Hill International Inc (HIL) 2008 Q2 法說會逐字稿

Good day, everyone. Welcome to Hill International second quarter 2008 financial results conference call. At this time, I would like to inform you this conference is being recorded and that all participants are currently in a listen only mode. I would now turn the conference over to Mr. Devin Sullivan. Please go ahead, sir.

Thank you very much, Regina. Good morning, everyone. Thank you for joining us today. The speakers on today's call will be David Richter, President and Chief Operating Officer of Hill and John Fanelli, Hill International Senior Vice President and Chief Financial Officer. Before we get started, I'd like to remind everyone 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 an clients actions, weather 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. No assurance that any prediction once made will continue thereafter to reflect management's beliefs and Hill does not undertake to update publicly its predictions, whether as a result of new information, future events or otherwise. I'd now like to turn the call over to David Richter, President and Chief Operating Officer of Hill. Please go ahead, David.

Thank you, Devin and good morning, everyone. Thank you all for joining us for second quarter 2008 earnings conference call. With half of the year now behind us, we are are extremely happy to report that our business is strong and getting stronger, that our revenue is growing at an extraordinary rate both organically and as a result of four key acquisitions that we've made over the past year. We just finished the best business development quarter in the company's history, increasing our total and 12 month backlogs to record levels. All in all, for us, another great quarter for our company.

Let me begin today as always with a brief overview of our performance during the second quarter of 2008 including a breakdown of the performance between our two operating segments, the project management group and the construction claims group. In the second quarter Hill's total revenue rose 41% to $96.9 million. Consulting fee revenue for the second quarter rose 69% to $81.8 million. This increase was the result of nearly 40% organic growth and 29% growth from acquisitions. This was our fourth consecutive quarter of increasing organic growth. Over the past four quarters, we saw 24%, 28%, 36%, and now 40% organic growth. We obviously view this as a very positive trend.

In our project management group, we achieved consulting fee revenue of $59.3 million, an 88% increase for the second quarter of 2007. This increase was the result of 43% organic growth primarily occurring in the Middle East and North Africa, and 45% growth from our acquisition of four companies over the past year -- KJM, Shreeves, Gerens, and Euromost. Our construction claims group had consulting fees of $22.5 million, which was an impressive 33% increase from the second quarter of 2007 and all the result of organic growth, primarily out of the Middle East and Europe. During the second quarter, Hill's consulting fee revenue was derived from the following geographic areas -- 24% from the Americas, 39% from the Middle East and North Africa, 35% from Europe, and 2% from Asia Pacific. Hill's overall gross profit increased 63% to $36.7 million in the second quarter. Gross profit margin as a percentage of consulting fees decreased slightly to 44.9% from 46.4% in the same quarter last year. This decline was primarily attributable to project mix, specifically a higher proportion of second quarter sales generated by the project management group which has a significantly lower gross profit margin than the construction claims group. We are also seeing improved gross margins in our Middle East and North Africa PM business which during the second quarter was essentially comparable to the gross margins we saw in our US PM business, despite historically being significantly lower.

Hill's SG&A expenses increased nearly 70% to $31.8 million during the second quarter from $18.8 million in the same period of 2007. As a percentage of consulting fees, SG&A increased slightly to 38.9% compared to 38.8% last year. The increase of $13 million in SG&A expenses year-over-year was due primarily to the inclusion of SG&A expenses from the four acquisitions, which totaled $2.7 million for the quarter, increased expenses supporting our operating groups and their strong organic growth which totaled $6.6 million, continued build up of corporate staff and expenses in connection with our current and anticipated growth which totaled about $2.2 million for the quarter, and a one-time stock based compensation expense due to a total amount of $1.5 million related to Hill's 2007 restricted stock grant plan, which was put in place in February of 2007, but was just recently approved by our stockholders in June of 2008. On an ongoing basis, through the five year period of the plan, which expires in the first quarter of 2012, we expect an ongoing quarterly charge non-cash charge of $275,000.

