Hill International Inc (HIL) 2008 Q3 法說會逐字稿

And welcome to Hill International's third quarter 2008 financial results conference call. (OPERATOR INSTRUCTIONS.)

I will now turn the conference over to Devin Sullivan. Please go ahead, sir.

Thank you, Regina, and thank you, everyone for joining us this morning.

Our speakers on today's call will be David Richter, Hill's 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 & Exchange Commission.

Accordingly, such statements should be considered in light of these risks. Any prediction by Hill is only a statement of Management's belief at the time the prediction is made. There can be no assurance that any prediction once made will continue thereafter to reflect Management's belief and Hill does not undertake to 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's. Go ahead, David.

Thank you very much, Devin, and good morning to everyone on the call. Thank you for joining us to discuss our record third quarter 2008 results. These results mirror essentially the preliminary third quarter results that we issued late last week.

Issuing preliminary results was an unusual step for us, and one we do not plan to repeat, but we thought it was important to keep our investors as up to date as possible given the unprecedented volatility and uncertainty in the financial market, including specifically with respect to our stock.

Over the past two months our stock went from an all-time high of nearly $20 a share to today a recent low of close to $5 a share. We believe that this has been based mostly on the financial market conditions. As you'll hear shortly, our revenues continue to grow and quickly. Our backlog is at an all-time high and continues to grow, and we achieved for the quarter record operating profit.

While we will have some issues to address as we broach the softening demand in certain areas of our business, particularly the overall economic conditions, we see other areas of the business benefiting during this time, and we continue to be very confident regarding our future, both in the short term and the long term.

Getting to our financial performance in the third quarter, Hill's saw total revenue increase nearly 36% to $98.1 million. Our consulting fee revenue for the third quarter rose nearly 70% to $87.3 million, and that growth was comprised of 43% organic growth and 27% growth related to acquisitions.

Hill's has generated now five consecutive quarters of increasing organic growth rate with respect to our consulting fees. Beginning with the third quarter of 2007 organic growth in our consulting fees increased by respectively 24%, 28%, 36%, 40%, and now over 43% for the most recent quarter.

Hill's ability to consistently generate strong organic revenue growth is an important metric for our business. We aren't simply buying growth through acquisitions, we are earning it quarter after quarter.

During the third quarter of 2008 we announced contracts with an aggregate value to Hill, and these are just the public announcements, of approximately $118 million, including work in Abu Dhabi, Libya, Egypt, our first project in India, work in Virginia and Pennsylvania in the United States, and a new project for us in the Caribbean.

During just the first five weeks of the fourth quarter we have publicly announced contracts with a value of more than $115 million, including additional work in Iraq, work in Libya, and the Dominican Republic, and new work in [Cutter].

If you look at our two operating segments separately, our PM Group saw an 85% increase in consulting fees for the third quarter and $64.8 million, which was the result of 47% organic growth, which occurred primarily in the Middle East and North Africa, combined with 38% growth from the three acquisitions of project management firms that we did in 2008 -- Shreeves, Gerens and Euromost.

During the third quarter our consulting fees in the Project Management Group were derived in the following geographic areas, in order -- 47% from the Middle East and North Africa, 29% from Europe, and 24% from North America.

Our Construction Claims Group had consulting fee revenue in the third quarter of $22.5 million, up 37% from the third quarter of 2007, 34% of this growth was organic, primarily due to increased activity in Europe and the Middle East, with 3% attributable to our acquisition of PCI Group during the third quarter.

During the quarter consulting fees from the Claims Group came from the following areas -- 53% from Europe, 20% from North America, 19% from the Middle East, and 9% from Asia Pacific.

Hill's overall gross profit during the quarter increased 56% to $38.3 million. Gross profit margin as a percentage of consulting fees decreased to 43.9% from 47.8% a year ago. This decline was primarily attributable to the changing mix of our business, specifically, a greater percentage of our revenues coming from the Project Management Group, which has a significantly lower gross profit margin than the Construction Claims Group, as well as some slightly lower gross margins from the businesses that we've acquired over the past year.

In addition, we are achieving slightly lower gross margins on work that we're doing in the Middle East, with several of our higher margin projects, including [Palm Island], were completed in the first half of this year.

Hill's SG&A, expenses grew slower than our consulting fees during the quarter, increasing 60% or $32.6 million in the third quarter. As a result, our SG&A as a percent of consulting fees declined to 37.4% from 39.5% a year ago. This was also a sequential drop from the second quarter of '08, where we had SG&A expense of 38.9% of consulting fees.

Hill's operating profit for the third quarter rose 41% to a record $7.2 million, which worked out to be 8.3% of our consulting fees, up from $5.1 million or 10% of consulting fees a year ago. The quarter-over-quarter decline on a percentage basis is due primarily to our recent acquisitions, which have had during the third quarter lower operating profits than the rest of Hill's business.

Operating profit margin at the Private Management Group for the third quarter declined to 16.7% from 20.4% in last year's third quarter due, as I said before, to lower margins from our recent PM acquisition.

Our Construction Claims Group saw higher margins in the third quarter, increasing to 11.2% from 10.8% a year ago.

The Company's provision for income tax in the third quarter was 26.0%, up from 21.8% a year ago, due primarily to the shift of profit generated through higher tax jurisdictions.

Our net earnings for the third quarter grew to $5.2 million or $0.13 per diluted share based on approximately 41.5 million shares outstanding, up from net income a year ago of $3.8 million, also $0.13 per share, on approximately 29.6 million diluted shares outstanding during the third quarter of 2007.

We ended the third quarter in a solid financial position and with a strong balance sheet. As of September 30 we had cash and cash equivalents of more than $26 million, working capital of more than $85 million, total debt of less than $8 million, and shareholders equity of nearly $149 million or approximately $3.60 per share of book value.

And as we announced last week, we recently nearly doubled the size of our revolving credit facility with Bank of America, up from $35 million to $60 million.

