called Gerens Hill International. Gerens is a major, one of the leading firms in project management in Spain. It also has operations elsewhere in Western Europe and in Mexico. For about the one-half quarter period, what's that, an eighth of a year? The six-week period in the first quarter we owned Gerens, they contributed consulting fees of $4.4 million, gross profit of $1.5 million and operating profit of $500,000.

With respect to the acquisition pipeline, we are continuing to seek out excellent firms that we think we can bring into the company at reasonable prices. We are actively talking to probably close to 10 firms right now, almost exclusively in the project management area and primarily firms in the U.S. and also several firms in Europe. While we don't expect to close all 10 acquisitions, although we'd probably like to, we think we will close a significant number of these over the next six months.

With respect to our joint venture opportunities that you may have been reading about, we've issued several press releases over the last four to five months; related to them, the most recent one of which was a joint venture in Egypt with the Talaat Moustafa Group holding company, a publicly traded real estate developer in Egypt. This new company, yet to be named, will be owned 50% by Hill and 50% by TMG, although we will name the CEO and we will consolidate their results into our results. This joint venture company will provide construction management service on TMG's major projects, both in and outside of Egypt.

Getting started, we are going to be working on five different projects, including the mega mall in Madinaty, Egypt, the Four Seasons Hotel in Luxor Egypt, the Four Seasons Hotel in Madinaty, a major expansion to their existing Four Seasons Resort in Sharm El Sheikh, Egypt, as well as a major housing development in Riyadh, Saudi Arabia, which will be consisting of about 5,000 residences, for an anticipated 22,500 inhabitants at over 3,000 square meters. Talaat Moustafa is, as I said before, a major developer and we anticipate doing a significant amount of work for them going forward.

Unlike some of the other joint ventures, this one has no startup costs. The overhead costs and initial startup costs are being funded by our partner and we anticipate that this joint venture will be profitable immediately, once we get it staffed and launched. In addition to Hill-TMG, we've also announced joint ventures with Makan, a capital group to create a company called Makan-Hill, which will be getting out of the development business and, we hope, filling out a significant amount of PM work for Hill to do as well as a joint venture in Shanghai, China, with a company called Shanghai Jianke Project Management, which will get our foot in the door in China, we hope in a big way, as well as our previously announced, at the end of 2007, joint venture with the Egyptian Ministry of Petroleum, which we are in the process of finalizing the startup of.

That al being said, we think we have gotten off to a great start in 2008. We have some issues to address in some of our operations, principally the project management group but also some holes to fill in the claims group and we're confident that we can address these over the balance of the year; continue to drive our SG&A and overhead costs down, as a percent of our overall company; continue the strong growth that we've seen and continue our strong growth and expansion both here and worldwide during the balance of 2008 and going forward.

So, we have a lot of confidence in where we are and where we're going. We hope you all agree and with that, John Fanelli our CFO and I are happy to take any questions that anybody has.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Tim McHugh, with William Blair. Please state your question.

Yes; I first want to ask about the cost of hiring and salaries, particularly in the Middle East, where it can be somewhat difficult to attract talent, especially as fast as you're growing. Is that having any factor on the margins here? Or is it entirely related to startup costs related to the joint ventures and the problems in the European PM business?

Good morning, Tim. We obviously are seeing some significant upward pressure on labor rates in the Middle East. Any hot construction market is going to see that. We're really only seeing that in the Middle East and, to some degree, in the Las Vegas market, which still is a very hot construction market.

In the Middle East, we are also seeing comparable increases in our fees from our clients. Our margins have held up well. Our clients understand that we are essentially a cost reimbursable business and that when our costs go up their costs have to go up.

Okay. And then, the European PM business, what exactly is the issue there? Can you elaborate a little bit, you know, what parts of Europe and what you plan to do to address that?

Yes. The (inaudible) legacy Hill business in Europe, meaning pre-Shreeves and pre-Gerens, was predominantly focused on the Balkans region in Southeast European. And [the loss] was in two things.

One, we had a major project wind down in Turkey and we've had some significant wind down costs in connection with that and a loss of some significant revenue. And we also have a structure over there that, you know, while diverse and we think it's a positive, diverse being in a lot of different countries, also has significantly higher overhead costs because of that. And almost every country over there requires a separate corporate addie and some complicating financial and accounting issues.

