Hill International Inc (HIL) 2008 Q4 法說會逐字稿

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

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

Thank you. Thank you everyone for joining us this morning. Our speakers on today's call will be David Richter, President and Chief Operating Officer of Hill International; and John Fanelli, Senior Vice President and Chief Financial Officer.

Before we get started I would 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 and it is Hill's intent that any such statements be protected by the Safe Harbor created thereby. Except for historical information contained during this call the matters set forth including but not limited to any projections of earnings or other financial items, any statements concerning plans, strategies and objectives for future operations and any statements regarding future economic conditions or performance are forward-looking statements. These forward-looking statements are based on current expectations, estimates and assumptions and are subject to certain risks and uncertainties.

Although Hill believes that the expectations estimates and assumptions reflected in forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any forward-looking statements. Important factors that could cause actual results, performance and achievements or industry results to differ materially from estimates or projections contained in Hill's forward-looking statements include modification and termination of construction management, project management and claims management contracts, control and operational issues pertaining to business activities that Hill conducts pursuant to joint ventures with other parties, difficulties Hill may incur in implementing its merger and acquisition strategy, the need to retain and recruit key technical and management personnel and unexpected adjustments and cancellations related to backlog. Additional factors that could cause actual results to differ materially from forward-looking statements are set fourth in the reports filed with the Securities and Exchange Commission. Hill does not intend and undertakes no obligation to update any forward-looking statements. I'd now like to turn the call over to David Richter, President and Chief Operating Officer of Hill International. Please go ahead, David.

Thank you very much, Devin, and thank you to everybody joining us on the call this morning. I'd like to go through a summary review of our 2008 full year financials and then discuss in more detail the fourth quarter results for our Company.

We had a very strong 2008. Our total revenue for the year grew to $380.5 million, a 31% increase over 2007. Our consulting fee revenue for the full year rose to $333.9 million, an increase of more than 64% over the prior year. Of that consulting fee growth, 60 of 64%, 40% was organic growth and 25% growth came from acquisitions, the five acquisitions that we closed on in 2008.

Our operating profit for the full year improved to $22.2 million an increase of 26% and net earnings grew nearly 25% to $17.7 million which equated to $0.43 per diluted share based on 41.1 million shares outstanding over the course of the year. All of these numbers were a record for our Company. We have seen some tremendous growth in the last couple years but particularly in 2008 and we're very proud of the accomplishments we achieved during the year.

In the fourth quarter, our total revenue was $104.6 million, an increase of over 21% from the fourth quarter of 2007. Our consulting fee revenue for the fourth quarter rose to $95.2 million an increase of more than 62% from the fourth quarter of 2007. That growth consisted of organic growth of a little more than 39% and 23% growth from acquisitions. Breaking down our consulting fee revenue, 78% came from the Project Management Group and 22% came from the Claims Group. The percentage of CFR, consulting fees, from Project Management continues to grow as that's a side of our business sees faster organic growth and the bulk of our acquisitions.

Breaking down our CFR by geography, in the fourth quarter 22% came from the Americas, 32% came from Europe, 35% from the Middle East, 8% from North Africa, and 2% from the Asia Pacific region. For the first time this year, you'll see in our 10-K for those of you lucky enough to read it, we are breaking out North Africa from the Middle East because we've seen a tremendous amount of growth there. The region only began for us about two years ago and has become a significant factor in our business and as of this quarter and going forward, North Africa will be its own region in our financial break down.

Looking at operating profit in the fourth quarter, we achieved operating profit of $3.8 million or 24% decline from the fourth quarter of 2007 as a result of several charges which I'll discuss in a minute. Net earnings in the fourth quarter were down 64% to $1.9 million as a result of the same charges which equated to $0.05 per diluted share based on 40.7 million diluted common shares outstanding.

The charges I just mentioned sort of summarized as follows. We took on additional reserves with respect to the collection of certain receivables totaling $1.5 million in the fourth quarter. We took on an expense for discretionary management bonuses that were made as of the end of the year that had not been accrued for during the year, and that totaled $1.2 million or as we calculated at sort of an additional $900,000 in the fourth quarter, some of that had been accrued over the course of four quarters. We were impacted quite a bit. We have a significant operation in the UK and in Europe now and the decline principally in the value of the British pound but also secondarily in the decline of the value of the euro had a significant impact on our earnings and not just our earnings but also our net worth and our backlog figures as a result of that, the decline in the operating profit in the fourth quarter as a result of those currency devaluations was nearly $600,000 and we had an acquisition that we had spent close to a year negotiating and were close to closing at the end of October of last year and given the change in the marketplace and valuations of companies and all of the events in the economy and the stock market. We reevaluated the value and benefit of that deal and its price and sought to renegotiate the price downward, the seller declined to do that and in the fourth quarter we walked away from that acquisition.

We have been a very aggressive acquirer but only of good companies and good prices and we're prepared to walk away from deals that we don't think create value for our shareholders but we having gotten to the eleventh hour of that deal had a significant amount of legal accounting and other costs involved and had to expense that in the fourth quarter and that was an additional $400,000. If you add these back in, the impact to our operating profit was about $3.5 million. We would have achieved operating profit absent these charges of over $7 million, slightly in excess of the consensus estimate or operating profit in the fourth quarter.

On the net earnings side on an after-tax basis, the impact to us was about $1.8 million or approximately $0.04 per diluted share so we would have earned about $0.09 absent these charges. On top of that we had several issues impacting us in the fourth quarter. We had an unusually high income tax rate of almost 46% versus less than 3% in the fourth quarter of '07. The fourth quarter of '07 that number was unusually low because of a tax credit we received in that quarter. That otherwise would have been 20% and in the fourth quarter of 2008, it was unusually high for a variety of factors mostly due to the changing mix in where our earnings come from and we expect that in 2009 on an ongoing basis our tax rate, effective tax rate should be approximately 25%, but that obviously is subject to fluctuation depending upon where our earnings are coming from and what jurisdictions and also any acquisitions that we do on a going forward basis and where their earnings are coming from.