Despite our fast growth, record operating profits, and strong balance sheet, we are fully cognizant of the deteriorating economic conditions around the world and in the United States. Our business, like every other, is clearly not without risk.

We are very focused on the following issues at the moment, to address these situations. We are reevaluating current acquisitions that we have been in discussions with, and our eyes are looking to lower our offered prices to reflect he more realistic current levels of valuation in this sector, or we are prepared to discontinue some of those negotiations.

We are focused on cutting costs and improving margins at the acquisitions that we have done in the recent past, particularly in the hardest hit area of growth so far, which has been in western Europe, so they can stop being a drag on our overall performance Company wide.

We are looking at significant overhead cuts within Hill. We're in the process of eliminating overhead costs that should result in annual savings to us of between $2 million and $2.5 million, and we expect to look at even deeper cuts at the end of the year as we put in place our 2009 budget.

We're looking to improve the performance of our existing underperforming units. I've discussed these in the past on prior calls. We believe it's several of them, including the eastern European regions for the PM business, and the western U.S. region for the claims business, have turned the corner and we expect significantly better performance from them beginning in the fourth quarter and moving forward.

While there are risks to the current market environment, we also see opportunities. Our claims business has traditionally been a countercyclical one, and generally does very well in difficult economic times, and it is seeing strong growth and increasing margins at the present.

We're also seeing a significant amount of new work in the claims business, un fortunately most of which, almost of which doesn't make the press release. As more and more projects continue to see delays and possibly cancellations, our claims business should perform very well.

Our U.S. PM business is primarily over 77% during the third quarter of public sector business, and particularly with the new Democratic Administration we expect to see a lot of new spending on the public works and infrastructure which should benefit us in our U.S. business quite a bit.

A lot of the concern that we have heard from investors has been about Dubai and whether that market is a bubble and is poised to implode. We don't think so, but in any event while the Middle East overall was our largest region in the third quarter at 39% of consulting fees, Dubai is a relatively small piece of that at 8% of overall consulting fees.

Our recent growth in revenues in that region and increased backlog have been mostly outside of Dubai, in such places as Abu Dhabi, Kuwait, Cutter, Saudi Arabia, Egypt, Libya, and Iraq. We have a much more diverse Middle East business than we had even just a few years ago, and we think that insulates us from the strong concern that we generally see about Dubai, in particular.

In summary, while we are pleased with our performance in the third quarter and through the first nine months of 2008 and we remain optimistic about the opportunities in front of us, we are being extremely cautious about the risks, as well, and we'll be rebuilding our efforts and making sure that we continue to build the business safely and profitably. And as we hope for the long-term benefit of our stock and our stockholders.

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

(OPERATOR INSTRUCTIONS.)

Our first question comes from Arnie Ursaner with CJS Securities. Please state your question.

Hi, good morning, David.

Good morning, Arnie.

My question, I think you said very little about your JVs, could you expand a little bit about what is the status and what we should expect on a go forward basis from your JVs?

They are somewhat of a mixed basis, we've had a lot of success with some. We expect a lot of success with some. Some others have been very slow in getting organized and off the ground.

Probably the most successful has been the joint venture with the [Talatmaska Group] in Egypt. It was one of the later ones and had the most immediate impact on us. We received about $96 million worth of work from [TMG] in I think the end of the second quarter on about nine different projects that a few months later grew to 11 different projects, about $4 billion worth of construction work. And we are staffing up those projects, they are in and outside of Egypt. And we're going to see -- we did see significant earnings from that in the third quarter, and we expect that to continue to grow.

We have a joint venture that we established in September, in Philadelphia, a development joint venture called Hill International Real Estate Partners, that we believe has a very high likelihood of getting their first project off the ground and are continuing to push on that front.

Some of the others, the Egyptian Ministry of Petroleum has been very slow in getting off the ground. We have a government agency, a bureaucratic government agency as a partner, and while we expected it to be slow, it's been slower than expected, but we anticipate that being functional and operating going forward in the first quarter of 2009.

The joint venture with [Macon Hill], which was intending to raise a significant fund has found that, as you can imagine in this market, extremely slow going, and we're reevaluating whether we'll have a fund or we'll fund projects on a project-by-project basis, and that's where that stands.

My final question, well, the other question I wanted to go down the path on is you mentioned in your prepared remarks your reevaluating acquisitions, you're maybe considering lowering your offered price or not move forward, so I have a couple of questions related to that. Are you still completely focused on acquisitions that would be accretive, because given where your stock is you'd have to buy these incredibly well forward to be accretive?

We are expecting that all acquisitions will be accretive.

Even at the current price of your stock?

The current price of our stock has nothing to do with whether an acquisition is accretive or not. We have a borrowing facility with the Bank of America that gives us $60 million of capital. We're only about $8 million drawn against that, and we have obviously acquisitions we're going to be doing going forward for the near term are going to be cash based acquisitions.

One of the acquisitions that we have renegotiated on had a significant stock component, and obviously with the stock at $5 and not $19 that deal has been reevaluated and we're in the process of trying to renegotiate a lower price. It does not include any stock. The ...

Sorry.

... the acquisitions that we anticipate doing, we expect will be accretive.

Okay. Were there any costs for acquisitions that failed to go through that were taken this quarter?

No, there haven't been.

Okay. I want to make sure I'm not double counting. You mentioned again in your prepared remarks you're cutting the costs at various acquisitions, particularly western Europe, and you mentioned you are planning to cut overhead costs by $2 million to $2.5 million. To be clear, are these -- are we double counting if we think of it or is the majority of the $2 million, $2.5 million likely to be in western Europe and on the ...

No, no, the $2 million to $2.5 million is almost entirely in the U.S., and I said, I think I said going forward we're going to be looking at the acquisitions in Europe and making sure that we can maximize their profitability and cutting any costs that we are able to cut now that we've acquired them.