After this last item, our SG&A expenses would have been only 37.1% of consulting fees during the second quarter, a big decrease from last year's amount of 38.8^ and an even bigger decrease from the first quarter of 2008, where we saw SG&A expense of 39.5% of consulting fees. So we are seeing some significant leverage in our SG&A expenses as a result of our growth and we expect this trend will continue. This is also more in line with our previous statement that we expect SG&A expenses as a percentage of CFR will be in the range of 36% to 38% for the full year of 2008. The caveat to this of course is that because the acquisitions are becoming increasingly important part of our growth strategy, SG&A on a quarterly basis may fluctuate up or down depending upon the specific expenses of the companies we acquire. And I'll talk about recent and potential acquisitions in a little bit more detail in a second.

Hill's operating profit for the second quarter rose 41% to a record $5.7 million or or 6.9% of consulting fees, up from $4 million or 8.3% of consulting fees in the second quarter of 2007. Excluding the non-cash expense related to Hill's restricted stock grant plan, operating profit would have been $7.2 million or 8.7% of consulting fee revenue for the second quarter.

Within the project management group, their operating margin declined slightly to 15.1% of consulting fees from 15.7% in the second quarter of 2007. This was primarily due to the non-cash charge from the restricted stock grant plant and amortization expenses in connection with our recent acquisitions. In our construction claims group, our operating margins were down to 9.3% for the quarter, down from 13.4% in the second quarter of 2007. This also is due in some part of the non-cash expense of a restricted stock grant plan, but also to some decreasing margins in certain of our operations, including continuing losses in our Asia Pacific and western US regions within the claims group. The company's provision for income tax in the second quarter of 2008 rose to 27.5% up from 23.8% in the same period last year. During the second quarter, though, Hill made a $1.3 million one-time adverse income tax adjustment that was in connection with the modification to our cash to accrual estimate that was made when Hill became a publicly traded company in 2006.

Net earnings for the second quarter grew to $3.8 million, which was the equivalent of $0.09 per diluted share based on a total of 41.2 million diluted shares outstanding. This was up 34% from last year's number, $2.8 million of net earnings, which was $0.10 per diluted share based on then 28.9 million diluted shares outstanding. If we add back the $1.5 million restricted stock grant charge, and the $1.3 million cash to accrual tax adjustment, hills net earnings would have been $0.16 for the quarter instead of $0.09. We ended the second quarter with a very strong balance sheet. As of June 30, our balance sheet included cash and cash equivalents of $30.3 million. Working capital of nearly $85.1 million, and shareholders' equity of $147.5 million. The use of cash during the second quarter reflected cash used for the acquisition of Euromost in Poland of approximately $16 million net of cash acquired, and capital expenditures of approximately $4 million principally related to expansion of our IT infrastructure.

At the end of the second quarter we had no outstanding borrowings under our $35 million credit facility with LaSalle Bank, now Banc of America, although we did have about $8 million of outstanding letters of credit on various projects overseas. We've currently in discussions with several lenders, including our current one regarding an increase of our borrowing capacity from $35 million up to $100 million or potentially more, and we expect we will have a new facility in approximately that amount in place before the next earnings call.

During the second quarter we saw a tremendous increase in our backlog. At the end of the quarter, our total backlog rose to a record $606 million. This is a 26.3% sequential increase in the end of the first quarter. Our 12 month backlog rose to a record $301 million, which is about a 24.4% sequential increase from the end of the first quarter. We are very, to make an understatement, very satisfied obviously with the growth in our backlog. We had a tremendous amount of success in the second quarter in business development and winning some very very major contracts, and we think these numbers bode very well for our continued growth over the next several years.

Now let me move on to a discussion of our recent acquisitions that we made so far this year. Two acquisitions in the first quarter 2007, Shreeves and Gerens were immediately accretive to our business, and contributions from both entities fell in line with our expectations for the second quarter. In January of 2008, we acquired UK project manager John Shreeves Holdings and its operating company, John Shreeves & Partners. For the second quarter 2008, Shreeves contributed consulting fee revenue of $2.1 million compared to $1.2 million during the first quarter. Gross profit and operating profit at Shreeves were $965,000 and $174,000 respectively, for the second quarter, and this is up significantly from gross profit of $500,000 and operating profit of $100,000 for the first quarter.

