Hill International Inc (HIL) 2009 Q1 法說會逐字稿

good day, everyone, and welcome to the Hill International 2009 first quarter conference call. At this time, I would like to inform you that this conference is being recorded, and that all participants are currently in a listen only mode.

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

Thanks, Dennis, and 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 of Hill.

Before we get started, I will remind everyone that certain statements contained in today's call may be considered forward-looking statements within the meaning of 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 herein 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.

Forward-looking statements are based on current expectations, estimates, and assumptions and are subject to certain risks and uncertainties. Hill believes that the expectations, estimates, and assumptions reflected in the forward-looking statements are reasonable. Actual results could differ materially from those projected or assumed in any of the 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 the forward-looking statements include modifications and termination of client contracts, control and operational issues pertaining to business activities that Hill conducts on its own behalf or pursuant to joint ventures with other parties, difficulties incurred in implementing its 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 forth in the reports filed with the Securities & Exchange Commission. Hill does not intend and undertakes no obligation to update any forward-looking statement.

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, Devin, and thank you, everybody else, for being on the call this morning and joining us for our first quarter 2009 earnings review. We are very pleased with our positive results for the first quarter of 2009 which included both strong organic revenue growth and solid profitability.

Hill's total revenue for the first quarter rose 29% to $103.9 million. Our consulting fee revenue for the first quarter increased to $92.1 million, up 32% from the first quarter of 2008. Of that consulting fee growth, 22% was organic and 10% was the result of acquisitions.

Breaking down our consulting fees by operating segment, 76% came from the Project Management Group and 24% came from our Construction Claims Group. The percentage of consulting fees from Project Management continues to grow as that side of our business continues to see faster organic growth and larger acquisitions.

By geographic region, 20%, 21% of our consulting fees in the first quarter came from the Americas, 29% were from Europe, 37% were from the Middle East, 10% were from North Africa, and 3% were from Asia-Pacific.

We now break-down our consultant fees and our operations between the Middle East and North Africa, given how much growth we've had in the latter region over the course of the last year.

Hill's operating profit for the first quarter of 2009 was $4.3 million, down from $5.5 million in the first quarter 2008. Net earnings attributable to Hill for the first quarter were $4.4 million or $0.11 per diluted share, compared to $6.8 million or $0.11 per diluted share in the same period last year.

Shares outstanding were essentially the same for both quarters at 41.1 million diluted shares.

Now, some of you may have noted that I used slightly different terminology, specifically net earnings attributable to Hill, as opposed to simply net earnings. That is because effective January 1st of this year we adopted statement of Financial Accounting Standard 160. There's an explanatory footnote in our earnings release, but basically we are now required to break-out the amount of consolidated net earnings attributable to the parent and any non-controlling interests which were formerly known as minority interests under the accounting language.

In Hill's case the non-controlling interests are primarily attributable to our Spanish subsidiary, [Heron's], although we also have joint ventures in some other smaller subsidiaries that have minority shareholders.

Hill's operating profit for the first quarter of 2009 included about $2.2 million of unfavorable items not included in the 2008 first quarter. These include a $980,000 adverse impact from currency devaluations in the British pound and the euro, which negatively affected our earnings per share by approximately $0.02, an $860,000 increase in bad debt expense related primarily to our Middle East and European regions, equal to about $0.01 per share, and $330,000 of legal and accounting expenses incurred in connection with an acquisition that we discontinued in the first quarter which impacted earnings per share by approximately a penny.

Earnings per share for the first quarter of 2009 were positively impacted by a tax credit of $1.5 million or $0.04 per diluted share, although this was less than in the first quarter of 2008 when Hill realized the benefit of a tax credit of $2.5 million or then $0.06 per diluted share.

Hill's SG&A expenses for the first quarter were $36.3 million, up 32% from the first quarter of 2008, but down 11% sequentially from the fourth quarter of 2008. That equates to 39.4% of our consulting fees for the first quarter, slightly above our anticipated range for the year of 36% to 38%, and this was due, in part, to the unfavorable items I previously mentioned and in part to higher unapplied labor for the quarter.

As I discussed in the last earnings call, however, we took out approximately $5 million in annual overhead costs during the first quarter. This was on top of approximately $2.5 million of annual overhead costs that we removed in the third quarter of 2008. We expect the affect of our first quarter cost cutting will positively impact our earnings beginning in the second quarter of 2009, all of the severance that was involved in the cost cutting which was primarily labor was reserved in the first quarter and will have no impact going forward.

Hill's total backlog at the end of the first quarter decreased sequentially to $598 million from $667 million at the end of the fourth quarter, but remained up significantly from $480 million at the end of the first quarter of 2008.