Okay. My final question relates to your operating margin goal. I think the biggest disappointment certainly for me, as one of the analysts keeping an eye on your stock, was the operating margin performance this quarter. Obviously, you're growing very fast. Have you given more thought to growing in a more orderly pace but more focused on margin?

We're very focused on margin, and we're a little bit surprised, you know, I've been talking about our plan for operating margins have been that over the next year we expect to get to 10%. I'm not sure why 8.3% is disappointing, but it's really not a trade-off. You can't start to slow-down your growth and think that's going to make your margins better. It's not a trade-off.

We are very focused on our operating margins. We're very focused on profitability. We are a good chunk of the way, probably halfway through the budgeting process for 2009. There are going to be some significant cost controls put in place in the operations to make sure that we can continue to grow our fees and grow our SG&A and our overhead cost at a much lower rate.

Thank you very much.

Thank you, Arnie.

Your next question comes from Tim McHugh with William Blair & Company.

Yes, I was wondering you mentioned Dubai, 8% of revenue, there are a lot of questions about that right now. You said you don't think it will slow down. I'm just cuprous if you can update us on kind of the new business activity that you're seeing there, as well as overall I guess throughout the business any cancellations or deferral of projects that you have or have not seen at this point?

Yes, we -- I don't think I said I don't expect Dubai to slow down. I expect Dubai will slow down. It's probably the most likely of those markets to slow down because a lot of the construction that's happened as very publicly discussed in the media has been built on debt as opposed to some of the other countries which are building off of wealth.

There will be a slow down. We've seen some decreasing opportunities in Dubai, and that's one of the reasons why we've been focused on building our business outside of that at (inaudible). We have not seen any cancellations on our existing projects there. As I said to somebody recently, the only major cancellation that we saw in the entire third quarter was on a project in [Sakanela] Georgia, which obviously is not a result of the economy but of Russian tanks on their border. So we don't see work being cancelled in Dubai or elsewhere.

Okay. And then the -- you mentioned, you quantified Dubai, and you said western Europe is an area where you're also seeing some exposure. Can you quantify, you gave the revenue by segments and region, I guess break-down, but I guess within western Europe for you how big is Spain and the U.K. I guess on the project management side, the areas that might be exposed?

Yes, I gave some specific information on those two acquisitions. We acquired Shreeves in January. That's a relatively small business that had about 25 to 30 employees. They actually lost money in the third quarter after being profitable in 2007.

We received from Shreeves operating -- I'm sorry, consulting fees in the quarter of $820,000. We had a gross profit margin of about $290,000, and we actually had operating losses of about $550,000 on that business. We're obviously focused on cutting the costs there that we don't need. That kind of operating loss is not going to be acceptable going forward.

Gerens, which is a much bigger business, Spain is facing the same kinds of broader economic issues. Gerens continues to be profitable, in the third quarter we had consulting fees out of them of $8.6 million, gross profit of $2.4 million, and operating profit of $400,000. And both of those numbers were before amortization, by the way. That's down, it's about a 5% operating margin, down from 10% when we bought it, and we are doing everything we can to make sure that going forward they continue to be profitable, both companies.

And what are the reasons for the declines in operating margin there? Is it a macro, lower revenue type of issue, or are there more fundamental operating issues?

No, they've seen -- it's really market issues, they've seen work come to an end and not be replaced by an equal amount of new work, so they're seeing the revenues come down a little bit. Both those countries are having some significant issues with the construction and development market, and our goal is just to make sure that we ride it out.

Euromost in Poland has not seen those kinds of problems. I think the European, the eastern European economy is vastly different from western Europe. In the third quarter Euromost provided consulting fees of $3.7 million, a gross profit of $1.9 million, and had operating profit again before amortization of $900,000. So they continue to do well. I think it's still our expectation that they'll hit their earn out targets for the year, and continue to grow from there.

Okay. And so is it fair to think, even Shreeves I thought was more consulting, so it'd be project management exposure in western Europe, is it mostly Gerens at this point, as we think about the size of that?

Yes, if you look at the size of the two businesses, it clearly is mostly Gerens in Spain. They have also been, they were before we bought them and they continue to make a big push outside of Spain, and have a permanent office in Mexico and have project offices in South America, and they expect that's going to become a bigger component of their business.

Okay. And then, lastly, where you mentioned kind of the offsetting factors here, some of the risks, but as well you still see some opportunities, it sounds like. Looking forward with the backlog do you expect to see continued growth, and where are some of the opportunities that has you, have you more encouraged I guess that you might be able to continue to grow that, if that's the case?

We continue to see a lot of opportunities in the Middle East and on some very big opportunities, very large contracts, and I think that will continue to be there. Even if the market comes down, it's just such a huge market, there's lots of opportunities for us to continue to win work, and we expect the Middle East to continue growing for us in the near term.

The claims business worldwide we think is going up significantly, and we're in the process of, as you know, after the [NOLS] acquisition we increased our fees quite a bit at the end of '06 and '07, and we're looking at doing that again this year.

We are the largest claims firm in the world, significantly bigger than number two, which is [Navigant], and we want to continue to take advantage of the pricing power that we think we have in this kind of a market, so we expect not only to see strong revenue growth but increasing fees and margins.

I think I've been talking to the market about anticipated revenue growth long term in the Claims Group being 10%. We grew 34% in the third quarter, significantly well beyond that. And we think the Claims Group will do very well.

As I said, I think the U.S. project management business, because it is focused in the public sector, almost no exposure to the commercial markets, and the private sector work that is done is typically for the long-term clients, the Fortune 500 types of clients, I think that business will actually pick-up over the next couple of years.

We're focused on the transportation infrastructure market, specifically, which we think will be the ones that benefit the most on a fully democratic government, and other areas, schools, are doing very well. The numbers that we saw from the Wall Street Journal just yesterday on nonresidential construction spending, were actually up in September, a slight dip in August. College, university, and school work, K through 12, was I think the biggest growing sector, up 4.4% if I remember correctly, and that kind of work is, where we have a specialty. And so I think the U.S. will actually do better for us in the next year.