We also had a significant increase in the number of diluted shares outstanding which negatively impacted our EPS. Those shares came from two issues, one was the exercise of our warrants at the end of 2007 which added over 13.5 million(Sic-see press release) common shares to our account and the achievement of our earn out a year ago and the addition of 2.3 million shares that were issued to the shareholders of the formerly private Hill as a result of our merger agreement between Hill and Arpeggio. So we had a significant increase in shares outstanding.

Our SG&A for the quarter was about 43%. About 40% not including the above charges which I discussed, this is still higher than the 36 to 38% guidance that we gave about a year ago and what we expected our SG&A expenses to be during 2008. We acknowledge that costs are an important item, obviously we're going to be very aggressive this year in managing our indirect and our overhead costs and our applied costs, essentially our unutilized labor costs and we've taken a renewed focus on making sure that we keep our workforce and our work load in balance. We announced various overhead cuts in the third quarter. At the last conference call of about $2.5 million and we expect to be aggressive in minimizing our overhead costs and are expecting to be able to take out a greater amount than that in the next several months in certain areas where growth has either stopped or declined and in various overhead areas.

Jumping to backlog, our total backlog at the end of the year was $667 million. This was up 60% from the end of 2007 but flat from the end of the third quarter of 2008. Our 12 month backlog at the end of the fourth quarter was $269 million. This was up 37% from the 12 month backlog at the end of 2007 but was a decline of almost 14% decline from the end of the third quarter of 2008. What impacted our backlog in the short-term was essentially a delaying of existing work as opposed to cancellations of work which impacted the 12 month backlog but didn't impact the overall backlog, and we also had a small impact from currency fluctuations as I mentioned before in the UK primarily and also Europe which declined the value of our backlog over the course of the fourth quarter.

Jumping to our business segment results, you'll see we gave specific break down in this years earnings release for the two operating groups within our Company, the Project Management Group and the Construction Claims Group. Let me just hit on those for the fourth quarter briefly.

Our total revenue for the Project Management Group was approximately $82.5 million. This is a 28% increase over the fourth quarter of 2007. Our consulting fees for the Projects group in the fourth quarter were $73.8 million. This is a nearly 85% growth from the year earlier quarter. That growth consisted of about 54% organic growth and 31% growth from acquisitions. We acquired three Project Management firms in 2008, Shreeves, Gerens and Euromost and they contributed a significant amount of growth to the operations of the Projects Group. The operating profit for the group in the fourth quarter was $10.9 million, a nearly 53% increase from the fourth quarter of 2007.

The Project Management business remained very strong in the fourth quarter although we certainly see a lot of market challenges ahead of us in 2009 and potentially beyond, including in specific sectors of the world most notably Dubai and Europe at this time but we also see upside in a lot of areas. We continue to see growth outside of Dubai in the Middle East. Oil has begun to head back North and we think that's going to have a positive impact and we continue to see opportunities particularly in Qatar where we announced several new contracts in the fourth quarter and North Africa where we continue to see growth as well as in the U.S. public sector market.

Our business in the United States and Project Management is sort of the flip side of the international business. Outside the U.S. it's about 80% private sector. In the United States our PM business is 80% public sector, involved in public buildings, public works, infrastructure, transportation projects and things of that regard. We see that business doing very well over the next couple of years, particularly in connection with the federal stimulus package and see a lot of upside potential there.

Jumping to the Construction Claims Group, in the fourth quarter, it had total revenue of $22.1 million, an increase of a little more than 1% over the fourth quarter of 2007. Consulting fees for the Claims Group in the fourth quarter were $21.3 million, a much larger increase, 14% increase over the prior years quarter. That growth consisted of about 9% organic growth and 5% growth from acquisitions. The Claims Group acquired two firms last year, PCI and Chichester in the third and fourth quarters of the year and they had a positive impact on growth for the quarter as well.

Operating profit for the Claims Group in the fourth quarter was $1.3 million which was in fact a 49% decline from the fourth quarter of 2007 and contrary to what we had been expecting which was that claims would be benefiting in a difficult economic environment, they saw a challenging and difficult fourth quarter. It was demand weakness, what we found was that short-term work which is primarily what the Claims Group does versus the long term work of the Project Management Group, clients who were in a position to defer or delay short-term expense did so in the fourth quarter and that had a significant negative impact on the Claims Group. Our utilization was down as a result and our unapplied labor was up which includes SG&A and resulted in a, unfortunately a decline in operating profit for that group. It's our expectation that that is short-term in nature and that what we've seen on both sides of the house has been to a large measure delays of work, not cancellations of work and we think that could reverse itself in the Claims Group in 2009 as that delayed work gets done.

We exited, jumping back to the Company as a whole, we exited the year with a very strong balance sheet and solid financial position. As of December 31, 2008, our balance sheet included cash and cash equivalents of about $20.4 million, working capital of $81.1 million, total assets of $254 million, and total debt of just under $19 million of which about $14 million was against our senior credit facility with Banc of America. Our total shareholders equity ended the year at $135.5 million which is down from the third quarter despite our profitability as a result of several things including the decline in the value of certain overseas currencies which impacted those operations balance sheets as well as our repurchase of shares during the fourth quarter which I'll talk about in a second.