This sequential drop was primarily the result of a $48 million contract that we were awarded in the third quarter of 2008 that was recently withdrawn by the client and that we expect will be put out for rebid.

Hill's 12-month backlog at the end of the first quarter remained strong at $270 million, up slightly from $269 million at yearend, and up from $242 million from the same time a year earlier.

Looking at our two operating segments separately, total revenue for the Project Management Group was approximately $80.8 million, up 36% from the first quarter of 2008. Consulting fees for the Projects Group rose at a faster rate, up 41%, to $69.7 million in the first quarter of 2008. This growth consisted of about 29% organic growth and 12% growth from our 2008 acquisitions of Heron's and Euromost.

The operating profit for the Projects Group in the first quarter was $9.1 million as compared to $7.4 million the year earlier quarter, an increase of 24%. This operating profit equates to 13.1% of consulting fees, slightly below our historical range of 15% to 20% operating margins in the Group. We think there's room for improvement over the balance of the year in the Projects Group.

The strongest areas for our Projects Group in the first quarter continued to be the Middle East, with the notable exception of Dubai and North Africa. The weakest reasons for PM in the first quarter were in Dubai where there's been a general freeze on new work and the United States. In Dubai we've continued to downsize our workforce there, as work continues to drop, and we shift those resources to elsewhere in the Middle East where we are seeing strong growth.

In the United States we made a management change at the end of the quarter promoting Tom Spearing to President of the Project Management Group Americas, and promoting Vince D'Ambrosio, the Senior Vice President in charge of Business Development of the entire region. We expect that the leadership of these two individuals should help maximize the performance of this operation going forward and strengthen its capabilities and operating results significantly. Because both of these gentlemen were already working for Hill the change out of the Management Team resulted in a significant cost savings for our Company.

Shifting to our Construction Claims Group, their total revenue in the first quarter rose $23.2 million, an increase of 8% from the first quarter of 2008. Consulting fees for the Claims Group in the first quarter were $22.4 million, an increase of 11% over the prior year quarter. That growth consists of 6% organic growth and 5% growth in the acquisitions last year of PCI and Chitester.

Operating profit for the Claims Group in the first quarter was $2.3 million, down 34% from an extremely strong quarter a year earlier. The decrease in operating profit was primarily due to higher labor costs, particularly in the Middle East, as a result of the then strong demand for labor last year, and to lower gross margins on new work, and to unfavorable currency exchange rates.

This operating profit equates to 10.3% of consulting fees, at the bottom of our historical range of 10% to 15% operating margins in the Claims Group. As well, we think there's room for improvement in the Claims Group over the last three quarters of the year.

We continue to see the strongest performance within the Claims Group in Europe, which is primarily the United Kingdom, and the Middle East Regions. Also, for the first time since we acquired it as part of the [Knolls] acquisition in 2006 the Asia-Pacific Region of our Claims group saw a quarterly operating profit, which we think is a very positive sign for that operation.

And during the first quarter we divested a piece of the Knolls acquisition, a company we inherited called [BBCG], that provided insurance adjusting services in Canada. We saw no strategic fit for that company within Hill, and we sold it to its management team in the first quarter of this year. The transaction was not material to Hill's results in the quarter, either the results of the sale or their operating performance.

On a consolidated basis Hill entered the first quarter with cash and cash equivalents of $18.6 million, working capital of $90 million, total assets of $260 million, and total debt of about $27.9 million, of which almost $24 million was against our $60 million senior secured credit facility with Bank of America.

The increase in our senior credit facility from yearend of $9.5 million was due primarily to stock repurchases, payment of management bonuses for 2008, our funding of our domestic operations and corporate costs, and general slowdown in the collection of receivables, particularly in the Middle East and North Africa.

Our total shareholders equity at the end of the first quarter was $136.2 million, down slightly from the end of last year, despite our profitability. This was due primarily to foreign currency devaluations and the repurchase of our stock.

During the first quarter we repurchased approximately 1.1 million shares of our common stock at a cost of approximately $3.4 million or an average of $3.01 per share. This is under the $20 million stock repurchase program that was approved by our Board and announced in November of 2008.

To date under the stock repurchase program we have repurchased a total of approximately 2.3 million shares of our common stock at a total cost of $9.4 million or an average cost of $4.06 per share.

We are currently in negotiations with Bank of America and a consortium of potential lenders regarding an increase in our credit facilities from $69 million currently to $100 million, and while we have no guarantees that those negotiations will be successful, we are highly confident that they will be, and we expect that it will be closed at some point during the second quarter of 2009.

That being said, we see despite the worst, probably the worst global economy we will see in our lifetime, I hope, a very positive outlook for Hill. We continue to win work and see additional opportunities for new work in our various geographic markets.