Okay. Then, last, two quick number ones for John, if I could sneak in -- the tax rate, what would you think going forward here both for the fourth quarter and then if you could give a preliminary guess where you might think in '09, if there's any unusual items? As well as the -- you mentioned the large new contract wins you've already announced for the fourth quarter, are those included in the Q3 backlog that you've given out here, just so we understand kind of the numbers?

Yes, Tim. On the tax rate, we're projecting in the fourth quarter to be 25%, and in '09 it's, without any discreet changes in our tax position and changes in our -- where our profit is in certain jurisdictions where the tax rate is higher, we're going to maintain around 20%, 25% for the year, '09.

Okay. And then the backlog numbers?

The ...

By the way, before he answers that, let me just say you might want to -- sort of the higher end of that range. The acquisitions that we're still looking at and are in the process of hopefully trying to close are almost all in the United States, and we expect they'll be profitable and accretive, so the -- we'll be picking up more profits in the U.S. where the taxes are probably the highest of anywhere in the world.

Okay.

In terms of the backlog, I would say most of the announced projects in the third quarter and in the fourth quarter are projected, are included in our backlog but some are not. And I would say and generally probably $30 million to $40 million is not ...

Okay. Thank you.

You're welcome.

Thanks, Tim.

Your next question comes from Joseph Foresi with Janney Montgomery Scott.

Hello.

Good morning, Joe.

Hi, how are you doing? My first question here is has there been a decision on how the new JVs are accounted for?

Yes, under GAAP, joint ventures that we control, we own 51% or more, sorry, over 50% or joint ventures that we control, are consolidated, if they have equal 50, 50 ownership they're not, and their profits are treated as ...

Equity interest.

Interest, equity in the (inaudible) on the income statement.

And so the new JVs that you've been talking about, those are accounted for (inaudible) profits and equity and earnings of affiliates, is that correct?

Yes, the exceptions to that are [Hill Jinanki], which is the new joint venture we're just getting started in Shanghai, where we own 60%, we'll be consolidating. And Hill International Real Estate Partners, the development firm in Philadelphia, it's an LP where we are the sole general partner, so because we control that entity that will be consolidated even though we have 50% equity ownership of the business.

Got you. And was -- just kind of moving on to the Middle East, I wonder if you could discuss what kind of work you're doing in the region, and who the end clients are, particularly in Dubai, are these public or private work, and where is the funding coming from?

We have a lot of clients and a lot of work in the Middle East. The bulk of it, probably close to 80% or more is private sector for developers, commercial real estate developers on projects that varies, commercial office buildings, high-rise residential, hotels and resorts, things like that. The balance is a mix of different kinds of work, highway, airport, water projects, things like that.

And that same ratio would apply to what you're doing in Dubai?

Yes, pretty much. The developers over there, especially the bigger ones, there's a very fine line between the public and the private sector, particularly in the [UAE], and a lot of the big developers are owned by the same people that run the government, so they're very closely aligned.

Got you. And I know you're sort of reevaluating some acquisitions, but you also extended your credit line. Should we take that extension to be anything more than it is? In other words, do you think you might get more aggressive on the acquisition front after you get through sort of the short-term reevaluation of some of them?

It really depends upon the opportunities that are out there. We do see -- let me rephrase that -- we expect to see prices coming down on these acquisitions over the next year. I don't think there's any question about that. There may be areas where certain markets are softer or maybe specific issues with those companies, or they may just be concerned about the overall economic conditions and need to be in a position to sell their company.

So we see more opportunities out there. I think we're going to be in the short term maybe a little, if anything a little more cautious about what we buy, and make sure that it's accretive, making sure that it's a stable business and we don't buy it and all of a sudden the business starts disappearing.

I think the increase in the credit line is both to make sure that we have enough cash to operate our business going forward, in fact more than enough cash, and that we can do the acquisitions that we see in the near-term future, which I would sort of define as the next six to nine months.

We have been talking about a much higher credit facility, and in the markets today we had the availability to get it but the pricing became so high that we chose not to. We don't want to pay for money that we don't need right away, and we expect that in the second or third quarter of '09 the pricing will be significantly better and we'll borrow that money when we have a demand for it.

And then just on the backlog, I think you guys have given rough goalposts on what -- how you realize, what percentage of your 12-month backlog is realized -- is that trajectory the same now? Are you seeing -- or do you think that it may take a longer period of time to realize that percentage of backlog? Maybe you can just run through the percentages again?

Yes, it's not really a time period, it's just a sort of a multiple of what I've talked about backlog is. It has run recently between 1.4 and 1.5 times what our 12-month backlog is, that we'll actually see in net revenue performance during those subsequent 12 months. On an organic basis, it obviously does not include acquisitions.

As we move more toward a PM business that's becoming an increasing percentage of our business, that number should come down slightly because the PM turns over at about 100 -- 1.1 to 1.2, whereas the claims business turns over 2 or 3, 2.0 to 3.0, that range.

When you say come down, I mean just roughly what do you think maybe 10 or 20%, or are we talking 5% or 6%, and what time period? I'm just trying to get a good gauge for what my expectation should be on the revenue side.

Yes, no, I would think over the next year it'll probably come down to between 1.3 and 1.4 as opposed to 1.4 to 1.5.

Got you.

Just given where our growth is and where are our acquisitions are projected to be.

Okay. That's solely based on mix, correct?

I'm sorry, Joe, say that again?

It's solely based on the shift in mix?

Exactly.

Okay. Great. Thank you.

Your next question comes from Chris Bamman with Morgan Joseph. Please state your question.

Good morning, gentlemen.

Good morning.

I was curious to know if -- I know that you mentioned in Dubai that a lot of the projects were debt funded and throughout the other areas of the Middle East a lot of it is cash. Are you seeing this slow down in new orders or new projects that are becoming available, just given the credit crisis, foreign oil prices, and people are looking to maybe horde cash a little bit now and decide how they spend it?