As I said, we had about $14 million borrowed against our credit facility with Banc of America. In October we increased that facility from 35 million to $60 million and we are currently in negotiations with our lender for a further increase to ensure that we have the working capital we need and the acquisition capital for 2009 and going into 2010. We're very conscience of as I said before the economic circumstances in the world. We're keeping a very close eye on not only our expenses but our cash flow. We have a very strong attention now on collecting our receivables, particularly in overseas markets that are hard hit by the economy, and maximizing our ability to access working capital both internally and externally. We can obviously make no assurances about the success of those negotiations but we're optimistic that we'll be in a stronger borrowing position a few months from now than we are today.

Two important things to note, the merger agreement between Hill and Arpeggio that was finalized in 2006 included an earn out structure. The earn out for 2008 was achieved. We had an EBIT target, earnings before interest and taxes of $18.4 million for the year, or actually EBIT was $21.2 million. The reason that's different from our stated operating profit is because of minority interest in certain companies that gets taken out of EBIT and with the earn out having been achieved, we will be issuing 1 million shares of common stock in some time probably the next 30 days to the shareholders of the formerly private Hill and we also repurchased in accordance with our stock repurchase program that was put in place by our Board in November of 2008 approximately 1.165 million, shares of our common stock from the public markets at a total cost of $5.9 million or an average price of $5.10 per share. We have a significant amount remaining under that program and we anticipate given the current stock price that that program will continue into 2009 at a more aggressive level.

That being said, despite what we think is a very undervalued stock at the moment we are very confident about our business and where it's heading, even despite the global economic challenges that are out there that obviously are impacting our clients and us to a degree but we think that there are a lot of upsides to the business. We're focused on minimizing our costs, maximizing our cash flow. We see some opportunities out there in the acquisition market which we are pursuing and we think we have the ability in 2009 to continue to have organic growth in the face of these economic challenges and to have earnings growth this year and we're working very hard to make sure that that happens.

So with that being said, thank you for listening to the presentation today. We're happy to, both John Fanelli, our CFO and I are happy to answer any questions that anybody has on the call.

(Operator Instructions) Our first question comes from the line of [Lee Tagoda] with CJS Securities.

Good morning, Lee.

In looking at the $3.6 million in adjustments trying to reconcile that back to the $1.8 million or $0.04 a share, what tax rate does that imply?

Well, what we did was we just looked at the net impact on net earnings. We didn't assume any different tax rate. We just used the actual effective rate of 46% in the fourth quarter. So if you try to normalize the tax rate you obviously come up with an even greater impact on--?

Right so I should be using the 46% tax rate or 43% tax rate?

Correct.

Okay, and then backing that out of the SG&A line assuming at of the adjustments were in there, it would be like a 39% of sales sort of SG&A number and I know you've targeted lower than that previously. In terms of Q1 given the continued challenging environment should it be roughly 39% or higher or how should we think about SG&A for Q1 or the first half of '09?

Yes, I would like to answer that, Lee. This is John Fanelli. David had mentioned that we're looking at our cost structures and in the third quarter, we did eliminate some of the costs and they will be effective in the first quarter, beginning the first quarter of 2009, so with that in mind I would think that we would be hopefully achieving a 38% and hopefully that will go down as the year proceeds based on our second phase of cost reduction programs.

Okay, so exiting 2009 then, where should we be sort of looking at a percent of sales number?

For total year?

I mean, in terms of so if it's 38 in Q1 and it trends down from there, do we end at 35 or do we end at 36 or 37?

We're expecting the same range that we gave last year which was in the 36 to 38% range.

For the full year?

We don't have a specific target because there are a lot of variables. One variable which impacted us in the fourth quarter was unapplied labor and the claims business wasn't as busy as we expected and people had lower utilization than we expected. The time that they spend not billable becomes SG&A.

Right.

And moves from direct labor to unapplied labor so that number can be a strong variable depending upon how busy people are.

Lee, just a side note. If you look at our total G&A, and if you break it down what's the components of that G&A? Approximately 30 to 33% of our total G&A expense this year in 2008 was unapplied labor so that's a big piece of our SG&A and you can consider unapplied labor as a variable component of our SG&A for various reasons. We've had, the increase was due to we had some acquisitions in 2009 or 2008 with Gerens and Euromost particularly in the Project Management so those costs are going to increase as the increase in revenue also increases.

Yes, if you look at -- maybe you can't see this but we can, our indirect labor component of our SG&A was down for the fourth quarter relative to the full year and down for '08 relative to '07 and indirect labor is a pretty good indicator of what our administrative or corporate overhead costs are. And those numbers are coming down, we're being, as you and everybody else knows we obviously had a lot of increase in our corporate overhead over the last three years having gone from a private Company to a public one and in connection with our growth around the world and that growth in overhead has clearly stopped. In fact we're looking at reductions and as we continue to grow through that we see our overhead costs becoming a smaller and smaller factor.

Sure, and then just on the claims side, to the extent that you're not seeing any pick up or are you seeing pick up in Q1 in terms of the deferred work in claims, are you or can you reduce heads or do we still have to incur the unapplied labor expense?

I think it will be a combination of increased work which will keep people busier and the staff reductions in certain areas. We had about a net 5% drop in utilization in the Claims Group in the fourth quarter relative to the fourth quarter '07, and as I said before, keeping your workforce and your work load in balance is not just something you go through in times like now. It's a constant effort in a Claims Group because you just don't know where the next job is coming from and this year, they will be very aggressive in making sure that the utilization rate stays as high as possible and that costs are kept to a minimum.

Sure and one more question and I'll hop back in queue. You currently have roughly $14 million left on your share repurchase authorization. Are there any covenants or bank issues that would prevent you from reentering the market as soon as you can given the previous purchases were made at significantly higher prices?