And I would like to reiterate now that we have the first quarter behind us that we continue to expect positive organic growth in consulting fees for 2009, an improvement in our net earnings for 2009 relative to 2008, and a -- by the time we're done we think a very successful 2009.

Thank you, all, for listening to the presentation today. We are happy to answer any questions that anybody has, either myself or our CFO, John Fanelli, and feel free to ask any questions you like.

(Operator instructions.)

And the first question comes from the line of Richard Paget with Morgan Joseph.

Good morning, guys.

Good morning, Richard.

So you mentioned that you took a $48 million contract out of backlog to go up to rebid, and I'm assuming that is for the owner who I guess might be looking to take advantage of maybe some cheaper pricing, is that the case? And if so with the new work that you're booking could it be at lower margins and by what magnitude?

No, that's not our understanding of why the project is being put out to rebid. We believe it was for political reasons, and despite six months of negotiations over a contract and waiting for the contract to be entered into by our potential client, they've decided to move in a different direction. We haven't determined whether or not we're going to rebid it, but that's -- the current award is not going to be implemented in the form of a contract. We have removed it from our first quarter backlog.

Okay, so relative to some other E&C companies that have a much heavier C component, I mean you haven't really seen some pricing erosion?

No, we haven't really seen that, at all, in our business. We have not seen clients put out the CM contracts for rebid to try and take advantage of lower prices. They can really do that through negotiation if they wanted to, and we really haven't seen that, at all.

We have seen owners put out construction contracts for rebid, when they're obligated to take the lowest price, because certainly the costs for construction have come down in the last six months. We have not seen it in our business.

Okay, and then anecdotally with the stimulus package in the U.S. I've heard lots of federal agencies don't have the manpower to let a lot of the construction projects, and they're getting pressure from the White House to do these things quickly. Have you seen any of these agencies looking for PM agencies to kind of help process this work?

We've seen exactly that, and we're pursuing some of that work. They gave the money faster than they have really the ability internally to process it and get it spent, and so we're seeing opportunities to help our clients do exactly that.

And we are seeing some of the stimulus money getting in the hands of our clients and we're pursuing assignments where we think that we have a pretty good shot of winning, that we'll benefit from the stimulus money.

And then with the tax rate going forward, what should we be assuming for the rest of the year?

Rich, I'll take that. Our effective tax rate by the end of the year should be between the 25% and 28% range, and that includes the tax benefit we received in the first quarter.

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

Thanks, Richard.

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

Hi, guys.

Good morning.

Good. The first question here is just on the pipeline, I always see the pipeline, you scrubbed it for the $48 million, how should we think about the prospects going forward, both in the short term and the long term? Is there anything on the horizon that could backfill that in a short period of time or is it more just sort of still a difficult time out there?

No, we see a lot of opportunities out there, and there's some very large projects that we're chasing that could more than offset that. We've won a lot of work in the first quarter, some of which we've announced and some of which we haven't. We see some big opportunities out there that we think we're positioned for. I would never mention one because I wouldn't want to jinx us, but there's still a tremendous amount of work out there.

I think the common perception on Wall Street is that the world came to a grinding halt and has stopped building, but most projections I've seen have talked about a decline in construction this year of anywhere from about 5% to 7% which certainly means there's still trillions and trillions of dollars being spent this year on construction.

And we see a lot of opportunities around the world. Some places are being hard hit. Dubai is the best example. Dubai is going to be in the project management area less than 2%, probably closer to 1% of our fees this year, and other areas that are growing we're moving resources and expanding there, so we see a tremendous amount of opportunity, we expect that our backlog will continue to grow but obviously we can't give you any assurance of that.

Sure. I wonder if you could talk a little bit about cash flow, you know, it was kind of down last quarter and this quarter? And maybe you could point to any particular causes? Is that on the receivable side and what your expectations are going forward?

I'll take that. With respect to the cash flow, we've been focusing on accounts receivable, and a lot of the decrease in our working capital is due to our increase in our accounts receivable. We have plans in place, we look at each account worldwide individually. We assess the collectability of that account, and we see some positive cash flow going forward. We're projecting that we'll have a positive operating cash flow for the second quarter and for the remainder of the year.

Okay. And then just lastly I was wondering what your position is on acquisitions at this point? It looks like you've kind of dipped into the credit facility to fund some working capital and some other needs, and I would think that that would probably put a little bit of damper on what you could look at from an acquisition standpoint.

If you do get the -- well, first of all, just what's your thought about using the credit facility going forward? And then if you did get the extension is it our assumption, or your assumption, that you would be using that to fund further acquisitions?