I assume those are the reasons. I'm guessing just like everybody else is guessing. But we clearly are seeing some projects in the Middle East, Dubai, in particular, be either cancelled or delayed. Our guess is those are projects that never should have happened in the first place. Obviously, in a frothy market lots of things get proposed that really shouldn't happen, and the projects that we're currently working on we haven't seen any issue with. There's still a lot of projects out there. We still see lots of opportunity, and I think we continue to execute better than most of our competition.

Okay. And has there -- is the labor market still pretty tight? Has more qualified people come on the job market, have you seen any of that?

Yes, we have. As far as sort of the up sides of the current market, is that the Middle East for us has been, it's been so hot for the last couple of years. The labor market has been particularly difficult, and we've seen so much growth that we have to add staff from the outside, from outside the Company generally when we win new work.

That's been difficult for us. The softening of the labor market has made it easier for us to attract people, I think. We are getting more resumes in the door, particularly with the slow down in the U.K., we've seen a lot more people coming off work in the U.K. and looking to the Middle East for opportunity.

Okay.

So it's made that market much better for us.

Okay. Terrific. And does the recent Presidential election and new incoming Administration and Congress affect you guys any way, do you think?

Yes, we do. I mean we see a lot more government spending coming. We also see a lot more taxes coming as a result. It isn't going to help the economy, but specifically as to Hill, I think a lot of that government spending is going to be in the area of public works and infrastructure, and they're going to use that like FDR did 70 years ago as a way to try and add some stimulus to the economy. And we should see a strong benefit.

Okay. That's all for me. Thank you very much.

Thank you, Chris.

Your next question comes from David Gold with Sidoti. Please state your question.

Hi, good morning. On the margin improvement, just to follow-up a little bit and, David, getting back to say the 10% plus range next year, can you give a little bit more color on is that more a function of say cutting out overhead? Will that be a function of raising or improving pricing or just sort of managing a little more differently, or just some color on your confidence in getting there?

It's a couple different things. Looking at the income statement, we expect our gross margins to continue to tick downward, that is basically solely a result of shifting mix toward more project management.

The specific things that we're going to be focused on are keeping costs as low as possible, much slower growing than our revenue. We expect SG&A to come down as a percent even faster than the gross margins, and that delta is going to push our operating margins higher.

And it's not just not a matter of keeping the growth smaller, we're looking at, as I mentioned before, that we've already put in place, and as we're going to be looking at in the next couple of months some significant actual cuts to our overhead costs that shouldn't hit our -- impact our revenue, at all.

Okay. On the backlog, I just wanted to -- John, did you say that essentially of everything that you've announced only $30 million or $40 million is not included in the number that you put out in the release?

That's correct.

Okay. And as you're pricing that new work, if -- essentially, have you had to come down price wise to win some of these contracts that are going into the backlog, given competition and the environment out there? Or are you able to hold your pricing?

No, we have not decreased our pricing.

Okay. So, you know, essentially, price holding, you would be surprised if in the backlog there were some related margin derivation as that work comes in?

No, I don't think there's any of that. In fact, in the Claims Group we see the opposite, we're going to be increasing rates, and I think we're going to get a lot -- I don't think we're going to get much, if any, push back on the rates this year.

Okay. And then just one last one, with the change in Administration, work at [Stanley Baker Hill], thoughts on that?

The projections that we've gotten from our people, and it's really independent of who was going to be the next President anyway, was that we've obviously got some -- a significant amount of new work in the third quarter for work in Iraq. A lot of it related to re-inspection of all the electrical work that had been done over there, which was proving itself to be substandard as several soldiers were being electrocuted because of the poor quality of the work. We saw significant bump-up in the third quarter, over $20 million worth of new work.

Our Management over there is telling us that for 2009 they expect our level of work in Iraq to be on a par or slightly higher than it was in 2008, and that should continue through March of 2010. And then beginning of March 2010 it is -- they have no visibility into that area.

We don't expect -- that no matter what happens with troops that the reconstruction effort is going to end. We expect work will continue past that point, it may even continue past the complete troop pullout.

And in any event once Iraq is its own country they're going to -- they've got lots of oil revenue, they're going to be continuing to rebuild their country and we see opportunities to have a longer presence, longer than just the work we're doing for the Corp of Engineers.

Okay. Thanks, that's helpful. That's all I have this morning.

Thank you, David.

Your next question comes from Kevin Liu with B. Riley & Company. Please state your question.

Hi, good morning.

Good morning, Kevin.

I know you guys don't give out specific kind of utilization numbers on the two business lines, but I'm assuming claims consulting still remains pretty strong there? But on the project management side, have you seen your utilization rates dip at all, just as some of the projects have finished up and there's like and there's less work available?

The utilization of the Project Management Group is extremely stable. We don't carry a big bench, so even if work was winding down and people didn't have anything to do, if there's no place to put them they don't -- we don't keep them for very long. So it hovers right around 90% give or take 1% or 2% consistently year after year, good times and bad.

I think we have seen a little bit of up tick in utilization in the Claims Group. We expect that to continue and, as you know, work in the Claims Group if you're not adding additional people or other costs tends to drop right to the bottom line. So we're going to continue to focus on that, as well.

If anything, we have openings to fill, so we don't have people lying around with nothing to do. And I think people are going to be, in this kind of market, which also benefits us, a little more flexible in relocating, and that helps us fill positions faster than it might have six months or a year ago.

Got it. And in terms of kind of the margin expansion efforts, I mean in the $2 million to $2.5 million of cost savings that you're expecting, what areas of the business are you taking that out of? If you can be a little bit more specific on that? And then just kind of curious as you look over the next year are there other areas of the business that some of that I guess savings will be reallocated towards?

As we finalize our budget for '09 we're going to look at every aspect of the business for cost savings. The costs, the $2 million, $2.5 million that I announced, that's across all three areas, claims, projects, and corporate, but it's predominantly in the Claims Group.