But we're operating in Romania, in Croatia, in Latvia, in Macedonia, in Greece, in Turkey. We've been really [making] a push there into some of the former Soviet countries, particularly Kazakhstan, Azerbaijan and Georgia. And it's a handful of contracts in each country and it's resulted in a lot higher overhead costs for that operation.

We've also seen some significant delays in the projects over there, where, because of financing issues, we've gotten staffed and have seen some significant delays in the work beginning on some of the larger projects. We think the issue is temporary; we're working on getting it resolved. We think the growth that we're seeing in Europe is going to help offset some of the overhead issues and we expect much better performance going forward.

Are some of the acquisition opportunities you're looking at ones that could give you additional scale that could help the markets in that area?

Yes; absolutely. We're looking at several acquisitions in Europe, both in the Southeast and outside of the Southeast that we think will help on the economies of scale and get us up to a level where that operation is consistently profitable.

Okay and then, can you quantify, in any way, how much or how significant were startup costs related to the joint ventures in this quarter, related to the margins?

Yes; the startup costs of the joint ventures were extremely minimal. The Egyptian joint venture has not yet been staffed. We spent what we thought was going to be about three months; it actually took about five to get the company initiated in Egypt. That's not to say that (inaudible) you can't set up a company in 24 hours. And so, we've had to go through that. We haven't staffed up the business and we are going to be waiting for, I think, some revenue opportunities before we staff it up fully.

We're going to try and keep the revenue and the costs in balance. We've had a negligible amount from that. We've had a negligible amount from Makan Hill. The Shanghai joint venture hasn't had any costs yet to date, other than some travel expenses. And TMG, as I said, won't have any startup costs.

Okay, great and then just a last one; can you comment at all on the outlook for the U.S. construction market, given the crosswinds we've been hearing about?

Yes. We think it's okay; it's obviously not as strong as we're seeing overseas. Last year, the U.S. construction market was up about --- by the construction market, I mean the nonresidential construction market was up about 10%, even though the overall market was down 18%. But that was driven primarily because the residential market was down 41%. And that sort of reflects the growth that we've had. We had organic growth in the U.S. of about 10%.

But I think in our U.S. PM business, we saw a drop in the first quarter of about 4% or 5%, including some --- I think that was primarily driven by the ending of a couple of major projects. And we expect that, given our focus on acquisitions in the U.S., we'll have a much greater depth, much greater geographic presence and, hopefully, some more critical mass in our larger offices that will help compensate for a project here and there winding down.

Great, thank you.

Thanks, Tim.

Your next question comes from the line of Richard Paget of Morgan Joseph. Please state your question.

Good morning. Maybe just a continuation of the prior question; I wondered if you could talk about, maybe more domestically, which particular end markets, whether it's institutional or commercial that you see either strength or weakness in or which are doing better than the others, in terms of new business coming up?

It's hard to say. We are so diverse in as far as markets factors; look at our PM group, especially in the U.S. But we do see a significant amount of opportunity coming for us in the transportation and in the infrastructure market. We think that's going to remain strong. You only have to see what happened in Minneapolis last year where the bridge collapsed to know that we're going to be --- the government's going to be needing a significantly greater amount of money on building up our nation's infrastructure; roads, highways, bridges, rail and things like that.

The airport market has been very strong within the transportation market and we picked up, with KJM, probably about two-thirds of their revenue was in the transportation market. So that significantly improved our capabilities, our experience in that area.

Schools has continued to be a strong market for us, nationally. We see a strong business for us in the casino market. We just won a project in Washington State in that area and we're seeing some opportunities in Las Vegas and Atlantic City.

If you look t our overall PM business in the U.S., it's principally, about 80% of it is public sector; about 20% is private sector. The amount of commercial work we do is negligible, although we're seeing, actually a couple --- surprisingly a couple big opportunities there that we hope we can close this year. And so the balance of that, which is for the Fortune 500 type of work, utilities, manufacturers, power producers; that market's held up pretty well.

Okay and just getting back to the transportation market, I know some of the public construction guys' backlog hasn't been all that great. And even though the needs are --- everyone realizes it, with the potential for some pressure on state and local budgets, some of the DOTs might not be letting things out as quickly. I mean, I know there's some bonding measures out there to pay for some things but you guys are seeing activity in the transportation market?