The purchases that we've made under the plan were subject to our bank's approval and obviously anything we do going forward is going to be subject to the approval as well. As part of the renegotiation regarding our credit facility, we have asked for and we've discussed a sort of a sublimit for share repurchases. Obviously that's not something lenders usually like to see but we've talked about a number sort of, a reasonable number that would be allowable given the kind of number we're talking about in the facility which is in the nine figures.

Okay, thank you very much.

Just to be clear, the facility is in the nine figures, not the repurchase program.

Right.

Our next question comes from the line of Joseph Foresi with Janney Montgomery Scott.

Hello, guys.

Hi, Joe.

First question is, yes, sir, I'm good, thanks. First question is on the revenue side. Typically, you said a 12 month backlog you typically do 130, 140% over the next 12 months. Has that changed at all?

My guess is it's too early to tell. It should come down a little bit because of challenges in getting new work. It's pretty much a function of how much new work you can win over the course of the next 12 months and as that becomes a little more challenging or as that number could come down slightly but we don't expect any major changes in that number.

Okay so are we talking maybe the 120 range?

I don't think it will be as low as 120. It will probably be in the 130s over the course of 2009.

Okay. And then my next question here, it looked like I think you ended last quarter with a debt balance or total debt of about$7 million and in this quarter we were up to $18 million, you took out $14 million on the credit facility. Maybe you could tell us what the purpose of that cash was for and why that debt balance increased?

I'll be glad to, Joe. Just going through the fourth quarter, the activity, our total debt at the end of the third quarter was $7.5 million, and it increased to $16 million or increase of $8.5 million and our cash was $26 million and that decreased to $20 million or a decrease of $6 million and it's due to the following items. We had the stock repurchase plan that David alluded to around $6 million, we made a quarterly tax payment around $1 million, we had capital purchases of around $600,000, we had the acquisition of Chichester, which we paid a cash portion and also repaid their debt of around $1 million and we had working capital needs of close to $6 million and then we had to go out and borrow the $8.5 million and that gave us our net decrease of $6 million for the quarter.

Okay. And why didn't you use the cash balance to pay that? Because you just wanted to keep the cash on hand?

Well, the cash balance is international. The debt balance is in the United States, and we try not to bring back any cash we don't have to to minimize our taxes on those earnings.

So I guess my next question is just sort of in line with this, it sounds like you're going to try and extend your credit facility and maybe potentially do some more acquisitions. In your approach for the acquisitions, first do you think that it's, given the fact that you are free cash flow negative last year is it probably the right time to do an acquisition if I could get your thoughts on that? And then secondly your approach to the acquisitions has that changed at all given where you are from a cash flow perspective?

Yes. Let me just give you a summary of where we are right now. We obviously pursued a lot of companies last year, probably talked to 12 to 15 companies over the course of the year and closed on five acquisitions. The current status is we are talking to one company. We are very far along in the discussions and we believe and hope that an acquisition will happen in the next two to four weeks. Can certainly give you no assurances that it will close. There are some hurdles between now and then but we're optimistic that the deal will happen. It is a large acquisition. It's a Project Management firm in the Western United States and it will be the largest acquisition that we've ever done by revenues and people. It's doing more than $50 million a year in revenue. We're going to spend the next six months focused on getting that deal done and integrated. We think it adds a tremendous amount of value to the Company and strengthens us considerably and the purchase price is certainly not cheap but we think it's a fair one for the business.

Is that acquisition earnings accretive?

Yes, we expect that it will be earnings accretive in 2009 and going forward.

And cash flow positive?

Yes.

And do you think that now is probably the right time, I just want to get your general thoughts on is now the right time to kind of lever up and take advantage of something or maybe a lower valuation or something of that nature?

Yes. We think right now is the time to do this deal even though it means tapping our credit facility for the purchase price, it is a company that is very highly regarded and we think combined with Hill makes us a major player in a very significant marketplace. And we are going to, despite I think fear has gripped a lot of people including Wall Street including this industry and we think now whenever now is, it's always the right time to strengthen your business and continue to build it and grow it.

Okay, thank you.

Our next question comes from the line of Tim McHugh with William Blair & Company.

First, following up on that last question, John, can you give us, so what was free cash flow or operating cash flow, those two items? I missed some of those numbers.

Okay. I'll go over them one more time. During the fourth quarter, we had a stock repurchase of $6 million, we had a quarterly tax payment of $1 million, capital purchases of $600,000, our Chichester acquisition in the fourth quarter consisted of the cash portion and also the repayment of their existing debt which was around $1 million and we had working capital needs throughout Hill of around 45.9 million and we had to borrow $8.5 million and that gave us our decrease in cash of $6 million. That's really a brief synopsis of the fourth quarter.

Okay. And if you look forward here as you've kind of budgeted for '09, do you have any sense maybe relative to where EBITDA comes out or something like that what you would expect cash flow to maybe look like going forward here on a little longer term basis?

Well, we haven't put the numbers together but as David mentioned earlier, I mean our focus now is on two items, our accounts receivable, monitoring collecting our receivables has been a big focus for us and also take a look at our cost structure. So the combination of those two, with our assumptions, we should be a positive EBITDA going into 2009.

Okay, and can you just, David, talk a little bit about the new business pipeline today both on the claims and kind of the Project Management side, maybe relative to where it was three to four months ago, is it getting worse? Is it stabilizing? What are you hearing from clients at this point?