Our second acquisition in February of 2008 was the principal project management firm in Spain, Gerens Management Group which is now called Gerens Hill International. For the second quarter this year, Gerens contributed consulting fees of $9.7 million, gross profit of $3.9 million and operating profit of $1.1 million. The acquisition of Gerens closed on February 15, exactly midway through the first quarter. For the six week period, through the end of the first quarter that we owned the Company, Gerens contributed consulting fee revenue of $4.4 million, gross profit of $1.5 million and operating profit of $500,000. Both of those acquisitions were strong if not stronger in the second quarter under Hill's ownership.

In May of 2008, we acquired Euromost Polska, a project management and construction firm based in Poland. Our results for the second quarter included one month of financial results for Euromost, and on this issue I need to correct some numbers that were in the Press Release and were inaccurate. The numbers I'm about to give you are accurate. For the month of June, Euromost contributed total revenue of $1.4 million. Net revenue also of $1.4 million. Gross profit of $700,000, and operating profit of $200,000. We expect that we will be able to expand Euromost's client base into the public sector. When we bought the company their client base was almost exclusively private sector clients. And also they will be able to enable us to make further roads into the surrounding areas around Poland, specifically Germany, Russia, and the Ukraine. We expect that Euromost, which has about 140 employees throughout Poland, will be $0.04 accretive to us over the balance of 2008 and $0.10 accretive for all of 2009.

Last week we closed our fourth acquisition so far this year. We acquired a company called PCI group based in Las Vegas. PCI provides scheduling, construction claims, project management support, and software sales and support services through out the western United States. Our acquisition of PCI will help us remain competitive in the US claims market, particularly in the West wherein the recent past we have been weak. Last year, PCI did approximately $7.5 million of total revenue and $1 million of net earnings. We expect that PCI will have a negligible impact to our EPS for this year but should add $0.01 to our 2009 earnings per share. As for future acquisitions, we're not getting into any specifics. Our pipeline of potential deals remain strong. We are currently in advanced discussions with three firms -- two medium size and one smaller firm -- and we believe that we can acquire over the next three months.

In summary, our performance over the past six months has placed us in excellent position to capitalize on the growing opportunities we see in the construction management and claims markets worldwide. Our recent and potentially future acquisitions we expect will make a significantly greater contribution to our growth. We expect to experience further momentum on all fronts as we continue to increase the came of the Company, expand our global reach and continue to elevate our profile -- as we claim our advertising, as the global leader in managing construction risk. So, with that, John Fanelli, our CFO and I are happy to take any questions anybody has regarding our performance in the second quarter or the first half.

(OPERATOR INSTRUCTIONS) Your first question come from the line of Tim McHugh of William Blair & Company. Please go ahead with your question.

Yes. First wanted to ask about the claims side, the gross margin there and the overall operating margin I guess was a little weaker. You gave some reasons for it. I guess the question is what can you do going forward here and how long does it take to turn that around?

We've had two laggers in the claims group for a while now. The Asia Pacific region, which we inherited from Knowles, has been unprofitable since we acquired it. We've taken some significant steps in that area to turn that business around. As you know, in a consulting type of business, the changes you make tend to increase your costs short-term although benefits tend to be long term. We've changed out most of the management of that operation. We've put new management in place. We've moved existing Hill managers over there in some cases and in some cases we've brought new management from the outside. We have eliminated their legal practice in Australia, which we thought was not only an operating drain but a conflict with their other claims business, and we expect to continue to push to make sure that that operation turns around as quickly as possible.

One other thing I didn't mention was in the second quarter we opened our first office in Japan, a Tokyo office with a claims group. We see an increasing amount of work coming out of the big Japanese contractors, and we think that will be a source of increased revenue for that operation. The second part of the business that has been an underperformer for us has been our claims business in the western US, and we've taken some steps recently -- we've added some very strong people. I think you saw the press release regarding John Balch in Denver. We have two other senior executives we've added in the Southwest. And the acquisition of PCI was meant to strengthen the capabilities and the resources and improve the critical mass of that operation to the point where it can become a significant and regular contributor to our profit.

Okay, great. And then the joint ventures, I had two questions. One would be the TMG contract, when would you expect those to start contributing revenue to you? And then can you give us any update on some of the other joint ventures that you've announced in the last few months but we haven't seen contracts from yet?