Yes we are. In some areas, some projects, they're starting moving slower in times like these. But those projects are so long-term and typically so critical that they don't get held up for long. The ones that are already in the works are moving forward. Things on the drawing board, which we probably wouldn't be involved in for months or years anyway, those are the ones that are getting held up.

By the time they get to a hiring decision that a construction or a project manager, they're usually already funded and already moving ahead.

Okay and then getting to the acquisition market, have owners' expectations changed at all?

I'm sorry, Richard. Would you say that again, with respect to what market?

With the acquisitions in the U.S., have the expectations of price changed at all, whether some people are feeling the pinch of the economy and are more willing to sell? Or, is activity still relatively strong so they still have some higher expectations?

I've got tell you, we've seen a lot more activity this year, as far as acquisitions go, than the last year. We've also seen more reasonable sellers. We were surprised; we only did one acquisition in 2007. There were a lot of firms that either decided they didn't want to sell or they weren't willing to sell for anything less than, from our viewpoint, an unreasonable price. So, we walked away from a lot of deals that we thought were over priced.

This year, we're seeing, I think, more reasonably priced sellers. We've had a lot of discussions; those 10 acquisitions I talked about that are in our pipeline, some are very well along, you know, to the point where we're past the point of price. And I don't know the cause of that. I don't know whether it's the market or whether we're just talking to people that want to sell, as opposed to some principals that don't want to sell, therefore, they're throwing a high price on the table. But we are seeing more reasonable prices out there for acquisitions and I think we'll see the benefit of that this year.

I don't know whether it's economy related. It's certainly not related to the private equity market, because private equity firms are not buyers in our industry, and never have been.

Okay and then how should we think about the tax rate for the balance of the year?

The tax rate for the year will probably come in, full year, around 17%, so you can factor in your quarters to get to that end write.

Okay so that's probably around 25% per quarter going forward?

That's a good number.

Okay, thanks, I'll get back in queue.

Thank you Richard.

Your next question comes from the line of David Gold of Sidoti and Company; please state your question.

Hi, good morning.

Hi David.

A couple of things; one, can you give a break down on the backlog?

Yes I can.

How would you like it broken down?

By business.

The total backlog as of March 31 for project management was $428 million, the construction claims group $52 million, for a total of $480 million. The 12 month backlog for project management was $201 million, and construction claims $41 million, totaling $242 million.

Perfect, thanks. And then David you commented a little bit on having spent a little bit on infrastructure and people, putting infrastructure in place for growth. I'm curious there if for the most past you've added what you sort of need to add to position yourself to bring on these acquisitions, or could we expect a further tick up, say in the G&A line?

Well you're going to see it over, I think, three quarters. But I think as far as the additional staff, I think the hiring has pretty much ended. I think the finance department, and John will confirm this, which has done a lot of hiring over the last two years, much more than we would like to do, but is required with a public company, especially one of our size, has pretty much leveled off. We've had a couple of recent hires, relatively minor. We're looking for one additional major corporate position, which is the head of M&A, that I think we'll bring on board I the second or third quarter. Other than that, there hasn't been too much. We increased the size of our legal department by 50%, going from two to three lawyers, but I don't expect that there'll be need for more growth there. And you may see the increase over the next couple of quarters relative to 2007, but as far as the hiring, I think that's pretty much leveled off.

Okay, and then just one last one, on the claims business, anything in particular you'd attribute the strength to? Were there any large projects or is this traditionally, in your experience, something that you generally see as the economic environment gets a little tougher?

For the claims group? I think we're seeing significant work around the world, a lot of it's been in Europe, the Middle East and the eastern U.S. We are focused on that group right now; it's not because of any one big assignment. The claims group is hitting a lot of singles, not very many home runs, and the work is relatively short term and smaller, you can see that in our press releases. We don't get a lot of press releases on the claims group because of the size of the contracts. But it's from a lot of little successes all over the world, and what we're focusing on in the claims group, and obviously very happy with the performance in the first quarter, is continuing to plug the holes that we still see.