Yes, Joe, that's one of the reasons why we've entered into negotiations to expand it from 60 to 100. The facility we're talking about also has an automatic accordion feature that would let us increase the facility from 100 to 150 if we have the need and request it.

We expect to be cash flow positive. Working capital is not the primary driver, but obviously we want to have sufficient working capital for whatever our needs may be over the next year and years.

At the moment, we don't have any active acquisition discussions going on, but we expect that we will over the balance of the year. For the last three months since the earlier acquisition we had been working on didn't occur, that we've been focused on internal issues, collecting our cash, making sure our receivables come in, cutting our costs, our overhead costs as much as we can, taking people when they come off projects, if they have nowhere to go we have not allowed ourselves to have a deep bench at the moment. And we've been focusing on integrating the acquisitions that we did do last year. We bought five companies last year.

I think going forward we're going to continue to see some good companies for sale, and we're going to continue to look to bring those companies into the fold.

And just one last question, on the extension of the credit facilities, how has that discussion progressed and is there any area that you think could potentially be a sticking point?

The negotiations have gone very well. We think we have a very good partner in Bank of America, and I don't really see any sticking points. We've had meetings with other banks, they're looking to syndicate a majority of the facility, and we've had some positive responses so far. So we -- we're very, as I said, highly optimistic that we'll have something in place before the end of the quarter.

Okay, thank you.

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

Yes, first can you talk about the improvement in your Asian operation for the -- on the claims side, as well as while we're talking about that region there's been obviously a large stimulus package in China. Can you give us an update on your joint venture that you had announced I think it was the middle of last year in China?

Yes, I'd be happy to, Tim. Our Asia-Pacific Region on a relatively small increase in fees had a significant increase in profitability, and we've been focused on cost cutting there. One area that we've seen a significant improvement in there is in Australia. We consolidated our two offices there into one office, in Sydney, we closed our Melbourne Office at the end of last year. And they've been very successful in winning new work there.

And that's an area, as I said, we hadn't made an operating profit, a quarterly operating profit there since we bought Knolls, and that was two-and-a-half years ago. But it's an area of the world where we see tremendous long-term opportunity. We have offices there in [kwal lampore] and Singapore and Hong Kong and Sydney, and that's an area of the world that we're committed to long term, and we're very pleased by the fact that they are now a profitable operation.

The joint venture that we launched last year, that we called [Hale Gianke] Project Management, is a joint venture that we own 60% of, 40% owned is owned by [Gianke], which is a company owned by the Shanghai Provincial Government, and we are likely to get that launched over about the next I'd say 90 to 120 days, with a full time staff on the ground, and we'll be pursuing work in that region.

I think China is probably coming down faster than you are hearing from the Chinese Government, especially in Shanghai where a lot of the work was commercial work, and we see with them as a partner a lot of opportunities in the infrastructure side, as well. Disney has announced a theme park in Shanghai. There's still a lot of people going out in that area to build, as well. You'll probably see fewer skyscrapers, commercial skyscrapers going up, but it's a huge part of the world and it's still growing, and there's still going to be a need for a lot of construction.

And we see China as a very big part of our long-term strategy in Asia. We have our first work we won late last year in India, a project there, a pretty significant high technology corporate park in India, and we see that as a great opportunity for our long-term growth in Asia, as well.

So while you'll continue to see us running at about 2% or 3% of our business I would say that in the next five to seven years it's going to be a much, much bigger component of our operation.

Okay, and then also if we could shift to Iraq, and if you could give us an update on the prospect for additional work there, both from the U.S. Government as well as perhaps looking more to the local construction company and developers?

Yes, our current contract expires in September of this year. We are currently pursuing the recomplete for that contract, which will have a one-year base and four one-year option periods, the same as our original contract.

Our work that we currently have there, any task orders that we receive to date will continue past the contract expiration, but we see 2009 most likely being a record year for us in Iraq. We see not a lot of visibility beyond the next 12 to 18 months. We have a new President, we see shifting resources from Iraq to Afghanistan on the military side, but I don't see any significant drop in the reconstruction effort in the short term. What happens long term we really just have no idea. We take it year by year.

Where are they in the I guess the -- and what inning are we in in terms of reconstruction over there. I know this issue of whether the U.S. wants to fund it or not, but in terms of the amount of work that's available over the next few years or that will need to be done, is it still--?

Let me give you a golf analogy instead of a baseball one. I think we're clearly on the back nine, whether we're on the 11th hole or the 16th, I can't tell you, but I think that there's no question that over time it's going to ramp down. The only question for us is how quickly or how slowly.

We have a team right now that is an entire joint venture, which is Stanley Baker Hill, has a team on the ground of about 325 people, of which about 80 of those are Hill employees. And we see that continuing for the balance of the year, and then once we get to 2010, until we get to 2010 we really won't know what 2010 looks like.