Sure, like anything, the joint ventures had various levels of success to date, just as far as how quickly they've ramped up or how slowly they've ramped up. TMG which is the most recent joint venture was the fastest to wrap up. We had a client TMG -- TMG is Talaat Moustafa Group -- in them we had a client that had a significant number of projects already ready to go, and we're looking for immediate help on the project management side. They have about $3.5 billion to $4 billion of projects that are beginning in the very short-term future, and as you saw from the press release, we won about $96 million worth of work through our Hill TMG joint venture to work on nine separate projects for them. So that's been a terrific start. We anticipate revenue from that in the third quarter of this year. That will ramp up rather quickly, and should last for no less than three to four years, just with that existing work.

Makan Hill, which is our joint venture company to pursue real estate development projects in the Middle East, is at the funding stage. They've been pursuing 00 the original plan was to pursue about a $500 million equity fund, to fund projects and discussions with them -- it looks like they're exceed that by a wide margin and we see projects beginning to launch fourth quarter this year or first quarter of 2009. The joint venture with the Egyptian Ministry Petroleum -- as expected, when your partner is a government agency as opposed to a private company has been relatively slow to launch. We have the company in place, now formed, and we anticipate that it will start pursuing work and before the end of this year. Both Makan and the Hill Petrol which is Egyptian joint venture -- we expect to have just about no impact to us in 2008. But Hill TMG, we expect a lot of significant impact on us in the second half.

And the China one?

Yes, Hill Jianke, which is a new joint venture in Shanghai is essentially just a start up office with a very well connected and strong local partner. And we've just opened that office and we expect that the balance of the year we will spend staffing up the overhead and sales capability offers and starting to chase work. They are not like the Egyptian Ministry Petroleum and TMG -- a joint venture with a partner that has work to give us. They are together with us going to be seeking work from third parties, so we expect that will ramp up slowly. But given our work that's in China and the structure of this JV and how connected our partner is, we see a lot of great things in China. We also -- on the non-JV route just announced our first project in India, and we hope that's the first of many. We see a lot of opportunity in that country as well, and between India and China we could see a tremendous amount of growth in Asia over the coming years. Second quarter Asia Pacific was only about 2% of our business and almost all that was on the claims side. We see the PM business in China becoming a much bigger part of our business.

Are you looking at further acquisitions in that area or will it be mostly organic growth to expand in Asia further?

We have been looking at a couple acquisitions in Australia. We haven't seen many acquisition opportunities in Asia, and frankly don't expect to see many, and I think that our that our growth in will be primarily driven by organic growth.

Okay, great. Thank you.

Our next question comes from David Gold of Sidoti. Please state your question.

Hi, good morning. I was hoping you could add a little bit of color on acquisition pricing. It sounds like you're decently active in the market? But are we seeing pricing become more attractive number one, and number two if you could add color on sort of where or what you line to acquire or where you'd like to buildout say?

Yes, I think, David, saying we're active in the acquisition front is an understatement -- but we've seen a lot more opportunities this year than we did last year. I can't say that that's a matter of the economy forcing people to lower their price or become reasonable and realistic. I just don't know. We're doing these one by one. We have seen some firms -- we certainly haven't stolen any firms from anybody but we are paying I think fairly reasonable prices for the companies that we've acquired and for the companies that we're talking to now but haven't closed yet. There haven't been financial flares in the market. So in terms of PE buyers really hasn't been a change, but I think we are seeing firms that are probably in a better position to be able to sell and maybe see a top and it's really triggering their desire not necessarily as their prices come down.

And then also, a minor one. Can you give, well -- I'm not going to let you off the hook, sorry on Part 2 of that, which was where you want to build out -- basically what's ideal for acquisitions for you?

You know as well, we don't like to set targets because targets tend to become ceilings or floors.

Sure.

We're out there looking to grow geographically. We're looking to add critical mass in the areas where we already are. We're looking to bring in certain kinds of market sector expectations. So we're looking for good project management [streams] all over the world and if we find a firm at a good price and is the right cultural fit and they have high quality people, and the numbers are good on top of that and the price is fair, we'll buy everybody that we can that we can integrate. And I think you'll see with four already done and I think three lined up in the next three months to close, we've got seven acquisitions this year. The size of the firm we're talking to has started getting a little larger and we talked to a few firms I'd say are large or very large, but I think the larger they are, the more likelihood we have of closing the deal. So we're trying to be as active as we can with the smaller and medium sized firms. 40% acquisition growth is fantastic. The fact that the trend has been upward we think is fantastic. But we are still looking to take this thing to a much higher level, competing with firms like URS and Jacobs and Acom that are $5 billion to $10 billion companies, and as we get larger it becomes a much more level playing field for us. We are very much focused on growth and at the same time we're trying to do that in a way we can integrate it reasonably well without losing people or clients along the way.