In Asia/Pacific we have taken some action to turn that around, and some of those actions actually increase our costs short-term, either hiring of new management or transferring current management, which we've done, to take over those operations. There are very few of the legacy Knowles managers still in place anywhere in the world, but particularly in Asia/Pacific. We've done some cost cutting in Australia to try and rationalize that operation. As you can see from the press release yesterday, we just opened a small claims office in Tokyo that we think will generate a lot of new work for us long-term, but that's a short-term cost. And we think long-term there's a tremendous amount of opportunity over there, particularly in taking those claims operations and trying to use them as stepping stones to build a PM practice, which is part of our plan.

Perfect, perfect, thanks.

Your next question comes from the line of Richard Whitman with Benchmark Capital; please state your question.

David can you break out the organic growth in the company, X acquisitions?

Yes, let me go back to those numbers Richard. Give me a second to flip some papers. Overall we had 56% growth last quarter in consulting fees, that was 36% growth organically and 20% growth by acquisitions. Construction claims group had 25% growth that was entirely organic; our PM group had organic growth of 42% and acquisition growth of 32% for 74% over all.

Great, thank you. And one other question, can you give me, do you have what your return on equity and return on capital were for the period?

We don't have that information, but if you want to call John Fanelli directly, he can have that for you by the end of the day.

No problem. Thank you very much.

Your next question comes from the line of Kevin Lu with B. Riley and Company; please state your question.

Good morning. The first thing, I know some of these are (inaudible) and then there's a full survey on, but are you seeing either the pipeline of opportunities, or is it just your sense that the opportunities going forward will kind of increase now that they're a part of you guys? And also if you could speak to what needs to be done to improve the operating margins at some of the areas that are a little bit below where you guys currently are, or where the original Hill business was?

There are a couple of things that we need to do. First of all, as far as cost cutting, at least for the three that we've done, I don't want to talk about anything that we're currently working on. With KJM we took out some significant costs from that business and despite that, we haven't seen an increase in their operating margins. So there's a certain amount of transition that needs to happen. KJM was a slightly different business than Hill in that they were generally a sub-consultant to other major firms on projects; they didn't manage a lot of their own projects. They provided scheduling and estimating, other project support services. And transitioning them to the point where they're chasing projects, and winning projects, we think is a longer-term process, but one that we think will be successful in the end.

With Shreeves and Gerens, we saw negligible opportunities for cost cutting. Shreeves we had a relocation of their office actually to a more expensive space where our current claims office is from where they were, and no cost cutting opportunities on the labor side. With Gerens we're talking about what's going to be a relatively independent company, because it has minority shareholders, for at least the next two to three years, and almost no opportunities for cost cutting there other than some real minor ones.

As far as transitioning the business, we sort of face the same issues with all the acquisitions that I just talked about with KJM, in that the sales cycle for project management is rather long. To start to get the full benefit of them being part of the Hill organization, with respect to either winning bigger projects or winning more projects, we expect that to take some time. And by some time, I mean a year or longer.

All right. And then in terms of the PM gross margin being down year-over-year and sequentially, was that primarily due to the geographic mix, or were there, I know you named a couple of other factors earlier. But I'm just curious how much of an impact the mix of business had on this quarter.

Well the Middle East typically has lower gross margins than the U.S. business, and that's been increasing, so I think to some degree, and John will correct me if I'm wrong, had some negative pressure on our overall gross margin within the PM business. He's nodding, so I know what I'm talking about, at least in this instance. I think we've got a couple of major negative impacts to it, which were the European business having a significant loss and D.C. and New Jersey offices in the U.S. going from significantly profitable operations to much less so, although they're still generating a profit.

That had a negative effect, and obviously the three acquisitions, where our business was making 17%, and they were making 8%, 9% and 12% respectively, is going to have a major negative impact. We think that the operating margin level of those companies is not reflective of what we think we can acquire in the marketplace going forward.

All right. And then on the claims side, in terms of the sustainability of that gross margin, obviously a very strong quarter for them. I know in the past you guys have mentioned kind of 55% to 60% being a decent number. What do you expect as we move through the balance of the year?

As far as gross margins?

Yes.