All right. And then as you look at your acquisitions over the past year, I mean you've certainly integrated some pretty successful ones that have -- have you seen any surprises pop-up in a few of these, where either kind of the contracts that were in place or maybe the personnel weren't quite what you expected, and just any sort of commentary on kind of your experience to date with them? And if you feel kind of more or less confident in taking on some of the larger or additional acquisitions going forward?

Yes, it's always been a mix. People, it's always hit or miss. Some of the acquisitions we've found with NOLS, going back to the first one after we went public, we found a very bad level of management at the top, but once you got below that the operational people, the billable people, the ones doing work for our clients was fantastic, and once we changed out the management I think that really unleashed that business to do what it could do.

With some of the businesses, the business in Spain, Gerens, the management was a key part of why we wanted the business, and why we paid out for it. We think the management is strong, and they're going through what's impacting the entire Spanish construction market, but I think they'll continue to perform well.

With KJM you had the opposite, you had a management team that we thought was good, but turned out after the fact not to be. And just about their entire -- their senior management team was replaced, and while that caused us some transition issues, I think the team we have now is poised to take that business and really start to grow it.

As we look at more acquisitions in the west coast, and I think we will, just one or more over the next couple of months, as we get more critical mass in the west coast I think it really helps that business, as well, to succeed.

And then just lastly, with the cash coming down this quarter I was kind of just curious if you could run through what the usages of cash were?

John, you want to take that one?

In the third quarter, well, most of the use of the cash was for acquisitions. We had some acquisitions in the third quarter, and we had some property, plant and equipment acquisitions. But I think in the fourth quarter, as David said, depending on the acquisitions we see that we should have some stronger cash position by the end of the year, and we have the line of credit if we need it.

Got it. Thanks.

Your next question comes from [Scott Nethal] with [Broad Lawn Capital]. Please state your question.

Hi, David and John

Good morning, Scott.

Your business was built around the idea of claims consulting and helping clients in difficult times. I know you're number one in the world right now, but I'd love to hear you talk more about what that means, how much bigger it can be, how big the category is going to grow, how much bigger the number two you can become, how that -- how you can quantify that into contribution to overall margin, expanding the margins within that group, itself? And I'd just like to hear a little bit more about that?

I'd be happy to, Scott. Thanks. We have talked about over the last couple of years the project management business being the real driver of our growth. Claims had become a more mature market, a more stable market. We expected slower growth in the 10% range minimum, as opposed to project management, which we thought was going to grow 20% plus. The fact that they've both grown a lot faster than that, those are conservative numbers.

But claims has seen its growth increase significantly of late. I think it's really the result of two things. One was the acquisition of NOLS, which sort of leapfrogged us into being the biggest firm and gave us a chance to really consolidate our operations and develop some critical mass globally, where we're seeing a tremendous amount of growth.

And I think on top of that now as we head into a worsening economy we're going to have lots of issues with projects, we're going to have lots of trouble with contractors who are going to be fighting for every last nickel because it might mean survival.

We expect the business to become a lot more active. It grew 34%, as I said before, in the third quarter. I don't know that if that growth continues for several years, obviously, it can become a lot bigger business.

We tend not to be focused on acquisitions in that area, although we did two in the third quarter with PCI and [Tidester]. PCI had about 40 people, Tidester had about 15, both excellent firms, but typically claims firms are going to be the most risky acquisitions you can make. And we're seeing such strong organic growth that it's easier for us just to hire the people than it is to buy their employer.

So we see a lot of opportunity there. It, as you said, it was really the -- it's really the foundation of the business and what led us to getting into project management. Helping clients avoid problems on their projects and resolving them when they do occur.

And as I said before, and let me just repeat it, we're going to be making a, given that market, given our market position, we're making a big push on pricing, trying to maximize the money we make in the claims sector, and I don't think that there's going to be much if any push back from the (inaudible).

You have about a little, a quarter or a little bit more than a quarter of revenue right now, can this be 40% of revenue in another two years?

Depending upon where the market goes, anything is possible. We don't expect it to. If anything we expect this growth to keep up with the PM Group, and they'll sort of stay where they are, if anything. I don't see it having that kind of growth. The PM Group in the third quarter has what kind of growth organically-- 43%, if I remember?

Yes.

The Claims Group grew 34%, so those numbers would need to reverse. I also think that our acquisitions going forward are going to be focused on more PM firms, and the acquisitions that we do will be a lot larger.

To the best of your knowledge do any of your publicly traded competitors on the project management side have the equivalent of a Claims Group of any sort?

No, we've said this from day one, there's no company in the world that looks like Hill, that has our size and scope and level of capability. URS has a claims business, and I think it's in the single digits. And Navigant, obviously, is our biggest competitor, especially in the U.S. FTI had begun to move into this market. I don't know what success they've had, if any, but they were buying firms that we didn't have a lot of regard for.

We see, you know, a lot of competitors shrinking and going away, and in this kind of environment especially when the stakes get bigger and bigger you're not going to go to a boutique firm, you're going to go to one of the giants. And the benefit is that on every project there's only one project manager, but every claim there's two or three or 10 claims consultants. And really only two major players in this business (inaudible), and I think that's going to bode very well for our success in business development on the claims side going forward.

Is there an antitrust concern if you wanted to become number one and two?

I don't know that Navigant has put that business up for sale, if they did we'd look at it, but ...

I mean they as a public company are in a tremendously weakened position.

Like all public companies, unfortunately, at this time. But that was sort of the same issue we faced with NOLS, which was it's such a big company. When your number one competitor in the international market comes up for sale you have to look at it, and in NOLS case we did and we bought it.

I think that any claims firm we would look at, but we're a lot more cautious on claims acquisitions than we are with PM, because there's a much greater risk of people and clients walking out the door, and with PM we really don't see that risk very much.

On another note, within the PM side of the world, how much opportunity are you guys seeing to grow your market share against some of the larger companies in the space right now?