There's still a tremendous amount of work out there. I would say our pipeline of work on both sides of the house is probably down slightly. We certainly are seeing increased levels of competition, but I think that we have a, we have seen in the fourth quarter and so far in the first quarter a significant amount of work that we've won. We have some very big things out there that we think we're positioned to win and hopefully once we do we'll have that to announce, but the feedback I get talking to a lot of investors is as I said before everyone is gripped by fear.

They think the construction market has come to a grinding halt. Nobody will build anything, nobody can get financing for any projects and that is clearly not the case. The market is down, no question about it and in some areas it's down a lot but there's a tremendous amount of construction going on out there. I think in 2008 the global construction market was 4.5 trillion to $5 trillion. It's going to be trillions this year and a lot of stuff is going to get billed and those projects need to be managed and as always those projects will have disputes that need to be resolved so we see a tremendous amount of work out there. It's certainly softer than it was a year ago but we think we can, as I said before, win enough work to have organic growth in our consulting fees this year and be able to improve our earnings.

Okay, and if I could just follow-up on kind of that last comment, the organic growth for the year, are you talking relative to the full year results or if I look just at kind of the fourth quarter run rate here, just annualizing that would imply a decent pace of organic growth if you will across the rest of 2009. Is that kind of what you're referring to or is it above and beyond even what I guess you've done recently?

Pretty much what I've said is all I'm going to say. I didn't like a year ago trying to forecast the future. I think I'm pretty bad at it. I don't know anybody that's good at it and we try to give as little guidance as possible. We have in certain areas of our spending like the 36 to 38% SG&A guidance that we gave. We've talked about it in the past looking at operating margins of 10% or more. In the last six months just given all of the uncertainty in the market we really aren't going to give any guidance other than we expect operating growth, I'm sorry, organic consulting fee growth and net earnings growth this year. Beyond that, trying to pick a number or give a range is just too difficult.

Okay, thank you.

Our next question comes from the line of Richard Paget with Morgan Joseph.

Good morning guys.

Good morning Richard.

David, I wonder if you could talk about what happens in the Project Management role when a project gets delayed or cancelled? Is that something that you guys would manage and then still be able to charge fees on and then once something does get mothballed does that lead to more construction claims work?

It can very well lead to more claims work when you have those kinds of issues. Dubai is a good example, we expect -- and Dubai's probably the worst example worldwide of a market grinding to a halt. New work, but obviously we have a lot of existing work and that work is overwhelmingly continuing but we're anticipating in 2009 our Claims business in Dubai is larger than our Project Management business, and everything that's happening now with delays and issues and funding problems just leads to more problems and that should have an upside on the claims side of the business.

To the extent of projects cancelled there's generally a winding down so our role continues as long as the client needs our services, sometimes it may even continue for quite a while, on delays, if it's a short-term delay our role generally continues without too much change. If we were to downside our staff on a project, it's near impossible to put them back in place six months later. So clients are cognizant of that and there's a lot of ways they can cut cost. We're really the last cost they should be cutting on a project otherwise they are really back to square one and we've seen probably more delays on the claim side, short-term work is easy to push off. Once there's a project going, you're not slowing it down because slowing it down causes all sorts of additional problems, but on the short-term work that the Claims Group sees, it's very easy to defer pursuing a claim for three months. It's not so easy to defer a project that has a lot more moving parts, so the deferrals that we saw in short-term work really impacted the claims business in the fourth quarter and had minimal impact on the projects.

And then getting to the U.S. with all of the public spending that's going to be happening and in some cases there's a timetable where it's kind of a use it or lose it, I mean, have you seen a lot of the states and federal construction mechanisms looking for Project Management more so in this particular case just because they don't have the internal capability to process the volumes of projects that are expected to go through?

Yes, they really didn't have the internal capability a year ago to manage the projects. State and local governments very much turn to outside project Management firms to manage their projects. We've seen numbers anywhere from 100 billion to 140 billion. That's going to impact the U.S. infrastructure market and it goes beyond just highways and bridges but also water projects, environmental clean up which we expect will be a big item on the Democratic agenda for the next four years and a lot more federal spending and not just sending money to the states but also the Federal Government is spending more money on its own projects and we're very well positioned with the Federal Government so we see an uptick in that. We think it's going to be later this year, probably in the second half and much more so in 2010 and we see a positive impact on our business from that.

As I said before about 80% of our business in the U.S. is public sector. We're very well positioned for that market and it is also a big part of what's driving us to do this acquisition at this time, the firm we're talking to is almost entirely a public sector business and stronger transportation than we are, so I think that's going to be a big positive for us and again with the caveat that we expect the acquisition will close but we won't know until it does.

So, just given I think it was last week or the week before, they've officially released some of this stimulus money. Have you guys seen any of these projects starting to move forward or it's still going to take the government some time to move?

Maybe your experience is different from mine but government moves pretty slowly and it doesn't happen in weeks, it happens in quarters or even years. On the upside though, I know a lot of people thought that all of a sudden, the DOT is going to get $1 billion to build a highway and now they have to figure out what to do. That's not the case. Every agency, every state government and local government has projects that are in the works that are ready to go. Some have been held back until they get funding but once the funding is there, they are in position to make it move forward relatively quickly, relative to the process but that is still quarters, not weeks.

Okay, and then do you have a break down of backlog between Project Management and Claims?

Yes, I do. Let me give you that information. Our total backlog at the end of the year was 667. Of that, $623 million was in the Project Management Group, $44 million was in the Claims Group, and with respect to the 12 month backlog that was $269 million at the end of the year and of that $236 million was in PM and $33 million was in Claims.

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

Thank you, Richard.

Our next question comes from the line of Kevin Casey with Casey Capital.

Hi, guys. A question about the acquisition and the way you guys look at acquisitions. How has the return on potential acquisitions changed given the decline in values offset by the higher interest you'll probably have to pay on increasing the revolver?