And then just the other minor I was going to ask you was backlog breakdown by division.

John?

Yes, at the end of June, the backlog of the [$6 million] was made up of project management of $527 million and claims $79 million. And the 12 month break down of the PM business is $233 million and $68 million for claims.

Perfect.

David, we've seen a big increase in the backlog within the claims group which we attribute primarily to two things. One they won some very large claims in the recent past -- one I think it's well over $10 million in fees over the next couple of years. And secondly, they're pursuing more longer term type contracts that we're doing claims management along the way of the project during the course of it, as opposed to getting hired after the fact just to be part of the litigation or arbitration. We have a very large role with Dubai International Airport which was recently expanded to include Dubai World Central Airport, which is twice if not larger existing to buy airport, and these types of long term contracts really add to our backlog in a business that historically didn't have a lot of backlog.

So you actually anticipated my next question on that which was essentially as you look at the business the length of -- on average the length of the assignments that you win in the claims business always getting to be a bit longer.

Yes, we think so. One of the areas where we're seeing an increased opportunity is in the nuclear business. That claim I just mentioned of eight figures was on a nuclear power plant in Europe, and we see a tremendous amount of opportunity both in PM and claims as the nuclear business worldwide begins to ramp back up.

Terrific, thank you both.

Thank you, David.

Our next question comes from Chris Bamman of Morgan Joseph. Please state your question.

Good morning.

Hi, Chris.

Just looking at the Middle East, what is the sustainability do you see in the growth in that region of the world? Are we sort of like in the middle inning of a nine inning game or just a little bit more color in terms of the sustainability of that growth rate?

We think it's highly sustainable. Obviously the price of oil will fluctuate and to some degree, it's driven by the [petro] dollar. But at the same time, we don't see long term trending downward with the price of oil, but a finite supply of it decreasing every year while you have growing demand. So the amount of wealth that's going to be transferred from the developed world to the Middle East I think is going to be long term and highly sustainable.

Okay.

You can also see a tremendous amount of growth -- people think of the Middle East all focused on Dubai. I got to tell you, Dubai is becoming a much more smaller part of our business. Abu Dhabi has a tremendous amount of wealth, in multiples of what Dubai has. Dubai right now is the biggest office we have in the company. I think Abu Dhabi will surpass it within the next year. The network there has been gigantic and we're expanding out of there. We're winning more work in Saudi Arabia and Africa. And we've honestly to -- get back to your basal analogy, we think we're in the bottom of the second inning. So there's a lot more to go with that.

Okay, that's helpful. And I guess moving on to the domestic market, the ABI forecast I believe is expected to be down but other engineering companies are really seeing their backlogs up. So I was wondering what are you seeing domestically in terms of pockets of strength or even weakness for that matter?

Well, the Architectural Billings Index, it tends to fluctuate widely, month to month and quarter to quarter. What we see overall -- it also tends to be highly reliant on the buildings market as opposed what we also see which is a very strong infrastructure market. We see the long term trending very positive. Short-term trend, we clearly seen de minimis growth in the US market. Unfortunately, I think we are an A-player internationally, but still to a large degree a B-player in the US, and we are very focused on changing that. We want to and we have to be an A-player worldwide, but particularly in our home market -- we saw in the second quarter we saw domestic growth of 9% which includes the KGN acquisition. Our organic growth in the US was only 3%. That's not satisfactory and we want to continue to push this business. We're bringing on what we think are some very key players domestically. We are are going to renew our focus in the acquisition front in US companies. The three of the last four we've done have been in Europe and now Europe is our second largest region and Middle East and North Africa, we need to continue to improve our critical mass in the US market and make sure that we are as dominant a player here as we are internationally.

That's very helpful and that's all for me. Thank you very much.

Thank you, Chris.

Our next question comes from Arnie Ursaner of CJS Securities. Please state your question.

Arnie, are you on the line? Arnie, if you're talking we can't hear you.