Well they had gross margins in excess of 60%, which in large part was driven by Shreeves continuing to perform better financially as a result of our consolidation, integration I mean into the Hill business. The operating margins are obviously at 17.5%, well above what we were hoping for at 15%, or expected to see. And despite that we still have some holes. The gross margins are relatively stable year-over-year, they've been a little under 60% and now they're posting at 61%. We think over the long-term with some continued pricing leverage, we may be able to tweak that up a little bit, but not a hell of a lot.

And what we really need to do is plug the operating margin, I guess the operating losses that we see within the project within the claims group, and get those operations turned around, and turned around as quickly as we can.

And then just lastly, how long before you expect this Moustafa, David, to start up, and what would the backlog contribution look like if you guys were to start some of those projects today?

I don't think that we've had a chance to add up the backlog from those three projects, but we think it's significant, and we think that they are going to start up in the next three months.

Great, thanks a lot.

Your next question comes from the line of Arnie Ursaner with CSJ Securities.

Hi, good morning.

Good morning Arnie.

David if you don't mind, one of the questions I know we've been asked over the last month or two is the S3 registration statement filed on behalf of your family. Again while your intentions may change going forward, would you care to comment on what your intentions are currently, why you filed the registration statement, and if you intend to sell shares in the open market?

Yes we received a significant number of shares both in the merger with Arpeggio Vistek as well as the (inaudible) shares that we've received over the last two years because we hit our EBIT target. And those are, they were, unregistered restricted shares, and we've seen a little bit of selling interest by some of our management team, to take some money off the table, other than by my dad and myself. And he and I have sort of a different strategy, which is basically we're not interested in selling significant amounts of stock. But we do see the opportunity to increase our liquidity by entering into margin arrangements so that we can get liquidity out of our holdings, while at the same time not diluting ourselves, not selling stock, and not incurring capital gain taxes in the process.

It became apparent in both of us talking independently to some institutions about doing that, that 144 stock created a significant handicap and that registered shares made it much, much simpler, not really simpler, but cheaper. And the costs of filing an S3 were relatively minor in connection with the amount of stock that we had. So we did that, the registration statement was effective as of a about a week or two ago and I would not expect, as a result, there to be significant selling as a result. Certainly no more than would have been under 144 sales by the shareholders, it just simplifies the process.

Okay. And going back to your organic growth of 36% and 25%, I guess I'd like to try to understand a little bit more about how headcount adds are building into that. I mean if you're showing that kind of organic growth I'd be surprised if your headcount growth was that strong. So could you comment on either higher prices you're getting, or better utilization relative to the headcount you have?

I think in the claims group it was due, it was primarily driven by high utilization and better rates. In the project group utilization is always strong, so it's not that, when we work we need to staff up those jobs with either existing people coming off projects or new hires. And we see significant new hires in the Middle East and North Africa over the last couple of months and going forward.

I guess what I'm trying to get a feel for is, what is the sustainable growth you have organically if you don't make significant hires in the current environment?

We're a professional services firm Arnie; we have to hire new people in order to grow. We can't get it all out of utilization and price increases. So when we win new work on the PM side, there's typically a significant number of new hires that are hired directly for that project, and put on that project as soon as it starts.

And do you have a view on how that's impacting margin as these will ramp up?

No; typically, as we ramp up, there are very few upfront costs in connection with new work, particularly in locations where we already have a presence. And I don't anticipate that that will increase going forward.

Okay. Final question from me relates to the SG&A. You mentioned the $6.7 million part of the $9.7 million, gave us a lot of details related to that but I guess what I'm trying to get a feel for is sitting here today, what do you believe your run rate SG&A is on a go forward basis, ex-ing out what might be due to somewhat one time items?

Yes; I don't -- thinking on a dollar basis, given the kind of growth that we're having, you could talk about an SG&A run rate. The bulk of the increase, 75%, 80%, you would say, John?

Yes.

...is from the operations themselves as they continue to grow organically. We don't anticipate a lot of increase in corporate costs. And I think, if you take a look at the press release, one of the schedules attached at the back breaks down our SG&A costs by SG&A pre-corporate and then corporate separately. And on both numbers, we're down, as a percentage. SG&A pre-corporate was down from 41.9% to 31.8%. And we don't see significant decreases in that but we see slight decreases over time.