Okay, and then, lastly, you mentioned you won several new engagements that you haven't even announced yet. Would those be reflected in your backlog, though?

Yes, when we get an award, once we get -- not just a notice, not just being told, but once we get a formal notice from our clients that we have won a procurement, the project goes into our backlog, so -- and there's very often a delay either because we're waiting for a signed contract or client approval, whether there's a delay between the award, and a public announcement of the project.

Okay, thank you.

Your next question comes from the line of David Gold with Sidoti.

Hi, good morning. A couple of questions for you. One, Dave, just to go over your comment about target and improved earnings in '09, was that on an organic basis or does that include potential acquisitions?

No, we think we're going to improve our earnings on an organic basis.

Okay. And then second, oh, direct it I guess to either one, it may be better suited for John. I was hoping you could give some more color on the bad debt expense during the quarter of I think it was $860,000?

Like I said earlier, David, when we look at our accounts receivable, we look at each account worldwide, and this is done on a monthly basis and more so on a quarterly basis. And each account we make a management decision as to the flexibility of that account.

And in these times we really took a harder look and we looked at a few accounts, probably six of those that represent that $800,000, that at this point we thought collectability was impaired and that's why we put a reserve on the book.

So the -- so was that one big one, or is that a whole bunch?

It was around a half a dozen.

Okay. Can you give a little bit more color, John, on your collection cycle and how that works by way of presumably, and I guess this is project management work that we're having the issues with the claims business, is a little more quickly collected, or no?

Yes, overseas particularly in the Middle East Region collectability is probably in the 100 to 120 day period, it's just the nature of the work and the way the -- our clients in that region pay. But our cash flow, as you know, we pay our people right up front within a week, but we have to wait for collectability on those receivables over 100 day or longer period.

Okay, all right.

We are as aggressive as we can be, focusing on collecting our receivables. We've been especially in the last three months having regular meetings with our management, that would include me and my dad, and it gets the highest level of attention.

But at the same time we're as conservative as we can be on our accounting and making sure that we have the reserves and the bad debt expense in place to make sure that we don't have too many surprises, but obviously we're in a phase of the global economy where a lot of people, particularly real estate developers and contractors and others are having some cash flow issues.

So we're -- we need to stay on top of our clients, make sure we don't get too far behind them, but I think we're doing a pretty good job of that, and we happen to be in a business where collections tend to be slow on a regular basis, especially in the Middle East. And they're slower now, but we're pretty confident that the class working are eventually going to pay us, but if we think there's an issue of a bankruptcy or any kind of a dispute we make sure we put the proper reserves in place.

So just I guess to add a little more color, presumably if the ones that you're taking charges for taking bad debt, you're not working for any more? Right? I mean basically if they stop paying you, you stop working for them?

That's not always the case, but very often it is. Sometimes the threat of stopping to work is enough to get you paid.

Right, well, I mean I guess I'm just trying to get a better handle on what happened here. So if we look at, an $860,000 -- those -- is that all for clients where you're not working or do you sit there and say, "Okay, we're going to write this down and, by the way, we'll keep working for you on this project." Right? I mean obviously that wouldn't make any sense if you're not getting paid on that, right?

Well, not always, because sometimes the clients will have some excuse, you know, regarding maybe the performance of an individual or someone who is on a project. It may take a few -- certain parts of our bills, in which case we weigh making a compromise in order to continue working and getting paid on the balance of the work.

I see, I see.

In most cases when we're running off a receivable it's we're no longer working for them.

Got you, got you. And then just one other, on the cutback side, are we still evaluating or the $5 million that we've taken out I guess on an annual basis are we about right sized for sort of where the business trends are?

I think we're right sized for the overall business and the review that we took in the first quarter regarding our overhead. We continue to look at corporate overhead cost cutting going forward to make sure that we always keep our workforce and our workload in synch.

Where we have operations that are underperforming, we're constantly looking at them for rightsizing to make sure that we can continue to make money. We've got 80 offices, I can't say ever, that's all profitable, or they ever will be profitable. But we're constantly looking at that.

I don't expect any major cuts on a company wide basis going forward unless we see a real radical change in the business, but the last three quarters we've taken out $7.5 million of annual overhead costs, and I think that's been significant for a business that's still growing and still expanding.

Got you, very good. Thank you both.

Thank you, David.

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

Hi, good morning. The first question I have is for John. John can you give us the end of quarter fully diluted share count, please?

41.1 million.

That would be inconsistent, if you bought the shares during the quarter and your average share count was 41.1 million it would probably not be consistent with your end of quarter share count.