Your line is open.

This is Mitch for Arnie.

Oh, Mitch?

Yes, can you hear me?

We can hear you, but we can't hear Arnie.

That's fine. I've got the questions here. Do you have the backlog by geography? And the change?

I have it right here.

Mitch how do you want it broken out? I can break it out by project management and claims? Or project management side, the domestic of the $527 million -- $145 million is domestic, internationally it's $382 million. For the claims side of the $79 million, $6 million is domestic and $73 million is international of the total backlog.

Right.

You want it broken out for the 12 months as well?

Sure.

Okay, the project management domestic is $51 million, internationally it it's $182 million, for a total of $233 million. The claims side domestically $6 million, internationally $62 million for a total of $68 million.

Okay, great. And I think last quarter you guys mentioned what the operating profit would have looked like excluding the acquisitions because some of those are still being turned to some degree. Do you have that detail?

The operating profit margins?

Right. Because I mean last quarter, there was like a 300 point delta.

I don't have the margins on a non-acquisition basis or organic basis, but the acquisitions that we've done in the past year, they've all been less profitable than Hill's existing PM business. And our focus has been on obviously integrating them with Hill, cutting their cost to the greatest degree we can, and getting them to pursue bigger and better projects and more profitable projects. The one exception to that has been Euromost, which was more profitable than official business. Last year they made about 25% operating margin. In June, I think given the distraction of putting themselves up for sale, and all the activity we had in closing the deal in May, the first month their profitability was down -- it was only about 15%, but we see that getting back to higher levels.

Okay. And last question on the SG&A, when you exclude everything, the base run rate coming out of the quarter, what would that be? And does that include the $275,000 that should be there? Rather than does the $1.5 million, maybe a better way to ask this -- the $1.5 million you're exing out -- doesn't include the $275,000 that's going to be there going forward, correct?

No, that's a good point because we backed out the entire amount of the charge, and you're right. There should be another $275,000 added to that. But absent that it was 37.1% heading into the third quarter plus the $275,000. And we see that number continue to drop.

Okay. All right, great. Thanks a lot guys and we'll see you at our conference.

Thanks, Mitch. Looking forward to being there.

Our next question comes from Kevin Liu of B. Riley. Please state your question.

Good morning guys. You mentioned some improved pricing in EMEA, so just curious why the gross margin wasn't better in the second quarter? Or is it just the timing of when some of these better price deals start to roll in during Q3 and beyond? And then also what should that do to the gross margin for the PM segment as we look to the back half of the year?

You talking specifically about the claim side?

On the project management side.

Yes, we've seen there's so much growth over there, we have very specifically targeted trying to increase the rates we get from our clients. And I think that's had a fair degree of success. Traditionally, the international PM business ran about 5% or 500 basis points lower than the US PM business as far as gross margin. We look at the numbers for the gross margin numbers for the second quarter -- they were just about equal. With one exception which was our European, our legacy European PM business, which was significantly lower than that, and another area I think that offers us some significant room for improvement. So that bodes well for that on the claim side as well. We've made some significant efforts following the Knowles acquisition to increase our pricing. I think I mentioned on last quarter's call that we increased the fee schedule rates of our claims business about 8% across-the-board while our labor rates increased about 5%, so we've gotten some leverage out of that. And I think in Europe and the Middle East in particular in the claims group, we're in bigger, more long term types of assignments that really help spread out the workload and puts us significantly increased profitability.

Okay, and then in the project management segment, when you look at the total backlog and exclude what's recognized in the upcoming year, just curious kind of how much concentration there is in terms of when some of that backlog starts to roll off. Would the majority of that finish up by 2010 or are we looking much further beyond that?

Well, our 12 month backlog has been running almost exactly 50% of of our total. But there's a whole spread of older projects to newer projects and when they end -- and projects that we're winning lately, they tend to be bigger, and bigger projects take longer to complete. On top of which, I think as you know, some of these very big long term programs in the Middle East aren't even reflected in our backlog because we get contracts not for the entire duration of the project, 10 to 12 or 15 years. We get contracts either two years at a time, or we get them by phase where we'll get a contract for the planning phase and the design phase and then the construction phase. So we're seeing pieces of these big long term programs being pulled in our backlog, tremendous amount of work out there and we think as long as the projects moving forward and we continue to perform for our clients -- it will be added to the backlog over the next couple years.