Well, first of all good morning, Kevin. Looking back at the acquisitions in 2008, obviously this is a terrible time to measure the success or failure of those acquisitions. We acquired three Project Management firms in Europe. Europe has been hard hit. The biggest acquisition was in a market that was particularly hard hit which was Spain, and they are seeing a very challenging demand environment in the marketplace. The construction and real estate sectors have come down. The UK where we acquired Shreeves has been similarly hard hit but we've been able to bring work to them and keep them busy.

I don't think sort of the metrics for how we evaluate an acquisition have really changed. I think we have seen slightly better economics on potential deals so they are not the drastic change in evaluations that the public companies have seen over the last six months, but there's still opportunities out there for good companies and good prices. I think if anything it may have slightly dried up the market for firms for good firms anyway because good firms have the ability to sit back and wait for the market to turn and you may see more bad firms on the market who are maybe a little more desperate or are seeing their work drying up and those aren't the firms we want to acquire so we see a slower universe of potential acquisitions out there this year. As I said we're not trying to buy every firm we can get, we're focused right now on one firm getting that closed and getting it successfully integrated and then we'll move on from there.

And how many of previous acquisitions are still have earn outs?

We have one acquisition, the acquisition of Euromost in Poland which we acquired in May of last year. They had a two year earn out, one for the calendar year '08 and one for calendar year '09.

And then if you integrated all of these acquisitions how much cost savings could you get?

Given the nature of the firms, the fact we didn't have overlapping operations, there were some cost savings with Shreeves in the UK where we had an existing presence, in fact a pretty large one in Spain and Poland, they are standalone operations that really didn't result in a lot of savings for us. In fact very minimal. The two claims acquisitions we did in the third and fourth quarters, there was a significant amount of cost savings from PCI where we had overlapping operations in California and Nevada but the Chichester acquisition they are headquartered in Florida, it's a relatively small Company of about 15 employees and that again is a pretty much of a standalone operational though we have seen synergy benefits on the revenue side as they can now sell to their clients as a much larger and stronger Company.

Okay, and then as those cost savings that you mentioned have they flowed through the income statement yet or is that some of the cost savings you're talking about that's going to happen throughout the year this year?

The cost savings we talked about in the third quarter of the $2.5 million, it really didn't impact us in the fourth quarter much. We'll see much more of an impact in the first quarter. Cost savings that we're looking at now probably won't impact us until the second quarter.

Okay, thanks. Good luck.

Thank you, Kevin.

Our next question comes from the line of Bill Sutherland with Boenning & Scattergood.

Oh, thanks, good morning everyone.

Good morning, Bill.

Can you give us a little more color on these cost savings just in terms of how they are being achieved both the ones you've already completed and the ones planned?

Yes. Specifically I don't want to give you too much color given that much of it hasn't happened yet, but our business is primarily as you know payroll and rent, and to the extent that we have people coming off projects that aren't going on to new projects we've been aggressive in downsizing them. We are not, we're never really desirous of having a large bench, meaning billable people that are between projects and right now we have extremely little patience for that and we're very focused on making sure that as projects or as offices are seeing work end, that their costs come down as quickly as possible.

And David, you mean both PM and Claims?

Yes. We're looking PM, Claims and Corporate, looking across-the-board at making sure that we aren't spending more than we need to spend and we expect as I said to see organic growth, so we're not slashing and burning, we are being very cost conscience in light of the economy.

Are you seeing in the claims side the delays from Q4 continuing more or less or any change in that direction that you saw in Q4?

We haven't seen a change yet.

Okay. And just so I'm clear, if really, that unapplied labor call out that you did and the expense structure, that was mostly in the claims side?

It was claims and projects but it impacted the claims business more because it's a much smaller group.

Oh, I see, okay. So not dissimilar numbers but bigger impact?

Correct.

The AR reserves, how many accounts did that apply to?

It was two accounts, almost equal. One was in the Middle East and one was in the U.S..

And have you changed your expectations for just your reserve levels in 09 as far as a percent of revenue?

I'm sorry, Bill, can you ask that question again?

Yes. Are you also looking at just a bigger expense number there in order to build up the reserves going forward?

Yes. We tend to do our accounting in a very conservative manner. We think that's the best course long term. Given the worldwide environment we have increased our reserves and our expenses for bad debt and uncollectible receivables and, that gets monitored on probably more than a quarterly basis, practically a monthly basis to make sure that in the future we don't have to take any of these unusual hits.

So, that's factored into your guidance in terms of the expense range that you're trying to achieve?

Yes, it is.

What was the, the PM gross margin in the fourth quarter, it was down year-over-year but significantly ahead of where it had been sequentially. Was that a mix of business issue?

Our gross margin and Project Management?

Yes.

No. That wasn't down at all. In fact in the fourth quarter it was 43.1%.

I was trying to say that it was better than it had been sequentially.

Yes, it has improved slightly. It was 43.1 versus 42.8 for the year earlier. For the full year it was 41.1.

Right.

For all quarters. And 43.1 for the fourth quarter, so it has been trending upwards.

And--?

Claims has seen a slight decline in gross margins. In the fourth quarter it was 55.8 down from 59.4 for the year earlier and I think that's a result of a lot of factors. We're seeing especially in the UK, we're seeing a lot of price competition from firms that are having a very bad year, primarily the quantity surveying firms that do some of what we do on the claims side and they are going through a blood bath in the UK, lots of layoffs and cuts and we've seen more competition from them as they've tried to expand in other markets.

Is that really the main factor in that line?

I believe it is, yes.