We didn't buy the shares over the course of the quarter, they were all bought after our blackout period ended in mid March.

There's one other --

So they were bought in the last two weeks of the quarter.

-- there's one other fact, Arnie, is that the earn-out shares for accounting purposes were soon to be part of the dilution effective January 1.

So, in essence, you reduced your shares due to the buyback and added in the earn out shares?

Correct.

But the earn out shares would have been known well ahead of time? I might follow-up offline, that answer doesn't really make a lot of sense, but I'll follow-up offline.

It doesn't matter when we learn about the earn out shares, they account from January 1 because they were based upon a contingent that occurred on December 31.

Okay.

But for accounting purposes we have to include them beginning January 1st. So essentially the stock repurchases and the earn out was a wash.

Okay. The 40 million contract removal, I'm assuming even though you didn't say it that it was in the project management side?

Yes, it was a project management contract in the Middle East.

Okay, that was my second question, was the geography. In the Q4 results you had been hit quite hard in claims consulting and the term you used when you spoke about it in Q4 were deferrals from Q4, and yet if you look at the revenue sequentially in Q1 you had minimal growth in claims consulting.

Did the deferrals turn out to not turn into business, at all, and can you kind of update us now about the trend you're seeing in claims consulting for some of the work that didn't happen, is it in fact finally getting booked?

Well, the deferral we expected it wasn't going to be 60 or 90 days, we expected it to be probably six to nine months. And we did have sequential growth from the fourth quarter of '08 to the first quarter of '09 in the Claims Group. In the fourth quarter we did about $21.3 million of consulting fees. In the first quarter we did about $22.4 million on significantly higher margins. Our operating margin went up from 6.2 to 10.3 sequentially, so we had some significant improvement. I think that over the balance of this year as we continue to climb our way out of this recession, as our clients are in a better position to fund our work, I think the Claims Group will continue to do strongly.

You've also got to keep in mind that the currency devaluations primarily the pound have a significant impact, about half of our Claims Group is in the UK, so you're bringing over their revenue and their profits at a much lower value, and that's continued, and that has a more than a rounding error impact on it.

My final question, do you have any material contracts in project management or otherwise that are expected to ramp over the next one to three quarters, that we should be building into our thinking?

We always have projects that expire, when you're talking about that kind of a time period over the course of three quarters. There aren't any that pop into my head as really significant.

Okay, thank you very much.

Thank you, Arnie. Hope your back feels better.

Thanks.

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

Hey, thanks. John, what was the stock comp expense for the quarter?

Give me one moment.

Well, while he's looking for the answer and flipping pages --

Okay, we can move on.

No, I was going to say that we --

Around $500,000.

$500,000. Thank you.

I was going to say, Bill, we did issue stock options in the first quarter this year. A new round, we had initiatives around the stock options since the first quarter of '07.

What was -- I'm sorry?

We had a million stock options in the first quarter.

Okay. I wanted to go back to the profitability picture, more on a segment basis, Dave, and I'm trying to understand -- I know some of the savings that you're achieving are in the unapplied labor or at least I believe they are, like I guess I'd like to understand how much of it is there, and then what are the other issues that you see tackling to improve the segment profitability further from Q1? Thanks.

The two components of labor that go into our SG&A are unapplied and indirect. Unapplied is essentially the hours, the cost of people that are expected to be billable when they're not billable. Indirect labor is the cost of people that are not expected to be billable, at all -- overhead, salespeople, people like that.

The cost cutting that I talked about earlier was primarily almost exclusively overhead cuts. We are constantly looking at downsizing, when we have people coming off of a project, if we don't have somewhere for them to go and continue to be billable, those people unfortunately are let go on a pretty regular basis, and those numbers did not include any of that cost cutting which in certain places, particularly Dubai and some areas of Europe happen pretty regularly.

The area that we're looking at going forward are really the same areas. This is a people business, probably 75% or 80% of our costs are payroll, and the biggest area for us to be able to trim costs in areas where we're having trouble is unfortunately people.

The good thing about our business is it's a very scalable business, both up and down in good and bad times, and not just as a whole but in specific markets, so that while Dubai, which everybody knows has basically come to a grinding halt, we don't have a lot of fixed costs, we have essentially two weeks of severance, and we have office space that we can get rid of.

So the down side of an area having the significant problem like Dubai has, to us is relatively minor, strangely enough. Dubai has been to us over the last five years.

So -- I'm sorry.

We can easily upscale our workforce in places where we see growth like right now in Qatar, in Libya, and my dad and I just got back from a trip to Egypt, that's an expanding operation for us.