Well, we see ourselves growing and we see ourselves growing faster than the competition. We only think of it as market share, because this industry is just so huge.

The global construction market, I think after 2008 is expected to be close to $5 trillion, and that's why the overall economic conditions don't scare us as far as work coming up, there's a tremendous amount of work out there. Even if it was to drop 20% next year, which we don't see anywhere close to that being the case, that's still $4 trillion of construction that's going to be put in place in 2009. That's a lot of work for us to chase and win to make sure that we continue not just replacing the work that gets completed, but continuing our growth.

But to have the ability to grow faster than the market when you're as small as you are relative to some of the other publicly traded competitors and the size of the market, so.

That's very true, and I don't see many other companies growing 43% organically.

Right. I appreciate it. Thank you.

Thank you, Scott.

(OPERATOR INSTRUCTIONS.)

Your next question comes from Bill Sutherland with Boenning & Scattergood. Please state your question.

Thanks. Hey, David and John.

Good morning, Bill.

It's almost lunch, so I'll make it quick. David, a little color on the difference in the sequential growth rate that you had and the total backlog and the 12 month backlog in the quarter, at the end of the quarter?

Are you talking about going from 606 to 667?

Yes, it was percentage wise much greater, the total backlog.

Yes, the 12-month backlog went up from 301 I think to 312, is that the right number?

Yes.

What you're seeing here is that we are winning much bigger programs, particularly internationally and particularly in the Middle East and North Africa, and those programs tend to be longer term. We see a lot more of the work that we win go into the total backlog than the 12-month, and I think that will continue to be the case.

So should we look at this as the same, more or less, risk profile to the business going into the backlog?

We see it as -- obviously, we'd rather get hired on a 10-year project than a 5-year project.

Right.

We see the long-term nature of the work that we're winning today relative to what we were winning just a few years ago as a real positive because it provides us a long-term stable revenue stream going forward. And why we've always thought that we would bounce through any kind of a recessionary period, because they tend to measured in quarters, even if you're talking about a year or two. We're still looking at four, five, seven-year contracts that we're winning on projects, that's going to ride us through I think a lot of this and give us a strong foundation to then grow from there.

Okay. John, I guess this is for you -- given the mix in PM, the gross margin is likely -- should we expect the gross margin to stay slightly under 40% going forward?

Yes, as David said, if our mix is leaning more to the project management than the claims business, our margins are going to, as a percentage ...

Well, I meant, John, I meant ...

You're talking specifically about the PM Group?

Yes, I meant within PM? Thank you.

Oh, I would say based on our current margins I think they should maintain those rates, and with our improvement in our cost reduction program I think that would improve our margins and our operating margin.

Specific to the PM Group?

Well, our gross margins should sustain where they are right now ...

Okay. Just around 40 or a hair under.

Yes.

Yes, we don't see them dropping much below 40.

Okay.

If they vary a little bit quarter to quarter, but not very much.

Okay, that's all I was trying to get at. Then last ...

Obviously, they're at 44 and that's a mix between projects and claims.

Yes. And then, last, well, actually two more, David, maybe you can discuss a little bit the -- I've heard you say that you want to expand the focus of the Company to include a greater proportion of other vertical markets, like energy and transportation, or maybe you can give us some others. Just wanted to see kind of where you are in that process and where you think it can go?

Given the nature of our business in project management we can really manage any project in any market, and there's some areas where we're strong, buildings and transportation. Some other areas that are 1% or 2% of our business but we see a lot of opportunity out there.

Oil and gas over the last couple of years has been a big focus of ours. It's what led us to doing the joint venture with the Egyptian Ministry of Petroleum, and that's been slow going, but we've seen a lot work and a little bit, very little of it on the PM side, a lot of it on the claims side.

There are other areas, transportation I think particularly in the U.S. is a big focus of ours. Some of the firms that we're looking at have a particular strength in transportation and infrastructure, and I think given where the government is headed, I think that's going to be a real positive over the next couple of years, a growing market for us.

We see the environmental area, that's also something I touched on before, environmental cleanup and restoration as a big market sector for us, and we see a lot of opportunity in that area, whether ...

That's all -- David, I'm sorry to interrupt -- that's already big for you?

Yes.

Relatively speaking?

The environmental last year was 2% of our business.

Yes, that's what I thought.

It's a much bigger area, not that we're, you know, that we're going to be in the cleanup business but ...

Right.

... managing those kinds of projects, whether it's the (inaudible) treatment plant, like we just announced in Pennsylvania. We do nuclear cleanup work for the -- we do oversight and consulting on nuclear cleanup work for the U.S. Department of Energy.

We're seeing a couple big opportunities outside the U.S., as well, but inside the U.S. particularly with a Democratic President, a Democratic Congress, I think a lot more money is going to spent on the environment and that should be a big part of where we see growth in the U.S. going forward.

Okay. And then, last, I know the JV in China has been slow to move ahead, but maybe you could just give us a little more color there and India, where you got your first deal, whether you're already starting to come into India to get more work?

Yes, we're just getting off the ground there. We won our first project I think it was the beginning of the third quarter in India, [Jinanki]. We are -- I think we just scheduled in a couple weeks, the first Board meeting for the Company, at which point we'll formalize everything, and put officers in place, and get going on the ground. I think that'll kick-off really at the beginning of the first quarter of '09, and the opportunities in those two countries alone I think are just tremendous for us.

But as far as being on the ground in India, in any greater degree now that you've got one project, are you going to try to do that in some way, or?

Yes, well, that's usually the way you grow in our business, is you get the first project and then you build a team around that, and that covers your cost so you're not doing it at a big loss. The -- I think that's exactly the way we plan to grow in India organically. The same way in China.

We're not looking at acquisitions in those two places, at least we haven't seen any opportunities yet, but we expect that to be organic growth and the up side could be significant.

They're already looking at doing work outside of Shanghai that would not be part of the joint venture. We're looking at establishing a sales presence in Beijing, as well, it's obviously the two biggest markets there, and our claims operation in China, which has been there for a long time, we see a lot of up side opportunity.