Just lastly, you kind of touched on this a little bit. In terms of these larger projects you guys are bidding today just curious as you look at the proposals outstanding, how large are those relative to what you seen in the past?

They're getting significantly bigger internationally and they're getting slightly bigger in the US. We are, maybe that's why we're not growing. We are chasing bigger projects, lower likelihood of success -- but ones we think as we continue to build our business, that we (inaudible). And the projects under lease now, it's very typical for us to win $1 billion project. It's untypical for us to win that in the US. The size of the projects are just bigger. But as we push into more areas, particularly those expanding to the West, Texas, California, Arizona, Washington State has some very big projects. And I think we're in a better position to start winning those. We have changed out the management that we inherited from KJM during the second quarter. We brought on some very strong senior managers for both our Texas and our Washington State operations and I think that those businesses -- even though they've been very solid and profitable since we acquired KJM, I think we'll be able to over the next year or two take them to the next level and be a much stronger competitor domestically.

All right, thanks a lot.

(OPERATOR INSTRUCTIONS) Our next question comes from Bill Sutherland of Boenning & Scattergood. Please state your question.

Thank you. Hi, Dave and John.

Hello, Bill.

The tax rate. Just curious what's a good estimate for the year now?

I'll answer that, Bill. Going forward, really our effective tax rate is really dependent on where we do business and where that profitability is. We're spread throughout the world and as you know, in the Middle East the -- traditionally has lower or even zero tax rate, but as we increase our presence in what David has described and North Africa, Saudi Arabia and our two acquisitions in Spain and Poland and even in the US, that rate is going to fluctuate. So I would use something in the range from 20% to 25% for the balance of the year for third and fourth quarter.

Yes, our tax rate is going to have to increase. It'll fluctuate. He means move higher.

What was -- just a client concentration question, what's the biggest client in Q2 sizewise?

Our two biggest clients were the City of New York and our own captive company, Stanley Baker Hill. As you know, we saw a large increase in our work load in 2007 that we're doing in Iraq. We see that continuing for the foreseeable future with [combat] foreseeable for us when you're dealing with one year task quarters is relatively short-term. But we see it being at or just slightly down next year through the end of 2009, and then when you talk about 2010 it's really anybody's guess.

And they're about what percentage in Q2?

It's in the 10-Q. I think they were about 8% of our net revenue, ballpark.

New York was slightly smaller than that.

New York was smaller than 8%?

Yes.

On the gross margin in claims, you had a margin more in the 60% range in Q1 and it came down in Q2. Did the factors of the weaker margins in the western US and Asia-Pac not have as pronounced impact in Q1, or was it just more offsets that went away in Q2?

John, do you want to take that one?

Well I think in the claims area it was a combination of what David referred to in his opening remarks about the higher cost and the stock based compensation. When you're talking about margin, are you talking about gross margins or operating profit?

Well in this case I referenced gross margin specifically. I think the compensation thing was below that line or not?

Yes.

Okay.

Well, the drop in the margin really is in the US due to higher unapplied labor, which is the using of our staffing that brought the margins down. And also in our UK claims business, they had higher direct expenses which brought down their margins in 3 to 4 percentage points than they traditionally do.

Also, Bill, the usual call down about the claims group, which is that their performance is never steady, it tends to fluctuate quarter to quarter and even internally we see month to month. So the numbers could be up or down just depending upon how much work comes in the door. We obviously have the downward pressure of the two operations that are poor performing, but most of that impact is at the operating margin line, not gross margin. But we see the claims group -- given 33% organic growth, which is well above what we've been anticipating. We think long term we'll do very well.

So David --

Margins can bounce around all over the Board.

So we should think about a 3 to 4 point range there -- and there's not a mix issue in terms of the disproportionate amount of growth in the Mideast for claims? That doesn't move it up or down necessarily?

I'm sorry, Bill. Say that one more time.

In terms of the direction of gross margin given the disproportionate growth in claims and the Mideast and that area, does that move it in a direction or just not necessarily?