And where we're focused on improving performance going forward are in areas where we have specific operations that are underperforming, whether it's because of market issues, economic issues, management issues, and you saw that we changed out the senior management team over our Project Group. I think they're going to be a lot more diligent in focusing on fixing the problems, and the underperforming operations be better performing, and making sure we continue to succeed in the areas where we have been.

You're referring to your U.S. Project Group, David?

Yes, I was. Yes, and I don't want to scare [Robe Galli], we did not let him go, he's still there. Still doing a great job. I was talking about [Tom Spearing] who took over the Presidency of the USPM business last month.

So you really attribute that more to your own -- the company specific as opposed to the market kind of driven factors as far as the underperformance in the U.S. project?

Yes, and I -- we see the U.S. business as potentially a very strong one over the next couple of years, with the spending and our business which in the U.S. is 80% public sector versus our international business, which is 80% private sector. We see the U.S. benefitting significantly.

Tom, specifically, his background is primarily in transportation and infrastructure, and that's the area that we think is really going to benefit over the next couple of years, and we think he's going to lead that team.

So just to return briefly to my segment profitability question, so most of the reductions have been in indirect expense, correct?

Correct.

And that applies to both segments, and then if you could just talk a little more specifically about the two segments as far as the elements, I mean is it mostly just further control of their indirect to get them up closer to their target ranges for profitability?

We're actually a pretty simple business, Bill. No more complicated than just making sure you're maximizing your revenue and you're minimizing your costs. It's not that we're going around this place with an ax, we're also adding key people. We've hired some very strong professionals in the Claims Group in the last six to nine months, both in the U.S. and overseas. We've added some key operational and salespeople and technical professionals in the Projects Group all over the world in the last six months. We're trying everything we can to maximize our revenues and continue growing, and growth takes care of a lot of other problems. At the same time, we're keeping a much more focused eye on the cost side.

Our philosophy up until about nine months ago was we're doing everything we can to keep the growth engine moving as quickly as possible in the Company, both organically and by acquisitions.

And just given the realities of the world we've spent the last probably six months, eight months, much more focused internally on making sure that we are not only growing but growing profitably, trying to increase our margins, which unfortunately have not been increasing over the last couple of years, as we invested in more growth, and then went into a recessionary period, a very strong recessionary period. But we know as we come out of this thing if we can continue growing, and we keep a very close eye on our costs, our operating margins should improve and improve significantly.

Okay, that's good. One last one, just looking at your backlog trend and thinking about the fact that you are increasing the activity in the JVs, including the 50-50 JVs where you're not flowing the business all the way through the income statement, is that something we should think about as far as the comps for backlog?

I'm not sure I fully understood the question, Bill?

Well, like the JV that's with the big developers in Katar, that doesn't -- those wins don't go into backlog, correct?

Well, when we have a joint venture if we own 50% of it we can't consolidate the revenue, but oftentimes those JVs will be subbing half the work to Hill, and the work that we perform, like with Stanley Baker Hill, the work that we perform we book the revenue and the profitability, as well as any profit that the joint venture makes, it's distributed to us.

Oh, I see. So the vast majority of those wins do show-up, at least the part that's subbed to you shows up in your backlog?

I think in probably about half the cases you'll see the revenue reflected in our backlog, and in our income statement. Probably about half the cases you'll see the joint venture performing the work, and we won't --

Okay.

-- other than at the bottom will we take a profit.

Okay, that's great. Thanks for the clarification.

Thanks, Bill.

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

Hi, just a couple of housekeeping questions to start off with, was kind of wondering if you had the D&A by segment, as well as the backlog by segment?

I'll give you the backlog first, Kevin. At the end of March the total backlog, project management was $559 million. Construction claims was $39 million, for a total of $598 million. The 12-month backlog, Project Management was $242 million, construction claims was $28 million, for a total of $270 million.

And then the D&A?

The total D&A was around $1.7 million, and I don't have the split between project and claims with me.

All right, not a problem, I can follow-up offline for that.

Going back to the collections questions from earlier, one, I think in the script you mentioned that there was a little bit more difficulty collecting particularly in parts of the Middle East, so I was wondering if you've been able to collect on some of those accounts here in Q2 and whether we should expect DSOs to kind of remain elevated for the remainder of the year? And then also was wondering if you could clarify kind of whether there is a differentiation between your believe and collect on PM contracts versus claims contracts?

Yes, I don't know what you mean by a script, I was speaking completely from memory.

Oh, okay.

John, you want to tackle that question?

Well, I think in these economic times, Kevin, it's going to be an area where we have to really focus and stay on top of our clients. And as David mentioned, we do have monthly meetings where we elevate these accounts to the highest level, and we're going to be constantly focusing on these accounts.