Good. Thanks, David.

Thank you, Bill.

Your next question is a follow-up question from Arnie Ursaner with CJS Securities. Please state your question.

Hi, David. A couple of follow-ups. To get an issue off the table, if you don't mind, the Richter family has pledged a lot of its stock, it's not selling any shares but it's pledged its shares, could you comment about any risk exposure given the stock price to margin calls for the Richter family? If you just could get that issue off the table, please?

Yes, I'd be happy to, Arnie. We haven't, my Dad and I have not sold any stock to date. We both put some margin loans in place, very conservatively, or so it seemed, six months ago.

With the stock price where it's headed we are going to be I think facing some issues in the short-term future to address those loans and my expectation is it's going to involve one or both of us selling some shares in the market now that earnings are announced.

Okay. And to follow-up on a couple of other items.

Yes, and just the reason, let me just follow-up with part of that, neither one of us wants to be selling in this market at this price. In fact, we are exploring opportunities for Hill to put in place a stock repurchase program.

We see the current stock price as absurdly low given the business and where it's headed. And if we were to sell any stock it would be solely in response to having to pay-off some margin debt that we have incurred. It has nothing to do with our assessment of where this business is going.

Okay. Can you give us a feel for your backlog by geography?

Arnie, I'd be glad to. Do you want it broken down consolidated or between projects and claims?

I think I'm more interested in trying to understand your exposure to the Middle East than things like Dubai in backlog.

I broke it down just domestic and internationally, not by regions.

Okay.

In total of the $667 million, $165 million is domestic and $502 million is international from the total backlog.

Okay.

And on the 12-month it splits domestic $61 million, internationally $251 million.

Okay. A few more questions, if I can? You mentioned your view of margin being maintained somewhere around the 40% range in project management, and a couple of questions about that.

My sense for the project management business is most of what you have there is a pass-through of your costs for an employee with an implied margin. So I guess one of the questions I have is if it is much easier getting labor, is that affecting -- it wouldn't affect the percentage margin you would hopefully earn, but is that one of the factors impacting margins in that segment a little bit?

No, you know, it's really a cost reimbursable business, so the cost of labor, which we really don't see changing much, I mean there's still, it's sort of stuck with the salary structure you have in place, even when you bring new people onboard. It's really the availability of the labor that we're seeing opening up.

So there isn't like, we're not hiring people a lot cheaper than we were before, it's just a lot more people available for us to hire, so we don't see that impacting the gross margins and we don't see it really impacting the bottom line, other than to the extent that we can people on jobs faster when we have revenue generating positions to fill.

Okay. And as a follow-up to David's question earlier, you are not seeing, to be very clear, you said you're not seeing customers pushing down the percentage margin they will allow you to earn or renegotiating contracts to lower rates -- is that a correct statement?

Not among our clients. I mean obviously price is a factor when we chase work. As I said, it's almost never the most important factor. The quality of the firm and their success on the project is far more important to the client than a couple percent on electric charging.

We have seen clients out there that want to hire the cheapest firm possible. They wind-up paying the consequences for that, and we generally see them as a claims client down the line. But with our clients and the kind of work that we chase, we aren't seeing a tremendous amount of push back on pricing.

And focusing on the claims business, you mentioned in your prepared remarks it's a countercyclical business, you're seeing increasing rates, and you expect to see quite a bit of incremental demand, and you also said that when you get incremental demand, it tends to drop right to the bottom line. How should we be thinking about 2009 margins in claims, given those dynamics? And what sort of the utilization are you comfortable getting to?

I think you -- obviously, on utilization the higher the better. If we were at 110% utilization we'd be ecstatic. Our people might not be, they can only do that for so long, but I think there'll be an incremental increase in gross margin in the Claims Group but a much more significant increase in operating margin.

Okay. Can you give us a feel for what that, a sense of magnitude of what it might look like?

On margin you're probably talking about certainly less, probably less than a percent. On operating margin you're probably talking about several percent.

Okay. And my final question relates to you mentioned you're going to work hard at lowering SG&A as a percent of sales, but the question I'd rather focus on is you -- because you give tremendous detail, you break-out your corporate expenses in total, can you give us a feel as a percent of consulting fee revenues, two questions.

One is how should we think about absolute dollars of corporate expenses given your comments that you plan to lower expenses where you can? And also how we should think of it as a percent of revenues?

Well, if you look at how we did in the third quarter, our corporate cost was 7%, that was down from 7.4% from a year earlier. SG&A, not including corporate expense, was down to 30.4 from 32.1.

I think what we'll see at the corporate level will be sort of a capping of the costs, so I don't expect a lot of or a significant amount of increase next year relative to this year.

I think on the operational SG&A, I think it'll continue to grow but the growth will be a lot slower.

So, again, I'm trying to be a little clearer. On your corporate expense which ran roughly $6 million this quarter, as I think about the dollars you're going to spend, should we think about that as a run rate number from which you will either control it or even perhaps reduce it, or will it continue to expand?

I think it'll be a number that expands slightly, but not significantly over the next couple of quarters. I don't see us increasing the costs at this stage, the costs tend to go up a little bit. On the SG&A side I think they will continue to grow along with the operations but at a slower rate, a significantly slower rate.

Okay. Again, I'm trying to back into how we could get to a 10% operating margin goal?

I understand what you're trying to do. I'm trying to give you the best answer I can.

Okay. Thank you.

There are no further questions. I will now turn the conference back over to David Richter.

Thank you very much, and I appreciate everyone's time today. It's a very interesting time in the stock market, interesting in the negative sense, but fortunately for our business we continue to do well. We are focused on doing everything we can to maximize our profitability and our growth so that we can continue to get the stock back on the right track. And with that, we're going to get back to work right now, and work as hard as we can to accomplish that. Thank you, again, everybody. We'll be talking to you during the next conference call.

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