And, corporate expenses went from 7.9% to 7.7% of consulting fees, which came down, even though there was a big dollar increase in the amount. And we expect that that number will continue to drop. So, I think you're better off looking at SG&A as a percent. And even though we were at the 39.5%?

Yes

...for the quarter, John's projection of 36% to 38% for the full year, we're still standing on it.

And in your filings, do you break out the elements that go into corporate expenses? And again, focusing on that line item, you did $5.4 million or so in Q1. How should we think about the growth in that number for the balance of this year? That, I assume, is not price of revenue or other factors.

Well, it's tied to our overall revenue in that we need to manage the company that we are, not the company that we were. And we expect the dollar number to continue to grow. We expect the percentage to continue to drop. So we see upward pressure on our operating margins as a result.

So, talking about the kind of detail to be given in the 10Q?

Well, I think overall, Arnie, the corporate expenses should start to stabilize except for costs or price increase for salary increases, any investments in additional business development people we have. But I think, overall, as David pointed out, I think the new hirings in the corporate areas they're (inaudible) complete.

Maybe taking the consolidated 37% to 38% as a percent of revenue, how should we think about the breakdown between corporate expense and the other part? How should we back the two of them up?

Well I think, if you looked at the press release, we break out the corporate expense, it's $5.4 million. To extrapolate that number, I think that would be almost just an increase in, like, the inflation would be sufficient for the balance of the year.

Okay.

And then the additional SG&A is really a function of the operations and its growth.

There's also two other factors, Arnie, which is that the acquisitions that we pick up, unfortunately, come with their own SG&A. And the three we did most recently had higher SG&A than we've been --- Hill does. So that's had some upward pressure on the number.

And acquisitions we expect to do, going forward, we could literally see four, five, six acquisitions in the next six months. And, I think, the level of those overheads that they have, I think, will be better than the acquisitions that we've done. But those are going to skew the numbers as well and they're going to add significant dollars.

When we do acquisitions, that adds to the corporate expense as well. And so, it's the operational expenses that (inaudible)...

Those are the operational expenses.

It doesn't impact corporate at all?

No.

Okay.

Okay; thank you.

Thanks, Arnie.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of Bill Sutherland, with Boenning and Scattergood. Please state your question.

Thank you; good morning.

Good morning, Bill.

Hi, Dave. The reference you made to [JV] revenue starting up, possibly in three months, were you just referencing Moustafa? Or all of them?

I was just referencing the TMG joint venture.

The TMG.

We think that's the one that has the most immediate needs for our help and will generate the most immediate revenue.

And the others really looking more like '09 events?

Well, toward the end of this year.

Yes.

We will expect the others --- the costs and the benefits to be relatively neutral for the year. We suspect all of them, except TMG, which we expect will be immediately positive.

Okay. The acquisitions, to date, with the lower operating margin run rates, I'm not sure if I understand whether they can be brought to sort of a corporate level, you know, the original corporate level, or whether it's just they're going to run at these levels until some time in the future when you can gradually change their overhead structures? Could you clarify that?

They're in the same business we are. And what they certainly give us is entrance into a new geographic market. So, we can begin selling in that area above the pre sale.

And my point is that the fundamental economics of their business is not different form our. So, you can't say, well, KJM is going to continue to do 9% operating margins forever because that's KJM's economics. They're in the same business we are. So, our goal is to get them into a lot bigger projects, longer-term projects, more profitable projects, doing, in KJM's case, less sub consulting work and more prime work where the margins are better, and use them as a base to grow from.

Not necessarily, you know, that we're not a portfolio manager. We're not buying these companies so we can run 12 different project manager businesses. We're buying them so we can expand on the one that we have.

Right.

And make them integrate into the one. So, we expect, long-term, that they're going to have the same kind of margins that we see in our business, long-term. And it's just a matter of getting there. You don't get there by cost cutting; typically, you get there by selling and winning projects that they wouldn't have won before and you weren't going to win because you weren't in that geographic market.

Okay; okay. And the ones coming in, potentially, they differ in the sense that they are not new beachheads, new geographic beachheads?

The acquisitions, I don't want to give too much about deals that haven't happened yet.

Sure.

And might not happen, so I want to clarify that. But the acquisitions that we're working on are significantly more profitable than the ones we've just closed.