I think in the near term are we going to see some slow-down in terms of collection? I think by the end of the year we should see some cash coming in and even short term. As we keep focus and work with our customers I think that's the best thing we can do.

All right, and as we look at the backlog today, I mean considering the projects that you have visibility into in terms of them rolling off this year and looking at your pipeline, would you expect there to be kind of sequential backlog growth as we move forward throughout the year?

It's nearly impossible to predict exactly where the backlog is going because we just don't know in advance which contracts we're going to win and which we're not. We have a certain amount of guesstimate in that, but certainly no assurances. Our expectation is that our backlog is going to grow over the course of the year, but quarter to quarter we just can't make any prediction.

All right, and then just lastly for the PM Group, the gross margin there looked like it dipped below 40% as a percentage of consulting fee revenues. Just wondering if you're seeing some of the new contracts being priced lower there or if that's more just a mix of where your business is coming from today?

It's really more a result of a couple very large, very high margin contracts, that we had in the first half of 2008 in the Middle East that came to an end, and they were big enough that they had a slight negative impact on our overall gross margin.

And also with the acquisitions primarily Heron's, Heron's operates at a slightly smaller gross margin than the rest of our PM business because of the Spanish market, and the acquisitions have had a little bit of downward pressure on our gross margin.

So should we expect this to be kind of the appropriate run rate as we move through the remainder of the year?

Yes, I think that's about the right number. It bounces around a little bit. It's averaged about 40%. A year ago we were at 40.6% and now we're 39.3% for this quarter, so you know we're right in that target area.

Okay, thanks a lot.

Your next question comes from the line of [David Cohen] with [Midwood Capital].

Hello?

Hi, David, go right ahead.

Hey, guys. Can you quantify the degree to which the -- your SG&A was burdened by unapplied labor? I think you have a target of 36% to 38%, SG&A as a percent of consulting fee revenue, and we're still operating above that level, and how much of that is being towards unapplied labor?

David, our unapplied labor as a percent of our total SG&A is around 33%, and it's been running around that for the last couple of quarters. So hopefully as we manage our unapplied labor better, that percentage and those dollars should be reduced.

Yes, I definitely think those numbers are going to be coming down in the second quarter and going forward, and we also had probably a significant amount of severance that was included in that number from the first quarter, as well.

Okay, what is a -- you're always going to have some unapplied labor, what's a comfortable level of a percent of SG&A that you'd like to be operating at?

There really isn't a target number. We try, we track our utilization very closely, and we try to absolutely minimize how much labor is involved in any specific operation in the Company as a whole. But it's a number that bounces around all the time. I think in the last six months it's probably been higher than usual.

Yes.

We'd probably see that number heading down from 33%.

Okay, and on your backlog it was -- basically flat sequentially. Do you experience some negative, some drag from FX translation in the back, the 12-month backlog sequentially, just look at the euro, I think that's down by 5%, but I don't know what other currencies are in there?

Yes, it has an impact year-over-year but not quarter -- not sequentially quarter to quarter.

Okay, and I know you guys, the backlog numbers are helpful, but is there any way you could sort of give us a sense of what kind of overall new bookings you guys have had?

It's simply a matter of arithmetic. If you take a look at the drop that we had in our backlog, 667 to 598 --

Yes.

-- it's (inaudible) drop. Take out the one $48 million contract that we really didn't have, and obviously don't have now, that's a $19 million decrease in our -- the rest of our backlog for the quarter.

Okay.

We did $92 million in consulting fees, so what that says is that we added about $73 million of new work during the quarter, that's hardly a frozen construction market, that's a lot of work. Obviously, we would rather win more work in the quarter than we performed so that our backlog grows, but that's still a significant amount of work, and you can do the same calculation.

Okay, great, thanks, guys.

Thanks, David.

(Operator instructions.)

Your next question is a follow-up question from the line of Richard Paget with Morgan Joseph.

Just real quick, given your prior comments, the equity in affiliates running a little above a million, is that a good run rate or was that just an exceptional quarter?

No, I would think that's a pretty good run rate for the balance of the year.

Okay, and then whether or not that continues into 2010, that's contingent upon if those contracts get re-upped?

Well, it's obviously a big part of that right now is the work in Iraq, but as we continue to build-up the joint ventures that we've entered into over the last 18 months, some of those are now beginning to move forward. They'll add to that number, as well.

Okay, that's all I had, thanks.

Thanks, Rich.

Thanks, Richard.

And there are no further questions. I will now turn the conference back to Management.

Thank you, everybody. We appreciate your time this morning. We, as I said had what we think is a pretty strong quarter, we think we can do better, and we're going to work hard to continue to drive our revenues up and our costs down over the balance of the year, and we look forward to even better performance for the balance of 2009. Thanks, again.

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