I don't think it's a downward trend. I think it's just a quarter fluctuation. Literally over the last 10 years, gross margins are very very consistent and look between Hill and Knowles, so we don't see that changing much. Our expectation was a little bit that it would trend upward slightly incrementally, but no, we don't see it (inaudible) the gross margin for the claims group in the second quarter was 56.9%. We don't see that as a permanent trend or a downward trend at all.

And then last, on the SG&A front, the impact of the JVs, would it be a tick up in terms of impact in the back half?

No, I think the Hill PMG joint venture will have a significant impact on us in the fourth quarter. The third quarter probably not so much as we ramp up those projects. The other projects will have -- the other two joint ventures will have almost no impact on us this year.

But as far as the carrying costs for them, or the development costs, will that accelerate at all?

Those are extremely minor.

Okay, so we can think about an ongoing SG&A to revenue well inside that band of 36% to 38% for the back half of the year just based on backing out the non-recurring?

Yes.

Okay, good. Thanks.

Our next question comes from the line of Arnie Ursaner of CJS Securities.

Hi, David how are you?

Hi, glad to hear your voice.

There you go. A couple of things. You mentioned a strong pipeline, three acquisitions, two medium one small -- can you fund these with your existing cash from current bank lines or do you have an accordion feature?

No, we can file that under our existing borrowing capacity and cash on hand. The increase in our credit facility from the $35 million to $100 million is for acquisitions that we see over the next 12 to 24 months as well as working capital for existing operations.

Okay. And then one of the questions we get asked a lot is obviously you have explosive organic growth and you have been building infrastructure in anticipation of the growth so I have a few questions related to that. First on the operating side, can you give us a feel for the headcount growth you've seen in consultants, perhaps a sense of turnover rates and the targeted levels you think you need to handle the expected work over the next 12 to 24 months? Are you guys there? Hello? Hello?

Please hold, your line is still open.

Thank you. David, can you hear me?

Ladies and gentlemen, this is the operator. I apologize but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. (OPERATOR INSTRUCTIONS) You may resume your conference.

Hi, thank you operator. And I apologize to everybody. Our phone disconnected. We've just redialed back in. Arnie, sorry about that. Arnie, as you know we don't report our billable professionals separately from just our total employees. Our total employee count recently with the PCI acquisition hit 2,100 employees and we really don't think about capacity issues. We're not a manufacturing plant. We win as much work as we can and we find the people to perform it. So we really don't feel constrained by hiring a staffing issues. It's a top priority of ours particularly in areas where staff is hard to come by or is becoming increasingly expensive which primarily is the Middle East, but also to some degree the UK -- and the US probably only place where we have difficulty finding people is the Las Vegas market. But with PCI, we just picked up a sizable number of very high quality professionals. So we see being able to staff the projects that we win and not having too much difficulty.

And following up on that a little bit more if I can, at the corporate level obviously you had to manage through very explosive growth and build out the financial team, the HR team, and some other very critical parts of your business. Where do we think we are on that process and what leverage either on a percentage basis or otherwise should we look for -- how do you think about managing that part of your business model?

Well, I think in the short-term I think we're pretty much through the overhead expansion as far as the staffing here at the corporate headquarters. To go back to the baseball analogy I think we're in the middle of the ninth inning. But long term as we get bigger, we need to continue to add high quality management, both operating management, business developers, and everything we have to do as a public company, finance and HR and IT staff. So that trend will occur long term. I think the build up is pretty much done, and we don't see adding any significant headcount to corporate in the short-term future.

You mentioned in your prepared remarks a $4 million spend for IT. What should we look for over the next 12 months?

I think probably the same amount.

On a quarterly basis?

Yes. Oh, sorry. John is shaking his head at me so I'll let him answer the question.

I think for the year, we're $4 million through six months -- so it will be another say $2 million per quarter.

Okay, and with the various acquisitions --

With acquisitions that could change.

Okay. But the ones you have so far, that would be embedded in the $2 million a quarter incremental spend for the balance of the year?

Yes.

Correct.

Okay, thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) There are no further questions. I'll now turn the conference back to management.

Yes, thank you, everybody. I appreciate your time today. As I said, we feel like we had a very strong quarter despite a couple one-time non-cash items that took our EPS down, but our backlog, our revenues -- both organic and acquisition growth have been terrific. We're looking forward to the third quarter and to doing this call again in three months, so thank you for your time and we'll talk to you soon. Bye.

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