And then how about the upside in the or not the upside but the uptick in the gross margin for PM?

I'm sorry, Bill, one more time?

What about the uptick in the gross margin for Project Management, what's the factor there, is it sustainable?

Yes, we think it's sustainable. It's as you said it's an uptick. Nothing has significantly changed in the PM business or where we're driving our revenue or our profitability from, so I think that it's certainly a positive change. We've seen over the last year or two increase in gross margin internationally and it is to as you know, used to be significantly less than the U.S. business. It's now on a par and I think that has continued upwards to some degree.

And that was just a matter of?

It's offset a little bit by the acquisitions which tend to be a little lower gross margin than the Hill business but despite the integration of those acquisitions it has gone up.

Just a matter of just pricing improving versus pay rates, that kind of thing?

It's difficult to, in the PM business where every sale is a unique pricing negotiation to say there are trends in pricing but it's counterintuitive to what we see which is more competition out there, particularly more competition on price internationally. So we have seen our margins going up. I think it's more a result of the mix changing slightly.

Okay, and then last, John, what's the DSO number at the end of Q4?

That's increased to over 90 days consolidated.

Versus, can you give me a comp at the end of third quarter and then also year-end?

Probably at the end of the third quarter it was probably slightly better than that, maybe in the mid 80's and at year-end it probably is around the 88 to 90 range and like we said earlier that's an area of focus for 2009, it's our receivables and the collectability of those receivables.

So DSO didn't go up dramatically then, you're just talking about a couple days or maybe five days from the end of third quarter? I suppose that, I'm just looking at the increase in working cap and trying to--?

Well, it's a combination. That number has gone higher than the 90 but overall our focus is in the Middle East and where those days are over 100, 125 days that's where the focus of a lot of our attention is is overseas accounts.

Yes.

Given the market environment, we actually expected that to be a lot worse. It picked up as John just mentioned by about five days quarter to quarter.

Okay. And I guess the bulk of the reason for the--?

We're making sure it doesn't grow more and we get it back down to where it should be.

But that is the bulk of the increase in working cap in the quarter I think it was $6 million?

Yes. Increase in receivables, correct.

Okay.

You could be surprised in the business growing 40% organically that has a slowdown in collections it's going to see a decrease in cash over the quarter.

Right, and then last one, David. Euromost, when you were talking before about your European acquisitions it doesn't sound like Gerens, in particular is going to be accretive in '09 but do you still expect that for Euromost? Thanks.

Yes, we expect Euromost will be accretive during the course of the year. Some of what impacted Western Europe three months ago is reaching Eastern Europe today but we think Euromost is still very well positioned to do well and be profitable in the course of the year.

Okay, thanks, Dave.

Thank you, Bill.

Our next question comes from the line of David Gold with Sidoti & Company.

Hi how are you? Two questions and I'll try to make them quick. Number one, Dave, can you speak a little bit on your level of confidence in the backlog? Obviously we're seeing a shift out that you alluded to from say 12 months to longer term, but what's the sort of level of confidence that we don't see something similar in the long term that we're being realistic there?

Well, we were pleasantly surprised that the total backlog number didn't go down, in the course of the quarter it stayed flat. Obviously it's difficult to assess what your clients are doing over the course of several hundred projects, but I think given how well it held up in the fourth quarter, we have not seen significant cancellations by any means as work gets pushed it usually can only be pushed so far and then it gets done, as I said the short-term work is easily pushed, the longer term work isn't. There hasn't been much of an impact on the PM business and that's the side where most of the backlog is, so we're very comfortable that the backlog is there and that we're not going to see big chunks of it start to disappear over the course of the year and at the same time we're doing everything we can to add to it with new sales and new work.

Okay. And then just one other, just to maybe help clarify and back and forth SG&A questions. John, you mentioned that unapplied labor was 30 to 35% of G&A for the year. Can you give a sense for what that was in the fourth quarter?

fourth quarter was around 33%.

33% of the whole number?

Yes.

So that wasn't much higher in the fourth quarter then?

Correct. But the percentage of that unapplied labor against our consulting fee revenue went up to 14.4% a year ago it was slightly less than 14% and on the year-to-date basis, full year '08 it was 12% so you can see the trend that was going up as a percentage of our consulting fee revenue.

Got you. So in other words, largely because the reimbursables had been coming down? That would explain that trend?

Not necessarily, no, because the reimbursables are all outside consultants, not internal people.

No, but I guess what you said is 33% of G&A but it's 14.4%, so in other words, over the base of the consulting revenue it stepped up?

Correct.

So the reason for that would be that you have less reimbursable or am I missing something? In other words on a percentage basis if you have less reimbursable the number is going to be higher as a percentage of consulting?

No. The reimbursables don'timpact that ratio at all.

What that's saying David is that our utilization rates are deteriorating somewhat.

I guess what I'm just trying to understand is you gave two numbers, you said it's 33% of G&A in the fourth quarter and that's pretty consistent with the rest of the year yet it's 14.4% of consulting which is up from say 12%, how do you gel those two if I'm missing it?

Well, for the full year '08 the unapplied labor was only 30% so it was a 10% increase just in the quarter.

Oh, okay, it was 30% for--?

Yes.

Got you, you'd given 30 to 35. All right, fair enough. I appreciate it.

Okay.

Our next question comes from the line of Kevin Liu with B. Riley & Company.

Hi, thanks for taking my question. Looking at the opportunities on the U.S. public side as well as in North Africa and then the decline in probably Europe and the Middle East, just wondering where you expect the regional shift to go or if you expect that to move significantly throughout 2009? And then also relative to the PM backlog just wondering given some of the work you might see rolling off this year do you still anticipate being able to grow organically in terms of just that backlog number?