Okay. I just want to understand again on the claims operating margin and what you were saying, as far as go forward from the upside in Q1, is it possible that it can run north of 15%? Or is it likely that that isn't kind of a level that it should come normal to over time?

No; we're hoping that we can do significantly better with 17.5% in the first quarter, given the gaps that I talked about, the holes that we need filling.

Yes.

If we can turn those operations around and get them profitable, we could do close to 20%. And I think that what you --- of the standards that the claims business was, for us, historically, is not the claims business we have today. And the kind of practice that we had five years ago, didn't include Knowles, wasn't as global as it is today.

I think that we have moved up --- we've always been a strong player in claims. It was our strength and the driver of our reputation worldwide. But I think today, given the combination of Knowles and Hill, we've become one of the, if not the leading player worldwide. And I think we're starting to see some benefits from that, as far as work. We won a significant claim in the first quarter; a very significant one, where it came down to us and Navigant, who we view as our number one competitor globally. And we won it and I think that's reflective of our now higher and better standing in the industry.

So I think the historical number of 15%, while we wanted to get Knowles to that, I think now that we're at that, in fact, higher than that, with, as I said, some potential for even more, if you take out the operations that were losing money.

Okay. I just wanted to make sure (inaudible).

(Inaudible) do significantly better than that going forward, because it's a fundamentally now different business.

I just didn't know if utilization had run so hot in Q1 that it was a special situation. But, certainly, the (inaudible).

(Inaudible) no, there was nothing about our performance in the first quarter in the claims (inaudible) that we think we think is unsustainable.

Okay. The issue that you referenced in the PM business in the U.S. in the first quarter, what sector, kind of, business is that? And, kind of, what was the order of magnitude?

I'm sorry, Bill. Can you say that again?

The issues you have in the two PM business lines, you know, the New Jersey, DC and then also the -- what was the other one? Oh, not just U.S. but European (inaudible) issue? That's actually not my focus; not the focus of the question but I am just referencing the DC, New Jersey office. Is that --- I just want to see if that's public sector work and, kind of, what the order of magnitude (inaudible)?

Yes, they're both almost exclusively public sector work. We've had the wind down of a major contract in New Jersey, with the New Jersey School Development Authority. That was a large and highly profitable contract for us that has begun to wind down. That's impacted profitability here.

In Washington, we are sort of now seeing the effects of about a year to two years ago when we lost the head of that office and it took about nine months for us to bring a new regional manager in. And we think he is doing well. Bob Hixon is the Senior VP in charge of the Washington office. But we had a very big gap during that time, with just about no sales. And it took him some time to get on board before he, probably another nine months that he was on board before he had a major sale.

So, we've got sort of a window there of lost opportunity that, I think, is going to impact us in the short-term. We think, long-term, that office will get back to being a significant profitable one for us.

Okay and then, just real quickly, one or two numbers of questions. The reimbursable expense number seems a lot different this period than last period, for both those segments. Is there anything I should know, or that we should know?

The reimbursable numbers, you know (inaudible), so we usually don't track off of it any of our margins or ratios fluctuate, quarter-over-quarter.

(Inaudible) -- a large part of the number, historically, at least over the last several years, has been CM build contracts in New York City, contracts under which we hired the contractors to do the work and their revenue passes through us. And, if you're saying there was a significant drop in that number, it might be a couple of those big projects winding down.

But, it's really not a number that we follow closely because it's a complete (inaudible).

Right. It's not material to the business. Last question, how much of the backlog was from the acquisitions? Thanks.

The acquisitions of Gerens and Shreeves, that is about $45 million in backlog to us. And there was about $40 million from Gerens about $5 million from Shreeves.

Okay; thanks.

Thank you, Bill.

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

Thank you, everybody. We appreciate your time this morning. As I said, we're extremely confident with the performance that we had in the first quarter. And we are very confident about what we see out there for the balance of the year.

Our continued strong financial performance, the new work that we are chasing and then hope and expect to win, the acquisition opportunities that we see out there, the opportunity is clear by the joint ventures that we've been successful on six months in getting entered into, and we expect good times ahead, as I hope you all do.

So, thank you very much for your time and we appreciate it. And we'll talk to you in three months. Thanks.

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