Yes, we think we will. The shift in geographic focus obviously is impacted by acquisitions so let me just take that out of it. We still see growth organically in the Middle East, significant growth. As I mentioned Dubai and to a much smaller degree Abu Dhabi has been impacted by what's happening over there. Outside of that country we still see a tremendous amount of activity. Qatar is an area where we've been winning work and has a tremendous amount of wealth that hasn't been impacted to much of a degree by what's going on and then North Africa obviously as well. So we see North Africa becoming a bigger part of the business on an ongoing basis. We see upside opportunity in the U.S. public sector market, and Asia Pacific is a relatively small part of our business and about 2% for several years now, so not much of an impact there. We have some endeavors to grow our business primarily in China and India over the short-term future but I think those will have very little if any impact to us in '09.

And then any sense for how much the currency fluctuations had on in terms of just the backlog numbers sequentially?

Kevin, I think it's minimal but in the 12 months it was probably around 14% of that total decrease.

All right, and then just lastly, considering your acquisition strategy as well as plans for further repurchases, I'm wondering if you could give us a sense for how much leverage you're comfortable with, maybe how you look at it relative to EBITDA or what other measures you might look for?

We're not comfortable with leverage much at all. We are as I've told you we are very risk averse. We're not portfolio managers. This is the only Company we have so we don't want to by any definition be overleveraged. That being said, we have an ability to I think borrow significantly more money than the current $60 million line that we have in place. We see a very good position opportunity out there right now that we're focused on closing and then we want to make sure that we have the working capital we need to continue to run a growing business. We, as I said, we don't want to become overleveraged. I think a lot of companies that became overleveraged at the top of the market are finding out how bad that can be at the bottom but fortunately for us we kept a very strong balance sheet through 2008, and through today, and we think we can get a lot of benefit out of the money we can borrow. Interest rates are very low and we think we can do acquisitions that are accretive and continue to invest in our business and grow it.

Great. Thanks a lot.

(Operator Instructions) Our next question comes from the line of Arnie Ursaner with CJS Securities.

Could you go through your backlog by geography please and specifically highlight what you have in backlog from Dubai and also if you have any major projects expected to be completed?

I'd be happy to. Thanks for joining the call. I actually went through this before but I'd be happy to give it to you again. Total backlog of 667 was broken down 623 Project Management and 44 claims. In the 12 month backlog, the total was 269 of which 236 was in Project Management and 33 was in claims. We don't have a specific break down for Dubai separate from the rest of the Middle East and we don't have as far as we can tell any projects that are winding down there in 2009.

But you did give the break down before by geography?

No, we did not.

That was revenue.

I gave a consulting fee break down for the fourth quarter by geography.

But backlog by geography, please.

No, we don't have that information.

Okay. And you began to speak about organic growth and you gave color that you expect significant growth in the Middle East, you were very upbeat about North Africa, very upbeat about the U.S. public sector, I guess I'm trying to get a little better feel, I know you don't want to give specific guidance but in a global economic contraction that we're under way right now what sort of levels of organic growth might we see and where are the other places we might see it from and obviously places like Europe I imagine are expected to have negative trends?

It's very difficult at any time much less the present to try and guess as to what our growth is going to be in 2009, and we don't want to do so. The statement I made earlier in the call is pretty much the only guidance we're going to give this year which is despite the economy we're expecting organic growth in 2009 and consulting fees and we're expecting to be able to grow our net earnings during the course of the year. Beyond that is going to be 10, 20, 30, 40% growth I have no idea, but I can pretty much tell you without throwing caution to the wind too much, pretty much tell you that 40% organic growth is not very likely this year.

But double digit organic growth would be incredibly progressive in the current environment if that were the level you could achieve. So let me ask a different question if I can, no one asked you about an update on the JVs and perhaps comment on how they might contribute to the growth rate you expect in '09?

Well, sometimes these JVs have taken on a life of their own, they are really a method by which we build a relationship with a client or team with other firms in our business to win work from one or more clients. We made a lot of announcements early last year, we ended the year with announcement regarding a joint venture with QPM, Qatar Project Management Company and we teamed with Louis Frasier to essentially outsource the PM work from the two largest developers in Qatar and we see that building pretty quickly and we see that as a tremendous opportunity for us this year and going into the future. We established a real estate development joint venture in September called HIREP Hill International Real Estate Partners which is focused on several things, the biggest of which and the most imminent of which is a 1500-foot tall skyscraper in Center City, Philadelphia. That project received full zoning approval in December of last year and right now is the Company's focus on two things. One of which, most important of which is signing tenants and secondarily, we are preparing to launch a real estate fund where we'll raise money into a Company and look to use that capital for investing in not only the America Commerce Center but other projects primarily distressed real estate projects in the Mid Atlantic area. We think there's a tremendous amount of upside, there's plenty available for investing in those types of funds, they're focused on distressed opportunities at the moment and it gives us access to capital so we can invest in projects without investing in Hill's Capital which we very much don't want to do and aren't going to do in the real estate business.

Okay, thank you very much.

Thanks, Arnie.

Our next question comes from the line of Richard Paget with Morgan Joseph.

My follow-up was answered.

Okay, Richard. Thanks.

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

Everybody thank you for your time and attention today, we appreciate your involvement in the call. As I said, we are very happy about our record 2008 performance. We had some issues in the fourth quarter which impacted sort of the headline of the results but we think we held up pretty well. That being said, we have some issues to address. We focused on the Claims Group and making sure that turns around quickly but our cost structure remains competitive and that we focus on the challenges that we have in the year ahead of us. That being said we're going to get back to work. We'll talk to you all soon, thank you.

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